Soft landing hopes in China after the moderating manufacturing indices over the weekend helped to send the Shanghai index higher by 1.6% and that set another positive tone for the rest of the region and that spilled over into Europe. However, most European bonds are trading lower after Dec Euro Zone CPI rose 2.2% y/o/y, above expectations of 2% and the highest since Nov ’08. The ECB’s explicit inflation target is 2%. The bond reaction to the inflation data offset a weaker than expected German jobs figure and French consumer confidence. Pressuring UK Gilts in particular was a 16 yr high in the UK manufacturing PMI index. Spanish bonds are rallying after China reiterated that they will be Spain’s sugar daddy and will continue to buy Spanish debt. With Europe being China’s largest trading partner, China has no choice but to support the region.
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