Traders have more reason to buy a dollar they value

April 15 – Risk aversion stemming from fear about an escalation of the conflict in the Middle East gives traders more reason to buy a dollar they already value.

The dollar has been in high demand this year as traders adjust bets to reflect the likelihood that the U.S. interest rate stays high. They have purchased more than USD 30 billion since January. Speculators have flipped from a USD 12 billion wager against the greenback to a USD 17 billion bet that it rises as expectations for the first U.S. interest rate cut of a 2024 easing cycle are pushed from March to September.

The uncertainty stemming from fears about a growing conflict in the Middle East, the continuing war in Ukraine and China’s economic woes gives traders plentiful cause to buy more dollars.

Not only is the dollar considered safe – and can soar in value even when the United Sates is at the center of any concerns – it is also the highest-yielding major currency. Those holding dollars are being paid to do so while they wait to see how situations develop.

Currently there are three big bets against the dollar that are more likely to be unwound, boosting it further. Gold could also benefit.

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)

De-risking, seeking safety as Middle East tensions rise

April 15 – Asian markets are set to open on the defensive on Monday, with heightened tensions in the Middle East spurring strong demand for safe-haven assets like the dollar, gold, and US Treasuries at the expense of stocks and local currencies.

Investor sentiment was already veering towards the negative following the US bank earnings-driven equity market slump on Friday – JP Morgan shares had their biggest fall in almost four years and world stocks lost the most in six months.

US stock futures are pointing to another steep decline at the open on Monday, so it’s likely Asian bourses will follow suit. Oil prices, which hit a six-month high on Friday, are likely to make further gains on Monday.

In such a febrile environment local Asian economic indicators and events are likely to take a back seat. Monday’s calendar is pretty light, with only Indian trade and wholesale price inflation data, and Japanese machinery orders on tap.

China’s first-quarter GDP on Tuesday and Japanese consumer price inflation figures on Friday are the two economic indicators from Asia that could most move local markets this week.

But for Monday at least, investors will be focused on reducing risk and playing it safe, and in that regard, there could be some big movement in the Japanese yen.

The yen is traditionally seen as a ‘safe-haven’ asset that does well in times of heightened risk aversion, boosted by large repatriation flows from Japanese investors and short covering from currency traders using the yen to fund carry trades.

And there is a large short position to cover – the yen is at a 34-year low below 153.00 per dollar and the latest US futures market data show hedge funds’ net short yen position is the biggest in 17 years.

To the surprise of many, Japanese authorities have not yet intervened to stop the rot, despite the near-daily warnings from officials that “excessive volatility is undesirable” and that Tokyo stands ready to respond to sharp currency swings.

Perhaps Tokyo has not yet intervened because the yen’s slide is fully justified on “fundamental” grounds – US yields and implied rates are rising faster than their Japanese equivalents because US growth and inflation rates are higher than Japan’s.

The strong dollar and recent spike in US bond yields, however, pose potentially significant problems for Asia. They represent a tightening of financial conditions and make servicing dollar-denominated debt more expensive.

A sharp fall in Treasury yields as investors scramble to reduce risk in their portfolios due to intensifying geopolitical tensions is unlikely to offer much comfort.

Here are key developments that could provide more direction to markets on Monday:

– India trade (March)

– India wholesale price inflation (March)

– Japan machinery orders (February)

(By Jamie McGeever; Editing by Diane Craft)

Treasury prices rise as Mideast tensions spur bond buying

NEW YORK, April 12 – Treasury prices rose on Friday, pushing yields lower as Middle East tensions spurred safe-haven buying and as hot inflation readings earlier this week forced investors to sharply readjust their outlook for Federal Reserve interest rate cuts.

Boston Fed President Susan Collins said she’s eyeing two rate cuts this year, adding her voice to other Fed officials who have recently pushed back on market views for a quick series of cuts and an easing of monetary policy.

Collins’ remarks followed a speech in which she said the US central bank is likely to cut its policy rate at some point this year but that uncertainties and risks around inflation mean the Fed needs to take its time before doing so.

Treasury buying also was spurred by dour results from several large US banks, including JPMorgan JPM.N, the biggest US bank by assets, and Israeli fears of an imminent attack by Iran or its proxies also played a part, analysts said.

“A lot of investors don’t want to be holding risky assets heading into the weekend, and there’s a little bit of disappointment on some of the bank earnings as well,” said Gennadiy Goldberg, head of US rates strategy at TD Securities in New York.

But the biggest catalyst was the hotter-than-expected report on the consumer price index on Wednesday.

“This report has challenged a lot of the assumptions that the market has had about the Fed cycle and what that means for broader asset markets,” said Brian Daingerfield, a macro strategist at NatWest Markets in Stamford, Connecticut.

“What the CPI print has forced the market to reckon with is this possibility that the Fed might be in a position to not cut at all this year,” he said. “You have this reset higher in rates, this reset higher in expectations and this change in the discussion around the Fed.”

The two-year Treasury’s yield surged past 5% on Thursday as futures traders slashed bets on the number of Fed rate cuts to two and pushed back the start of the easing cycle to September from expectations of June.

Market bets on the Fed cutting its target rate in June fell to 27.1%, down from 53.2% last week, according to the CME Group’s FedWatch Tool.

The yield on two-year Treasury notes, which typically moves in step with interest rate expectations, slid 8.1 basis points to 4.8822%, while the yield on the benchmark 10-year Treasury note’s yield fell 5.8 basis points to 4.499%.

“Some investors are buying the dip, so to speak, and making sure that they get in at these highly attractive levels,” Goldberg said. “There’s a lot of uncertainty as to what happens next. A lot of investors are debating whether rate cuts are still possible this year.”

The difference in two- and 10-year Treasury yields, seen as a recession harbinger when a shorter-duration yield is higher, or inverted, than longer securities, was at -38.24 basis points.

The yield on the 30-year bond fell 6 basis points to 4.603%.

(Reporting by Herbert Lash; Editing by Andrea Ricci)

Gold surges as Middle East tensions spur safe-haven rush

April 12 – Gold prices rose above USD 2,400 per ounce to an all-time high on Friday, heading for their fourth week of gains, as growing tensions in the Middle East prompted investors to seek refuge in the safe-haven assets.

Spot gold eased 0.8% to USD a2,353.35 per ounce as of 1:40 p.m. ET (1740 GMT), taking a breather after hitting a record high of USD 2,419.79. Prices were up around 1% for the week.

US gold futures settled 0.1% higher at USD 2,374.1.

Taking cues from gold’s upward momentum, platinum tested the key USD 1,000 per ounce level to its highest level in nearly four months.

“What’s really telling about the strength of gold is the US dollar index and Treasury yields are climbing, yet gold continues to rally strongly – that’s very indicative of strong safe-haven demand,” said Jim Wyckoff, senior analyst at Kitco Metals.

A reportedly imminent attack by Iran on Israel is a real and viable threat, the White House said, giving no details about possible timing, reiterating that the US takes its commitments to defend Israel seriously.

“Gold continues to go from strength to strength as we are witnessing fear of missing out on clear display,” Ole Hansen, head of commodity strategy at Saxo Bank, said in a note.

Gold’s recent surge arrived despite traders dialing back bets for an early interest rate cut from the Federal Reserve.

“Gold has pushed back against some data that should have typically been negative. It will be somewhat healthy to see a correction in the bull’s market, but the trend will continue to be positive,” said Chris Gaffney, president of world markets at EverBank.

Meanwhile, Goldman Sachs hiked its year-end gold price forecast to USD 2,700 per ounce from USD 2,300, citing the metal’s bull market’s indifference to the usual macro factors.

Spot silver fell 1% to USD 28.21 per ounce, after touching its highest level since early 2021. Platinum rose 0.6% to USD 985.65 and palladium firmed 0.9% to USD 1,055.62.

All three metals were poised for weekly gains.

(Reporting by Ashitha Shivaprasad, Brijesh Patel, and Anjana Anil in Bengaluru; Editing by Vijay Kishore and Alan Barona)

In the Market: The mysterious one-day drop in a repo rate

April 12 – Something odd just happened in US short-term funding markets: a benchmark interest rate suddenly fell precipitously on March 19 before bouncing back up the next day.

The drop, which has garnered little attention outside Wall Street trading desks, happened in a corner of the repurchase agreement market, or repo, where firms borrow funds from investors against Treasuries.

That day a key repo interest rate, called the Treasury GCF Repo Index, fell to 5.142%, a significant drop from its previous day’s print of 5.334%. The volume of transactions went up USD 57.64 billion from USD 31 billion the previous day.

Behind the drop was a large, single trade late in the day involving a big player, according to three market sources and a review of publicly available transaction data. The trade was in the mid-USD 20 billion range at a 5% rate and happened sometime after 1 pm, according to two of the sources.

The trade was odd as the bulk of repo market activity happens in the morning. A big investor was likely stuck with a huge amount of cash and needed to get it off its books, the sources said. They attributed it to bad collateral management.

Reuters could not determine further details of what happened, including the identity of the parties involved in the trade.

The aberrant trade poses a mystery that’s worth solving for the sake of transparency in one of the world’s most important markets. While the incident may be contained, with the market working as intended, information about what went on could provide important insights into market function.

Short-term funding markets are crucial to Treasuries and global finance, and disruptions there can have broad ramifications, including for financial stability. They, however, tend to be secretive, with even regulators sometimes struggling to understand what goes on there.

Darrell Duffie, a Stanford University finance professor, said regulators are probably curious about what happened. “A transaction this large, and at these terms should raise some antennae,” he said.

Duffie, however, noted that there was no obvious sign that it represented “an undue risk to the financial system or bad behavior.”

The Depository Trust & Clearing Corp and the New York Fed, which publish general collateral repo rates, declined to comment. The Securities and Exchange Commission declined to comment.

The trade happened around the time the New York Fed conducts its reverse repo operations, where money market funds, government-sponsored enterprises, and banks can put up cash with the Fed, the sources said. The Fed has been paying 5.3% for overnight funds, much higher than the rate the investor got in the large trade on March 19.

If the trade involved a government-sponsored enterprise or money market fund, it could provide information about the institution’s risk controls.

Understanding what went on could also shed light on market structure and concentration risks. The fact the trade didn’t happen at a much lower rate suggested that the investor behind the trade was important enough for banks to help them, two of the sources said.

To be sure, the trade may not have any broader implications. One of the market sources said such incidents happen from time to time. The Treasury GCF repo index, for example, saw a similar one-day drop on July 8, 2022, when it fell to 1.176% from 1.55% the previous day before bouncing back.

The impact of the March 19 trade on the overall market was limited. Other benchmark rates based off transactions in the market, such as the Secured Overnight Financing Rate and the Broad General Collateral Rate, were not affected by the trade.

Even so, it was large enough to show up in transaction data. In calculating the Broad General Collateral Rate, for example, the New York Fed publishes the interest rates at which transactions are done by percentiles.

On March 19, the first percentile showed a rate of 5%, down from 5.25% the previous day. By March 20, it had bounced back up again.

(Reporting by Paritosh Bansal; Editing by Anna Driver)

China’s March exports and imports shrink, miss forecasts by big margins

BEIJING – China’s March exports contracted sharply, while imports also unexpectedly shrank, both undershooting market forecasts by big margins, customs data showed on Friday, highlighting the stiff task facing policymakers as they try to bolster a shaky economic recovery.

Shipments from China slumped 7.5% year-on-year last month, marking the biggest fall since August last year and compared with a 2.3% decline forecast in a Reuters poll of economists. They rose 7.1% in the January-February period.

“Besides disruptions from forex changes, the worse-than-expected momentum of both exports and imports in March indicate that more comprehensive and targeted policy stimulus will be needed for China to meet its ambitious growth target,” said Bruce Pang, chief economist at Jones Lang Lasalle.

“It will be a long march for China’s foreign trade to again provide growth energy for the state.”

In the first quarter, exports showed a 1.5% year-on-year rise, according to the data.

The nation’s exporters endured a tough period for much of last year due to soft overseas demand and tight global monetary policy. With the Federal Reserve and other developed nations showing no urgency to cut interest rates, Chinese manufacturers may be faced with a further period of challenges as they try to shore up goods sales overseas.

The China Beige Book survey said the recent improvements in business conditions, including better corporate revenue, profits and capital spending, were “more of a return to mediocre from genuinely poor.”

Analysts warn Western concerns over China’s overcapacity in some industries may bring more trade barriers for the world’s manufacturing hub.

While overall exports weakened last month, steel shipments were at the highest level since July 2016.

Imports for March also declined 1.9% year-on-year from the 3.5% growth in the first two months, missing an expected 1.4% rise. For the first quarter, imports rose 1.5% year-on-year.

The imports figure underlined the sluggish domestic demand conditions, which were also highlighted by Thursday’s data showing consumer inflation had cooled more than expected last month.

March soybean imports fell to their lowest in four years while crude oil imports slipped 6%.

China’s economy got off to a relatively solid start this year after policymakers rolled out support measures to revive household consumption, private investment and market confidence since the second half of 2023.

Yet, growth in the Asian giant remains uneven and analysts don’t expect a full-blown revival anytime soon mainly due to a protracted property sector crisis.

Rating agency Fitch cut its outlook on China’s sovereign credit rating to negative on Wednesday, citing risks to public finances as the economy faces increasing uncertainty in its shift to new growth models.

The economy likely grew 4.6% in the first quarter from a year earlier – the slowest in a year despite signs of stabilisation, another Reuters poll showed on Thursday, maintaining pressure on policymakers to unveil more stimulus measures.

China last month set a full year growth target of around 5%, which analysts have described as ambitious as they noted that last year’s 5.2% expansion came off a COVID-hit 2022.

Some analysts say the central bank faces a challenge as more credit is flowing to production than into consumption, exposing structural flaws in the economy and reducing the effectiveness of its monetary policy tools.

On the fiscal front, China plans to issue 1 trillion yuan ($138.18 billion) in special ultra-long term treasury bonds to support key areas. It also raised the 2024 special bond issuance quota for local governments to 3.9 trillion yuan from 3.8 trillion yuan in 2023.

Moreover, in an attempt to revive demand, the cabinet last month approved a plan aimed at promoting large-scale equipment upgrades and sales of consumer goods. The head of the country’s economic planner estimated the plan could generate market demand of over 5 trillion yuan annually.

(Reporting by Ellen Zhang and Joe Cash; Editing by Shri Navaratnam)

Global investors pull back from equity funds amid inflation concerns

April 12 – Global investors dumped equity funds for the second consecutive week in the week ended April 10, amid persistent inflation worries and diminishing expectations for a US Federal Reserve rate cut in June.

Economic data released on Wednesday showed US consumer prices increased more than expected in March, casting further doubt on whether the Federal Reserve will start cutting interest rates in June.

Global equity funds saw an outflow of USD 2.9 billion during the week, with US and Asian equity funds witnessing outflows worth USD 2.7 billion and USD 1.9 billion respectively.

On the other hand, European equity funds collected an inflow of USD 891 million.

Among sectoral funds, investors withdrew a net USD 708 million out of the technology sector, breaking a 12-week-long buying trend.

By contrast, global equity funds had a robust inflow of USD 60 billion in the first quarter of the year, driven by investor anticipation of Federal Reserve rate cuts, enhancing the appeal of riskier global equities.

Meanwhile, global bond funds attracted strong inflows, amassing USD 12.8 billion over the week, spurred by dampened expectations for a US rate cut in the near term.

Mark Haefele, chief investment officer of UBS Global Wealth Management, revised his outlook anticipating the Fed could lower rates by 50 basis points starting in September instead of June.

“With US Treasury 10-year yields at 4.55% by Wednesday’s US equity close, we view now as an attractive time to lock in yields. We retain our preference for quality bonds,” he said.

Medium-term US dollar bonds saw robust inflows of USD 2 billion, while government short-term US dollar bonds garnered USD 1.3 billion. Loan participation funds secured USD 686.6 million, while US dollar municipal funds raised USD 505 million.

On the other hand, US dollar corporate bond funds experienced outflows totaling USD 1 billion, and global high-yield dollar bond funds saw a reduction of USD 473 million.

Global money market funds experienced a USD 3 billion outflow, following a mammoth USD 105 billion worth of inflow in the previous week.

In the commodities market, investors sold off precious metal funds worth USD 524 million, reversing from USD 691 million in net purchases the previous week. Energy funds, on the other hand, saw a net outflow of USD 76 million.

Data from 29,583 emerging market (EM) funds revealed a decline in purchases of EM bond funds, with investors buying just USD 597 million compared to USD 1.67 billion the previous week. Additionally, they sold USD 1.7 billion in EM equity funds during the week ending April 10, the largest amount in five weeks.

(Reporting By Patturaja Murugaboopathy and Gaurav Dogra in Bengaluru; Editing by Sonali Paul)

Oil rebounds on Mideast tensions but set for weekly loss

LONDON – Oil rose on Friday as heightened tensions in the Middle East raised the risk of supply disruptions from the oil-producing region, although the market is set for a weekly loss on expectations of fewer U.S. interest rate cuts this year.

Concern that Iran might retaliate for an attack on Monday by suspected Israeli warplanes on Iran’s embassy in Damascus has supported oil near a six-month high this week, despite dampening factors such as rising U.S. inventories.

“The geopolitical premium is all about the rumour and not the fact,” said Tamas Varga of oil broker PVM.

Brent crude futures LCOc1 climbed 66 cents, or 0.7%, to USD 90.40 a barrel by 0822 GMT, while U.S. West Texas Intermediate CLc1 crude futures rose 90 cents, or 1.1%, to USD 85.92.

Prices pared gains after the International Energy Agency cut its forecast for 2024 world oil demand growth and predicted a further slowdown in 2025. Oil was set for a weekly fall as Brent and WTI headed for a roughly 1% decline.

The U.S. expects an attack by Iran against Israel but one that would not be big enough to draw Washington into war, according to a U.S. official. Iranian sources said that Tehran has signalled a response aimed at avoiding major escalation.

ING analysts said they expect a pullback in oil’s rally if there is no further escalation in the Middle East or supply disruptions.

“We maintain our forecast for Brent to average USD 87 a barrel over the second quarter of this year,” the ING analysts added.

Friday’s gains erased the losses from the previous session, which was dominated by worries about stubborn U.S. inflation that dampened hopes for an interest rate cut as early as June.

U.S. Federal Reserve officials signaled on Thursday that there was no rush to cut interest rates as U.S. inflation persisted.

(Additional reporting by Katya Golubkova in Tokyo and Jeslyn Lerh in Singapore; Editing by Barbara Lewis)

Widening FX worry, South Korea sets rates

April 12 – Monetary policy decisions in South Korea and Singapore, and Chinese trade and Indian inflation data top Asia’s calendar on Friday, as investors look to shake off the US inflation-fueled volatility from the previous day and end the week on a high.

Currency markets remain on high alert for yen-supporting intervention from Japan, with the dollar holding above 153.00 yen at a 34-year high. Even if Tokyo doesn’t act, traders will be wary of staying ‘long’ dollar/yen at these historic levels going into the weekend.

The yen’s deep-rooted weakness – it is also at a 31-year low against the Chinese yuan – and the competitive advantage it seemingly offers Japan in world trade is bound to be causing unease across Asia.

It opens the possibility of an eventual ‘beggar thy neighbor’ wave of currency devaluations across the continent. This may never be official policy, but weaker exchange rates may be tacitly welcomed or encouraged in certain capitals.

Of course, weak exchange rates can complicate central banks’ fight against inflation. In China higher inflation would be welcome, but a weak and falling currency instead raises the potential for renewed capital flight out of Chinese assets.

And China’s currency is weak against the dollar. On Thursday it slipped to a five-month low despite the central bank’s efforts to steer it higher, and the offshore yuan had its steepest fall in three weeks.

On the equity front, meanwhile, Asian stocks can clock their best week in five if markets take heart from Wall Street’s remarkable rebound on Thursday, in particular the Nasdaq’s 1.7% jump.

A rise of 1% on the day will seal the MSCI Asia ex-Japan index’s best week this year and lift it to a new 14-month high.

The resilience of Asian stocks is all the more notable given the weakness in China. The blue chip CSI 300 index has fallen six days in a row, and another decline on Friday will mark the index’s worst run since the pandemic onset in March 2020.

A battered property sector, rising debt levels, and deflation remain heavy drags on economic activity, and the latest snapshot of consumer and producer prices will have done little to improve the outlook.

Beijing releases trade figures for March on Friday, with economists expecting exports to have contracted, cooling some of the optimism from earlier in the year.

South Korea’s central bank, meanwhile, is expected to keep its key policy rate unchanged at 3.50% for a 10th straight meeting on Friday, before embarking on a shallow cutting cycle next quarter, according to a Reuters poll.

And figures from India are expected to show inflation is expected to have eased to a five-month low of 4.91% in March, still well above the Reserve Bank of India’s 4% medium-term target.

Here are key developments that could provide more direction to markets on Friday:

– South Korea interest rate decision

– India consumer price inflation (March)

– China trade (March)

(By Jamie McGeever)

US yields tick higher on inflation scare, two-year hits 5%

NEW YORK, April 11 – US Treasury yields pushed higher on Thursday with two-year yields breaching 5% for the first time since November, as investors worried over rebounding inflation despite the release of softer-than-expected March producer prices data.

Yields, which move inversely to prices, had soared on Wednesday on the back of hotter-than-anticipated inflation data that has raised doubt over the Federal Reserve’s ability to lower interest rates this year. The selling pressure continued on Thursday, though to a smaller extent.

“Typically when you get a big shock like that markets take about three days to normalize. Day two, we’re still squaring some positions, some late tap-on-the-shoulder sellers are out there,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

The producer price index rose 0.2% month-on-month in March, below an expected 0.3% increase. Meanwhile, the number of Americans filing new claims for unemployment benefits fell more than expected last week, suggesting the labor market remained fairly tight.

Benchmark 10-year yields were last seen at 4.574%, about one basis point above Wednesday’s levels. Two-year yields, which tend to more directly reflect expectations on monetary policy, briefly breached 5% but declined later and were last at 4.956%, slightly lower on the day.

While producer prices for March were welcome news, investors were still scarred by Wednesday’s release of the consumer price index, which showed inflation remains sticky.

“The big event really was yesterday’s CPI,” said Michael Reynolds, vice president of investment strategy at Glenmede.

“September is probably our best guess for a first rate cut, but that means you have to see inflation get back down … and we just haven’t seen that yet this year,” he said.

After Wednesday’s inflation data traders have trimmed their expectations for rate cuts this year to less than two, below the three cuts Fed officials had penciled in last month. On Thursday, fed funds futures were showing expectations of a total of about 43 basis points of cuts this year.

Several global brokerages have also pushed back their rate cut expectations, with some seeing a cut only in December.

“PPI ran cool in March, but not by enough to negate the signal from the first quarter’s hot CPI reports,” Bill Adams, chief economist for Comerica Bank, said in a note. “The Fed will likely wait until the third quarter to begin reducing interest rates,” he said.

Fed officials on Thursday said there was no urgency to ease, with Boston Fed President Susan Collins saying the strength of the economy and uneven retreat of inflation argued against a near-term push to lower rates.

The Treasury sold USD 22 billion in 30-year notes with a high yield of 4.671%, which was about 1 basis point above the expected rate at the time of the bid deadline, a sign that investors demanded a premium to absorb the issuance.

Yields on 30-year bonds at 4.66% added nearly three basis points on Thursday.

(Reporting by Davide Barbuscia; Editing by Andrew Cawthorne, Jonathan Oatis, and Nick Zieminski)

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