More cheer rests on China PMI, Fed decision

Jan 28 – The big questions for investors in Asia this week are whether the rebound in sentiment towards China is sustained, and whether the Federal Reserve vindicates or cools the growing belief in markets that it will soon start cutting US interest rates.

The Fed decision and Chair Jerome Powell’s press conference on Thursday will dominate proceedings, and the biggest market-moving event in Asia is potentially the release of Chinese purchasing managers index data.

The regional calendar also includes PMIs from across the continent, fourth-quarter GDP figures from Taiwan, Hong Kong, and the Philippines, and the latest inflation figures from Indonesia and South Korea.

Asian markets go into the week with their tails up. Bumper US GDP data combined with surprisingly low inflation last week provided further evidence that the world’s largest economy is steering clear of recession and headed for a soft landing.

This fueled a bullish burst of ‘risk on’ sentiment globally, while the positive reaction to China’s efforts to support its markets and economy added further local cheer.

Beijing’s latest move came on Sunday, with the securities regulator saying it will fully suspend the lending of restricted shares effective from Monday. Figures on Saturday, meanwhile, showed that industrial profits in China are shrinking at their slowest rate since October 2022.

China’s CSI 300 index of leading shares snapped a three-week losing streak and rose 2%, the Shanghai Composite jumped 2.75% for its best week since July, and the MSCI Asia ex-Japan index also snapped a three-week losing streak.

Japan’s Nikkei 225 bucked the trend and ended lower – its biggest fall in seven weeks – but not before clocking a new 34-year high just shy of 37,000 points. It would not be a total surprise if profit-taking and position-squaring extended into this week.

On the data front, China’s PMIs top the bill, providing the first glimpse into how Asia’s largest economy has started the year.

The official manufacturing PMI is expected to remain in contractionary territory for a fourth month, according to a Reuters poll, although edging up to 49.3 from 49.0 in December.

Manufacturing activity has been shrinking for most of the past year, underscoring the wider economy’s lackluster recovery from the pandemic and doubts over its trajectory.

US Treasury Secretary Janet Yellen said on Friday she doesn’t expect major spillovers from China’s economic travails. Beijing has taken steps to inject liquidity into the financial system and shore up the property sector, and markets have responded favorably, at least initially.

There are no policy decisions in Asia this week, although the Bank of Japan on Wednesday sheds more light on its thinking when it releases the summary of board members’ opinions from its Jan. 22-23 policy meeting.

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

– New Zealand trade (December)

– Singapore business expectations index (Q4)

– Euro zone flash GDP estimate (Q4)

(By Jamie McGeever; editing by Diane Craft)

Gold holds steady with spotlight on Fed verdict

Jan 26 – Gold prices held steady on Friday as investors’ attention shifted to the US Federal Reserve’s policy meeting due next week for more insights into the interest rate outlook.

Spot gold was little changed at USD 2,016.95 per ounce by 02:15 p.m. ET (1915 GMT), down 0.6% so far this week.

US gold futures settled mostly flat at USD 2,017.3.

“We are seeing the gold market consolidating at the moment as the expectations of rate declines aren’t quite as soon as the market would like,” said David Meger, director of metals trading at High Ridge Futures.

“But underlying theme or the idea that interest rates will come down in 2024 continues to underpin and support the gold market.”

Markets widely expect the Fed to leave interest rates unchanged at its policy meeting on Jan. 30-31, but have pared back expectations of a rate cut by March, according to the CME FedWatch Tool.

Lower interest rates decrease the opportunity cost of holding bullion.

US prices rose moderately in December, keeping the annual increase in inflation below 3% for a third straight month, which could allow the Fed to start cutting interest rates this year. Another set of data on Thursday showed the US economy grew faster than projected in the fourth quarter.

On the physical side, China’s gold premiums climbed this week as additional stimulus measures aided sentiment, days before Lunar New Year celebrations begin.

In the short-term, the direction of gold and silver will continue to be dictated by incoming economic data and their impact on the dollar, yields, and rate cut expectations, said Ole Hansen, Saxo Bank’s head of commodity strategy in a note.

Spot silver lost 0.8% to USD 22.75 per ounce and headed for its best week in five.

Platinum rose 2.6% to USD 914.33 and palladium gained 1.9% to USD 958.81, with both on track for a weekly increase.

(Reporting by Anushree Mukherjee and Ashitha Shivaprasad in Bengaluru; Editing by Shweta Agarwal)

Cautious investors trim equity holdings before inflation data, Fed meet

Jan 26 – Global investors reduced their holdings in equity funds in the week leading up to Jan. 24, exercising caution before a pivotal inflation report due on Friday and a meeting of the US Federal Reserve next week, which could reshape expectations about the pace and extent of interest-rate cuts.

Despite this, a surge in global stocks limited fund outflows, spurred by optimism after strong quarterly results from Netflix and bullish forecasts from semiconductor companies, including Taiwan’s TSMC and Super Micro Computer.

According to data from LSEG, global equity funds experienced USD 2.19 billion in net outflows during the week, marking the smallest weekly outflow in four weeks.

Investors sold US and European funds of about USD 3.04 billion and USD 2.12 billion, respectively, on a net basis. Conversely, Asian funds drew a net USD 2.35 billion in buying as inflows extended to a third successive week.

The tech sector gained USD 2.47 billion amid optimism over upbeat forecasts, the biggest inflow since Nov. 22, 2023. The healthcare and energy sectors, meanwhile, saw USD 552 million and USD 593 million worth of net selling, respectively.

Debt funds attracted increased interest, with global bond funds registering USD 9.34 billion in inflows, marking the fifth consecutive week of positive inflows.

Short-term global bond funds received USD 5.29 billion, the largest inflow since Oct. 11, 2023. High-yield funds saw net purchases of USD 880 million.

Concurrently, investors pulled a net USD 18.27 billion out of money market funds, staying net sellers for a second successive week.

In the commodities segment, precious metal funds attracted USD 209 million, their first weekly inflow in four weeks. Energy funds also saw about USD 54 million worth of net buying.

Data covering 27,956 emerging market funds showed investors offloaded a net USD 2.83 billion worth of equity funds during the week, the biggest net selling in five weeks. Bond funds also witnessed net selling, worth about USD 790 million.

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru; Editing by Pooja Desai)

Money market funds keep growing despite expected Fed cuts, JPMorgan strategists say

NEW YORK, Jan 25 – Assets in money market funds are rising to start the year, challenging some expectations that investors are set to pour cash on the sidelines into stocks and fixed income, JPMorgan strategists said on Thursday.

So far this year, taxable US money market fund (MMF) balances have increased by USD 75 billion, JPMorgan fixed income strategists led by Teresa Ho said in a note. By contrast, such funds have seen seasonal outflows at the start of the year in general over roughly the past decade, the strategists said.

The rise in assets is “challenging the view that the USD 6 trillion of cash sitting in MMFs will rotate into alternative assets such as fixed income and/or equities,” the strategists said in the note.

Last year, money market fund assets rose by over USD 1.1 trillion, or 22%, “one of the largest increases seen in the past decade,” JPMorgan said.

Some expect outflows this year, especially if the Federal Reserve delivers the rate cuts it has penciled in for 2024, pushing down yields and making the funds less attractive to investors.

However, in prior easing cycles, money market funds continued to see inflows even when the Fed began to cut rates, according to JPMorgan’s analysis of three such cycles since 1995.

“This makes sense, as MMF yields tend to lag yields of direct cash alternatives such as T-bills when the Fed starts to cut rates, thus attracting flows from other liquidity alternatives,” the strategists said in a note.

Further, the strategists said they believe much of the cash in money market funds is “core liquidity” among institutional and retail investors — used for cash management needs — as opposed to an investment asset class that is part of an investment portfolio.

“We think the amount of core cash in MMFs is around USD 5.5 trillion, which leaves about USD 500 billion susceptible to flight risk, particularly from retail investors,” according to the note.

Overall, the strategists said they think money market fund assets will remain elevated in 2024 and do not expect “meaningful” net outflows.

(Reporting by Lewis Krauskopf; editing by Diane Craft)

US dollar gains after GDP data; euro falls to six-week low after dovish ECB, Lagarde

NEW YORK, Jan 25 – The US dollar rose on Thursday after data showed the world’s largest economy grew at a faster pace than expected in the fourth quarter, suggesting the Federal Reserve would be in no rush to cut interest rates.

The dollar index, a gauge of the greenback’s value versus six major currencies, was last up 0.2% at 103.53. So far this year, the dollar has gained about 2%.

The euro, on the other hand, fell to a new six-week low against the dollar of USD 1.08215 after mixed comments from European Central Bank President Christine Lagarde. She said it was “premature to discuss rate cuts” for the eurozone economy, but noted that the risks to economic growth remain “tilted to the downside.”

The ECB, at its policy meeting on Thursday, left borrowing costs unchanged as expected, re-affirming its commitment to fighting inflation.

The euro last traded at USD 1.0839, down 0.4%.

In the United States, the Bureau of Economic Analysis’ advance GDP estimate showed gross domestic product in the last quarter increased at a 3.3% annualized rate, compared with the consensus forecast of 2% growth rate.

“The dollar overall is stronger today, but given the scope and scale of the GDP beat, I would argue that it should be a lot higher,” said Eugene Epstein, head of structuring for North America at moneycorp in New Jersey. “The market, even in the face of all this information that the economy is growing well, still does not buy the higher-for-longer premise that the Fed has given.”

Post-data, US rate futures market priced in a roughly 51% chance of easing at the March meeting, up from late Wednesday’s 40% probability but down from the 80% chance factored in two weeks ago, according to LSEG’s rate probability app.

The market is fully pricing in the first rate cut to occur at the May meeting, with a roughly 94% probability.

The Fed will likely wait until the second quarter before cutting interest rates, according to a majority of economists polled by Reuters. June is seen as the more likely month economists expect the Fed to ease.

“The market is not buying the idea that rate cuts are going to happen no earlier than the summer,” Epstein said.

Next week, the Fed is widely expected to stand pat but comments from Chair Jerome Powell will be intensely scrutinized for clues as to when the US central bank will start cutting rates.

For the ECB, money markets priced in an 80% chance of the first rate cut of 25 basis points in April, from 60% before the ECB statement. They also fully factored in 50 bps of cuts by June.

“Today (Thursday), Lagarde had the opportunity to push back on the market pricing and she chose not to, which led to a front-end driven rally,” wrote Danske Bank analysts in a research note. “Markets are pricing 140 (basis points) of rate cuts until the end of this year.”

A separate report from the Labor Department showed initial claims for state unemployment benefits increased 25,000 to a seasonally adjusted 214,000 for the week ended Jan. 20. Economists had forecast 200,000 claims in the latest week.

Its market impact was muted though given the release of the GDP data.

In other currency pairs, the dollar was up 0.2% versus the yen at 147.705, giving back some of its gains from Wednesday when traders focused on the Bank of Japan’s hawkish tilt.

Sterling was down 0.2% at USD 1.2704.

The Bank of England is due to announce its latest decision on interest rates and its outlook for the economy on Feb. 1. Many investors and analysts have said they expect it will soften its stance against talking about cutting rates from nearly 16-year highs.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Alun John in London; Editing by Alex Richardson, Will Dunham, and Andrew Heavens)

US yields slip on signs of slowing inflation in GDP report

NEW YORK, Jan 25 – Treasury yields fell on Thursday as investors bid up prices on news the US economy grew faster than expected in the fourth quarter, while data showed the pace of inflation remained on track to meet the Federal Reserve’s 2% target.

US gross domestic product increased at an annualized 3.3% in the last quarter, the Commerce Department’s Bureau of Economic Analysis said, a growth rate surprisingly faster than the 2.0% rate that economists polled by Reuters had forecast.

Yet inflation pressures subsided, with the personal consumption expenditures (PCE) price index increasing just 1.7% over the past three months from 2.6% in the third quarter.

Bond yields, which move inversely to their price, slid. The yield on two-year Treasuries, which reflects interest rate expectations, fell 7.4 basis points to 4.304%. The yield on benchmark 10-year notes fell 5.6 basis points to 4.122%.

The report confounded some economists, as strong growth and slowing inflation are at odds.

“My view is this combination of data is very, very unusual and it’s not likely to be sustained,” said Tom Simons, money market economist at Jefferies in New York.

“Either inflation is going to pick back up again or growth has to slow. I just don’t understand how the economy can continue with this perfect, ideal, immaculate disinflation story.”

Real gross domestic income has not kept pace with GDP growth, suggesting the economy may not be as strong as it appears, said Joe Lavorgna, chief US economist in New York at SMBC Group.

Also, massive government spending is keeping demand stronger than it otherwise would be, he said in a note.

Expectations that the Fed will cut interest rates in March rose to 47.4% from 41.2% on Wednesday, according to CME Group’s FedWatch Tool.

Earlier, the European Central Bank kept rates unchanged at a record-high 4%, as expected. Bond yields plunged as investors bet the ECB has both the growth and inflation outlook wrong and will deliver five rate cuts starting in early spring.

Treasury yields fell as the ECB press conference began as the US market tried to keep pace, said Tom di Galoma, a managing director and co-head of global rates trading at BTIG.

The Fed is expected to keep its target rate unchanged at 5.25%-5.50% when policymakers meet next week.

The Treasury Department sold USD 41 billion in seven-year notes at a high yield of 4.109%, with primary dealers taking 13.9%.

“Whenever the dealers take less than 15%, it’s a very good sign that there’s a lot of demand,” di Galoma said.

The 30-year Treasury bond yield was down 4.2 basis points at 4.372%.

The difference in yields on two- and 10-year notes flattened further to -18.3 basis points. The curve has been inverted since July 2022, with the shorter-dated security’s yield higher than the longer-dated one, in what has proven to be a recession harbinger.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.272%.

The 10-year TIPS breakeven rate was last at 2.282%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Herbert Lash; Editing by Richard Chang and Nick Zieminski)

Gold gains as Treasury yields drop after US GDP data

Jan 25 – Gold edged higher on Thursday as Treasury yields fell after US GDP data highlighted that pace of inflation slowed, while the focus shifted to inflation data for further hints on the Federal Reserve’s interest rate cut strategy.

Spot gold rose 0.2% to USD 2,015.56 per ounce by 1:49 p.m. ET (1849 GMT). US gold futures settled 0.1% higher at USD 2,017.8.

Benchmark 10-year Treasury yields slipped after the GDP data.

The US economy grew faster than expected in the fourth quarter amid strong consumer spending, with growth for the full year coming in at 2.5%. The report also showed fourth-quarter inflation pressures subsiding.

“The economy is running a lot hotter than expected, but at the same time, we are having a situation where inflation is coming down, therefore we shouldn’t prepare for a big spike in interest rates,” Bart Melek, head of commodity strategies at TD Securities, said, adding that it was helping gold.

Lower interest rates decrease the opportunity cost of holding bullion.

Markets widely expect the Fed to hold rates unchanged at its policy meeting on Jan. 30-31 and are expecting an 89% rate cut by May, according to the CME FedWatch Tool.

Gold also got some support from a separate report that showed initial claims for state unemployment benefits in the United States increased 25,000 to a seasonally adjusted 214,000 for the week ended Jan. 20. Economists had forecast 200,000 claims in the latest week.

“The initial jobless claims data says that the jobs picture is deteriorating, labor markets cooling, that is helping gold,” said Phillip Streible, chief market strategist at Blue Line Futures, in Chicago.

Focus now shifts to the US personal consumption expenditure (PCE) data due on Friday.

Spot silver rose 0.7% to USD 22.81 per ounce, while platinum dipped 1.2% to USD 888.59 and palladium fell 2.5% to USD 938.39.

(Reporting by Anushree Mukherjee and Ashitha Shivaprasad in Bengaluru; Editing by Shilpi Majumdar)

Oil jumps, settles up 3% on strong US economy, Red Sea tensions

NEW YORK, Jan 25 – Oil prices gained about 3% on Thursday to settle at their highest since December after US economic data showed faster-than-expected growth in the last quarter and as tensions in the Red Sea kept disrupting global trade.

Brent crude futures settled up USD 2.39, or 2.99%, to USD 82.43 a barrel. US West Texas Intermediate crude gained USD 2.27, or 3.02%, to USD 77.36.

Geopolitical tensions in the Middle East and the disruption of shipping in the Red Sea corridor remained in focus.

Maersk said explosions forced two ships operated by its US subsidiary that were carrying US military supplies to retreat when they were transiting the Bab al-Mandab Strait off Yemen, accompanied by the US Navy.

“We are finally seeing energy markets wake up to the distinct possibility that these supply chain disruptions will rumble on for months yet,” said Joshua Mahony, chief market analyst at Scope Markets.

“The prospect of a military solution to ensure safe passage looks unlikely,” he added.

Yemen’s Houthi leader said on Thursday the group would continue targeting ships linked to Israel until aid reaches the Palestinian people in Gaza.

A Ukrainian drone attack on an oil refinery in southern Russia overnight also sparked supply worries, said Bob Yawger, director of energy futures at Mizuho.

In the US, a larger-than-expected draw in crude inventories last week, primarily because of extreme cold, also supported prices. US inventories fell by 9.2 million barrels last week, according to the Energy Information Administration.

Data on Thursday showed the US economy grew at a faster pace than expected in the fourth quarter, a positive demand indicator, Yawger said.

Oil prices also drew support from the expectation China’s economy is recovering after the central bank announced a deep cut in bank reserves on Wednesday.

The market had been waiting for economic stimulus from China for the past several months, said John Kilduff, partner at Again Capital LLC. The bank reserves cut could boost oil demand, he added.

Elsewhere, however, the prospect of sustained high interest rates loomed.

The European Central Bank on Thursday retained its record-high benchmark rate of 4%, giving no hint that policymakers were contemplating policy easing.

(Additional reporting by Noah Browning and Natalie Grover in London, Yuka Obayashi in Tokyo, and Jeslyn Lerh in Singapore; editing by Mark Potter, Jason Neely, Emelia Sithole-Matarise, Barbara Lewis, and David Gregorio)

China optimism spreads, S. Korea GDP in focus

Jan 25 – The focus for Asian markets on Thursday will be on whether the improvement in investor sentiment toward China and Hong Kong continues, following the Chinese central bank’s latest move to inject liquidity and support asset prices.

The regional economic data calendar is light and will be dominated by the first estimate of South Korea’s fourth quarter gross domestic product growth, ahead of which the Korean won just chalked up its biggest rise against the dollar in a month.

The dollar is trading softer across the board, weighed down by lower US bond yields and a rebound in market expectations that the Fed could cut interest rates as early as March.

That alone should help whet investors’ risk appetite in Asia on Thursday, as should the rally in China and Hong Kong on Wednesday that was sparked by the People’s Bank of China’s decision to slash bank reserves by the most in two years.

The move, which will inject about USD 140 billion of cash into the banking system, and PBOC Governor Pan Gongsheng’s pledge to unveil policies on improving commercial property loans extended this week’s bounce in risk assets and the yuan.

The Shanghai Composite’s 1.8% rise was its biggest since July, the CSI 300 index of blue chip shares is now poised to snap a three-week losing streak, and the Hang Seng jumped 3.6%.

Beijing’s actions on Wednesday came hot on the heels of a Bloomberg News report that authorities are weighing up a 2-trillion yuan (USD 278 billion) funding package of measures to support the country’s creaking markets.

And with strong US earnings reports, especially from Netflix, and rising chipmaker stocks lifting the S&P 500 to yet another record high, the mood at the open in Asia on Thursday should be bullish.

Official figures from Seoul, meanwhile, are expected to show that South Korean growth slowed in the final three months of 2023 to a seasonally adjusted 0.5% quarter-on-quarter pace, according to a Reuters poll of economists, down a touch from 0.6% in the previous quarter.

Year-on-year growth, however, is expected to have accelerated to 2.1% in the fourth quarter from 1.4% in the preceding quarter.

The benchmark KOSPI index has had a very weak start to 2024, and is down 7% so far this year. For comparison, the MSCI Asia ex-Japan index is down 4.5% slide, China’s CSI 300 index was outperforming that even before this week’s stimulus, and Japan’s Nikkei is up 8%.

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

– South Korea GDP (Q4 advance estimate)

– Hong Kong trade (December)

– Bank of Korea manufacturing survey (February)

(By Jamie McGeever)

S&P 500 ekes out another record high as Netflix and chipmakers leap

Jan 24 – The S&P 500 climbed to its fourth straight record high close on Wednesday, as Netflix surged following blowout quarterly results and a strong report from ASML fueled gains in chipmakers.

Riding optimism about Wall Street’s most valuable companies, Microsoft hit an all-time high, lifting its market value above USD 3 trillion for the first time.

The Nasdaq touched its highest since January 2022 and is now less than 4% below its record-high close in November 2021.

Netflix jumped 10.7% to a two-year high after strong subscriber growth cemented investor confidence the firm has won the streaming wars with its password-sharing crackdown and a strong content slate.

The S&P 500 communication services index, which includes Netflix, rose 1.2% and also hit a two-year high.

Alphabet and Meta Platforms, part of the so-called Magnificent Seven group of heavyweights that drove much of 2023’s recovery in the S&P 500, each gained over 1%.

“Technology-enabled companies – the Magnificent Seven in particular and the AI theme – last year put up some ridiculous earnings and guidance. We will see over the next 10 days how that plays out, but early indications are certainly pretty positive,” said Mike Dickson, head of research at Horizon Investments.

The S&P 500 climbed 0.08% to end the session at 4,868.55 points.

Even as the S&P 500 rose, declining stocks outnumbered rising ones within the index by a 2.5-to-one ratio.

The Nasdaq gained 0.36% to 15,481.92 points, while the Dow Jones Industrial Average declined 0.26% to 37,806.39 points.

Volume on US exchanges was relatively heavy, with 11.6 billion shares traded, compared to an average of 11.4 billion shares over the previous 20 sessions.

Tesla dipped 0.6% and weighed on the S&P 500. The carmaker was scheduled to report December-quarter results after the closing bell.

The Philadelphia SE semiconductor index rose 1.54% to a record high after upbeat results from manufacturing equipment maker ASML Holding pointed to a recovery in global chip demand.

Nvidia and Broadcom both jumped more than 2% and hit record highs. Traders exchanged over USD 34 billion worth of Nvidia shares, more than any other stock on Wall Street, according to LSEG data.

AT&T dropped 3% after forecasting annual profit below expectations, while DuPont De Nemours slumped 14% after forecasting a fourth-quarter loss.

On the data front, a survey showed business activity picked up in January and inflation appeared to abate, suggesting that the economy kicked off 2024 on a strong note.

A resilient US economy and uncertainty over the timing of interest rate cuts have led investors to reassess their bets on how quickly the Federal Reserve will cut rates this year.

Traders now see an 85.5% chance of a rate cut in May, according to CME Group’s FedWatch Tool. Traders previously expected a rate cut in as early as March.

(Reporting by Ankika Biswas and Johann M Cherian in Bengaluru, and by Noel Randewich in Oakland, Calif.; Editing by Anil D’Silva, Devika Syamnath, Maju Samuel, and David Gregorio)

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