Yields ease as investors buy after recent bond weakness

NEW YORK, Jan 22 – Treasury yields fell on Monday as investors took advantage of a recent decline in bond prices to buy ahead of economic reports this week that could influence the Federal Reserve and its assessment of US interest rates.

Treasuries began the day tracking European bonds, said Tom di Galoma, managing director and co-head of global rates trading at BTIG.

“That’s just pulling us down a bit,” he said. “We started to see lower yields in US Treasuries and I think it’s really just a function of European rates falling.”

After the 2023 year-end bond rally, Treasury yields, which move inversely to their price, rose sharply last week as central bank officials pushed back against market expectations that the Fed would soon cut rates as inflation cools.

Fed funds futures show the likelihood of a Fed rate cut in March has slipped to 41.5% from 81% on Jan. 12, according to CME Group’s FedWatch Tool. The odds the Fed’s target rate stays in a range of 5.25%-5.50% has increased to 15% from zero.

A string of economic indicators last week showed resilience despite high interest rates, suggesting the Fed may not shift to a less restrictive posture as soon as previously expected.

Monday’s lower yields are the result of “a retracement of what we saw last week, when we got a bit of a pushback against the market rally that we saw late last year,” said Jonathan Mondillo, head of North American fixed income at abrdn.

“Portfolio managers have cash to put to work, and a nice parking position is Treasury bonds.”

Benchmark 10-year Treasury yields were down 4.8 basis points (bps) at 4.097%, but still up more than 20 bps from their close of 3.86% on the last trading day of 2023.

Two-year yields, which typically reflect market expectations for interest rate changes, fell 2.5 bps to 4.383%.

The larger drop in 10-year yields deepened the inversion of the two- and 10-year yield curve to -28.8 bps. The curve has been inverted, with short-term bonds yielding more than longer ones, since July 2022. The phenomenon has reliably preceded recessions.

Investors await gross domestic product data for the fourth quarter on Thursday, and the Personal Consumption Expenditures index (PCE) on inflation on Friday.

The Treasury will sell USD 60 billion in two-year notes on Tuesday, USD 61 billion of five-year notes on Wednesday and USD 41 billion on seven-year notes on Thursday.

(Reporting by Davide Barbuscia and Herbert Lash; Editing by Kirsten Donovan and Richard Chang)

Gold slides on trimmed US rate cut bets, rallying equities

Jan 22 – Gold prices eased on Monday as investors rolled back expectations of a US interest rate cut at the end of March, with a surge in equity markets further dampening interest in safe-haven bullion.

Spot gold was down 0.5% at USD 2,020.09 per ounce at 1:49 p.m. ET (1849 GMT).

US gold futures settled 0.3% lower at USD 2022.2.

Technical selling and a rally in stock markets are likely the two main factors limiting buying interest in the gold and silver markets, said Jim Wyckoff, senior analyst at Kitco Metals.

“We have had better US economic data lately, that suggests the Fed may have to hold off longer on lowering interest rates.”

Higher interest rates increase the opportunity cost of holding bullion.

Gold fell about 1% last week, its biggest weekly decline in six, after the US Federal Reserve said it needs to see more inflation data before any rate cut judgment could be made and that the baseline for cuts to start was in the third quarter.

Traders are pricing in about a 41.6% chance that the Fed will cut interest rates in March, according to the CME Fed Watch Tool, compared with more than 70% at the beginning of last week.

Investors are waiting for the US flash PMI report on Wednesday, fourth-quarter advance GDP estimates due on Thursday, and personal consumption expenditures data on Friday for more cues on interest rates.

Spot silver fell 2.1% to USD 22.13 per ounce, platinum was down 0.7% at USD 892.89 and palladium slipped 1% to USD 936.69.

UBS expects platinum to be undersupplied by 300,000 ounces in 2024, for a second consecutive year, mainly on the back of the platinum to palladium substitution in autocatalysts.

(Reporting by Anushree Mukherjee in Bengaluru; Editing by Kirsten Donovan, Christina Fincher, and Krishna Chandra Eluri)

China moves to support yuan as stock markets tumble – sources

SHANGHAI/BEIJING, Jan 22 – China’s major state-owned banks moved to tighten yuan liquidity in the offshore foreign exchange market on Monday, actively selling US dollars onshore, four sources with knowledge of the matter said.

The goal was to prevent the yuan from falling too fast as China’s A shares plunged, said one of the people.

Offshore yuan tomorrow-next forwards jumped to a more than two-month high of 4.25 points, reflecting signs of tighter liquidity conditions.

The benchmark Shanghai Composite index lost 2.7% on Monday, posting the biggest one-day drop since April 2022.

State banks often act on behalf of China’s central bank in the foreign exchange market, but they can also trade on their behalf or execute clients’ orders.

(Reporting by Shanghai and Beijing Newsroom; Editing by Kirsten Donovan)

Oil rises 2% on supply disruptions in Russia, US

HOUSTON, Jan 22 – Oil prices rose about 2% on Monday on concerns over global energy supplies following a Ukrainian drone strike on Russia’s Novatek fuel terminal and as extreme cold weather continued to hamper US crude production.

Brent March crude futures settled at USD 80.06 a barrel, up USD 1.50, or 1.9%.

Front-month US West Texas Intermediate crude futures contract (WTI) for February delivery closed at USD 75.19, up USD 1.78, or 2.4%, as the contract expired. The more active March WTI contract was up USD 1.36 at USD 74.61.

“There are finally concerns in the market about genuine supply disruptions,” said John Kilduff, partner at Again Capital LLC, citing the drone strike that idled portions of the Novatek terminal.

Severe cold weather across the US is limiting crude oil output in North Dakota, as well hampering production in other states, said Phil Flynn, analyst with Price Future Group.

Over 20% of output in the third largest oil producing state remained shut in on Monday after being halved last week by extreme cold weather and operational challenges, North Dakota’s pipeline authority said.

Flynn added that stock markets continue to gain, pointing to greater demand in the coming months.

“Pessimism about the economy is going away,” he said.

The benchmark S&P 500 scaled a fresh record high, extending a bull run into a new week on a boost from megacap and chip stocks.

There are no signs of respite in Israel’s offensive in Gaza while attacks by Iran-aligned Houthis on commercial vessels in the Red Sea have continued despite retaliatory measures from the United States.

Still, oil fundamentals could continue to drag on prices, according to IG analyst Tony Sycamore.

Oil production is higher while the growth outlook in China and Europe is mixed and data this week is expected to show US economic growth has slowed considerably, he said.

“Investors want to be bullish, but tepid data and a cautious narrative from policymakers keep them on the back foot,” said Tamas Varga of oil broker PVM.

The latest demand growth forecasts by the US Energy Information Administration, the International Energy Agency and the Organization of the Petroleum Exporting Countries for 2024 range between 1.24 million and 2.25 million barrels per day, though all three organizations expect demand growth to slow in 2025.

Separately, production at Libya’s Sharara oilfield resumed on Sunday, state oil company NOC said, after protesters ended a sit-in that had halted output since early January.

(Reporting by Erwin Seba; additional reporting by Natalie Grover, Noah Browning, Mohi Narayan, and Florence Tan; Editing by Marguerita Choy, Jane Merriman, and Tomasz Janowski)

China rate decision set to disappoint

Jan 22 – An interest rate decision in China kicks off the week in Asia on Monday with investors hoping – forlornly, perhaps – that the central bank will provide some much-needed relief for the country’s sluggish economy and creaking markets.

This will be followed by the Bank of Japan’s policy decision and guidance the next day – an equally anticipated event, but for different reasons – meaning trading activity and volume should start the week on a strong note.

Especially in foreign exchange.

The Chinese yuan and Japanese yen both go into their respective central bank meetings on the defensive against the dollar. The yuan last week touched a two-month low and the yen’s accumulated year-to-date losses reached 5%.

Indeed, out of nine Asian currencies only the Indian rupee is up against the dollar this year. And even then, only by a whisker.

The dollar is also up against every one of its rival G10 currencies even though the Fed is still expected to cut rates by more than any other major central bank in the world this year, despite the recent pullback.

Asian stocks should have a decent spring in their step on Monday after the S&P 500 hit a new all-time high on Friday.

The rise in global stocks was sparked by Taiwanese chipmaker Taiwan Semiconductor Manufacturing (TSMC), the world’s largest contract chipmaker. On Thursday it projected more than 20% growth in 2024 revenue on booming demand for high-end chips used in AI.

The MSCI Asia Pacific ex-Japan index rose more than 1% on Friday but still fell for a third consecutive week, and is down more than 5% year-to-date.

Chinese stocks are languishing around five-year lows, foreigners are pulling money out of the country, and the yuan is falling. Beijing is under pressure to act, but is nervous about the debt and FX risks associated with more stimulus.

The central bank on Monday is expected to leave the benchmark one- and five-year loan prime rates (LPR) unchanged at 3.45% and 4.20%, respectively. More disappointment for investors, or is it already priced into the currency and stocks?

Meanwhile, the BOJ is also expected to leave policy unchanged on Tuesday, and with inflation continuing its downward slide towards the BOJ’s 2% target, the pressure to ‘normalize’ policy and reverse negative interest rates is easing.

The yen is on the defensive and, despite an understandable wave of profit-taking after hitting 34-year highs, Japanese stocks could be set to rise again on Monday.

Other key events on the Asia/Pacific economic and policy calendar this week include South Korean GDP, Tokyo inflation, an interest rate decision in Malaysia, and consumer inflation figures from New Zealand, Vietnam, Singapore, Hong Kong, and Malaysia.

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

– China interest rate decision

– Malaysia CPI inflation (December)

– Hong Kong CPI inflation (December)

(By Jamie McGeever; Editing by Deepa Babington)

US yields keep climbing as prospects of imminent rate cuts wane

NEW YORK, Jan 19 – US Treasuries maintained a bearish bias on Friday as the market digested a string of solid economic data and braced for the prospect of interest rate cuts not being as imminent as many had hoped.

Treasury yields, which move inversely to prices, have been rising over the past few days as central bank officials pushed back against market expectations of a quick shift to lower rates. Data this week has also shown that US economic activity remains resilient despite interest rates at their highest level in decades, which suggests Federal Reserve policymakers will not rush to a more accommodative policy stance.

US consumer sentiment improved in January to the highest level since the summer of 2021 amid optimism over the outlook for inflation and household incomes, the University of Michigan’s survey of consumer sentiment showed on Friday.

The survey’s reading of one-year inflation expectations fell to 2.9% this month from 3.1% in December. Its five-year inflation outlook slipped to 2.8% from 2.9% in the prior month.

Meanwhile, the S&P 500 confirmed on Friday that it has been in a bull market since October 2022, as it notched a record-high close for the first time in two years on optimism around artificial intelligence.

The short-term interest rate futures market showed on Friday that traders were betting interest rate cuts will start in May, with the probability of a March cut dropping below 50%, down from 77% last week, according to CME Group data. Traders had been betting on a March start to Fed rate cuts since late last year, after Fed policymakers signaled they would probably reduce interest rates in 2024.

“It’s been a data-dependent market and that is what has been driving the market and the volatility,” said George Catrambone, DWS Group’s head of fixed income.

“For the moment, more resilience in the data will continue to push projections of cuts in March further out,” Catrambone added.

Atlanta Federal Reserve President Raphael Bostic said on Thursday he expected rate cuts to start in the third quarter. Chicago Fed President Austan Goolsbee on Friday said the Fed still needed weeks more of inflation data before any cut.

US Treasury benchmark 10-year yields were last at 4.145%, hitting their highest level in more than a month and registering their biggest weekly increase since October.

Two-year yields, which tend to more closely reflect monetary policy expectations, were up about five basis points to 4.408%, their highest in two weeks. Weekly gains in two-year yields have been the biggest since May last year.

Further out on the curve, 30-year yields hit an intra-day high of 4.403% on Friday, their highest since early December.

The curve comparing the yields on the 2/10 maturities was at minus 27 basis points – flatter, or more inverted, than Thursday.

Curve inversions occur when short-dated bonds yield more than longer-dated ones. The 2/10 part of the curve, which has been inverted since July 2022, is closely watched by investors as inversions have reliably preceded recessions.

“The economy may not be out of the woods yet with respect to a hard landing. Some further caution may be warranted,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities in New York.

An inverted yield curve tends to un-invert and turn noticeably positive either shortly before or at the initial stage of recession, LaVorgna said in a note.

(Reporting by Davide Barbuscia and Herbert Lash; Editing by Hugh Lawson and Will Dunham)

Dollar edges lower but poised for weekly gain as early rate cut hopes dim

NEW YORK, Jan 19 – The US dollar edged lower on Friday, pausing after five straight sessions of gains but still poised for a weekly climb, as recent economic data and comments from Federal Reserve officials dampened expectations of rapid cuts in interest rates.

The greenback strengthened early in the session after economic data showed the University of Michigan’s preliminary reading on the overall index of consumer sentiment came in at 78.8 this month, the highest reading since July 2021, compared with 69.7 in December and the 70.0 estimate of economists polled by Reuters.

The data comes on the heels of solid labor market and retail sales data earlier this week indicating the economy remained firm.

Expectations for a cut from the Fed in March of at least 25 basis points (bps) have dipped below 50% according to CME’s FedWatch Tool, with traders now targeting May as the likely month for a rate cut announcement.

“The market is refusing to give up, it is pushing its ideas into the future, but it hasn’t changed its ideas,” said Joseph Trevisani, senior analyst at FXStreet in New York.

“The Fed is going to start lowering rates and the reason they’re going to start lowering rates is the economy is going to get weaker – this has been the mantra ever since the Fed pretty much started raising rates.”

The dollar index =USD, which tracks the greenback against a basket of six currencies, was down 0.08% at 103.26, on pace to snap a five-session win streak, but was up 0.8% on the week.

A steady stream of Fed officials, starting with Governor Christopher Waller on Tuesday, have pushed back on market expectations the central bank will embark on a path of fast reductions to interest rates. Waller said the Fed should proceed “methodically and carefully” until it is clear lower inflation will be sustained.

On Friday, Chicago Fed President Austan Goolsbee said weeks more of inflation data need to be in hand before any decision could be made to cut interest rates.

In addition, Federal Reserve Bank of San Francisco President Mary Daly said there is still a lot of work left to do on inflation and it is premature to think rate cuts are around the corner.

The euro was up 0.16% at USD 1.0891 against the dollar but is down about 0.5% for the week. J.P.Morgan on Friday pulled forward its expectations for the start of interest-rate cuts by the European Central Bank to June from September, but said it remained “cautious” about inflation and wage growth trends.

The yen was flat versus the greenback at 148.15. The Bank of Japan is scheduled to hold a policy meeting next Monday and Tuesday, and is likely to maintain its ultra-loose monetary settings. The dollar is up more than 2% against the Japanese currency this week and on track for its third straight weekly gain.

Earlier data showed Japan’s core inflation rate slowed to 2.3% in the year to December, its lowest annual pace since June 2022, taking the pressure off policymakers to make swift moves.

Sterling was last trading at USD 1.27, down 0.06% on the day after weakening to USD 1.2662 following data which showed UK retail sales slumped by the most in three years in December.

In cryptocurrencies, bitcoin gained 2.04% to USD 41,900.00 but was on track for its second straight week of declines as investors have taken profits following the US approval of spot bitcoin exchange-traded funds.

(Reporting by Chuck Mikolajczak; Editing by Jonathan Oatis)

Global equity funds see big outflows as rate outlook shifts

Jan 19 – Global equity funds witnessed hefty outflows in the week up to Jan. 17 as investors trimmed positions after central bankers in the US and Europe pushed back against market expectations of an early interest rate cut.

Investors pulled a net USD 8.68 billion out of global equity funds during the week, logging the third straight week of outflows, data from LSEG showed.

Hopes of a policy rate cut in March dimmed on Tuesday as US Federal Reserve Governor Christopher Waller cautioned against trimming rates until lower inflation can clearly be sustained, echoing remarks from some of his European counterparts.

The US and European equity funds saw net selling of USD 9.23 billion and USD 1.48 billion, respectively. Conversely, Asia funds attracted about USD 1.72 billion, the second successive week of inflows.

Global sectoral equity funds raked in about USD 329 million in inflows during the week. The tech and financials were the more popular sectors, with USD 713 million and USD 390 million, respectively, in net purchases.

The consumer discretionary sector, however, saw outflows worth USD 285 million.

Investors showed strong interest in debt funds, pumping a net USD 14.33 billion into global bond funds during the week, the biggest amount in about a year.

Corporate bond funds received USD 5.92 billion, the largest amount since at least April 2020. Government and high-yield bond funds also secured around USD 1.12 billion and USD 1.65 billion, respectively.

At the same time, investors exited about USD 28.51 billion worth of money market funds, breaking a three-week-long buying streak.

In the commodities segment, outflows from precious metal funds eased as investors withdrew USD 181 million when compared with about USD 805 million of net disposals in the previous week. Meanwhile, energy funds faced outflows of USD 209 million.

Data covering 27,982 funds in the emerging markets showed investors shed roughly USD 904 million worth of equity funds after a week of net buying. Bond funds, however, secured inflows for a fourth successive week, amounting to a net USD 198 million.

(Reporting by Gaurav Dogra in Bengaluru; Editing by Tasim Zahid)

Chinese fund managers dig deep into own pockets to launch equity funds

SHANGHAI/SINGAPORE Jan 19 – In the face of intense pressure from authorities to help revive a sickly stock market, Chinese fund management companies are increasingly launching equity funds that are bankrolled mostly by the firm’s own money.

China’s securities regulator has been nudging fund managers to prioritize the launch of equity products as authorities scramble to revive a stock market plumbing five-year lows.

In recent informal guidance, the regulator told some fund managers they needed to launch at least four equity funds before they open any new bond fund, in hopes of propping up the stock market in a way that some analysts think is unlikely to succeed.

Torn between the regulator’s guidance and investors’ apathy towards equities in an ailing economy, mutual fund companies are increasingly setting up so-called “sponsored funds”.

Under Chinese regulation, fund management companies can kick off sponsored funds with just 10 million yuan (USD 1.39 million) of seed money that must remain in the fund for three years.

That compares to the normal requirement for new funds to have at least 200 million yuan, or nearly USD 28 million, of assets and 200 investors before the launch.

“Fund performance is ugly and clients are suffering from losses, so money managers have to take money out of their own pockets,” said hedge fund manager Zhang Kaihua. “What else can they do?”

The number of sponsored equity funds and balanced funds that invest in both stocks and bonds jumped nearly 40% to 122 last year, according to fund consultancy Z-Ben Advisors.

Despite the burst of such funds, China’s blue-chip index has extended its decline in the new year, casting doubts over the effectiveness of the raft of policy measures regulators have announced since the middle of last year.

The impasse in markets has seen Chinese funds perish as rapidly as they are born. A total of 148 equity and balanced funds were forced to liquidate last year because of being too small to be viable, the most in five years.

Fund managers are under pressure to launch equity funds, but “in such a environment, you can hardly raise money,” said a Shanghai-based portfolio manager who is preparing to launch a sponsored fund.

“You have no choice but to invest with your own money first,” said the fund manager, who spoke on condition of anonymity.

The anaemic fund-raising by funds and a sliding stock market feed each other “in a vicious cycle that dents long-term investor confidence,” said Lei Meng, China equity strategist at UBS Securities.

LOWER THRESHOLD

Sponsored funds, which charge the usual management fees, will be wound up after three years if they do not have a required 200 million yuan in assets.

Top managers of sponsored funds include China Asset Management Co, E Fund Management Co, China Southern Asset Management Co and Fullgoal Fund Management, according to Z-Ben Advisors.

Wanjia Asset Management Co this month set up a 10 million yuan fund that invests in pharmaceutical stocks, almost entirely with its own money, a regulatory filing showed.

In December, Galaxy Asset Management set up a new materials equity fund LP68792679 after securing only four subscribers, according to a filing. Galaxy ended up contributing 10 million yuan, or 98.9% of the fund assets.

China Southern Asset Management declined to comment. Wanjia, Galaxy and the other named managers of sponsored funds did not respond immediately to requests for comment.

Bond funds are more popular with investors, but regulators have slowed vetting applications for fixed income products, instead speeding up the approval for equity funds.

“Once you get green light to launch an equity fund, you don’t want to waste it,” said another fund manager who also declined to be identified. “It’s also a condition to launch bond funds.”

Another reason behind the burst of sponsored funds is a hope among money managers that investors disappointed with the performance of existing funds will look for fresh opportunities, and hence a new lease of life for their business.

“Investors have been losing money in existing funds, triggering heavy redemptions and fund liquidation,” said hedge fund manager Zhang. “With new funds, portfolio managers can start afresh.”

(USD 1 = 7.1961 Chinese yuan renminbi)

(Reporting by Samuel Shen in Shanghai and Vidya Ranganathan in Singapore; Additional reporting by Jason Xue; Editing by Jamie Freed)

Oil drops slightly on China demand concerns but records weekly gain

NEW YORK, Jan 19 (Reuters) – Oil prices settled slightly lower on Friday but recorded a weekly gain as Middle East tensions and disruptions to oil output offset concerns about the Chinese and global economies.

Brent futures settled 54 cents lower at USD 78.56 a barrel. US West Texas Intermediate crude fell 67 cents to settle at USD 73.41.

For the week, Brent gained about 0.5% while the US benchmark rose over 1%.

In China, slower-than-expected economic growth in the fourth quarter raised doubts about forecasts that demand there will drive global oil growth in 2024.

“The Chinese equity market this week dropped to near a five-year low,” said Bob Yawger, director of energy futures at Mizuho Bank. The indication for weaker demand drove crude prices down on Friday.

In the Middle East, geopolitical risks supported prices for the week.

On Friday, tensions escalated in Gaza as Israeli forces pushed south against Hamas militants, while earlier in the week, the US launched new strikes against Houthi anti-ship missiles aimed at the Red Sea.

Although conflict in the Middle East has not shut any oil production, supply outages continued in Libya.

In the US, about 30% of oil output in North Dakota, the country’s third largest producing state, remained shut due to extreme cold, the state’s pipeline authority said on Friday.

Output had been cut by some 700,000 bpd, or more than half, midweek.

It could take a month for production to return to normal levels, the state regulator said on Friday.

“Supply disruptions remain an upside risk but there are downside risks too, including the global economy,” Craig Erlam, analyst at brokerage OANDA, said.

Meanwhile, the number of oil rigs operating in the US, an early indictor of production, fell by two to 497 this week, Baker Hughes said on Friday.

The International Energy Agency this week raised its 2024 global demand forecast, but its projection is half that of producer group OPEC. The Paris-based agency also said that – barring significant disruptions to flows – the market looked reasonably well supplied in 2024.

“The forecast for global oil demand growth remains unclear, with stakeholders and research institutions providing widely differing projections,” analyst Bjarne Schieldrop of SEB said.

The premium of the first-month Brent contract to the six-month contract rose to as much as USD 2.15 a barrel on Friday, the highest since November. This structure, called backwardation, indicates a perception of tighter supply for prompt delivery.

Money managers cut their net long US crude futures and options positions in the week to Jan. 16, the US Commodity Futures Trading Commission (CFTC) said on Friday.

(Additional reporting by Alex Lawler, Yuka Obayashi and Andrew Hayley; editing by Jason Neely, Louise Heavens, Barbara Lewis, Jonathan Oatis, and David Gregorio)

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