Stocks fall, dollar and yields up after US services data

NEW YORK, Sept 6 – World stock indexes fell while the benchmark US Treasury yield rose and the US dollar hit its highest in six months on Wednesday after stronger-than-expected US services sector data suggested inflation pressures remain.

Weighing heavily on Wall Street stock indexes, shares of Apple (AAPL) fell 3.6% after the Wall Street Journal reported, citing people familiar with the matter, that China had banned officials at central government agencies from using iPhones and other foreign-branded devices for work.

The Institute for Supply Management (ISM) said its non-manufacturing PMI rose in August, with new orders firming and businesses paying higher prices for inputs.

Some investors said the data may add to signs that interest rates could remain elevated for longer. The US Federal Reserve is still expected to pause in its rate hikes when it meets later this month.

Also on Wednesday, Fed Bank of Boston President Susan Collins said that while there are signs of progress in cooling inflation, now is a time for the central bank to proceed carefully when it comes to its next monetary policy steps.

The Nasdaq ended more than 1% lower, leading declines on Wall Street. Technology was down the most among major S&P 500 sectors.

The Dow Jones Industrial Average fell 198.78 points, or 0.57%, to 34,443.19, the S&P 500 lost 31.35 points, or 0.70%, to 4,465.48 and the Nasdaq Composite dropped 148.48 points, or 1.06%, to 13,872.47.

The pan-European STOXX 600 index ended down 0.6% and MSCI’s gauge of stocks across the globe also shed 0.6%.

The yield on the benchmark US 10-year Treasury note rose 3 basis points to 4.298%. The yield has risen about 21 basis points over the past three sessions, its biggest three-day gain in about a month.

In other data, manufacturing activity in Germany, Britain, and the eurozone declined, while their service sectors fell into contraction territory.

Also, the US central bank’s latest “Beige Book” summary of surveys and interviews released on Wednesday showed economic growth was “modest” in recent weeks while job growth was “subdued” and inflation slowed in most parts of the country.

“The two big challenges facing the Fed right now are the risks that inflation could become entrenched and the risks that the consumer could falter when excess savings dry up,” Jeffrey Roach, chief economist at LPL Financial, wrote in a note.

The dollar index rose to a fresh six-month high of 105.03, and was last at 104.85, up 0.1%, with the euro up 0.03% to USD 1.0723.

Oil prices reversed early declines to end higher, as traders anticipated further draws on US crude oil inventory.

Brent crude futures settled up 56 cents at USD 90.60 a barrel while US crude futures settled up 85 cents at USD 87.54.

(Reporting by Caroline Valetkevitch; additional reporting by Gertrude Chavez-Dreyfuss in New York and Nell Mackenzie in London and Kane Wu; Editing by Edmund Klamann, Sam Holmes, Will Dunham, and Sharon Singleton)

Hot ISM services data sends yields higher

NEW YORK, Sept 6 – US Treasury yields were mostly higher on Wednesday, as earlier declines evaporated after economic data showed the services sector unexpectedly accelerated in August, with indications that inflation pressures remain firm.

The Institute for Supply Management (ISM) said on Wednesday its non-manufacturing PMI rose to 54.5 last month, the highest reading since February and up from 52.7 in July, while a gauge of prices paid also increased from the prior month.

A reading above 50 indicates expansion in the services industry, which accounts for more than two-thirds of the economy.

The data raised concerns the economy remains resilient enough for the Federal Reserve to keep rates at higher levels for a longer period of time.

“At the end of the day, if these numbers continue to be elevated, I would just expect (the Fed) not to ease as quickly as I think they will,” said Tom di Galoma, co-head of global rates trading at BTIG in New York.

However, di Galoma still expects the economy to slow considerably next year and bring about a sharp drop in yields.

The yield on the benchmark US 10-year Treasury note on Wednesday rose 3 basis points to 4.298%. The yield has risen about 21 basis points over the past three sessions, its biggest three-day gain in about a month.

The yield on the 30-year bond fell 1 basis point to 4.367%.

Earlier in the day, Federal Reserve Bank of Boston President Susan Collins said that while there are signs of progress in cooling inflation, now is a time for the central bank to proceed carefully when it comes to its next monetary policy steps, noting that price pressures remain despite some signs of moderation.

Despite the stronger-than-expected ISM reading, the central bank’s latest “Beige Book” summary of surveys and interviews conducted across its 12 districts through Aug. 28 showed economic growth was “modest” in recent weeks while job growth was “subdued” and inflation slowed in most parts of the country.

Yields had risen sharply over the prior two sessions, with analysts citing a widely anticipated influx of corporate debt following the Labor Day holiday as exacerbating the climb.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 73.3 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, climbed 6 basis points to 5.029%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.277%, after closing at 2.275% on Tuesday, its highest close since August 24.

The 10-year TIPS breakeven rate was last at 2.306%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Sharon Singleton and Nick Zieminski)

Gold extends decline as dollar gains upper hand

Sept 6 – Gold extended its retreat to a fifth day on Wednesday as yields climbed and bets for higher-for-longer US interest rates and global growth concerns continued to drive safe-haven flows into the dollar.

Spot gold fell 0.4% to USD 1,917.50 per ounce by 1:53 p.m. EDT (1753 GMT), its lowest since Aug. 29. US gold futures settled 0.4% lower at USD 1,944.20.

The dollar held near a six-month peak, while benchmark 10-year Treasury yields were near Aug. 23 highs.

A rise in the safe-haven rival dollar makes gold more expensive for overseas investors, while higher yields decrease non-yielding bullion’s appeal.

Gold’s move is not dramatic, it’s a wait-and-watch to see “what the FOMC is going to do and also if the global economy is going to slip into recession or not,” said Chris Gaffney, president at EverBank World Markets.

Markets were all but certain that the Fed will keep rates unchanged at its Sept. 19-20 meeting, but still bet on a 43% chance of a hike before 2024, according to CME’s FedWatch tool.

The resilience of the US economy, especially the labor market, will allow the Fed to continue to raise rates, especially after OPEC did not do any favors by extending their voluntary production cuts, said Gaffney.

Fed Governor Christopher Waller said on Tuesday the latest round of economic data was giving the US central bank space to see if it needs to raise rates again.

“A lot will also depend over the next few months on how China’s economy holds up, in particular, appetite for jewelry, which really goes hand in hand with consumer confidence,” said Edward Gardner, commodities economist at Capital Economics.

Silver dropped 1.6% to USD 23.17 per ounce, platinum fell 1.8% to USD 909.80. Both slid to over two-week lows.

Palladium was little changed at USD 1,212.88, after hitting its lowest since late 2018 earlier in the session.

(Reporting by Harshit Verma in Bengaluru; Editing by Andrea Ricci, Richard Chang, and Sandra Maler)

Hedge funds tracking trends to profit from bearish US bond, yen trades – JPMorgan

LONDON, Sept 6 – Hedge funds and funds using computer algorithms to trade market trends ended August with bearish positions in US government bonds and the yen, a JPMorgan client note showed, suggesting funds were poised to benefit from recent falls in those assets.

So-called commodity trading advisors (CTAs), which use computers to catch price movements, held strong net short positions in the yen and US and European government bonds as of Aug. 29. They also held a smaller net bearish position in Hong Kong stocks, the JPMorgan (JPM) note released late on Tuesday showed.

A short position is essentially a bet that an asset’s price will fall.

Since late August, the yen has fallen a further 1%, and hit a 10-month low at around 147.82 per dollar on Wednesday.

The 10-year US Treasury yield meanwhile has risen 15 basis points to 4.25%, extending recent price losses. Bond yields rise when prices fall.

The “general resilience of the US economy in the face of higher rates is making market participants more optimistic for a softer landing, and an increase in the issuance of government debt,” underpinned the rise in US yields, said MUFG senior currency analyst Lee Hardman.

A better-performing US economy means the Federal Reserve is likely to keep interest rates higher for longer – hurting government bonds.

That has weighed on the yen, which is sensitive to rising US yields. Japanese 10-year yields are well below 1% even after a recent tweak in Bank of Japan policy.

Trend following funds held net long positions in European credit, US investment grade, and high-yield bonds, as well as Japanese equities, said JPMorgan.

CTAs generally held long stock positions that declined over August. They mostly held on to Japanese stock positions, whereas long positions in European stocks more than halved by August 29. Long positions in Hong Kong stocks turned from a net long to net short, said the bank.

Systematic traders were divided on commodities, ending the month slightly net bullish on oil and turning flat to bearish on gold, the note said.

Brent crude oil on Tuesday closed above USD 90 a barrel for the first time since November.

(Reporting by Nell Mackenzie and Alun John; editing by Dhara Ranasinghe and Sharon Singleton)

The euro usually climbs versus yen in September

Sept 6 – History shows that the euro usually climbs against the Japanese yen in September. It might be prudent for those seeking to go long the single currency this month to invest in EUR/JPY as an alternative to a fragile.

A study of EUR/JPY’s seasonal performance shows it has posted a positive return in 14 of the last 23 September months. Seasonality should not be considered in isolation, but when combined with other factors it can be a useful tool.

Two factors that point to a EUR/JPY rise are interest rate differentials and the strong relationship between the cross and USD/JPY. European Central Bank policy rates are well above the Bank of Japan’s, and markets expect this to remain the case for the foreseeable future. EUR/JPY’s 30- and 60-day correlations with the bullish USD/JPY are well above +0.7, meaning the two currency pairs continue to move in tandem with each other.

(Martin Miller is a Reuters market analyst. The views expressed are his own)

China warns against ‘new Cold War’ at ASEAN summit

JAKARTA, Sept 6 – Chinese Premier Li Qiang said on Wednesday it is important to avoid a “new Cold War” when dealing with conflicts between countries as world leaders gathered in Indonesia amid sharpening geopolitical rivalries across the Indo-Pacific region.

Speaking at an annual summit involving members of the Association of Southeast Asian Nations (ASEAN) and China, Japan and South Korea, Li said countries needed to “appropriately handle differences and disputes”.

“At present, it is very important to oppose taking sides, bloc confrontation and a new Cold War,” Li told the meeting.

ASEAN, which has warned of the danger of getting dragged into major powers’ disputes, is also holding wider talks with with Li, U.S. Vice President Kamala Harris, and leaders of various partner countries including Japan, South Korea, Australia, and India.

Neither U.S. President Joe Biden nor his Chinese counterpart, Xi Jinping, is attending the summit.

High on the agenda at the gatherings in the Indonesian capital, Jakarta, is concern about China’s increasingly assertive activity in the South China Sea, an important trade corridor in which several ASEAN members have claims that conflict with China’s.

ASEAN this week discussed with China accelerating negotiations on a long-discussed code of conduct for the waterway, said Foreign Minister Retno Marsudi of the ASEAN chair, Indonesia.

The issue also came up during an ASEAN-Japan summit where leaders “expressed the importance of keeping situations in the region conducive, especially in the Korean Peninsula and also the South China Sea”, she said.

The United States and its allies have echoed ASEAN’s calls for freedom of navigation and overflight and to refrain from building a physical presence in disputed waters. China has built various facilities, including runways, on tiny outcrops in the sea.

“The vice president will underscore the United States’ and ASEAN’s shared interest in upholding the rules-based international order, including in the South China Sea, in the face of China’s unlawful maritime claims and provocative actions,” a White House official said on Tuesday.

Just before this week’s gatherings, China released a map with a “10-dash line” showing what appeared to be an expansion of the area it considers its territory in the South China Sea.

Several ASEAN members rejected the map.

“Great danger”
Some members of the Southeast Asian grouping have developed close diplomatic, business and military ties with China while others are more wary. The United States has also courted ASEAN countries with varying degrees of success.

ASEAN, in a draft of a statement it will issue this week and seen by Reuters, said it needed to “strengthen stability in the maritime sphere in our region … and explore new initiatives towards these ends”.

Lina Alexandra, a political analyst at think tank CSIS, said the draft was “very weak on the issues of the South China Sea”, noting the Philippines was losing patience with ASEAN when it came to dealing with China’s presence in the area.

“If ASEAN is not useful that is a great danger, because the other option is they go up to the big powers and they bring these big powers to the region,” Alexandra said.

A source close to the matter verified the draft.

The summit also saw South Korean President Yoon Suk Yeol pledge to work with Japan and China for the early resumption of a three-way talks between them in building better ties.

Yoon said any military cooperation with North Korea must immediately stop, referring to a report that its leader, Kim Jong Un, plans to meet Russian President Vladimir Putin to discuss supplying Russia with weapons for the war in Ukraine.

The 10 members of ASEAN held their summit earlier in the week with leaders seeking to assert the bloc’s relevance in the face of criticism it is failing to press Myanmar’s military leaders to cooperate on a plan for peace in their strife-torn country.

ASEAN member Myanmar has been gripped by violence since the generals overthrew an elected government led by Aung San Suu Kyi in early 2021.

ASEAN groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore, Thailand, the Philippines and Vietnam.

(Reporting by Stanley Widianto, Kate Lamb; Writing by Kanupriya Kapoor; Editing by Robert Birsel)

Oil prices edge higher on supply woes as Saudi, Russia extend output cuts

Sept 6 (Reuters) – Oil prices ticked up on Thursday, as markets worried about a supply shortage after Saudi Arabia and Russia extended their voluntary supply cuts to the end of the year.

Brent crude futures rose by 17 cents, or 0.2%, to USD 90.21 a barrel at 00:08 GMT. It crossed the USD 90 mark for the first time since November on Tuesday in the sixth straight day of gains.

US West Texas Intermediate crude (WTI) futures gained 23 cents, or 0.3%, to USD 86.92 a barrel after touching a 10-month high in the previous session.

Near-term prices for oil traded on Tuesday at their steepest premium since November to later-dated prices, reflecting concern about tight near-term supplies.

Saudi Arabia will extend its voluntary oil output cut of 1 million barrels per day (bpd) for another three months until the end of December 2023, state news agency SPA said on Tuesday, citing an energy ministry official.

Russia extended its voluntary decision to reduce its oil exports by 300,000 bpd to the end of this year, Deputy Prime Minister Alexander Novak said in a statement on Tuesday.

The Saudi and Russian voluntary cuts are on top of the April cut agreed by several OPEC+ producers, which extends to the end of 2024.

Both countries will review the cut decisions monthly to consider deepening cuts or raising output depending on market conditions, SPA and Novak said.

(Reporting by Arathy Somasekhar in Houston; Editing by Christopher Cushing)

Japan won’t rule out options if FX speculation persists: Kanda

TOKYO, Sept 6 – Japan’s top currency diplomat Masato Kanda said on Wednesday that Japanese authorities won’t rule out any options on currencies if speculative moves persist, a comment apparently warning against a sell-off in the yen.

It was the strongest warning since mid-August, when the Japanese currency slid past the key threshold of 145 per dollar. Since then, the authorities have stopped firing warning shorts, keeping traders guessing on Japan’s intervention strategy.

Kanda, vice minister of finance for international affairs, was speaking to reporters after the dollar broke above 147 yen JPY= to edge closer to 148 yen overnight, this year’s strongest ever against the Japanese currency.

The dollar has gained momentum on the view the Federal Reserve may raise rates one more time to cope with persistently solid inflation, while the Bank of Japan is expected to continue powerful easing to stoke demand-pull inflation driven by strong wage growth. Such policy diversion is behind the yen’s weakness.

“We won’t rule out any options if speculative moves persist,” Kanda told reporters. “Needless to say, it’s important for currency moves to reflect fundamentals.”

Japanese core consumer prices, running at above 3% for more than a year has shown little signs of sustainable inflation accompanied by solid wage gains.

(Reporting by Tetsushi Kajimoto; Editing by Jacqueline Wong)

China’s exports, imports likely contracted more slowly in August

BEIJING, Sept 5 – China’s exports likely contracted at a slower pace in August, a Reuters poll showed on Tuesday, highlighting that manufacturers remain under pressure after outbound shipments recorded their worst performance since February 2020 last month.

Data for August are expected to show a 9.2% fall in exports from a year earlier, following a drop of 14.5% in July, according to the median forecast of 33 economists in the poll.

Barclays and Nomura were the most bearish, forecasting that overseas demand for Chinese goods worsened last month and are predicting a 15% drop in exports, while Standard Chartered forecast exports fell by just 4%.

Chinese factory activity shrank for a fifth straight month in August, weighed down by a lack of new export orders and imported parts, although factory owners indicated producer prices had improved for the first time in seven months, in a nod to improving domestic demand.

Policymakers have introduced a series of measures in recent months to shore up growth, with the central bank and top financial regulator last week easing some borrowing rules to aid homebuyers. But analysts warn these measures may struggle to move the needle amid a slowing labour market recovery and uncertain household income expectations.

Imports are expected to have shrunk by 9.0%, after dropping 12.4% in July, reflecting slightly improved domestic demand.

But South Korean shipments to China, a leading indicator of China’s imports, dropped 27.5% last month, worsening from a 25.1% fall in July.

The median estimate in the poll indicated that China’s trade surplus would shrink, with analysts predicting it will come in at USD 73.80 billion, compared with $80.6 billion in July.

China’s trade data will be released on Thursday.

(Reporting by Joe Cash; Polling credits: Milounee Purohit and Veronica Khongwir; Editing by Sharon Singleton)

China woes threaten European open

Sluggish economic data from China is set to weigh on European shares a little at the open – stop us if you’ve heard this one before in the past few weeks.

Euro STOXX 50 futures are down 0.3% with FTSE futures down 0.44%, following declines in Asian stocks and currencies after data that showed China’s services activity expanded at the slowest pace in eight months in August.

Also in the mix were oil prices, after Brent touched its highest level this year on Monday, above USD 89 a barrel.

In company news, Novartis confirmed it plans to spin-off its generic medicines division on October 4, as it published half-year results for the division, showing net third-party sales of USD 4.8 billion in the first half of the year.

Elsewhere, the initial public offering (IPO) of Renault’s Ampere electric vehicle division could get a valuation of up to 10 billion euros (USD 10.8 billion), Chief Executive Luca de Meo told the Financial Times.

*****

Morning Bid Europe–China optimism dissipates after weak data

Investor sentiment on China remains fragile, with Monday’s wave of optimism giving way on Tuesday to rekindled worries about the world’s second-biggest economy, after the release of a new set of weak data.

The Caixin PMI showed on Tuesday that China’s services activity in August expanded at the slowest pace in eight months, with sluggish demand continuing to dog the economy while stimulus has so far failed to meaningfully revive consumption.

The data, broadly in line with the official services PMI released last week, dragged markets lower.

The MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.75%, on course for its worst day since Aug. 25. Against a basket of currencies, the dollar was steady.

Investor attention fixed firmly on China’s largest private property developer, Country Garden. A person close to the company said it had made interest payments on two U.S. dollar bonds, due last month, just as a grace period was scheduled to end on Tuesday.

Country Garden on Friday won approval from onshore creditors to extend a private bond worth 3.9 billion yuan ($536 million).

The Reserve Bank of Australia kept interest rates steady as expected but said further tightening of monetary policy may be required. The Aussie AUD=D3 was down about 0.6%, little moved by the decision.

A whole range of data in the European hours will provide further clues on the region’s economy ahead of a European Central Bank policy meeting next week.

ECB President Christine Lagarde, noting price swings due to changes in the labour and energy markets as well as geopolitical turmoil, said on Monday: “It will be critical for central banks to keep inflation expectations firmly anchored while these relative price changes play out.”

The market is now leaning against a hike at the ECB’s September meeting, after a run of soft data.

In company news, Danish drugmaker Novo Nordisk NOVOb.CO launched its popular Wegovy weight-loss injections in the United Kingdom. Surging demand for the injections, and for its highly effective diabetes drug Ozempic, helped Novo to unseat LVMH LVMH.PA as Europe’s most valuable listed company on Friday, ending the French luxury group’s 2-1/2 year-long reign.

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