China’s sliding yuan could be next ‘black swan event’ for markets, hedge fund EDL says

LONDON, Aug 17 – Hedge fund EDL Capital is betting on further falls for China’s offshore currency and says the yuan’s slide could be the next “black swan event” to rattle world markets, according to an investor presentation this month seen by Reuters.

The US dollar has strengthened roughly 6% against the offshore yuan so far this year and Chinese state banks have been seen selling dollars this week to stem the yuan fall.

Back swan events refer to unexpected developments with far-reaching consequences.

EDL Capital, which manages about USD 1 billion, said factors weighing on the yuan include geopolitical tensions driving Western countries to re-home supply chains that will starve China of foreign investment.

China’s labor market has also grown less competitive versus other Asian countries such as Vietnam and India, while a post-pandemic recovery has sputtered and foreign currency reserves “might be lower than what they are believed to be,” it said.

The hedge fund held a short position in the offshore yuan, the Aug. 2 presentation shows. A way to do this would be via derivatives called options aimed at profiting at certain price levels on dollar strength against yuan weakness, said the presentation, without confirming if EDL is using this strategy.

China, the world’s second-largest economy, is vital to global growth.

An expectation of monetary policy easing in China, juxtaposed with dollar strength, has driven yield differentials between the United States and China to the widest level in 16 years, pressuring the yuan further.

The hedge fund, run by star manager Edouard de Langlade, was up about 8% this year, said the presentation. It is one of the better-performing hedge funds in 2023 that finds trade ideas in macroeconomic signals.

Switzerland-based EDL has made most of its money this year with long positions in Brazilian and Japanese equities and Brazilian rates. Trades on mining, short positions in US equities, and bullish bets on Chinese stocks detracted from fund performance, the presentation showed.

EDL declined to comment when contacted by Reuters.

(Reporting by Nell Mackenzie; Editing by Dhara Ranasinghe and Mark Potter)

US Treasury yields rise to highest since October as rate angst weighs

LONDON, Aug 17 (Reuters) – US government bonds continued to sell off on Thursday, with long-dated yields rising to their highest since October on growing expectations that a resilient economy will keep interest rates higher for longer.

The yield on 10-year US Treasury Inflation-Protected Securities (TIPS), meanwhile, rose to 1.99%, its highest since 2009 in a further sign of expectations policy will remain tight.

Wednesday’s release of the Federal Reserve’s July meeting minutes showed rate setters were divided over the need for more rate hikes, adding to the selling in bond markets.

In London trade, benchmark 10-year Treasury yields last stood at around 4.29%, having touched 4.31% earlier – their highest level since October.

“If you think about the scale of rate cuts that had been priced in, the longer the data holds up, the longer the markets become anxious about what has been priced and has to adjust,” said Derek Halpenny, head of research, global markets EMEA, MUFG.

Renewed bond selling puts Treasury yields back within sight of reaching their highest levels since 2007.

Analysts at ING said it was possible for 10-year yields to rise to 4.5%.

Yields on 30-year Treasuries also touched their highest since October, at around 4.4%, while two-year bond yields were flat at around 4.97%.

Markets are pricing in a roughly 86% chance of the Fed standing pat next month, with a 36% chance a quarter point rate increase at the November meeting.

(Reporting by Dhara Ranasinghe; Editing by Andrew Cawthorne)

Dollar hovers around 2-month high

LONDON/SINGAPORE, Aug 17 – The dollar hovered around a two month-high on Thursday after the Federal Reserve Minutes left the door open for more rate hikes and data this week pictured a resilient US economy.

The Norwegian crown rose from six-week lows against the dollar and the euro on Thursday after Norges Bank raised interest rates, as expected, and said it was likely to hike again in September.

The US dollar index was 0.05% lower at 103.41, after hitting a two-month high of 103.59.

The greenback has drawn support from a recent run of resilient US economic data, which reinforced the view that interest rates will remain high for some time.

Data on Wednesday showed that U.S. single-family home building surged in July and permits for future construction rose, while a separate report revealed production at U.S. factories unexpectedly rebounded last month.

“We’ve got the U.S. staying really resilient still, under the weight of high interest rates,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

In the meantime, inflation – which is stubbornly above the 2% target – will encourage the Fed to “maintain monetary policy at a restrictive level,” she added.

Minutes of the Fed’s July policy meeting showed officials were divided over the need for more rate hikes last month, citing the risks to the economy if rates were pushed too far.

Against the dollar, the Norwegian crown was last up 0.4% to 10.5750, having fallen to as low as 10.66 earlier in the session. It rose 0.3% against the euro to 11.5000, after touching its lowest since July 10.

Elsewhere, the yen edged 0.1% higher at 146.14 after weakening to 146.565 per dollar, its lowest level since November, having come under renewed pressure as a result of interest rate differentials between the United States and Japan’s ultra-low rate environment.

The Japanese currency has come under close watch since it touched the key 145 per dollar level for the first time in about nine months last Friday, crossing into a zone that sparked an intervention by Japanese authorities in September and October last year.

AUSTRALIAN DOLLAR

The Australian dollar sank to a nine-month low, taking its New Zealand counterpart along with it, after data showed that Australia’s employment unexpectedly fell in July while the jobless rate ticked higher.

The Australian dollar was last 0.36% lower at USD 0.6401, having tumbled more than 0.9% to a trough of USD 0.6365 following the employment data release.

The softer reading stoked speculation the Reserve Bank of Australia (RBA) might be done hiking interest rates.

“Cracks are finally appearing in the employment data, and that should clear up any doubt over whether the RBA is done hiking,” said Matt Simpson, senior market analyst at City Index.

“They’re done at 4.1% as far as I’m concerned now, with persistently weak data from China and easing from the (People’s Bank of China) adding to the case of a peak rate.”

The kiwi also touched its lowest level since November and was last down 0.2% to USD 0.5928.

The two antipodean currencies, often used as liquid proxies for the yuan, have also taken a beating over the past few sessions as a result of the darkening outlook over China’s economy.

The offshore yuan hit a nine-month low of 7.3490 per dollar, while its onshore counterpart similarly weakened to a nine-month trough of 7.3113 per dollar.

The euro was flat at USD 1.0875, after falling to a six-week low at USD 1.0862. Sterling was flat against the euro at 85.40 pence, after surging to a one-month high on Wednesday on British inflation data.

Despite a sharp drop in Britain’s headline inflation rate, key measures of price growth monitored by the Bank of England (BoE) failed to ease in July, boosting bets the BoE will keep rates higher for longer.

(Reporting by Joice Alves in London and Rae Wee in Singapore; Editing by Angus MacSwan)

Oil rises as dollar eases, China seeks to soothe economic woes

HOUSTON, Aug 17 – Oil prices rose on Thursday after falling for three straight sessions, as the dollar weakened and China’s central bank sought to bolster the property market and wider economy.

Brent crude futures rose 67 cents, or 0.8%, to USD 84.12 a barrel, while US West Texas Intermediate crude (WTI) was up USD 1.01, or 1.3%, at USD 80.93 a barrel.

Prices fell more than 1.5% in the previous session on worries about China’s embattled economy and the potential for further increases in US interest rates.

China’s central bank said it would keep liquidity reasonably ample and maintain a “precise and forceful” policy to support economic recovery against headwinds.

“Oil traders like the fact that China isn’t going to tolerate weakness in economic activity,” said Naeem Aslam at Zaye Capital Markets.

The dollar index slipped off a two-month high the day after Federal Reserve meeting minutes left the door open for more rate hikes and data this week indicated a resilient US economy.

Higher interest rates increase borrowing costs, which could slow economic growth and reduce oil demand.

On a bullish note, China made a rare draw on crude oil inventories in July, the first time in 33 months it has dipped into storage.

Data released on Wednesday showed that US crude oil inventories fell by nearly 6 million barrels last week on strong exports and refining run rates.

US gasoline stocks however drew to the lowest in more than two months, US Energy Information Administration data showed on Wednesday. Weekly products supplied, a proxy for demand, rose to the highest since December.

“Travel demand has remained stubbornly strong,” said Dennis Kissler, senior vice president of trading at BOK Financial. Travel demand typically tapers after the US Independence Day holiday on July 4.

Oil looks like it will find a home around the USD 80 level as too many risks to the macroeconomic outlook remain on the table, said OANDA analyst Edward Moya.

(Reporting by Arathy Somasekhar in Houston; Additional reporting by Natalie Grover in London, Katya Golubkova and Sudarshan Varadhan in Singapore; Editing by David Goodman, Christina Fincher, David Gregorio, and Jan Harvey)

Dollar, US yields deliver one-two punch

Aug 17 – Asian market sentiment on Thursday will again be a mix of caution and nervousness, with familiar roots: a supercharged dollar and rising US bond yields, tightening financial conditions, and deepening concern over China.

Wall Street’s steep fall on Wednesday following another batch of bumper US economic data showed that the relentless rise in borrowing costs is weighing more heavily on investors’ psyche than the surprising strength of the US economy.

This will likely feed into the market open in Asia, where the economic calendar on Thursday is pretty full – Japanese trade and machinery orders, Australian and Hong Kong unemployment, and an interest rate decision from the Philippines are all on tap.

The dollar is worth noting. It rose again on Wednesday and is now up 18 sessions out of the last 24. It is on track for its fifth consecutive weekly gain, which would be its best run since April-May last year.

The greenback’s strength has this week pushed the Indian rupee to a record low, the Japanese yen to a 2023 low and into territory where Tokyo intervened heavily last year, and the offshore Chinese yuan within sight of October’s record low.

The twin rise in the dollar and US bond yields is a classic red flag for emerging markets, and this time is no different.

Goldman Sachs’s financial conditions indexes show that Chinese and aggregate emerging market financial conditions have tightened sharply this month, by more than 100 basis points, and are both now the tightest this year.

The People’s Bank of China is responding – on Tuesday it cut rates in a surprise move, and on Wednesday it injected the most short-term cash into the banking system through seven-day reverse repos since February.

But the pressure on Beijing to do more to support the creaking economy can be seen in the 10-year yield’s slide to its lowest since May 2020. Remarkably, China’s 10-year yield is now 170 basis points below the 10-year US Treasury yield, the widest gap since 2007.

Oil prices, which last week hit their highest levels of the year, are now in retreat due to fears over faltering demand from China. Brent and WTI crude are down 4% to 5% this week, both on course to snap seven-week winning streaks.

Good news, perhaps, from the point of view of keeping global inflation in check; not so good news that the world’s growth engine is sputtering badly.

It’s little wonder Chinese and regional shares are feeling the heat. Chinese blue chip shares fell on Wednesday for a fourth day, and the MSCI World and MSCI Asia ex-Japan indexes have now fallen 10 out of the last 12 sessions.

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

– Philippines interest rate decision

– Australia unemployment (July)

– Japan trade (July)

(By Jamie McGeever; Editing by Josie Kao)

Gold eases as traders assess Fed rate outlook

Aug 16 – Gold prices eased on Wednesday as the dollar ticked higher, while minutes from the Federal Reserve’s July policy meeting highlighted that policymakers remained divided over the need for more rate hikes.

Spot gold dipped 0.2% at USD 1,897.00 per ounce by 2:15 p.m. EDT (1815 GMT), while US gold futures settled 0.4% lower at USD 1,928.30.

The dollar index was up 0.2%, making bullion more expensive for overseas buyers.

Minutes for the Fed’s July 25-26 meeting showed “some participants” citing the risks to the economy of pushing rates too far even as “most” policymakers continued to prioritize the battle against inflation, according to minutes of the session.

“The broader economic situation looks better than it did three months ago and inflation seems to be coming down the way the Fed wants, and in such a situation there is less need for safe havens like gold,” said Everett Millman, chief market analyst at Gainesville Coins.

“The path of least resistance seems to be lower for gold right now.”

Gold prices have dropped more than 8%, or over USD 170 per ounce, since scaling above the key USD 2,000 level in early May, as a rally in US Treasury yields and a strong dollar took the shine off non-yielding bullion.

Indicating investor sentiment, holdings of the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust GLD, fell to its lowest level since January 2020.

Rising US interest rates increase the opportunity cost of holding gold.

“The main factor slowing gold’s decline is the lack of confidence in the health of the global economy with the latest data out of China adding to that negative sentiment,” Rupert Rowling, a market analyst at Kinesis Money, said in a note.

Silver fell 0.2% to USD 22.47 an ounce, platinum lost 0.2% to USD 886.55 and palladium slipped 2.2% to USD 1,208.46.

(Reporting by Brijesh Patel in Bengaluru, additional reporting by Ashitha Shivaprasad; Editing by Paul Simao, Jonathan Oatis, and Shilpi Majumdar)

Hedge funds dump Chinese stocks aggressively as growth outlook dims

NEW YORK, Aug 15 – Global hedge funds are “aggressively” selling Chinese stocks amid heightened concerns over the country’s property sector and a weak batch of economic data, a Goldman Sachs report on Tuesday showed.

All types of stocks were sold, but A-shares, those listed in the domestic stock market, led the sell-off, comprising 60% of it, the bank said.

“Hedge funds have net sold Chinese stocks in eight of the last ten sessions on the prime book through 8/14,” it said, adding its clients divested both their long and short positions.

This is the largest net selling in Chinese equities over any 10-day period since Oct 2022 and one of the highest moves in the past five years.

Goldman Sachs, as one of the biggest providers of lending and trading services through its prime brokerage unit to investors, is able to track hedge funds’ investment trends.

Global investors have raised concerns about China’s economy as a confluence of recent events has darkened its economic outlook.

On Tuesday, a broad array of Chinese economic data highlighted intensifying pressure on the economy from multiple fronts, prompting Beijing to cut key policy rates to shore up activity.

Chinese property giant Country Garden is seeking to delay payment on a private onshore bond and a major Chinese trust company that traditionally had sizable exposure to real estate, Zhongrong International Trust Co, has missed some repayment obligations.

Hedge funds are increasingly wary of their exposure to China. A raft of US-based hedge funds, including Coatue, D1 Capital, and Tiger Global, cut their positions in Chinese stocks in the second quarter, as the country’s economic prospects already seemed to wobble and geopolitical tension increased, securities filings showed on Monday.

(Reporting by Carolina Mandl in New York; Editing by Sonali Paul)

Oil settles lower as China fears, rate hikes counter tight US supply

Aug 16 – Oil prices settled lower on Wednesday despite a large drawdown in US crude stocks as investors weighed worries about China’s embattled economy against expectations of tighter supply in the United States.

Brent crude futures fell USD 1.44, or 1.7%, to settle at USD 83.45 a barrel while US West Texas Intermediate crude (WTI) fell USD 1.61, or 2%, to USD 79.38.

Both benchmarks fell more than 1% in the previous session to their lowest since Aug. 8.

US crude oil inventories fell by nearly 6 million barrels last week on strong exports and refining run rates, despite crude production rising to its highest since the coronavirus pandemic decimated fuel consumption, Energy Information Administration data showed on Wednesday.EIA/S

However, product supplied of gasoline fell by 451,000 barrels per day in the week as peak driving season draws to a close.

“This week’s draw simply offset last week’s unexpected 6-million-barrel build and looking ahead to next week, we can see a sharp decline in exports that will likely prompt a counter-seasonal crude stock build,” said Jim Ritterbusch, president of Ritterbusch and Associates LLC in Galena, Illinois.

Oil also fell along with equities after the release of the Federal Reserve’s minutes showed central bank officials were divided over the need for more interest rate hikes at their last meeting.

Higher interest rates increase borrowing costs for businesses and consumers, which could slow economic growth and reduce oil demand.

China’s sluggish economy remained in focus, after retail sales, industrial output and investment figures failed to match expectations, fueling concern over a deeper, longer-lasting slowdown.

July activity figures have prompted concerns that China may struggle to meet its growth target of about 5% for the year without more fiscal stimulus, and calls for authorities to take decisive steps.

Without giving details, a cabinet meeting chaired on Wednesday by Premier Li Qiang said China would continue to introduce policies aimed at boosting consumption and promoting investment.

Both the OPEC+ group, comprising the Organization of the Petroleum Exporting Countries and allies, and the International Energy Agency (IEA) are banking on China – the world’s biggest oil importer – to galvanize crude demand over the rest of 2023.

While dismal Chinese economic indicators have been causing headaches, providing a justified excuse for investors to go on the defensive, the global oil balance shows no signs of loosening up, PVM analyst Tamas Varga said, citing the latest numbers on US crude inventories.

Supply cuts by Saudi Arabia and Russia have pushed up oil prices over the past seven weeks. Figures published on Wednesday showed that Riyadh’s crude exports fell to their lowest since September 2021.

(Additional reporting by Natalie Grover in London, Arathy Somasekhar in Houston, and Trixie Yap in Singapore; editing by Muralikumar Anantharaman, Jason Neely, Tomasz Janowski, and Josie Kao)

China crisis

Aug 16 – The word ‘crisis’ should always be used responsibly and judiciously when covering financial markets, business, and economics, but are we at that point now with China?

Developments in the last 24 hours from the world’s second-largest economy – another string of top-tier data ‘misses’, a shock interest rate cut and an abrupt announcement that (record high) youth unemployment data will no longer be published – suggest we might be.

The deepening concern around China’s economy, policy options, and financial markets will weigh heavily on Asian investor sentiment on Wednesday, with an interest rate decision from New Zealand and the latest manufacturing and service sector ‘tankan’ surveys from Japan also on tap.

It’s not all doom and gloom in Asia – Japan’s economy grew twice as fast in the second quarter as economists had expected – but China’s travails are front and center right now.

Perhaps even more worrying for investors than the misses on investment, industrial production and retail sales, or the surprise rate cut, was Beijing’s decision to suspend the publication of youth unemployment figures for an unspecified length of time.

The official rate in June was a record 21.3%. That’s bad enough, but in an online post last month – since removed – Peking University professor Zhang Dandan estimated it could be closer to 50%.

The latest snapshot of Chinese house prices will be released on Wednesday, and again, another weak report could be in store, with the country’s property sector in a genuine state of crisis.

JP Morgan on Tuesday said if developer Country Garden suffers a full-scale default, it will more than double China’s year-to-date property default tally to USD 17 billion, adding to the USD 100 billion racked up over the past two and a half years.

The People’s Bank of China may have finally pulled the interest rate lever, but it had the expected impact of slamming the exchange rate. The offshore yuan tumbled through 7.30 per dollar to its weakest level this year and is now flirting with November’s historic low of around 7.35 per dollar.

Compare and contrast China with Japan, as per Tuesday’s bumper Q2 GDP data, and the US, where figures on Tuesday showed a surge in retail sales. The Atlanta Fed’s GDPNow model is projecting annualized Q3 growth of 5.0%.

Global stocks, Wall Street, and emerging markets all buckled on Tuesday under the weight of rising bond yields, ‘higher for longer’ Fed rate expectations, and a buoyant dollar.

The MSCI Asia ex-Japan index fell for a fourth day and has now only risen twice in the last 11 sessions. Among the biggest losers in Asia on Tuesday was Hong Kong’s mainland property index, which fell 1% to take its year-to-date decline to 16%.

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

– New Zealand interest rate decision

– China house prices (July)

– Japan tankan surveys (August)

(By Jamie McGeever; Editing by Josie Kao)

Yields briefly pop to nearly 10-month highs after strong US retail sales

NEW YORK, Aug 15 – Benchmark 10-year US Treasury yields hit an almost 10-month high on Tuesday before quickly dipping, after data showed July retail sales rose more than expected.

Retail sales jumped 0.7% last month, above the 0.4% forecast. June data was revised higher to show sales rising 0.3% instead of the previously reported 0.2%.

Americans boosted online purchases and dined out more, suggesting the US economy continues to expand and putting recession fears at bay. Resilient US data has also boosted expectations that the Federal Reserve may hold interest rates higher for longer to bring inflation down closer to its 2% annual target.

Markets have priced in “a considerably higher probability that we stay around the current terminal rate for a longer period than was previously expected,” said Jonathan Cohn, head of US rates desk strategy at Nomura in New York.

Benchmark 10-year yields hit 4.274%, the highest since Oct. 24, before settling at 4.215% in afternoon trading.

Two-year yields reached 5.024%, the highest since July 7, before retreating to 4.952%. The interest rate-sensitive notes are holding below the 5.120% yield reached on July 6, the highest since June 2007.

The inversion in the closely watched yield curve between two- and 10-year notes narrowed to minus 74 basis points.

The Fed will release minutes from its July 25-26 meeting on Wednesday. The Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming, on Aug. 24-26 could also deliver clarity on Fed thinking.

Futures markets are now pricing in a nearly 35% chance that the Fed’s benchmark rate will be above its current range at its December meeting, up from a roughly 25% chance seen a month ago.

The market is evaluating “how far the sell-off can run” before the Fed releases minutes of its previous meeting Thursday afternoon, said Benjamin Jeffery, US rates strategy at BMO Capital Markets.

August 15 Tuesday 4:00PM New York / 2000 GMT

	Price	Current Yield %	Net Change (bps)
Three-month bills	5.29	5.4519	0.010
Six-month bills	5.28	5.5152	-0.019
Two-year note	99-162/256	4.948	-0.017
Three-year note	99-64/256	4.6459	0.003
Five-year note	98-236/256	4.3689	0.014
Seven-year note	98-32/256	4.3146	0.027
10-year note	97-64/256	4.2149	0.033
20-year bond	91-208/256	4.505	0.046
30-year bond	96-168/256	4.325	0.044

DOLLAR SWAP SPREADS
	Last (bps)	Net Change (bps)
US 2-year dollar swap spread	0.00	0.00
US 3-year dollar swap spread	0.00	0.00
US 5-year dollar swap spread	0.00	0.00
US 10-year dollar swap spread	0.00	0.00
US 30-year dollar swap spread	0.00	0.00

(Reporting by Karen Brettell; Editing by Emelia Sithole-Matarise, Richard Chang and Jonathan Oatis)

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