US corporate bond spreads tighten on positive data prints

Aug 10 – US corporate bond spreads tightened on Thursday after the July consumer price index (CPI) and initial jobless claims data came in line with expectations.

Investment-grade bond spreads, or the premium companies pay over Treasuries for their bonds, broadly tightened by a few basis points, and junk-bond prices ticked up a quarter to half a point after the US Labor Department released the data earlier on Thursday, according to bankers and analysts.

The CPI gained 0.2% last month, lifting the annualized rate to 3.2% from 3% in June. Economists polled by Reuters expected headline CPI to rise to 3.3%.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits increased 21,000 to a seasonally adjusted 248,000 for the week ended Aug. 5. Economists had forecast 230,000 claims for the latest week.

“That is actually good news, because what we’ve been waiting for a while is for more slack in the labor markets,” said Hans Mikkelsen, managing director of credit strategy at TD Securities.

The prints served as a further assurance to bond markets that the Fed’s tightening cycle may be nearing an end.

“The combination of these two factors should give the Fed more room to pause at the next meeting,” said Blair Shwedo, head of investment-grade trading at US Bank.

The Fed’s next policy meeting is scheduled for Sept. 19-20.

Supply of new bonds is expected to pick up, though credit spreads are not expected to widen.

“The inflation crisis ended last spring, and since then investment-grade spreads and high-yield spreads have been moving tighter,” said Guy LeBas, chief fixed income strategist at Janney Capital Management.

The average spreads on investment-grade bonds over Treasuries have tightened 17 basis points this year while junk-bond spreads have come in 76 basis points, according to ICE BofA data.

(Reporting by Matt Tracy in Washington; Editing by Leslie Adler)

Gold firms on Fed pause hopes after US inflation data

Aug 10 – Gold prices ticked up on Thursday after data showed US consumer prices increased moderately in July, cementing expectations the Federal Reserve is at the end of its rate hike cycle.

Spot gold was up 0.1% at USD 1,915.49 per ounce by 1:51 p.m. EDT (1751 GMT), after rising as much as 0.8% following the release of the US data.

US gold futures settled 0.1% lower at USD 1,948.9.

The consumer price index (CPI) rose 0.2% last month, matching the increase in June, the US Labor Department said. The CPI advanced 3.2% in the 12 months through July, up from a 3.0% rise in June, which was the smallest year-on-year gain since March 2021.

“With CPI continuing to slowly tick lower, that portends less likelihood of the Fed’s need to continue to raise interest rates, particularly at the September meeting,” said David Meger, director of metals trading at High Ridge Futures.

“As a result, we’ve seen the dollar retrace and yields pull back and that’s a better underlying environment for the gold market.”

Following the data, the dollar eased against its rivals, making gold more attractive for other currency holders. However, benchmark US 10-year bond yields rose in a choppy session, keeping gold gains in check.

According to the CME’s FedWatch Tool FEDWATCH, the probability the Fed leaves rates unchanged at its September meeting is now at 90.5% from around 86.5% prior to the data.

Gold is highly sensitive to rising US interest rates, as they increase the opportunity cost of holding non-yielding bullion.

A separate report from the Labor Department showed initial claims for state unemployment benefits increased by 21,000 to a seasonally adjusted 248,000 for the week ended Aug. 5.

Elsewhere, silver gained 0.2% to USD 22.72 per ounce, platinum rose 2.2% to USD 908.21 and palladium jumped 4.5% to USD 1,290.94.

(Reporting by Brijesh Patel and Deep Vakil in Bengaluru; Editing by Krishna Chandra Eluri)

Moody’s warning on US banks a wake-up call for sanguine investors

NEW YORK, Aug 10 – The slide in US bank stocks this week appeared to catch traders in the options market by surprise, data shows, raising questions over whether bank investors have become a little too comfortable with the sector that only months ago was in crisis.

US bank shares dropped on Tuesday after ratings agency Moody’s downgraded credit ratings of several US regional lenders and placed some banking giants on review for a potential downgrade.

It warned lenders will find it harder to make money as interest rates remain high, funding costs climb and a potential recession looms. It also cited some lenders’ exposure to commercial real estate as a risk.

The warning caught some investors off guard.

A day before, options traders’ expectations for near-term swings in the shares of two major sector exchange-traded funds (ETFs) – SPDR S&P Bank ETF and SPDR S&P Regional Banking ETF – hit the lowest level since the collapse of Silicon Valley Bank in March, signaling little investor concern about the sector’s outlook, data from Cboe’s options analytics service Trade Alert showed.

On Tuesday, SPDR S&P Regional Banking ETF’s options-based 30-day implied volatility rose to 31.1%, up from 28.9% touched on Monday. At 30.7% late on Wednesday, that gauge of how much traders expect the shares to gyrate still remains well below the high of 82% touched in March.

Investors appear to have made their peace with risks in the sector and were not focused on defensive positioning, either because they had already shed banks exposure, or were not very concerned about fresh bad news, said Steve Sosnick, chief strategist at Interactive Brokers.

“There’s not nearly as much risk being priced in,” he said.

With some 1.5 put options open against each call option, as of Wednesday, positioning is less defensive than it has been about 80% of the time over the last four years, and a far cry from March when there were more than 4 puts open against each call, according to Trade Alert.

Calls convey the right to buy shares at a fixed price in the future and are usually used to bet on shares rising. Put options give the right to sell shares and express a bearish or defensive view.

While the S&P 500 Banks index is down about 3% for the year, compared with a 17% gain for the S&P 500 Index, it is up about 17% from the multi-year lows touched in early May.

“This is more of a shot across the bow for those investors that are getting complacent within this space,” said David Wagner, Portfolio Manager at Aptus Capital Advisors, referring to the Moody’s ratings changes.

RISKS LINGER

The collapse of three mid-sized US banks earlier this year and record deposit outflows from smaller lenders sparked investor concerns about the broader banking industry, but no further bank failures and resilient economic data have helped shore up investor sentiment since May.

Still, risks linger, including exposure to the commercial real estate office sector, which has been hurt by lingering pandemic vacancies and high interest rates, and the growing cost to retain flight of deposits.

“Commercial real estate is one of the focal points for investors. It is going to take a long time to play out and is…one of the biggest risk factors for banks at the moment,” said David Smith, an analyst at Autonomous Research.

“There has been a change in deposit mix leading to higher cost of funding which remains a concern,” he added.

Analysts also believe that some risks from impending new regulatory capital hikes may be under-priced, since these could result in short-term capital pressure for some lenders.

Some investors, though, said the biggest risks are mostly short-term.

Brian Mulberry, client portfolio manager at Zacks Investment Management, which holds stocks in a number of major lenders, said he was looking 12 to 18 months out when earnings are expected to jump.

“In the near term, there are reasons for caution about banks in general and we have made changes where appropriate,” he said.

“As interest rates go higher, the more pressure it puts on banks’ profitability, even so, we do not see this as a solvency issue where the entire banking system will collapse.”

(Editing by Michelle Price and Diane Craft)

Dollar softens ahead of CPI, energy costs another focus

TOKYO/LONDON, Aug 10 – The dollar dipped against most currencies on Thursday ahead of U.S. inflation data later in the day that will shape the Fed’s policy direction, though the greenback did touch a one-month high against the Japanese yen, partly on higher energy costs.

The euro rose 0.44% to USD 1.10235, the pound gained 0.3% to USD 1.2757, and the yen was steady at 143.77 per dollar, having earlier softened to 144.14 per dollar, its weakest in a month.

However, the main scheduled event of the day – and indeed the week -the release of US CPI for July is yet to come.

The data will go some way towards underscoring or disrupting markets’ current expectation that the Federal Reserve is finished with its hiking cycle.

Expectations are for headline inflation to pick up slightly to an annual 3.3%, while the core rate, which excludes the volatile food and energy segments, is forecast to rise 0.2% in July, for an annual gain of 4.8%.

“The market reckons its got a good handle on CPI. Yes the headline number will go up, but on base effects so the Fed won’t mind and the core number is probably going to go down towards the target, so everything’s going to be OK,” said Jane Foley head of FX strategy at Rabobank.

“But even if the number comes out in line, there are a number of things for the market to be watching out for,” she said pointing the recent volatility in the US Treasury market and higher energy costs, which could filter through to inflation, and cause central banks to keep hiking rates.

European benchmark gas prices hit a nearly two-month intraday high on Wednesday afternoon after news of possible strikes at Australian liquefied natural gas facilities, while oil is at multi-month peaks.

“We’ve got euro/dollar back above USD 1.10 this morning, quite possibly because of energy because markets are thinking ‘oh does that mean the ECB will have to hike interest rates again?'” said Foley.

“Though you could argue it the other way given the euro zone recession risk if energy stays higher,” she added.

The impact of higher energy costs were also a factor in the softer yen, as the resource-poor nation is a major oil importer.

“The fact that energy prices have risen for almost seven weeks, that’s certainly weighed on the yen,” said Tony Sycamore, a market analyst at IG.

A break above 145 would open the way potentially to 148 “if we get the U.S. dollar flexing again after the CPI,” he said.

Despite the BOJ’s decision to relax its control of long-term yields at the end of last month, policymakers have stressed the change was a technical tweak aimed at extending the shelf life of stimulus, chiefly defined by the negative short-term interest rate.

Elsewhere, China’s yuan edged further from a one-month trough after the People’s Bank of China again set a stronger-than-expected mid-point guidance rate in a sign of displeasure at recent weakness.

That helped lift the Australian and New Zealand dollars from near two-month lows.

The dollar was down 0.14% against the offshore yuan to 7.216, and the Aussie, which has tended to follow the yuan closely this week, rose 0.4% to USD 0.6555, rebounding from Tuesday’s trough at USD 0.6497, the lowest level since June 1.

The Swiss franc, the best-performing G10 currency against the dollar this year, also firmed. The dollar was down 0.5% at 0.873 francs.

(Reporting by Kevin Buckland and Brigid Riley; Editing by Shri Navaratnam, Kim Coghill and Sharon Singleton)

China, Hong Kong stocks rise after China lifts curb on foreign group tours

HONG KONG, Aug 10 – China and Hong Kong shares ended higher on Thursday, reversing losses in early trading, as the lifting of a pandemic-era ban on outbound group tours boosted airline and travel-related stocks and helped improve sentiment.

** China’s blue-chip CSI 300 Index climbed 0.21%, while the Shanghai Composite Index gained 0.31%. Both indexes snapped three consecutive sessions of losses.

** Hong Kong’s Hang Seng Index inched up 0.01%, rebounding from a two-week low seen earlier on Thursday.

** CSI Tourism Thematic Index rose 2% on news that effective on Thursday, group tours can resume on key markets such as the United States, Japan, South Korea and Australia in a potential boon for their tourism industries.

** Shanghai-listed Air China rose 4.86%, while Hong Kong-listed shares of Trip.com gained 2.71%.

** Energy and oil stocks also rose, with CSI Energy Index rising 2.12%. Yankuang Energy jumped 5.54% to hit a two-week high.

** Still, China’s faltering recovery and high youth jobless rate also capped the gains in key indexes. The state media reported on Tuesday that almost half of Chinese graduates are ditching mega-cities and returning to their home towns after graduation due to a sagging job market.

** Consumer discretionary-related stocks dropped 0.64%.

** The Hang Seng Mainland Properties Index fell 2.08% after property developer Country Garden failed to make USD 22.5 million in coupon payments due earlier this month, and as investors remained sceptical if the debt-laden sector could turn around soon.

** China Unicom 0762.HK rose 3.28% after it reported first-half net profit rose 13.1% to 12.4 billion yuan, and added 5.3 million new mobile subscribers, highest first-half net addition in four years.

** The market is also awaiting US July Consumer Price Index (CPI) data due later in the day, which is expected to show a slight year-over-year acceleration.

** “As the US Federal Reserve’s rate hike cycle is nearing an end, for the third quarter I’ll expect the HSI to find support at the 18,500 level,” said Linus Yip, chief strategist at First Shanghai Securities.

(Reporting by Georgina Lee; Editing by Rashmi Aich and Varun H K)

Gold struggles for traction as traders await US inflation report

Aug 9 – Gold prices slipped on Wednesday as investors stayed on the sidelines ahead of key US inflation data that could offer more cues on the Federal Reserve’s stance on monetary policy.

Spot gold was down 0.5% at USD 1,915.98 per ounce by 1:57 p.m. ET (1757 GMT), lowest since July 10. US gold futures settled 0.5% lower at USD 1,950.60 per ounce.

“Tomorrow’s CPI will be a pivot point for Fed policy … it’s kind of wait-and-see mode now,” said Daniel Pavilonis, senior market strategist at RJO Futures.

“Gold has been this inflationary kind of hedge also, but it is fighting an uphill battle with a 10-year yield. Gold will likely struggle if inflation is still there and the Fed is looking to raise rates too fast,” Pavilonis added. US/

US consumer price index (CPI) data, due on Thursday, is expected to show inflation slightly accelerated in July to an annual 3.3%.

Most traders expect no change from the Fed at its policy meeting in September. There is just a 13.5% chance of a quarter-point rise, according to the CME’s FedWatch Tool.

“For a sustained recovery (in gold), we believe the market will need to see increased certainty on 2024 US rate cuts,” said Baden Moore, head of carbon and commodity strategy at National Australia Bank.

Lower interest rates decrease the opportunity cost of holding non-yielding bullion and weigh on the dollar.

Offering some respite to gold, the dollar fell 0.1% against its rivals after data showing the Chinese economy slipped into deflation last month lifted hopes for more stimulus.

Spot silver eased 0.4% to USD 22.67 an ounce and platinum slipped 1.1% to USD 890.34, while palladium gained 1.2% to USD 1,234.47.

(Reporting by Brijesh Patel and Anjana Anil in Bengaluru; Editing by Krishna Chandra Eluri)

Bond strategists cling to forecasts for declining US yields

BENGALURU, Aug 9 – US Treasury yields will fall in coming months despite clear signs the Federal Reserve is reluctant to consider rate cuts any time soon, according to bond strategists polled by Reuters who said the 10-year yield would not revisit its cycle peak.

Although yields have mostly defied predictions in recent months and come in higher on a still-resilient economy and an inflation-focused Fed, bond strategists, mostly at sell-side firms, have clung to their expectations for declines.

The median forecast for the 10-year Treasury note yield was 3.60% in six months, a slight upgrade from 3.50% in a July survey, and compared with 4.03% on Wednesday and a cycle high of 4.34% last October, the Aug. 3-9 poll of 41 strategists showed.

But some analysts are showing signs of hesitation about steep falls. The 10-year note yield is still well below the two-year equivalent, usually a sign of impending recession at a time when most of the talk in markets is about the Fed avoiding one.

“We now see more limited scope for yields to fall over coming quarters,” said Phoebe White, US rates strategist at J.P. Morgan. They upgraded their year-end 10-year yield forecast to 3.85% from 3.50%.

“A stronger growth trajectory into next year than we previously forecast should allow the Fed to stay on hold for longer, and we now expect just 25bps of easing per quarter beginning in Q3 2024,” she said.

But an overwhelming 81% majority of respondents to an additional question, 29 of 36, said the 10-year yield would not revisit its October 2022 high of 4.34% at any point in this cycle. The remaining seven said it would, with most expecting that to happen this year.

A hotter-than-expected July US consumer price index inflation reading, due Thursday, could raise expectations for more hawkish Fed policy and drive bond yields up further. Prices rose 3.3% from a year ago last month from 3.0% in June, a separate Reuters poll predicted.

Interest rate futures are now pricing in the first Fed rate cut in May 2024 instead of March a few weeks back.

“The market is currently pricing six rate cuts next year. I don’t see that, because I don’t think inflation will go back down to 2%, preventing the Fed from cutting too aggressively,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management.

“For inflation to go down from 8% to 3% was fairly easy, but going down to 2% will be very hard given the very strong labor market,” he added.

According to the poll, the interest rate-sensitive 2-year note yield will have dropped over 40 basis points to 4.33% six months from now.

If realized, this would reduce the yield curve inversion – the spread between yields of 2-year and 10-year notes – to about 30bps in a year from about 75bps currently.

That view was in line with bond traders betting on yield curves returning to a more normal shape on hopes slowing economies force central banks to cut interest rates.

“As we move forward and the Fed goes from a singular focus on fighting inflation to being on hold, we are likely to get a steeper yield curve configuration,” said Robert Tipp, chief investment strategist at PGIM Fixed Income.

“If our forecasts are correct, we will in fact achieve a soft landing … and this would be an exception to the rule for curve inversion.”

(Reporting by Sarupya Ganguly and Indradip Ghosh; Polling by Anitta Sunil, Sujith Pai, and Purujit Arun; Editing by Jonathan Cable, Ross Finley, and Jonathan Oatis)

European shares rebound as Italy eases stance on bank levy

Aug 9 – European shares hit a one-week high on Wednesday, with Italian lenders rebounding from previous session’s sharp losses after the government eased its stance on a new banking tax.

The pan-European STOXX 600 added 1.0%, with technology and bank leading gains.

Eurozone banks gained 1.9% after a 3.5% slump a day earlier, as Italy’s government announced late on Tuesday a cap on a windfall tax for the country’s lenders. It clarified that the 40% windfall tax would not amount to more than 0.1% of their total assets.

Italian lenders such as Intesa Sanpaolo ISP, Banco BPM and UniCredit added between 3.3% and 4.1%, while the banks-heavy FTSE MIB index rose 2.0%.

“We’ve had some watering down of the policy from yesterday and what it looks like is the impact should be less severe, but still a tax, nonetheless,” said Ankit Gheedia, head of equity and derivatives strategy at BNP Paribas.

Investors also appeared to shrug off data that showed China’s consumer sector fell into deflation and factory-gate prices extended declines in July.

“Economic data has already been weak and I wouldn’t say that there’s a lot of optimism baked into the market for a swift China recovery,” Gheedia said.

“If there is some policy announcement that supports growth in China, that should benefit Europe.”

The basic resources sector climbed 1.7% as copper prices advanced on a softer dollar and hope for stimulus measures from top metals consumer China.

The focus will shift to US inflation data due on Thursday, with investors looking to see if the Federal Reserve will pause its monetary tightening cycle this year.

Meanwhile, earnings for STOXX 600 companies are expected to have fallen 4.8% in the second quarter, according to Refinitiv IBES data, a clear improvement from the 8.2% drop estimated at the start of the earnings season.

Delivery Hero DHER.DE advanced 7.8% to the top of the STOXX 600 after the German online takeaway food company raised its full-year revenue outlook.

Dutch supermarket group Ahold Delhaize N.V fell 2.6%, with analysts pointing to weakening profitability in the United States even as the company raised its free cash flow forecast.

Flutter Entertainment FLTRF.I lost 5.8% after the world’s largest online betting firm posted a 76% jump in half-year core profit but warned of a weaker Australian market outlook.

(Reporting by Shashwat Chauhan and Sruthi Shankar in Bengaluru; Editing by Varun H K and Eileen Soreng)

China stocks fall as economy slips into deflation

HONG KONG, Aug 9 – China A-shares extended losses on Wednesday as consumer prices fell into deflation, with markets looking forward to more stimulus policies to revive spending. Hong Kong stocks closed higher.

** China’s blue-chip CSI 300 Index dipped 0.31%, and the Shanghai Composite Index fell 0.49%.

** Hong Kong’s Hang Seng Index edged up 0.32% and the Hang Seng China Enterprises Index rose 0.39%.

** China’s consumer prices fell into deflation in July, dropping 0.3% year-on-year, its first fall in over two years.

** Factory gate prices fell for the tenth consecutive month.

** Chinese policymakers will soon organize a meeting with four biggest cities’ top leaders to discuss property policy optimization, Chinese media Economic Observer reported on Wednesday.

** “Both CPI and PPI are in deflation territory. The economic momentum continues to weaken due to lacklustre domestic demand,” said Zhiwei Zhang, president of Pinpoint Asset Management.

** The CPI deflation may put more pressure on the government to consider additional fiscal stimulus, he said.

** Goldman Sachs analysts said in a note they expect annual PPI inflation to bottom out this quarter and CPI inflation to experience a “U-shaped” recovery in the coming months.

** Linus Yip, chief strategist at First Shanghai Securities, said the falling CPI is not all bad news.

** Given the US rate hike cycle is close to an end, today’s CPI number actually makes some investors look forward to a larger room for policy easing, he said.

** Meanwhile, major state-owned banks were seen selling US dollars to buy the yuan in the onshore spot foreign exchange market, sources told Reuters, in a bid to slow yuan declines.

** Tech giants listed in Hong Kong narrowed losses in the noon session and closed flat.

** In mainland A-shares, healthcare stocks climbed 1.4%, while artificial intelligence-related firms down 2%.

** Top homebuilder Country Garden lost another 1.8% after a 14% slump on Tuesday as the company missed two dollar bond coupon payments.

(Reporting by Summer Zhen; Editing by Savio D’Souza and Varun H K)

Oil hits new highs on US fuel demand, tighter supply

HOUSTON, Aug 9 – Oil prices hit new peaks on Wednesday with the global Brent benchmark touching its highest since January after a steep drawdown in US fuel stockpiles and Saudi and Russian output cuts offset concerns about slow demand from China.

Brent crude settled USD 1.38, or 1.6%, higher at USD 87.55 a barrel, its highest since Jan. 27.

West Texas Intermediate crude (WTI) closed USD 1.48, or 1.8%, higher at USD 84.40, at its highest since November 2022.

US gasoline stocks fell by 2.7 million barrels last week, while distillate inventories, which include diesel and heating oil, dropped by 1.7 million barrels, government data showed, compared with analysts’ expectations in a Reuters poll for both to hold mostly steady. EIA/S

“The draws in refined products continue to be bullish for the oil market,” said Andrew Lipow, president at Lipow Oil Associates in Houston.

Markets largely shrugged off a higher-than-expected 5.85-million-barrel build in US crude stocks after a record drawdown the week before.

The US fuel stock drawdown helped offset some demand concerns after Chinese data on Tuesday showed crude oil imports in July fell 18.8% from the previous month to their lowest daily rate since January.

China’s consumer sector also fell into deflation and factory-gate prices extended declines in July, as the world’s second-largest economy struggled to revive demand.

Supporting prices, however, were top exporter Saudi Arabia’s plans to extend its voluntary production cut of 1 million barrels per day for another month to include September. Russia also said it would cut oil exports by 300,000 bpd in September.

“The latest recovery is mainly driven by the pledge of major producers, like Saudi Arabia and Russia, to keep supply subdued for another month,” said Charalampos Pissouros, senior investment analyst at broker XM.

Crude posted its sixth consecutive weekly gain last week, helped by a reduction in OPEC+ supplies and hopes of stimulus boosting oil demand recovery in China.

On Tuesday, Saudi Arabia’s cabinet said it reaffirmed its support for precautionary measures by the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, to stabilize the market, state media reported.

Markets will also closely watch July’s US Consumer Price Index (CPI), due on Thursday, which is expected to show a slight year-over-year acceleration.

(Additional reporting by Alex Lawler in London, Yuka Obayashi in Tokyo, and Andrew Hayley in Beijing; Editing by Paul Simao, Kirsten Donovan, and Cynthia Osterman)

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