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)

US bank stocks fall on prospect of tougher oversight, more downgrades

Aug 15 – Shares of US banks dropped on Tuesday as the prospect of tighter regulations and a possible downgrade of several lenders by Fitch Ratings raised investor concerns over the health of the sector.

Federal Deposit Insurance Corporation Chairman Martin Gruenberg said in a speech on Monday that the agency planned to propose new rules to overhaul how large regional banks prepare “living wills” – detailed plans on how they would wind up their businesses should they fail.

The rules are part of sweeping changes US regulators are aiming to introduce to tighten oversight of the banking system following the collapse of several lenders in March.

A Fitch Ratings analyst warned that the agency could downgrade several large US banks, weeks after rival Moody’s cut the ratings of 10 mid-sized lenders, citing funding risks and weaker profitability.

The S&P 500 banking index was down 2.5%, hitting its lowest in a month, with JPMorgan Chase (JPM) falling nearly 4%. Bank of America (BAC), Wells Fargo (WFC), Goldman Sachs Group (GS), Citigroup (C), and Morgan Stanley (MS) declined between 1.7% and 2.1%.

“We kind of knew some of this was coming and the downgrades are reflective of stuff the market has already digested and taken into consideration,” said Jack Janasiewicz, portfolio manager and lead strategist at Natixis Investment Managers.

“It’s just a reflection of the general sentiment,” Janasiewicz added.

Among the mid-sized banks, Western Alliance Bancorp (WAL) and PacWest Bancorp (PACW) were down more than 3%, respectively. Michael Burry’s Scion Asset Management disclosed on Monday that it had sold its stake in both banks. Comerica (CMA) and KeyCorp (KEY) were also among the losers, dropping more than 4% each.

Benchmark 10-year US Treasury yields hit an almost 10-month high at 4.274% on Tuesday before quickly dipping, boosting expectations that the Federal Reserve could hold rates for longer.

Bank depositors will probably watch whether higher rates could put further pressure on small and regional banks, said Quincy Krosby, chief global strategist at LPL Financial.

(Reporting by Niket Nishant in Bengaluru and Chibuike Oguh in New York; Additional reporting by Saeed Azhar in New York. Editing by Arun Koyyur, Sriraj Kalluvila, and Tomasz Janowski)

Japan’s policymakers hold fire as yen enters intervention range

TOKYO, Aug 15 – As the yen slid past 145 per dollar with barely a murmur from Japanese policymakers during recent days, suspicion grew that they won’t be as quick to order intervention as they were last year as they now reap some benefits from a weaker currency.

Surging exports helped economic growth hit 6% on an annualized basis in the second quarter, and lower global oil prices have helped keep a lid on the import bill.

But a key factor behind the yen’s weakness is unchanged, namely the yawning yield gap with the United States. The Bank of Japan is taking baby steps away from its ultra-loose monetary policy, and there are increasing hopes that US rates may have peaked, but as of now, the bond market provides a good reason to sell yen.

Yet currency traders remain nervous about provoking intervention, as the yen entered the same zone that triggered heavy dollar selling by Japanese authorities in September and October of last year.

Finance Minister Shunichi Suzuki issued a reminder on Tuesday against causing volatility in the exchange rate, as the yen struck a 9/1-2 month low of 145.60 in Asian trading.

Suzuki warned that rapid moves are “undesirable” and the government is “ready to respond appropriately,” while reiterating that no specific levels are targeted for intervention.

Officials had been a lot more vociferous in June when the yen weakened past 144, and their subdued response to the latest depreciation was interpreted by market participants as a sign that Tokyo will tolerate a bit more weakness so long as speculators didn’t push it too fast.

“The pain associated with the 145-150 level is less now for the economy, so I don’t think they’ll be quite as aggressive as they were last year,” said Aaron Hurd, a senior portfolio manager at State Street Global Advisors in Boston.

If the uptrend for the dollar-yen rate is gradual, intervention isn’t likely until “around 150 or a little bit above,” he said.

For now, traders are testing the waters by selling the yen against sterling and the Swiss franc, mindful that selling against the dollar could gather momentum quickly.

NO IMPERATIVE TILL 150

Japan spent more than 9 trillion yen (USD 62 billion) intervening in currency markets last year to arrest the yen’s decline, buying yen in September and October – first at levels around 145 and again at a 32-year low just short of 152.

At the end of August last year, the price of Brent crude oil was about USD 105 per barrel, and complaints about the pain from imported energy prices were in the Japanese press on a daily basis.

“Not only economically, but also politically, yen weakness at that time was a problem, and it clearly impacted the government’s approval rating,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management in Tokyo.

The price of Brent is now around USD 88, and those complaints over imported fuel have faded into memory.

From a purely macroeconomic perspective, Kichikawa said, officials have no imperative to prevent yen weakness before 150, which is consistent with the mild inflationary pressure that the BOJ aims to foster.

The bond market, which precipitated the yen’s slide, may ultimately give Japan’s authorities reason to hold off on pressing the intervention button.

Should the lynchpin 10-year US Treasury yield stabilize not far above 4%, and Japanese yields rise towards the BOJ’s new 1% cap, Japanese authorities may be inclined to let market forces perform a gradual recovery in the yen as the yield gap closes.

“The policy divergence story is going to turn, if it hasn’t already,” said Shinichiro Kadota, a currency strategist at Barclays in Tokyo. “The risk of intervention definitely increases above 145, but the urgency is less.”

(USD 1 = 145.4900 yen)

(Reporting by Kevin Buckland and Saqib Iqbal Ahmed; editing by Simon Cameron-Moore)

FTSE 100 opens lower as stronger pound weighs

Aug 15 – The UK’s exporter-heavy FTSE 100 index opened lower on Tuesday, dragged down by a stronger sterling after a record-high wage growth spurred worries of inflationary pressures, while retailer Marks & Spencer led mid-cap stocks higher.

British wages excluding bonuses were a record 7.8% higher than a year earlier in the three months to June, adding to worries for the Bank of England about long-term inflation, which could keep interest rates elevated for longer.

The benchmark FTSE 100 index was down 0.2%, while the pound rose as much as 0.28% to USD 1.2720, right after the data.

Mid-cap stocks rose 0.1%, with British retailer Marks & Spencer jumping more than 8%.

M&S raised its profit outlook, saying it was continuing to win market share in both its clothing, home and food businesses.

Retailers’ stocks rallied over 1%, leading sectoral gains.

(Reporting by Siddarth S in Bengaluru; Editing by Rashmi Aich)

Oil drops over 1% on worries about Chinese economy

NEW YORK, Aug 15 – Oil prices fell over 1% on Tuesday on sluggish Chinese economic data coupled with fears that Beijing’s unexpected cut in key policy rates was not sufficiently substantial to rejuvenate the country’s sputtering post-pandemic recovery.

Brent crude futures fell USD 1.32, or 1.5%, to settle at USD 84.89 a barrel, while US West Texas Intermediate crude (WTI) dropped USD 1.52, or 1.8% to USD 80.99.

Supply cuts by Saudi Arabia and Russia, part of the OPEC+ group comprising the Organization of the Petroleum Exporting Countries (OPEC) and allies, have helped to galvanize a rally in prices over the past seven weeks.

Both Brent and WTI, however, have fallen for two consecutive sessions as the oil market takes a breath, said Andrew Lipow, president at Lipow Oil Associates in Houston.

Weighing on sentiment, China’s industrial output and retail sales data showed the economy slowed further last month, intensifying pressure on already faltering growth and prompting authorities to cut key policy rates to bolster economic activity.

When the oil market appears to be comfortable, it is often the case that China is the number one fire douser, throwing a wet blanket over those dreaming of prices north of USD 90, said John Evans of oil broker PVM. China is the world’s biggest oil importer.

China’s central bank lowered interest rates marginally after the data that highlighted intensifying pressure on the economy, mainly from the property sector, though analysts say the cut was too small to make a meaningful difference.

There are concerns China could struggle to meet its growth target of about 5% for the year without more fiscal stimulus.

Barclays cut its forecast for China’s 2023 growth in gross domestic product to 4.5%, citing a faster-than-expected deterioration in the housing market.

Also adding to risk-off sentiment, an analyst at Fitch Ratings warned that US banks, including JPMorgan Chase JPM.N, could be downgraded if the agency further cuts its assessment of the operating environment for the industry, according to a report from CNBC.

“When the banking sector is shaky, oil gets shakier because it is so sensitive to interest rates, loans and the general health of the economy,” said Phil Flynn, an analyst at Price Futures Group.

On a brighter note, refinery throughput in China rose in July 17.4% from a year earlier as refiners kept output elevated to meet demand for domestic summer travel and to cash in on high regional profit margins by exporting fuel.

In US supply, crude stocks dropped by about 6.2 million barrels last week, according to market sources citing American Petroleum Institute figures released late Tuesday.

Ahead of weekly government data due on Wednesday, analysts polled by Reuters estimated on average that crude inventories fell by about 2.3 million barrels last week.

(Reporting by Stephanie Kelly; additional reporting by Natalie Grover, Muyu Xu, and Katya Golubkova; Editing by Marguerita Choy and Deepa Babington)

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