China data deluge as EM turmoil deepens

Aug 15 – As waves of volatility crashed over emerging markets on Monday, most notably in Argentina and Russia, the focus on Tuesday once again returns to the root of much of the deeper anxiety and uncertainty around EM: China.

Investment, retail sales, unemployment, and industrial production figures for July will be released against a worrisome backdrop of deflation, slowing growth, market weakness, and growing contagion risks from an imploding property sector.

As if that were not enough for Asian markets on Tuesday, minutes of the Reserve Bank of Australia’s last policy meeting, Australian wage growth data, and second-quarter GDP growth figures from Japan will also be released.

Currency markets are also on intervention watch from Japanese authorities, with the yen falling through the 145 per dollar area and anchored around its weakest level against the euro since 2008.

If recent Chinese economic numbers are any guide, the latest batch on Tuesday is liable to disappoint. Reuters polls of economists suggest annual growth in investment and industrial output will remain steady from June’s levels, while retail sales growth will rise to 4.5% from 3.1%.

Authorities have so far resisted the growing clamor for large-scale fiscal or monetary stimulus. One of the reasons is the currency – it is already extremely weak and investors are shunning Chinese assets. Beijing will not want to add fuel to either fire.

The offshore yuan slumped on Monday to its lowest level this year, approaching the 7.30 per dollar mark, and the yuan’s official onshore exchange rate is the weakest in a month.

Tuesday’s data dump comes a day before the central bank delivers its latest monthly monetary policy decision. A Reuters survey of economists says rates on the bank’s medium-term policy loans will be left unchanged, although another round of notably weak economic indicators could shift the dial.

Some investors are slashing their exposure to China. Regulatory filings show that some major US-based hedge funds cut their holdings of Chinese companies in the second quarter.

China’s blue-chip CSI 300 index slipped 0.7% on Monday, following Friday’s 2.3% slide – the biggest fall since October – contributing to weakness across the continent and the EM complex.

MSCI’s Emerging Market and Asia ex-Japan indices both fell 1.3% on Monday, following 1% falls on Friday. With the US dollar and US Treasury yields marching higher, global financial conditions are tightening and there doesn’t appear to be any respite for emerging markets on the immediate horizon.

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

– China retail sales, unemployment, investment, industrial production (July)

– RBA minutes

– Japan Q2 GDP

(By Jamie McGeever; Editing by Marguerita Choy)

Dollar jumps, oil slides on China worries

WASHINGTON, Aug 14 – The US dollar hit its highest levels in more than a month on Monday amid worries over China’s economy, while Wall Street struggled for any clear picture ahead of fresh data on consumer appetite.

The dollar index, which tracks the greenback versus a basket of six currencies, was last up 0.28% at 103.133, after hitting its highest level since July 7.

The dollar surged on news that China’s new bank loans tumbled in July even as policymakers cut interest rates. Investors also feared trouble at the nation’s largest private property developer, Country Garden 2007, could have a chilling effect on home buyers and financial institutions.

Country Garden’s shares plunged 18% to a record low on Monday after its onshore bonds were suspended for the first time.

Meanwhile, two Chinese listed companies said over the weekend they had not received payment on maturing investment products from asset manager Zhongrong International Trust Co.

“A lot of traders are focusing again on China,” said Edward Moya, senior market analyst at OANDA. “I think there’s so much concern with just their growth outlook, with their current property crisis, and I think one of the biggest wealth managers not being able to make (their) debt obligations is a big red flag.”

The three major US indexes were up slightly, as a 7% surge in chipmaker Nvidia (NVDA) helped push megacap growth stocks higher.

The Dow Jones Industrial Average rose 26.23 points, or 0.07%, to 35,307.63, the S&P 500 gained 25.67 points, or 0.58%, to 4,489.72 and the Nasdaq Composite added 143.48 points, or 1.05%, to 13,788.33.

The session began in the shadow of last week’s global equity sell-off, with the MSCI world equity index, which tracks shares in 45 nations, last down 0.12%.

Oil prices were down on Monday also on China worries, as concerns about the nation’s ability to bounce back to pre-pandemic levels outweighed gains previously posted on tighter supply.

Brent crude ended the day down 0.68% at USD 86.22 a barrel. US crude was down 0.87% at USD 82.47 per barrel.

Safe havens in the US also looked more appealing after voters in Argentina surprised markets by pushing a radical libertarian outsider candidate into first place, placing pressure on the country’s bonds.

In the aftermath, the country’s central bank planned to hike interest rates by 21 percentage points to 118% and devalued the nation’s currency until the nation’s formal October election.

The safe haven appetite drove up yields on benchmark 10-year US Treasury bonds to a nine-month high. Benchmark 10-year yields hit 4.215%, the highest since Nov. 8, before falling back to 4.186%.

Gains for the dollar and US Treasuries weighed on gold prices, which dipped to a more than one-month low on Monday. Spot gold prices were last down 0.36% at USD 1,906.20 an ounce.

Fresh economic data this week includes US retail sales on Tuesday. Consumers are forecast to show a 0.4% pickup in spending, but it could swing higher thanks in part to Amazon’s Prime Day. US retail giants are also due for quarterly reports this week.

A strong spending report could challenge the market’s benign outlook for US rates, with futures implying a 70% chance the Federal Reserve is done hiking in its bid to tame inflation. The market also has more than 120 basis points of cuts priced in for next year starting from around March.

(Reporting by Pete Schroeder in Washington, Wayne Cole in Sydney, and Alun John in London;
Editing by Richard Chang and Matthew Lewis)

US hedge funds stampede out of China in Q2

NEW YORK, Aug 14 – US-based hedge fund investors including Coatue, D1 Capital and Tiger Global cut their exposure to Chinese companies in the second quarter, as the country’s economic prospects seemed to wobble and geopolitical tension increased.

Tiger Global slashed its position in JD.com by roughly 12%, to USD 719.3 million from USD 1.1 billion, while also reducing its number of shares in Kanzhun.

Coatue Management LLC, founded by Philippe Laffont, formerly of Tiger Management, cut its positions in Alibaba, Baidu, JD.com, Kanzhun, KE Holdings, Li Auto, and PDD Holdings, regulatory filings showed.

The hedge fund slashed its position in Alibaba by roughly 90% from March to June, filings showed.

D1 Capital Partners also dumped all its 1.7 million shares – or USD 176.8 million – in Alibaba, according to documents.

Louis Bacon’s Moore Capital Management sold over USD 200 million in shares of Alibaba, exiting its position in the company.

Michael Burry’s Scion Asset Management sold small positions it had in both Alibaba and JD.com.

The funds did not immediately respond to requests for comment.

Every quarter, institutional investors have to disclose their equity positions in so-called 13-F filings, but they do not provide any explanation for the positioning changes.

Although they are backward-looking, many investors scour them for trends.

The changes came as hopes for a post-COVID surge in growth deflated as data has shown an uneven recovery, while US-China geopolitical tensions also raised concern.

Worries have heated up in recent days, as the country’s largest private real estate developer, Country Garden, seeks to delay payment on a private onshore bond.

Meanwhile, last week US President Joe Biden announced an executive order to prohibit some US technology investments in China, sparking concerns among fund managers.

Amid those uncertainties, China-focused mutual funds also suffered a net outflow of USD 674 million in the second quarter.

At the end of July, hedge funds’ exposure to China was well below five-year averages, Goldman Sachs showed.

(Reporting by Carolina Mandl, in New York; Editing by Alison Williams and Cynthia Osterman)

Higher US dollar drags gold to more than one-month low

Aug 14 – Gold prices fell to a more than one-month low on Monday as a stronger dollar took the shine off bullion, while investors awaited fresh catalysts to gauge the downside after mixed US inflation numbers last week.

Spot gold was down 0.3% at USD 1,907.40 per ounce by 02:47 p.m. EDT (1847 GMT), after hitting its lowest since July 6. US gold futures settled 0.1% lower at USD 1,944.00.

The dollar jumped 0.3% to its highest level in over a month, making greenback-priced bullion more expensive for overseas buyers, while benchmark 10-year Treasury yields hit a nine-month high on Monday.

“We continue to see a pretty significant decline in long exposure in gold and a significant increase in short exposure. Speculative investors are getting out of gold and interest rate expectations are a big factor here,” said Bart Melek, head of commodity strategies at TD Securities.

“Technically gold can move below the USD 1,900 levels here without a lot of problems. We’ve reached recent support levels and the path is quite open for gold to trend lower as short-term interest rates move higher.”

Last week, data showed US consumer prices increased moderately in July. However, producer prices rose slightly more than expected, fuelling concerns that the Federal Reserve could keep rates higher for longer.

Interest rate increases tend to lift bond yields and also raise the opportunity cost of holding non-yielding bullion.

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

The focus this week will be on US retail sales data on Tuesday, followed by the minutes of the Federal Open Market Committee’s July meeting on Wednesday that could shed light on the appetite for higher rates.

Elsewhere, silver fell 0.4% to USD 22.57 per ounce. Platinum dropped 1.4% to USD 899.51, while palladium shed 2.4% to USD 1,262.47.

(Reporting by Brijesh Patel and Anjana Anil in Bengaluru; Editing by Nick Macfie, Sharon Singleton, and Shilpi Majumdar)

Yen drifts after breaching 2023 low, dollar gains

SINGAPORE, Aug 14 – The yen slipped on Monday to its lowest in the year against the dollar, breaching the key 145 level before regaining some ground as traders warily looked for clues on possible intervention, while the dollar rose to a more than one-month peak.

The Japanese yen JPY=EBS weakened to as low as 145.22 per dollar in early Asian hours, its lowest since Nov. 10 before quickly reversing course in a volatile start to the week. It last fetched 144.92, up 0.03%.

Japan’s low yields have made the currency an easy target for short-sellers and funding trades, with the widening gap in the interest rates between Japan and the United States leading to persistent weakness in the yen.

Japan intervened in currency markets last September when the dollar rose past 145 yen, prompting the Ministry of Finance (MOF) to buy the yen and push the pair back to around 140 yen. The yen is down nearly 10% against the dollar for the year.

“Lack of verbal intervention so far suggests that the patience level of Japanese authorities may have gone up after the latest tweak to monetary policy and the disinflation trends in the United States,” said Charu Chanana, a market strategist at Saxo Markets.

“Still, traders are potentially cautious of that 145 handle and some profit taking is possible, suggesting the move above 145 will likely remain a slower crawl.”

With the yen loitering around the level again, traders expect Japanese officials to start warning of intervention soon as they did in June.

“We believe the MOF will start pushing back in the 145-148 range,” said Joey Chew, head of Asia FX research at HSBC. “But if it does not, short positions on the yen will likely be rebuilt further.”

Investors currently hold a short position in the yen worth USD 7.25 billion, down 30% from a 14-month high last month.

Analysts said GDP and CPI data in Japan due this week are likely to be key along with US retail sales data which could continue to push Treasury yields higher.

Treasury yields have been elevated and got another boost on Friday after data showed US producer prices increased slightly in July, more than expected, as the cost of services rebounded at the fastest pace in nearly a year.

That comes after news on Thursday that consumer prices rose moderately in July. The PPI data cast some doubt on whether the Federal Reserve is done with its rate hike cycle.

Markets anticipate nearly 89% chance of the Federal Reserve standing pat on interest rates at its meeting next month, the CME FedWatch tool showed, with traders anticipating no more hikes for the rest of the year.

Central bank officials, though, have maintained that it is too soon to make that call.

ANZ analysts said the resilience of the US consumer will be in the spotlight with the release of July retail sales data, with rising fuel prices and tighter credit conditions expected to bite.

The dollar index, which measures the US currency against six peers, rose 0.097% to 102.95, having touched a more than one month high of 103.02

The euro was down 0.12% to USD 1.0931, while sterling eased 0.15% to USD 1.2675.

The Australian dollar fell 0.42% to USD 0.6470, while the kiwi slipped 0.36% to USD 0.5963. Both Antipodean currencies slid to their lowest since November earlier in the session. The currencies have been undermined by disappointing trade and inflation data from China, the biggest buyer of their resource exports.

While sentiment towards China is down, this week’s high-frequency China data may only need a small beat to cause a strong upside reaction in China proxies, said Pepperstone’s Head of Research Chris Weston.

(Reporting by Ankur Banerjee in Singapore. Editing by Shri Navaratnam and Lincoln Feast.)

US recap: Dollar up for fourth-straight week led by yen’s fall

Aug 11 – The dollar managed a modest gain on Friday as Treasury yields from 2- to 10-year tenors surged 7-10bps on waning expectations for eventual Fed cuts and concerns inflation will not dissipate as quickly as hoped.

The dollar index is probing key resistance that has confounded a breakout toward June’s highs this month.

Treasury yields are also biased higher on the risk US fiscal imbalances will increase. That after the recent Fitch downgrade of US debt and a surprise surge in how much the government says it will need to borrow.

Treasury yields rose on Thursday and Friday after seemingly sedate US CPI and modestly higher PPI, along with slightly softer Michigan sentiment. Consumers’ 1-year inflation expectations fell 0.1% again to 3.3%. Normally this data would not be greeted with sharply higher Treasury yields.

EUR/USD fell 0.3% and is nearing the 55-day moving average that caught August’s prior slides, now by 1.0940. Bund yields were also sharply higher, but risk aversion in European and Chinese markets favored the dollar.

USD/JPY rose modestly, but its uptrend is so far stymied by June’s 2023 high at 145.07 and worries Japan’s MoF may want to keep the yen from falling below 145 again; a level it previously defended.

Actual FX intervention looks less likely near current levels given the sharp drop in Japan CPI from December’s 10.2% peak.

Sterling rose 0.12%, but was well off Friday’s highs scored after above-forecast UK GDP sent gilt yields skyward, including a roughly 20bp surge in 10-year yields. Pricing in of two more 25bp BoE hikes became embedded from December through June.

The downside for the pound is that higher for longer rates and yields are headwinds for the economy.

USD/CNH rose 0.22% on imploding Chinese bank loans, that as the government looks to patch local government financing holes.

AUD/USD fell 0.25% to its lowest since June 1.

Tuesday’s US retail sales are the next major release.

(Editing by Terence Gabriel; Randolph Donney is a Reuters market analyst. The views expressed are his own.)

Gold set for third weekly fall on stronger US dollar, yields

Aug 11 – Gold prices hovered near a one-month low on Friday and were heading for their third consecutive weekly dip, as the dollar and bond yields strengthened after data showed US producer prices increased in July.

After dropping to its lowest level since July 7 earlier in the session, spot gold was little changed at USD 1,913.35 per ounce by 1:41 p.m. ET (1741 GMT). Bullion was down 1.4% so far this week.

US gold futures settled 0.1% lower at USD 1,946.60.

“The producer price index came a bit hotter than expected, that pushed up Treasury bond yields and boosted the US dollar index a little bit. So that put a little bit of pressure on the gold market,” said Jim Wyckoff, senior market analyst at Kitco.

“We’re also seeing technical selling in both gold and silver because the charts have turned more near-term bearish in the past couple of weeks.”

The US producer price index for final demand rose 0.3% last month, the Labor Department said. In the 12 months through July, the PPI increased 0.8%. Economists polled by Reuters had forecast the PPI would climb 0.2% for the month and advance 0.7% on a year-on-year basis.

The dollar gained 0.3% against its rivals and was on track for its fourth consecutive weekly gain, making gold more expensive for other currency holders. Benchmark 10-year yields also gained for the fourth straight week.

On Thursday, data showed US consumer prices increased moderately in July, lifting hopes that the Federal Reserve is at the end of its interest rate hike cycle.

Rising US interest rates increase the opportunity cost of holding non-yielding bullion.

Spot silver slipped 0.1% to USD 22.66 an ounce and platinum gained 0.4% to USD 910.06. Both were on track for their fourth consecutive week of losses.

Palladium rose 0.9% to USD 1,298.19 per ounce.

(Reporting by Brijesh Patel and Sherin Varghese in Bengaluru; Editing by Krishna Chandra Eluri, Shilpi Majumdar, and Shounak Dasgupta)

Bond market’s newfound economic optimism may be shortsighted

Aug 11 – In recent weeks, US bond markets have bought into the prospect of a “soft landing,” prompting some investors to question whether they are ignoring the risk that companies will run into trouble in a higher-for-longer interest rate environment.

Corporate credit spreads, which indicate the premium investors require to hold companies’ bonds over safer government paper, have tightened in a sign that investors have come to believe the US Federal Reserve will manage to bring down inflation without causing too much economic pain.

Some analysts and bankers said that optimism might be ill-advised. Curbing inflationary pressures could take time and lead the Fed to keep interest rates high for longer than investors believe. That, in turn, could still cause a recession and hurt corporate balance sheets.

“People might be capitulating on the recession call too soon,” said Cindy Beaulieu, managing director and portfolio manager at Conning, which manages USD 205 billion.

Edward Marrinan, macro credit strategy desk analyst at SMBC Nikko Securities America, added: “Credit risk at this point is mispriced.”

Fixed income markets are expecting a perfect landing, but they may instead be in for more turbulence ahead. Investors got a taste of what that can mean on Aug. 7 when Moody’s downgraded several banks, citing the possibility of a mild recession and commercial real estate risks. The move prompted a sell-off in equities and a slight widening in corporate credit spreads.

But the lesson was short-lived. Investors recovered from that dent to sentiment after labor and inflation data on Thursday came in line with expectations, spurring hopes the Fed will not hike rates again in September.

The average investment-grade bond spreads as of Thursday were just a few basis points wider than the tightest levels touched this year in July and 16 basis points tighter from January. Junk-bond spreads are 98 basis points inside January levels.

Daniel Krieter, credit strategist at BMO Capital Markets, said the reason for the sanguine view in credit markets was a sense that corporate fundamentals look better so far this year than expected and bets to the contrary may be too expensive.

“It is far more expensive to keep betting against what you can see for now rather than relying on what you cannot,” Krieter said.

HIGH YIELDS

SMBC’s Marrinan said the safer trade for investors would be to reduce risk and buy higher-quality bonds of companies that have financial resilience in a difficult economic environment.

But that’s a hard call to make with corporate bonds offering high yields as a consequence of the sharp increases in US interest rates, and corporate fundamentals turning out to be better than expected after the latest quarterly earnings.

The rate of defaults for junk bonds, the riskiest form of US debt, in the broad US high-yield index, stood at around 1% this year, much lower than expectations of 5% to 8% at the beginning of the year, said Manuel Hayes, senior portfolio manager at London-based asset manager Insight Investment.

“Default rates even in the worst-case scenario of a prolonged high rate environment are now expected to tick up to about 2-3% with a lot of this risk priced in already,” Hayes said.

Refinancing needs are also expected to pick up in two to three years, he said, reducing the risk of a near-term wave of debt defaults.

The spreads on junk bonds rated CCC or those prone to bankruptcies or payment defaults have tightened 267 basis points this year, more than the 98 basis points tightening in spreads of better quality BB-rated junk bonds, according to Informa Global Markets data.

“With market consensus now expecting a soft landing, the credit markets are arguably underpricing default risk,” BMO’s Krieter said. “It begs the question whether credit should be priced to perfection for a soft landing as it is currently.”

(Reporting by Shankar Ramakrishnan and Davide Barbuscia; Editing by Paritosh Bansal and Jonathan Oatis)

US equity funds record biggest weekly outflow in seven weeks

Aug 11 – US equity funds saw heavy outflows in the seven days to Aug. 9 amid investor caution ahead of the US inflation data and concerns over credit rating downgrades in the banking sector.

According to Refinitiv Lipper data, investors withdrew about USD 14.96 billion from US equity funds during the week, their biggest week of net selling since June 21.

Wall Street stocks posted big losses last week, with the S&P 500 and the Nasdaq registering their biggest weekly declines since March as investors took profits after five months of gains.

Also tempering investor appetite, credit rating agency Moody’s downgraded 10 small- to mid-sized US lenders on Monday and placed another six banks on review for potential downgrades.

Investors sold out of US large-, mid-, and multi-cap funds to the tune of USD 14.95 billion, USD 543 million and USD 261 million, respectively, but small-cap funds still drew about USD 748 million in inflows.

By sector, materials, financials, and tech saw net sales of USD 891 million, USD 554 million, and USD 524 million, respectively. Meanwhile, healthcare funds received USD 1.39 billion, the most in a week since March 2022.

Meanwhile, US money market funds and government bond funds attracted USD 40.88 billion and USD 4.48 billion, respectively, as investors hunted for safety.

On a combined net basis, US bond funds received USD 3.99 billion in inflows, compared with about USD 938 million of outflow in the previous week.

US general domestic taxable fixed income and short/intermediate investment-grade funds received about USD 800 million each in inflows. On the other hand, high yield and loan participation funds saw net sales of USD 565 million and USD 419 million, respectively.

(Reporting by Gaurav Dogra and Patturaja Murugaboopathyin Bengaluru; Editing by Mark Potter)

Dollar set for fourth week of gains, inflation cements rate outlook

LONDON, Aug 11 – The dollar headed for a fourth weekly gain on Friday after data showed US inflation did not pick up as strongly as expected in July, which helped reinforce the existing view among investors that the Federal Reserve is unlikely to raise rates much more.

The stronger dollar put the Japanese yen on course to test a key support level, though liquidity was thin with Japan on holiday on Friday.

The yen was flat at 144.72 per dollar in early Asian hours, having earlier traded at 144.89, its weakest since June 30, when it briefly breached 145, a level at which investors think the Bank of Japan might intervene.

“You should expect the rhetoric once yen gets to 145,” said Bank of Singapore currency strategist Moh Siong Sim. “I think the market will get a lot more careful as we get to that level.”

Japan intervened in currency markets last September when the dollar rose past 145 yen, which prompted the Ministry of Finance to buy the yen and push the pair back to around 140 yen. The yen is down over 9% against the dollar for the year.

The yen was also lower against the euro at 158.98 per euro, which hit a 15-year peak of 159.19 on Thursday.

Meanwhile, sterling rose for the first time in four days after data showed the British economy grew more than expected in June, allaying some concern about the impact of high inflation and high rates on activity.

The pound was last up 0.3% at USD 1.2711, but was still heading for a fourth weekly drop.

Data on Thursday showed US consumer inflation rose 0.2% last month, matching the gain in June, and by 3.2% in the 12 months through July.

Economists polled by Reuters had forecast a monthly rise of 0.2% last month and a year-on-year gain of 3.3%.

Futures traders place a near-90% chance of the Fed leaving its benchmark interest rate in its current range of 5.25-5.5% when it meets in September. Prior to the inflation data, that chance was already above 85%.

“(The) CPI report appears to put another nail in the coffin for the prospects of further Fed rate hikes this year,” said Nick Rees, FX market analyst at Monex Europe.

Moderating inflation, together with an easing labour market, has bolstered economists’ conviction that the US central bank will be able to engineer a “soft landing” for the economy.

Fed officials have expressed more caution. San Francisco Fed President Mary Daly said on Thursday it was premature to suggest the central bank had finished raising rates.

The dollar index , which measures the U.S. currency against six others, fell 0.1% to 102.50, but was still set for a fourth weekly gain, thanks in part to a rise in Treasury yields.

The dollar fell against the euro , which rose 0.1% to USD 1.0995 and against the Australian dollar, which rose 0.14% to USD 0652.

The Aussie dollar still headed for a fourth straight weekly loss even though the head of the central bank said domestic rates may have to rise further, even if inflation is coming down as expected.

(Additional reporting by Ankur Banerjee in Singapore
Editing by Shri Navaratnam, Simon Cameron-Moore and David Evans)

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