China to hold rates steady, markets digest G7

May 22 (Reuters) – The People’s Bank of China is expected to keep key lending rates on hold on Monday, as traders in Asia digest the implications of the G7’s stance on China and the tense and fluid situation in Washington regarding the US debt ceiling standoff.

Looking further into the week, the main regional drivers for Asian markets are likely to be policy decisions in New Zealand, South Korea, and Indonesia, inflation figures from Singapore and Malaysia, and Japanese unemployment and retail sales figures.

In their joint communique on Saturday, G7 leaders said they are looking to “de-risk, not decouple” economic engagement with China. Neither are they turning inward and nor do they want to hamper China’s economic development, they said.

But Chinese markets have weakened sharply in recent weeks as economic indicators have fallen off a cliff, against the backdrop of major world powers appearing to reconsider their long-term investment strategy towards China.

The Chinese yuan has fallen through the 7.00 per dollar barrier but is unlikely to get any immediate policy support, as the PBOC is expected to leave one-year and five-year loan prime rates unchanged on Monday at 3.65% and 4.30%, respectively.

If anything, the weak economy and evaporating inflation could steer the PBOC towards easing policy in the coming months.

It could not be more different in Japan. Stocks have powered to a 33-year high, the economy grew much faster than expected in the first quarter, and the Bank of Japan could soon start to reverse its ultra-loose policy. Investors like what they see.

Wider market sentiment on Monday could be set by the mood music in Washington around the debt ceiling. President Joe Biden and House Republican Speaker Kevin McCarthy will meet after a “productive” phone call on Sunday as the president returned from the G7 summit.

McCarthy said on Sunday there were positive discussions on solving the crisis and that staff-level talks will resume ahead of his meeting with Biden. Markets will see this as progress.

On the other hand, Treasury Secretary Janet Yellen reiterated that June 1 remains a “hard deadline” for raising the debt ceiling. If not, the government will likely run out of cash and fail to meet all its commitments through June 15, when more tax receipts are due.

Time is running out and as long as there is no deal, a US default, a potential catastrophe for world markets, cannot be completely ruled out.

Later this week the Reserve Bank of New Zealand is expected to raise its cash rate one last time by 25 basis points to 5.50%, while the Bank of Korea and Bank Indonesia are seen keeping their benchmark rates on hold at 3.50% and 5.75%, respectively.

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

– China loan prime rates decision

– Japan machinery orders (March)

– Euro zone consumer confidence (May)

(By Jamie McGeever; Editing by Chris Reese)

Artificial intelligence gives real boost to US stock market

NEW YORK, May 19 (Reuters) – Recent advances in artificial intelligence are fueling optimism over how businesses can operate more productively in the years ahead. They are also providing a big boost to the stock market.

The S&P 500’s 9% rally this year has been driven by a handful of the index’s biggest stocks, a number of which are at the center of the AI frenzy that has spread in the wake of the chatbot sensation ChatGPT.

Five stocks – Microsoft (MSFT), Google parent Alphabet (GOOGL), Nvidia (NVDA), Apple (AAPL), and Meta Platforms (META) – are responsible for the S&P 500’s entire year-to-date return, said Jessica Rabe, co-founder of DataTrek Research. About 25% to 50% of those gains are owed to “the buzz around artificial intelligence,” she noted.

A recent Societe Generale analysis zeroed in on 20 stocks widely owned by AI-related exchange-traded funds, whose overall assets under management have grown almost 40% this year.

Removing those stocks from the S&P 500 would reduce the index’s performance by roughly 10 percentage points, putting stocks in negative territory for the year, SocGen’s analysis showed.

“It’s the AI-driven stocks that are getting the strongest returns,” said Manish Kabra, head of US equity strategy at SocGen. “As a secular theme, for sure, it’s attractive.”

The rush of AI developments has analysts licking their lips at the profit potential stemming from new revenue opportunities and productivity improvements.

Goldman Sachs strategists estimate that generative AI could create productivity gains that result in S&P 500 companies expanding profit margins by about 4 percentage points in a decade following widespread adoption.

Indeed, optimism over AI is a key factor supporting a stock market facing numerous headwinds. Those include uncertainty over the US Congress coming to an agreement to raise the debt ceiling and avoid a default and worries the economy may be on the verge of a downturn, as the Federal Reserve’s interest rate hikes filter through the economy.

“We are strongly of the view that AI will change the world,” Jim Reid, strategist at Deutsche Bank, said in a note titled, “Will ChatGPT prevent the US recession?”

The AI excitement has helped propel hefty gains for some stocks. For example, shares of Microsoft, the second-largest US company by market value, have climbed 32% this year. The software giant has grabbed headlines with its partnership with ChatGPT creator OpenAI and sprucing up its Bing search engine with AI.

Shares of Nvidia, the fifth-biggest US company by market value whose chips are central in the AI excitement, have soared 110% this year.

The Global X Robotics & Artificial Intelligence ETF (BOTZ) has jumped nearly 30% this year.

Investors next week will be keeping an eye on developments regarding the US debt ceiling, as well as inflation data and corporate earnings including results from Nvidia.

Other factors have supported megacap stocks. Those include a decline in Treasury yields from last year’s highs that has soothed concerns over tech valuations and investors viewing megacaps as safety plays in an uncertain environment.

At the same time, even the shares of potentially transformative technologies are vulnerable to price bubbles, as history shows. A dotcom stock mania helped markets roar higher in the late 1990s, but a crash followed a few years later, leaving only a handful of internet names standing.

A BofA Global Research report published Friday said AI stocks were in a “baby bubble” in comparison with far larger asset price moves seen in areas such as internet stocks and bitcoin over the last few decades.

Nonetheless, many investors say that AI is no fad.

King Lip, chief strategist at Baker Avenue Wealth Management in San Francisco, calls the developments in AI a “game changer.” His firm owns shares of Microsoft, Nvidia, and Alphabet.

“It goes beyond the next shiny object,” Lip said. “The path is pretty clear on how generative AI can lead to earnings growth for these companies.”

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Richard Chang)

US regional bank stocks fall after Yellen says more bank mergers necessary

NEW YORK, May 19 (Reuters) – Shares of US regional lenders fell on Friday after CNN reported that US Treasury Secretary Janet Yellen told bank chief executives that more mergers may be necessary following a series of bank failures.

Yellen also reaffirmed the strength and soundness of the country’s banking system at the meeting with bank CEOs on Thursday in the aftermath of the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank.

The KBW Regional Banking Index fell 2.2%, with shares of PacWest Bancorp (PACW) and Western Alliance (WAL) among the biggest losers as they shed 1.9% and 2.4, respectively. Comerica Inc (CMA) declined 1.2%, Zions Bancorp (ZION) fell nearly 1.7%, and Valley National Bancorp (VLY) dropped 5.5%.

The regional bank crisis has been partly blamed by some on aggressive interest rates by the US Federal Reserve, which forced some lenders to seek new capital to make up for a fall in the value of assets linked to interest rates.

Fed Chairman Jerome Powell said on Friday the after-effect of recent banking sector troubles is expected to take some pressure off the US central bank’s interest rake hiking cycle.

Tighter credit conditions meant that “our policy rate may not need to rise as much as it would have otherwise to achieve our goals,” Powell told a central bank conference in Washington.

But Tom Plumb, portfolio manager at Plumb Balanced Fund, said he doesn’t expect the Fed to start lowering interest rates anytime soon as the US economy is still showing signs of strength and inflation is not abating as quickly as expected.

“People thought that inflation was going to come down faster and that the pressure on these regional banks and those failures were leading to this narrative that the Fed was going to lower interest rates by the end of this year. I don’t think that’s the case,” Plumb said.

An agreement on raising the US debt ceiling is still possible if both Republicans and Democrats negotiate in good faith and recognize they won’t get everything they want, a White House official said on Friday shortly after an impasse in talks was reported.

The debt ceiling dispute has weighed on market sentiment, including for regional bank stocks.

“Unfortunately, the way our government works they are going to take you to the brink and they’re going to cause a significant last wave of panic. And then they will come up with some type of resolution,” Plumb added.

(Reporting by Chibuike Oguh in New York; editing by Deepa Babington)

Gold gets lifeline from renewed banking jitters, Powell comments

May 19 (Reuters) – Gold rallied 1% on Friday, recouping some losses from earlier this week, on renewed worries about the stability of the banking sector, while traders slashed bets for another interest rate hike following remarks from the US Federal Reserve chairman.

Spot gold gained 1.2% to USD 1,981.79 per ounce by 12:30 p.m. ET (1830 GMT). US gold futures settled 1.1% higher at USD 1,981.60.

“Gold is up more on Yellen than a cautious Powell which still suggests that June will be a ‘skip’ meeting unless data over the next few weeks is especially troublesome,” Tai Wong, a New York-based independent metals trader, said.

Shares of US regional lenders fell after CNN reported that US Treasury Secretary Janet Yellen told bank chief executives that more mergers may be necessary following a series of bank failures.

“Nothing makes the market reflexively grab for an airsick bag more than bank jitters ahead of a weekend,” Tai Wong added.

Fed Chair Jerome Powell said it was still unclear if US interest rates will need to rise further, as central bank officials balance uncertainty about the impact of past hikes on borrowing costs.

Markets now see an 82% chance of the Fed holding rates until July.

Gold was on course for its worst week since February, down about 1.5% so far, after a series of robust economic data.

“This is the week that gold really got crushed because there’s been a steady flow of that debt ceiling optimism and, in addition to that, some hawkish pushback from the Fed,” said Edward Moya, senior market analyst at OANDA.

Meanwhile, US House Republicans and President Joe Biden’s Democratic administration paused talks on raising the debt ceiling.

Silver rose 1.7% to USD 23.90 per ounce, platinum gained 1.4% to USD 1,064.09, and palladium jumped 3.8% to USD 1,508.57.

(Reporting by Deep Vakil in Bengaluru; Editing by Jan Harvey, Shilpi Majumdar and Shounak Dasgupta)

Global equity funds post outflows for fifth week in a row

May 19 (Reuters) – Global equity funds suffered outflows for a fifth straight week in the week to May 17, undermined by uncertainties over the US debt ceiling and concerns about the global economy, with soft economic data coming out of the US and China.

According to Refinitiv Lipper data, global equity funds faced USD 8.72 billion worth of outflows in the week to May 17, compared with about USD 4.77 billion worth of net selling in the previous week.

The US and European equity funds recorded withdrawals of USD 7.64 billion and USD 1.81 billion respectively during the week, but Asian funds received USD 180 million worth of inflows.

Healthcare, financial, and energy sector equity funds faced net outflows of USD 698 million, USD 677 million, and USD 410 million, respectively, but tech secured a net of USD 906 million worth of inflows.

Meanwhile, investors favored safer government bond funds and money market funds as both obtained a fourth weekly inflow in a row, worth about USD 2.23 billion and USD 9.96 billion, respectively.

The data also showed that combined net inflows into global bond funds stood at USD 4.31 billion during the week, with short- and medium-term funds drawing a net USD 3.45 billion worth of inflows. Meanwhile, high-yield funds had about USD 2 billion worth of outflow.

Among commodities, precious metal funds received USD 236 million marking a fourth straight week of inflows but investors exited USD 84 million worth of energy funds after three weeks of net buying in a row.

Data for 23,976 emerging market funds showed equity funds obtained a net USD 684 million in a third weekly inflow in a row, while bond funds drew USD 43 million worth of net purchases after three weeks of outflows.

(Reporting by Gaurav Dogra in Bengaluru; Editing by Rashmi Aich)

Oil slips as debt talks pause, Fed warns of high inflation

HOUSTON, May 19 (Reuters) – Oil prices fell on Friday, as investors worried that US politicians will fail to agree on a new debt ceiling and trigger a default that would hurt the economy and reduce fuel demand.

Brent futures settled 28 cents, or 0.8%, lower at USD 75.58 a barrel, while West Texas Intermediate US crude for July expiry fell 25 cents, or 0.3%, to USD 71.69.

The less active US crude contract for May, due to expire on Monday, closed down 31 cents, or 0.4%, to USD 71.55.

Brent and US crude prices nevertheless notched their first weekly gains in a month, with both benchmarks rising about 2%.

Oil gave up gains of as much as a dollar after Republicans in the US House of Representatives and President Joe Biden’s administration on Friday paused talks on raising the federal government’s USD 31.4 trillion debt ceiling.

The Treasury Department has warned the government could be unable to pay all its bills by June 1.

A White House official said a deal remained possible.

Markets were also spooked by Federal Reserve Chair Jerome Powell’s comments that inflation was “far above” the Fed’s objective, adding no decisions had been made yet on the next interest rate action.

“It doesn’t look they are going to get the debt deal done today… the chance of a 25-basis point (rate) increase in the June meeting is rising by the day… There’s not a lot for the bulls to hang their hats on,” said Mizuho analyst Robert Yawger.

Following reports of the paused debt ceiling negotiations and Powell’s comments, US stocks, Treasury yields, and the dollar all moved lower.

Providing some support for markets, US Treasury Secretary Janet Yellen reaffirmed the strength and soundness of the country’s banking system in a meeting with bank CEOs on Thursday, the Treasury Department said in a statement.

US oil rig count, an indicator of future production, fell by 11 to 575 this week, the biggest weekly drop since September 2021, energy services firm Baker Hughes Co BKR.O said. RIG/U

Money managers cut their net long US crude futures and options positions in the week to May 16, the US Commodity Futures Trading Commission (CFTC) said.

While the potential for additional rate hikes increases concern about demand weakness in the United States, prices could rise on higher Chinese demand throughout 2023, said analysts from National Australia Bank.

China’s oil refinery throughput in April rose 18.9% from a year earlier to the second-highest level on record, data showed this week.

Chinese refiners maintained high runs to meet recovering domestic fuel demand and build stockpiles ahead of the summer travel season.

(Additional reporting by Noah Browning in London, Jeslyn Lerh in Singapore; Editing by Tom Hogue, Jason Neely, Louise Heavens, Barbara Lewis, David Gregorio, Jan Harvey and Daniel Wallis)

Stocks climb as debt ceiling deal optimism grows

NEW YORK, May 18 (Reuters) – US stocks closed higher on Thursday on mounting optimism that a US debt ceiling deal could be reached within days, with discount retailer Walmart Inc (WMT) providing additional support after an upbeat annual sales forecast.

The benchmark S&P 500 index rebounded from early declines on news that top US congressional Republican Kevin McCarthy said a deal to raise or suspend the debt ceiling could potentially be reached in time to hold a House vote next week.

On Wednesday, President Joe Biden and McCarthy reiterated their aim to strike a deal soon to raise the USD 31.4 trillion federal debt ceiling and agreed to talk as soon as Sunday.

“Today and yesterday it’s really been about some easing pressure from the debt ceiling, McCarthy again came out expressing some optimism a deal could be formed by the end of the week, House could vote on a bill the following week,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan.

According to preliminary data, the S&P 500 gained 39.07 points, or 0.94%, to end at 4,197.84 points, while the Nasdaq Composite gained 188.60 points, or 1.51%, to 12,689.44. The Dow Jones Industrial Average rose 117.25 points, or 0.35%, to 33,538.02.

Walmart (WMT) shares gained after the retail giant reported better-than-expected first-quarter earnings and boosted its 2023 sales and profit outlook.

The debt ceiling has drawn attention away from uncertainty about the Federal Reserve’s stance on interest rates.

Economic data showed the number of Americans filing new claims for jobless benefits fell more than expected last week, suggesting the labor market remains tight, giving the Fed more cushion to continue raising rates.

Recent data has indicated some slowing in the US economy following a string of Fed rate hikes to fight high inflation. But while the market is pricing in a rate cut by the end of the year, comments from Fed officials suggested they are not yet ready to cut, or even pause hiking rates, soon.

Dallas Federal Reserve Bank President Lorie Logan and Fed Governor Philip Jefferson said on Thursday the economy does not appear to be softening fast enough for the central bank to pause its rate hike cycle.

“If we get a debt ceiling agreement at the end of the week here and remove that macro issue, you still have the Fed meeting at June, now that is probably a live meeting based on what some of the policymakers have been saying this week, so that could be a concern, it could kind of cap some of the momentum in the market,” said Saglimbene.

Despite another rise in the 10-year US Treasury yield, growth stocks advanced, led by a jump in Synopsys (SNPS) shares after its second-quarter earnings results and forecast.

Netflix Inc (NFLX) surged after saying its recently launched ad-supported tier reached nearly 5 million active users per month.

Chipmaker Micron Technology Inc’s (MU) shares gained as it plans to invest up to 500 billion yen (USD 3.70 billion) in Japan for new chips over the next few years.

Take-Two Interactive Software Inc (TTWO) jumped as it beat estimates for quarterly adjusted sales.

(Reporting by Chuck Mikolajczak; Editing by Richard Chang)

Gold slides as robust US data drives hawkish Fed bets

May 18 (Reuters) – Gold extended declines on Thursday after more strong economic readings from the US further soured bets that the Federal Reserve may ease up on interest rates hikes, with bullion also pressured by optimism for a debt ceiling deal.

Spot gold fell 1.3% to USD 1,956.79 per ounce by 1:40 p.m. EDT (1740 GMT), after earlier touching its lowest since April 3 at USD 1,951.73.

US gold futures settled 1.3% lower at USD 1,959.80.

A lower-than-expected number of new US jobless claims last week was accompanied by a milder fall in a business index from the Philadelphia Fed.

Along with a relatively vibrant jobs market, some optimism over the debt ceiling negotiations has also strengthened the dollar and supported equities, denting safe-haven demand a bit, said David Meger, director of metals trading at High Ridge Futures.

“We’re no longer as positive on the gold market as we’ve been for really several months.”

Pressuring gold, Wall Street turned higher, and the dollar and 10-year Treasury yields climbed to multi-week peaks on the economic data.

Markets were now pricing in around a 20% chance of another rate hike in June, compared with 20% bets for a cut around a month ago.

Non-yielding bullion suffers when higher rates boost returns on competing assets like bonds.

Dallas Fed President Lorie Logan said inflation is not cooling fast enough yet to allow the Fed to pause rate hikes in June, while Fed Governor Philip Jefferson said it was too early to judge the full impact of the rapid increases so far.

Both sit on the Fed committee that sets monetary policy.

“Gold’s failure to hold technical support at the 50-day moving average will likely encourage further tests of the downside,” said independent analyst Ross Norman.

Silver dipped 1.1% to USD 23.47 per ounce, platinum was down 1.9% at USD 1,048.27 while palladium was also down 1.9% at USD 1,458.87.

(Reporting by Deep Vakil and Kavya Guduru in Bengaluru; Editing by Simon Cameron-Moore, Sharon Singleton and Shailesh Kuber)

As China’s yuan drops through 7 again, the dollar is in the driver’s seat

SHANGHAI/SINGAPORE, May 18 (Reuters) – China’s heavily managed yuan has dropped to multi-month lows and breached the closely watched 7-per-dollar level and analysts who are predicting more weakness point to the US Federal Reserve’s policy as being the bigger driver than economic weakness at home.

The yuan, also referred to as the renminbi, hit 7.0234 per dollar on Thursday, levels last seen in December before euphoria over China’s reopening after the COVID-19 pandemic lifted it for a few weeks.

As doubts grow about the strength of its economic recovery, foreign money has left China’s markets and the currency has fallen 4% against the dollar since late January.

Analysts at Nomura and Societe Generale say the yuan could soon head for 7.3, which was last plumbed in November. Kiyong Seong, lead Asia macro strategist at Societe Generale, says a wider monetary policy divergence between China and the US coupled with lackluster Chinese growth would result in a weaker yuan.

“An important part of the climb in dollar-yuan over the past month has to do with the dollar, so this is not just a renminbi story,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore.

Reflecting that, the trade-weighted CFETS basket against which the People’s Bank of China (PBOC) manages the currency, has dropped to 99 from 100 in February.

Meanwhile, as the Fed weighs whether to pause its tightening after taking rates up 5 percentage points since March 2022, China appears set to keep monetary conditions loose amid growing signs its recovery is losing steam.

In the forwards market, the wide yield difference has the yuan trading stronger, thus disincentivizing exporters to convert their earnings. Six-month yuan is trading at 6.89.

A Shanghai-based exporter, who didn’t want to be quoted by name, said he was keeping his dollars for now, rather than swapping them for yuan.

“I know I shouldn’t be too greedy, but the yuan will weaken to 7.3. I will wait,” he said.

The PBOC has so far given little hint it is uncomfortable with the currency’s recent moves or stepped in to defend it. But the RBC’s Tan said authorities will be keen not to let the selling accelerate.

“So even if it’s weaker, they prefer that it’d be orderly. And frankly, it has been generally orderly so far,” said Tan.

The PBOC did not immediately respond to Reuters request for comments.

THE CHEAP CURRENCY

Becky Liu, head of China macro strategy at Standard Chartered Bank, expects the yuan will continue to depreciate.

“The interest rate gap remains wide, so many hedge funds continue to use yuan as a funding currency,” Liu said.

“Apart from the carry trade, the other is seasonality as the dividend payment season will start soon. So in the short term, we don’t think the yuan has huge upside room, instead we think it will face some pressure.”

Analysts at Nomura estimate mainland China firms listed and paying dividends in Hong Kong will make roughly USD 8 billion of dividend payments in each of June and July 2023.

The usual tailwinds for the yuan from capital inflows are also flagging as exporters hold back flows and foreign investors hesitate to buy into the market until they are convinced of more solid economic momentum and regulatory support.

While foreign net buying of Chinese stocks has been around 193 billion yuan (USD 27.92 billion) so far in 2023, they have sold 226.5 billion yuan worth of bonds in the first four months of this year, according to Reuters calculations based on official data.

A look at commercial banks’ foreign exchange operations shows they are selling more dollars on net. They sold USD 9.8 billion to their clients in the four months of this year, according to the State Administration of Foreign Exchange.

Yet, foreign exchange deposits grew USD 28 billion so far this year to USD 881.9 billion at the end of April, PBOC data show.

(USD 1 = 6.9121 Chinese yuan renminbi)

(Additional reporting by Jason Xue in Shanghai; Writing by Vidya Ranganathan; Editing by Kim Coghill)

BSP holds rates as expected

MANILA, May 18 (Reuters) – The Philippines central bank kept its benchmark interest rate steady at 6.25% on Thursday, pausing its 10-month tightening cycle, with inflation on track to ease back towards its 2% to 4% target range for the year.

Sixteen out of 22 economists in a Reuters poll had predicted the central bank would take a break after raising rates by a total of 425 basis points (bps) since last May, while the rest had expected a 25 bps hike.

(Reporting by Neil Jerome Morales and Enrico Dela Cruz; Editing by Martin Petty and Kim Coghill)

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