Dollar adrift as optimism over China reopening turns to caution

SINGAPORE, Dec 29 (Reuters) – The dollar pared some gains on Thursday after riding long-end US Treasury yields higher overnight, though investors remained on edge going into the year end as initial optimism over China’s reopening fizzled.

Following China’s removal of its quarantine rule for inbound travelers beginning Jan. 8, countries such as the United States, Japan and India said they would require COVID tests for travelers from China.

The speed at which the country has scrapped COVID rules has overwhelmed its health system and sparked concerns about the spread of the virus.

The Japanese yen was last roughly 0.6% higher at 133.71 per dollar, languishing near a one-week low of 134.50 that was hit in the previous session.

Sterling rose 0.1% to USD 1.2030, but was similarly not far off its three-week trough of USD 1.1993 hit last week.

The euro was up 0.12% at USD 1.0623.

“Many countries adopting an additional layer of testing for travelers arriving from China reflect hobbled resumption of travel amid China’s outbreak,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank. “This might also fuel fears of new strains of COVID that could once again disrupt the global recovery.”

The uncertainty over the global economic outlook, along with mounting worries about a recession in the United States, saw the two-year Treasury yield, which typically moves in step with interest rate expectations, slip overnight. It last stood at 4.3678%.

Meanwhile, the yield on the benchmark US 10-year Treasury last stood at 3.8637%, after rising to a more than one-month high of 3.8920% overnight.

Against a basket of currencies, the US dollar index was firm at 104.33.

“Near term, there’s still the big question mark as to how soon can we get over this COVID resurgence,” said Moh Siong Sim, a currency strategist at Bank of Singapore. “But in the medium term … I think the growth outlook for China can be steadier and less bumpy, and that in turn means the rest of the world could benefit from that as well.”

The Aussie was last 0.07% higher at USD 0.6745, while the kiwi gained 0.55% to USD 0.6345.

The Chinese offshore yuan rose more than 0.2% to 6.9789 per dollar.

In cryptocurrencies, Bitcoin edged 0.12% higher to USD 16,560, while Ether gained 0.3% to USD 1,193.40, though both are on track for a decline of more than 60% this year.

(Reporting by Rae Wee; Editing by Bradley Perrett and Stephen Coates)

Oil dips as China COVID spike dampens demand outlook

SINGAPORE, Dec 29 (Reuters) – Oil prices dipped on Thursday as surging COVID-19 cases in China dimmed hopes of a recovery in fuel demand for the world’s largest crude oil importer.

Brent futures for February fell 26 cents, or 0.3%, to USD 83.00 a barrel by 0430 GMT, while US crude CLc1 fell 26 cents, or 0.3%, to USD 78.70 a barrel.

The scale of the latest outbreak and doubts over official data prompted some countries to enact new travel rules on Chinese visitors, even as China began dismantling the world’s strictest COVID regime of lockdowns and testing.

“The lack of clarity over the virus situation in China has prompted some new travel rules from various countries, which could serve as some dampener for previous optimism,” said Jun Rong Yeap, market strategist at IG.

“Heading into 2023, there are chances for oil prices to rebound but it will still boil down to the pace of China’s reopening, and whether market participants have priced for the growth risks as a trade-off to tighter central bank policies,” he added.

Oil markets were also buffeted by expectations of another US interest rate increase in the United States, as the Federal Reserve tries to limit price rises in a tight labor market.

US crude oil inventories fell less than expected, by about 1.3 million barrels, in the week ended Dec. 23, according to market sources citing American Petroleum Institute figures.

That compared with estimates for a draw of 1.5 million barrels, according to analysts’ estimates. The US government will release its weekly figures at 10:30 a.m. EST on Thursday.

Also weighing on prices, pipeline operator TC Energy said it was working to restart the portion of the Keystone pipeline that was shut down after a leak this month. However, that comes as an Arctic freeze has forced some oil refining facilities offline, backing up crude supplies.

Oil refiners continued to ramp up operations, but some of that recovery is expected to extend to January.

Markets, however, drew some support from Russian President Vladimir Putin’s ban on exports of crude oil and oil products from Feb. 1 for five months to nations that abide by a Western price cap.

Germany said the ban has “no practical significance” as the country has been working since spring to replace Russian oil supplies and ensure security of supply.

(Reporting by Arathy Somasekhar in Houston and Jeslyn Lerh in Singapore; Editing by Himani Sarkar and Gerry Doyle)

Gold prices inch higher as US dollar, yields slip

Dec 29 (Reuters) – Gold prices ticked up on Thursday as the US dollar and Treasury yields eased, with market participants awaiting new indications on the Federal Reserve’s rate hike plans.

Spot gold was up 0.3% at USD 1,808.73 per ounce as of 0551 GMT, after dropping 1% in the last session. US gold futures fell 0.1% to USD 1,814.70.

The dollar index slipped 0.1%. A weaker greenback makes bullion more appealing to buyers holding other currencies. Benchmark US 10-year Treasury yields eased after hitting a six-week high in the previous session.

Traders will scan the weekly US jobless claim numbers due at 1330 GMT, for their likely influence on the Fed’s rate-hike strategy.

“Jobless data will be important. If it shows an increase in claims, then it should weaken dollar and support gold,” said Ajay Kedia, director at Kedia Commodities, Mumbai.

The bullion was under pressure for most part of this year, buffeted by rapid rate-hikes from major central banks.

However, prices have risen nearly USD 200 from a more than two-year low hit in September on hopes the US central bank might slow its pace of interest rate hikes.

The Fed raised interest rates by only 50 basis points (bps) in December after four consecutive increases of 75 bps each, while Fed Chair Jerome Powell has emphasized the need to keep rates elevated for a time to fight inflation.

Higher rates dim gold’s anti-inflationary appeal and increase the opportunity cost of holding the asset since it pays no interest.

“In 2022, gold has already priced in the rate hikes. In 2023, gold will be well supported by geopolitical tensions, recession woes and central bank buying,” added Kedia.

“Gold ETFs (exchange traded funds) are also starting to rise.”

Spot silver gained 0.6% to USD 23.66, platinum rose 0.7% to USD 1,015.25 and palladium was up 0.3% to USD 1,788.38.

(Reporting by Ashitha Shivaprasad in Bengaluru; Editing by Uttaresh.V and Krishna Chandra Eluri)

Asian shares skid as COVID surge in China unsettles investors

SINGAPORE, Dec 29 (Reuters) – Asian share markets fell along with oil prices on Thursday as soaring COVID cases in China unsettled investors who have been expecting the world’s second biggest economy to regather momentum after the relaxation of stringent COVID curbs.

MSCI’s broadest index of Asia-Pacific shares outside Japan was down 1.06%, and was set for a third straight week of losses.

China shares opened 0.4% lower, while Hong Kong’s stock market fell 1%. Japan’s Nikkei fell more than 1% to a nearly three month low, while Australia’s resource heavy S&P/ASX 200 index lost 1.18%.

China’s health system has come under heavy stress since Beijing started dismantling its zero-COVID regime at the start of the month.

On Monday, China announced it would end quarantine requirements for inbound travelers on Jan. 8, and several countries, including the United States and Japan, have made COVID tests mandatory for travelers from China.

Nomura analysts said in a note that there could be significant waves of infection across China, spreading from urban to rural areas, during the nationwide travel rush for the Lunar New Year which falls on Jan. 22.

“China may find itself in a difficult situation due to its procrastination on embracing a ‘living with COVID’ approach,” Nomura analysts said, noting that the previous zero-COVID policy could have overprotected people, raising the risk of a surge in infections once the controls were removed.

Concerns that central banks efforts to tame inflation could lead to an economic slowdown and the uncertainty over how China’s economy will fare following the removal of COVID controls have kept markets subdued.

Markets are now pricing in 69% chance of a 25-basis point rate hike when the US Federal Reserve holds a policy review in February, and they are now looking at US rates peaking at 4.94% in the first half of next year.

The Fed raised interest rates by 50 bps earlier in December after delivering four consecutive 75 bps hikes but has said it may need to keep higher interest rates for longer.

US treasury yields have risen as traders attempt to assess the impact of China reopening its economy on the Fed’s rate hike policy.

The yield on 10-year Treasury notes was down 2.2 basis points to 3.864%, not far off six-week high of 3.89% it hit in the previous session.

The yield on the 30-year Treasury bond was down 2.1 basis points to 3.956%. The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 1 basis point at 4.349%.

In the commodities market, US crude fell 0.52% to USD 78.55 per barrel and Brent was at USD 82.84, down 0.5% on the day. Surging COVID cases in China has raised doubts over a fast recovery in fuel demand in the world’s second-biggest oil consumer.

Spot gold added 0.2% to USD 1,807.98 an ounce. US gold futures fell 0.17% to USD 1,805.80 an ounce.

In the currency market, the Japanese yen strengthened 0.56% versus the greenback at 133.70 per dollar, while sterling was last trading at USD 1.2044, up 0.26% on the day.

The dollar index, which measures the dollar against six major currencies, fell 0.057%, with the euro up 0.19% to USD 1.0628.

(Reporting by Ankur Banerjee; Editing by Simon Cameron-Moore)

US yields rise as investors gauge effect of China reopen on Fed

NEW YORK, Dec 28 (Reuters) – The yield on the benchmark US 10-year Treasury rose for a third straight day on Wednesday, reversing an earlier decline, as investors attempted to navigate the impact of China’s reopening policy on the path of interest rate hikes by the US Federal Reserve.

While China has quickly reversed course on its previous “zero-COVID” policy this month, which is likely to benefit the global economy, the change has come with a surge in cases that could hamper the economy in the short-term.

The yield on 10-year Treasury notes was up 2.5 basis points to 3.883% after hitting a six-week high of 3.89%. On Tuesday, the 10-year jumped 11.1 basis points, its biggest one-day rise since Oct. 19.

“First glance was with the reopening it would end up if not being inflationary, certainly sort of arrest the decline in inflation,” said Sam Stovall, chief investment strategist at CFRA in New York.

“Now with an increase in demand for materials and whatnot, that could put a support underneath prices and another reason why inflation could end up being stickier.”

After hitting a near-three-month low on Dec. 7 as hopes grew the Fed would signal that an end to its rate hike cycle was on the horizon, the 10-year yield has steadily climbed. It saw its biggest weekly rise in 8-1/2 months last week on the heels of policy announcements from the US central bank, the Bank of England and the European Central Bank.

The yield on the 30-year Treasury bond was up 3.3 basis points to 3.976%.

Forecasts by the US central bank see the fed funds rates climbing above 5% next year, while Fed Chair Jay Powell and other Fed officials have emphasized there may be a need to keep rates at a higher level for longer to completely stamp out inflation.

Analysts have cautioned that it is difficult to put too much weight on market direction this week given the limited trading activity around the holidays.

An auction of USD 43 billion in five-year notes was viewed as solid by analysts, with a high yield of 3.973% and demand for the debt at 2.46 times the notes on sale was better than average.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 47.8 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 1.1 basis points at 4.357%.

The breakeven rate on five-year US Treasury inflation-protected securities (TIPS) was last at 2.369%, after closing at 2.368% on Tuesday.

The 10-year TIPS breakeven rate was last at 2.289%, indicating the market sees inflation averaging 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Chizu Nomiyama and Leslie Adler)

US yields climb as investors gauge Fed path while China reopens

NEW YORK, Dec 27 (Reuters) – The yield on the benchmark US 10-year Treasury note rose on Tuesday, as investors tried to assess the path of interest rate hikes from the Federal Reserve as China continues to scale back its COVID-19 restrictions.

China said it would stop requiring inbound travelers to go into quarantine from Jan. 8, the National Health Commission (NHC) said late on Monday, a major step towards loosening its curbs.

After hitting a near three-month low on Dec. 7 as hopes grew the Fed would signal an end to its rate hike cycle was on the horizon, the 10-year yield has steadily climbed. It saw its biggest weekly rise in 8-1/2 months last week on the heels of policy announcements from the US central bank, Bank of England and European Central Bank (ECB).

Investors have been trying to determine how high the Fed will need to raise rates as it tightens policy in its continuing battle against high inflation, while also trying to avoid tilting the economy into recession.

The yield on 10-year Treasury notes was up 10.4 basis points at 3.851% after hitting a five-week high of 3.862%.

“It is pretty likely that rates will continue to climb higher as the market sort of digests this huge supply of Treasuries that now is being put onto the private sector,” said John Luke Tyner, fixed income analyst at Aptus Capital Advisors in Fairhope, Alabama.

“Long story short, in the short term we will see rates trade on the recession theme on the long end and basically what the Fed is expected to do on the front-end, and until we get some new data it is going to be hard to break out of that range.”

The yield on the 30-year Treasury bond was up 11.5 bps at 3.937%.

Analysts also cautioned it was difficult to extrapolate any concrete direction given the limited trading activity around the holidays.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was
up 7.7 bps at 4.400%.

Shorter-dated bonds saw their yields fall from their highs of the day after an auction of USD 42 billion in two-year notes, which was viewed as strong by analysts, with a high yield of 4.373% and demand for the debt at 2.71 times the notes on sale.

Forecasts by the central bank see the fed funds rates climbing above 5% next year, while Fed Chair Jay Powell and other Fed officials have emphasized there may be a need to keep rates at a higher level for longer to completely stamp out inflation.

On the economic front, data showed the advance goods trade deficit for November narrowed to USD 83.35 billion from the prior month’s USD 98.8 billion, while a separate report pointed to continued struggles for the housing market as home prices fell under rising mortgages rates.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 55.1 bps.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.37%, after closing at 2.229% on Friday.

(Reporting by Chuck Mikolajczak; Editing by Tomasz Janowski and Nick Macfie)

Gold jumps to six-month high on China reopening optimism

Dec 27 (Reuters) – Gold prices jumped to their highest level in six months on Tuesday as optimism surrounding decisions by top consumer China to further ease COVID-19 restrictions weighed on the dollar, while benchmark US yields limited gains.

Spot gold jumped 1.1% to USD 1,816.69 per ounce by 1:52 p.m. ET (1852 GMT), rising to USD 1,832.99 earlier in the session, its highest level since June 27.

US gold futures settled up 1.1% at USD 1,823.1.

“Gold is following the decisions by China to further ease COVID restrictions,” on the anticipation of higher demand from the region and in spite of rising yields, said Bob Haberkorn, senior market strategist at RJO Futures.

The dollar index edged lower and benchmark 10-year yields held close to their highest levels in over a month.

Gold has gained nearly USD 200 after falling to a more than two-year low in late September, as expectations about slower interest rate hikes from the Fed dimmed the dollar’s allure and lowered the opportunity cost of holding bullion, which pays no interest.

Top gold consumer China relaxed quarantine rules, in a major step toward easing curbs on its borders, which have been largely shut since 2020.

“The gold futures bulls have the overall near-term technical advantage. Prices are in a seven-week-old uptrend on the daily bar chart,” with the first resistance at USD 1,825 an ounce, said Jim Wyckoff, senior analyst at Kitco Metals, in a note.

In other metals, spot silver gained 1.6% to USD 24.09 per ounce, while platinum edged up 0.2% to USD 1,023.73.

Palladium jumped nearly 4% to USD 1,832.44, earlier in the session hitting its highest level in over a week at USD 1,839.66, on news about China opening up.

“We continue to see palladium as the stronger of the two metals (platinum and palladium) almost specifically due to supply constraints,” said David Meger, director of metals trading at High Ridge Futures.

(Reporting by Seher Dareen in Bengaluru, Editing by Louise Heavens, Matthew Lewis and Shailesh Kuber)

Global finance unknowns are more “who” than “what”

LONDON, Dec 27 (Reuters Breakingviews) – After British pension funds narrowly dodged catastrophe in 2022, regulators are hunting enthusiastically for hidden risks in the non-bank financial industry. Also known as shadow banking, it’s a market that could be over USD 225 trillion in size. The key to stopping a crisis isn’t locating the landmines – it’s working out who’s most likely to stand on them.

When UK pension funds were caught short by a sudden fall in government bond prices in September, the Bank of England had to launch a 65-billion-pound scheme to stabilize the market. Had it not done so, it said, the funds would have had to liquidate investments to meet margin calls on their loans. Panicked sales of bonds could have pushed borrowing costs up in the mortgage market, rippling through the wider economy. As a result, regulators everywhere, including the G20’s financial stability task force, are on high alert looking for hidden leverage.

Emerging market funds are one place to start the search. When interest rates were low, investors sought out riskier assets in markets like Indonesia, Brazil and Mexico. But as US interest rates rise past 4%, there is less need for investors to venture into riskier markets for returns. If a fall in demand for a country’s bonds coincided with a political upset, for example, investors might rush to liquidate holdings in emerging market funds, causing rapid and disorderly price falls.

Leveraged loans are also vulnerable to a similar fire sale. Before the pandemic, banks, hedge funds and other investors were happy to back corporate takeovers with high levels of debt. So-called open-ended funds, which make up 4% of the leveraged loan market, are a particular worry, because these allow investors to demand their money back, even though the fund’s assets might not be easily sellable. In the market ructions of March 2020, open-ended funds sold USD 14 billion of leveraged loans, which accounted for 11% of the transactions in the secondary market and contributed to a 19% drop in prices.

But not all market weaknesses deserve heavy-handed regulation. It might make sense to police investments crowded with pension funds whose activities also influence government bond prices, but not those where losses would be borne by other less interconnected investors. An obvious example is the collapse of cryptocurrency exchange FTX in November; it involved an investor panic, but left critical firms like banks unscathed, because most regulated institutions have given crypto a wide berth.

Regulators around the world are intent on preventing another crisis. It’s good that they’re focused on hidden leverage and potential fire sales. When it comes to stress-testing the system, though, it makes most sense to be clear about who has the potential to cause systemic risk, not just what. Otherwise watchdogs risk trying to regulate everything and achieving little.

(This is a Breakingviews prediction for 2023.)

CONTEXT NEWS

The G20’s Financial Stability Board recommended in a report on Nov. 10 that systemic vulnerabilities in investment funds and other “non-banks” that make up almost half the world’s financial system be addressed by tweaking existing rules, before assessing whether more radical action was needed.

The Bank of England on Sept. 28 unveiled a 65-billion-pound bond-buying scheme to stabilize the bond market, after some funds were forced to sell government bonds to meet margin calls.

(Editing by John Foley and Katrina Hamlin)

Oil steady as US output ramps up after freeze, China eases COVID curbs

HOUSTON, Dec 27 (Reuters) – Oil prices were steady after hitting a three-week high on Tuesday as restarts at some US energy plants shut by winter storms offset gains stemming from hopes of a demand recovery as China eases its COVID-19 restrictions.

Brent crude was up 41 cents, or 0.5%, at USD 84.33 a barrel, while US West Texas Intermediate crude settled 3 cents lower at USD 79.53 per barrel.

Both benchmarks hit their highest level since Dec. 5 earlier in the session. UK and US markets were closed on Monday for the Christmas holiday.

Refineries along the Gulf Coast began to resume operations and ramp up production after an Arctic blast sent temperatures well below freezing and led to power, instrumentation and steam losses at facilities along the US Gulf Coast.

The cold also cut oil and gas production from North Dakota to Texas.

Output of about 450,000-500,000 barrels of oil per day was curtailed over the Christmas weekend in the Bakken oilfields, the North Dakota Pipeline Authority said, adding that operators were working quickly to restore lost production.

“The US weather is forecast to improve this week, which means the rally may not last too long,” said Kazuhiko Saito, chief analyst at Fujitomi Securities.

China will stop requiring inbound travelers to go into quarantine, starting Jan. 8, the National Health Commission said on Monday in a major step toward easing curbs on borders that have been largely shut since 2020.

“This is certainly something that traders and investors have been hoping for,” Avatrade analyst Naeem Aslam said.

Russian President Vladimir Putin on Tuesday also signed a decree that bans the supply of oil and oil products to nations participating in the price cap from Feb. 1 for five months. Concern over a possible production cut by Russia also provided price support.

Russia might cut oil output by 5% to 7% in early 2023 as it responds to price caps, the RIA news agency cited Deputy Prime Minister Alexander Novak as saying on Friday.

(Reporting by Arathy Somasekhar in Houston and Alex Lawler in London; Additional reporting by Yuka Obayashi in Tokyo and Isabel Kua in Singapore; Editing by Louise Heavens, Matthew Lewis and Nick Macfie)

Philippines reports at least eight deaths as rains, floods disrupt Christmas celebrations

MANILA, Dec 26 (Reuters) – Philippine authorities on Monday reported at least eight deaths mostly due to floods triggered by heavy rains in the southern provinces, as Christmas celebrations were disrupted for thousands of residents who were forced to evacuate.

Images on social media showed rescue workers helping residents out of chest-deep flood waters caused by two days of moderate to heavy rainfall in central and southern Philippines.

In its latest bulletin, the national disaster agency reported eight casualties, five of whom died from drowning, while 19 were missing. Of the eight deaths, six were in the mountainous and coastal Misamis Occidental province.

Nearly 46,000 people were sheltering in evacuation centres, data from the social welfare ministry showed on Monday.

“We need food. Our house and animals were carried away by floods,” Estela Talaruc, a Misamis Occidental resident, told DZRH radio station. “Nothing was left, not even clothes.”

The Philippines, an archipelago of more than 7,600 islands, sees an average of 20 tropical storms annually. The Southeast Asian nation is also hit by adverse weather conditions like monsoon rains that cause deadly landslides and floods, and damage crops.

(Reporting by Neil Jerome Morales; Editing by Kanupriya Kapoor)

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