European shares slip on recession fears, China optimism limits losses

Dec 5 (Reuters) – European shares slipped on Monday after data showing a decline in euro zone business activity fanned recession fears, while hopes of easing of stringent COVID-19 curbs in China boosted miners and other China-exposed equities.

The region wide STOXX 600 closed 0.4% down.

The index had notched gains for the seventh straight week on Friday, helped by China-led optimism and easing worries over aggressive interest rate hikes.

Data on Monday showed euro zone business activity declined for a fifth month in November, suggesting the economy was sliding into a mild recession.

Governing council member Gabriel Makhlouf said the European Central Bank is likely to raise interest rates by 50 basis points (bps) next week on the way to potentially moving beyond a deposit rate of 3% amid ongoing inflationary concerns.

Most of the STOXX 600 sectors were in the red, with rate-sensitive technology stocks and consumer staples such as Nestle (NESN) and L’Oreal (OREP) being the biggest drag on the index.

“The ECB still has to be pretty strong, despite the fact that clearly activity in the euro zone is contracting a bit and it does look like Europe is on the cusp of a shallow recession,” said Danni Hewson, financial analyst at AJ Bell.

UK’s resource-heavy FTSE 100 was the only regional index in green, up 0.2%, helped by a jump in miners and China-exposed financials like Prudential.

“FTSE 100 is outperforming because of its make -,” added Hewson. “On balance, the expectation is that China will relax restrictions.”

Miners gained 0.6% as prices of base and precious metals rose with investors cheering the prospects of a broader policy shift in top consumer China in the wake of historic protests last month over COVID restrictions.

In company news, shares of Vodafone Group (VOD) slipped after the British mobile operator said Chief Executive Officer Nick Read would step down at the end of this year.

Credit Suisse (CSGN) gained 2.9%. Investors including Saudi Arabia’s crown prince and a US private-equity firm run by a former Barclays chief executive have shown interest in investing USD 1 billion or more in Credit Suisse’s new investment banking unit, the Wall Street Journal reported on Sunday.

(Reporting by Amruta Khandekar and Bansari Mayur Kamdar in Bengaluru; Editing by Vinay Dwivedi, Sherry Jacob-Phillips and Jonathan Oatis)

Philippines trims 2023 GDP growth target due to global risks

MANILA, Dec 5 (Reuters) – The Philippines on Monday lowered its economic growth target for 2023, taking into account an anticipated weakening in global activity, but retained its expansion goals for the succeeding five years.

The Southeast Asian nation’s economy is now expected to grow 6.0%-7.0% next year, a lower and narrower range compared with the previous official goal of 6.5%-8.0%, the inter-agency Development Budget Coordination Committee (DBCC) announced in a media briefing.

“It is the global slowdown that is affecting the adjustment,” Finance Secretary Benjamin Diokno said.

Last week, International Monetary Fund (IMF) Managing Director Kristalina Georgieva said the chance of
global growth falling below 2% next year was increasing due to the effects of the war in Ukraine and simultaneous slowdowns in Europe, China and the United States.

The DBCC, however, kept the growth target for 2024-2028 at 6.5%-8.0%.

For 2022, officials said the economy was on track to meet the growth goal of 6.5%-7.5%, faster than the 5.6% expansion in 2021, after the government removed nearly all COVID-19 restrictions and allowed more business activities to resume.

The government also revised its foreign exchange rate assumptions.

It expects the peso to trade against the U.S. dollar at 54-55 in 2022 compared with the previous assumption of 51-53, at 55-59 in 2023, and at 53-57 in 2024, compared with the previous forecast of 51-55 for 2023 onwards.

Trading around the 55 territory on Monday after plunging to a record low of 59 in recent weeks, the peso PHP= has recovered against the dollar thanks to a series of interest rate hikes by the Bangko Sentral ng Pilipinas (BSP) to match U.S. Federal Reserve’s aggressive tightening.

The BSP will likely hike rates at its Dec. 15 meeting by either 25 or 50 basis points, Governor Felipe Medalla said last week.

Meanwhile, economic officials, during the same briefing, supported the establishment of a
sovereign wealth fund, even as Medalla has voiced caution over the proposal, stressing the importance of transparency.

The Philippines’ bicameral legislature on Monday approved a record 5.268 trillion pesos (USD 94.4 billion) for the 2023 national budget, the first full-year spending plan under President Ferdinand Marcos Jr.

(USD 1 = 55.8050 Philippine pesos)

(Reporting by Neil Jerome Morales and Karen Lema; writing by Enrico Dela Cruz; Editing by Kanupriya Kapoor)

Bargains begin luring big banks back to China bets for 2023

HONG KONG, Dec 5 (Reuters) – As Chinese assets whipsaw around hopes and fears over the country’s path out of the pandemic, big offshore investors are slowly leaving the sidelines as they plot a cautious return to one of the year’s worst-performing equity markets.

The drumbeat of bullish outlooks has grown a bit louder over recent weeks as analysts at Citi, Bank of America, and J.P. Morgan upgraded recommendations, and said re-opening can lift consumer-exposed stocks that have fallen to attractive prices.

Goldman Sachs forecasts 16% index returns for MSCI China and CSI300 next year and recommends an overweight allocation to China, while J.P.Morgan expects a 10% potential upside in MSCI China in 2023.

Morgan Stanley upgraded its recommendation to overweight on Monday with an increase in exposure to consumer stocks as reopening prospects improve. Bank of America Securities turned bullish in November, with its China equity strategist, Winnie Wu picking internet and financial stocks to lead the short-term rebound.

Overall, however, while consensus is building around economic recovery, there is hesitation over timing and weight of capital to allocate to China as the regulatory and political risks that have stalked its equity markets for the past couple of years remain.

“We would rather miss the first 10% gains, and wait until when we can see clearer, ongoing signs of policy pivot,” said Eva Lee, head of Greater China equities at UBS Global Wealth Management, the world’s biggest wealth manager by assets.

“We have experienced several rounds of policy back and forth in 2022,” she added, referring to both COVID and property policies. UBS Global Wealth Management recommends a market-neutral allocation to Chinese stocks.

There is some evidence that the first leg of an early recovery happened last week, with the Hang Seng .HSI up 6% and closing out its best month since 1998 with a 27% rise through November. The yuan posted its best week since 2005 on Friday.

Market participants say the asset moves so far – coming with COVID cases at record highs and only hints of a shift in authorities’ response – suggest light positioning in China that could lift markets if it were to solidify into steady inflows.

US institutional investors continue to reduce US-listed Chinese American Depositary Receipts (ADRs) so far in the fourth quarter with estimated outflows of USD 2.9 billion.

Short interest in ADRs was also up by 11% last month, Morgan Stanley data as of Nov. 29 shows. Societe Generale analysts downgraded their recommended China allocation from overweight to neutral.

ACCUMULATE ON WEAKNESS

China’s market weathered a perfect storm this year, with US-China tension threatening the US listings of Chinese companies, a credit crisis crunching the once-mighty real estate sector and COVID restrictions curtailing growth.

The CSI300 has lost 22% and the Hang Seng 20% so far this year, compared with a 16% loss for world stocks.

The policy response has been monetary easing, steadily increasing support for the property sector and the easing of some of the strict COVID rules. It is yet to win investors’ full approval, since unpredictable regulation and politics still hang over profitability, and domestic confidence remains fragile.

“Monetary easing has become ineffective, just like pushing a string,” said Chi Lo, senior strategist at BNP Paribas Asset Management. He is sticking with a preference for sectors that are likely to receive policy tailwinds.

“We continue to focus on the three key themes which are in line with China’s long-term growth target: technology and innovation, consumption upgrading and industry consolidation,” he said.

Goldman Sachs also recommends policy-aligned bets on sectors such as technology hardware and profitable state-owned businesses.

Politics aside, price and the prospect that rate hikes put a lid on US equities next year has also got money managers starting to weigh up the risk of missing out.

A 27% drop for the MSCI China index this year has left its price-to-earnings ratio at 9.55 against a 10-year average of 11.29.

“It’s now getting risky to be really underweight or short China as many of the hedge funds were,” said Sean Taylor, Asia-Pacific chief investment officer at asset manager DWS, which thinks there is scope for a 15-20% rally in China next year.

“Our view is to accumulate, on weakness, reopening beneficiaries, and particularly those driven by the consumer,” said Taylor.

(Reporting by Summer Zhen; Editing by Shri Navaratnam)

Oil falls over 3% after data raises Fed interest rate worries

NEW YORK, Dec 5 (Reuters) – Oil prices fell over 3% on Monday, following US stock markets lower, after US service sector data raised worries that the Federal Reserve could continue its aggressive policy tightening path.

Brent crude futures settled down USD 2.89, or 3.4%%, at USD 82.68 a barrel. West Texas Intermediate crude (WTI) fell USD 3.05, or 3.8%, to USD 76.93 a barrel. Both benchmarks had earlier risen more than USD 2, before reversing direction.

During the session, WTI’s front-month contract began trading lower than prices in half a year, a market structure called contango, which implies oversupply.

US services industry activity unexpectedly picked up in November, with employment rebounding, offering more evidence of underlying momentum in the economy as it braces for an anticipated recession next year.

The news caused oil and stock markets to pare gains.

The data challenges hopes that the Fed might slow the pace and intensity of its rate hikes amid recent signs of ebbing inflation.

“Macro-economic jitters about the Fed and what they’re going to do on interest rates are taking over the market,” said Phil Flynn, an analyst at Price Futures group.

Supporting the market earlier, the Organization of the Petroleum Exporting Countries and allies including Russia, together called OPEC+, agreed on Sunday to stick to their October plan to cut output by 2 million barrels per day (bpd) from November through 2023.

“The decision … is not a surprise, given the uncertainty in the market over the impact of the Dec. 5 EU Russia crude oil import ban and the G7 price cap,” said Ann-Louise Hittle, vice president of consultancy Wood Mackenzie.

“In addition, the producers’ group faces downside risk from the potential for weakening global economic growth and China’s zero COVID policy.”

The Group of Seven (G7) countries and Australia last week agreed on a USD 60 a barrel price cap on seaborne Russian oil.

However, the price cap’s effect on the futures market during Monday’s session ran out of steam by the end of the day, said Andrew Lipow, president of Lipow Oil Associates in Houston.

“The market has realized that the EU is already banning the purchase of Russian oil with a few limited exemptions, and China and India are going to continue and purchase Russian crude oil, so the impact of the price cap will be mitigated,” Lipow said.

At the same time, in a positive sign for fuel demand in the world’s top oil importer, more Chinese cities eased COVID curbs over the weekend.

Business and manufacturing activity in China, the world’s second-largest economy, have been hit this year by strict measures to curb the spread of the coronavirus.

(Reporting by Stephanie Kelly in New York; Additional reporting by Noah Browning in London, Sonali Paul in Melbourne and Emily Chow in Singapore; Editing by Marguerita Choy and Matthew Lewis)

Gold retreats from near 4-month peak on positive US jobs data

Dec 2 (Reuters) – Gold prices slipped on Friday, retreating from a near-four month high, after robust US jobs data fanned concerns that the Federal Reserve might stick with its aggressive monetary policy tightening.

Spot gold fell 0.4% to USD 1,794.96 per ounce by 2:21 p.m. ET (1921 GMT), after earlier hitting its highest since Aug. 10 at USD 1,804.46. US gold futures GCv1 settled down 0.3% at USD 1,809.6.

Data showed US employers hired more workers than expected in November and raised wages despite mounting worries of a recession.

“With the US jobs number coming in much stronger than expected… what we’re seeing is the concern that the Fed may need to go further with their expected interest rate hikes,” said David Meger, director of metals trading at High Ridge Future.

“You’re going to see pressure on most asset classes today, not just the precious metals complex.”

The dollar edged 0.1% higher against its rivals, while benchmark US Treasury yield rose.

Additionally, Chicago Fed President Charles Evans stated at an event that there could be “a slightly higher peak rate of the funds rate, even as we likely will step down” the pace of rate hikes from 75 bps.

Fed funds futures prices still implied a 75% chance of the central bank raising its policy rate by 50 basis points to a 4.25%-4.5% range in mid-December.

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

Gold prices were still set for their second straight weekly rise, up 2.2% so far this week, as the dollar dipped after Fed Chair Jerome Powell’s dovish speech this week.

Other precious metals were set for weekly gains as well. Spot silver XAG= rose 1.5% to USD 23.11 per ounce, having hit its highest since May 5. Platinum dropped 2.6% to USD 1,014.25 and palladium was down 2.1% to USD 1,901.25.

(Reporting by Seher Dareen and Brijesh Patel in Bengaluru; Editing by Sriraj Kalluvila and Shailesh Kuber)

US equity funds register biggest weekly outflow in over five weeks

Dec 2 (Reuters) – US equity funds logged big outflows in the week to November 30 as investors booked profit after concerns over economic growth resurfaced due to protests in major Chinese cities against strict COVID-19 policies.

Investors were also cautious about the tech sector amid a hit to iPhone production in China.

According to data from Refinitiv Lipper, US equity funds saw outflows of USD 17.37 billion, the biggest amount for a week since June 15.

Data showed the S&P 500, Nasdaq Composite and Dow Jones Industrial Average .DJI all recorded two straight months of gains through November.

US equity growth and value funds both witnessed outflows for a second straight week, with disposals amounting to USD 6.8 billion and USD 1.76 billion, respectively.

By sector, investors exited tech, financials, and real estate funds worth USD 647 million, USD 231 million and USD 219 million, respectively.

Data for US bond funds showed investors withdrew USD 10.41 billion in a fourth straight week of net selling.

US investors sold taxable bond funds of USD 8.91 billion, marking a third straight week of outflow, while exiting USD 288 million out of municipal bond funds.

US general domestic taxable fixed income funds recorded outflows of USD 6.38 billion, the biggest for a week since at least Jan. 2021, while short/intermediate investment-grade, and high yield funds had net selling of USD 1.23 billion and USD 1.11 billion respectively.

Meanwhile, safer US money market funds received USD 26.95 billion, the biggest amount in four weeks, and government bond fund attracted USD 738 million.

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru)

ECB to start offloading debt to fight inflation

FRANKFURT, Dec 2 (Reuters) – The European Central Bank is all but certain to start offloading some of its 5 trillion euro (USD 5.3 trillion) bond stash next year as it ramps up efforts to bring down record-high inflation in the euro zone.

Along with a continuing streak of interest rate increases, it hopes so-called quantitative tightening, or QT, will raise borrowing costs and thereby slow demand for goods and services across the 19 countries that use the euro.

The policy shift will be historic, after the ECB spent nearly a decade doing the exact opposite via multiple stimulus programmes that kept the euro zone economy afloat through sequential crises.

It also poses a challenge to governments that have relied on the ECB as a major lender for years, particularly in the bloc’s indebted south.

The ECB will lay out the “key principles” of the QT program on Dec 15, with kick-off expected in the first few months of 2023.

Here are the main questions investors are asking about the ECB’s plans.

WHAT IS QT AND HOW IS IT SUPPOSED TO WORK?

At a general level, quantitative tightening is supposed to be a mirror image of the quantitative easing (QE) policies that have dominated the past decade.

Under QE, the ECB drove down borrowing costs by buying government bonds, hoping this would spur banks and other investors to put their money to more fruitful use, such as financing companies.

Through quantitative tightening, the ECB will mop up the liquidity created by QE by shedding its bond holdings.

This should raise the cost of money and cool credit and investment.

WHAT WOULD IT LOOK LIKE IN PRACTICE?

The ECB has hinted that it doesn’t plan to sell its bonds but will instead simply stop replacing some of those that mature, as the US Federal Reserve did when it started its own QT programme earlier this year.

The Fed said it would only reinvest proceeds from maturing bonds exceeding a certain monthly threshold.

WILL THE ECB SIMPLY COPY THE FED?

Probably not, as monthly redemptions from the ECB’s Asset Purchase Program range from 17.8 billion euros next August to 52.7 billion euros in October.

That means it might need to use a percentage of redemptions as its yardstick or smooth reinvestments across several months, as it has done in the past.

But ECB policymakers have been adamant that they want QT to be predictable and gradual, so don’t expect too much variation.

The idea is to put it on autopilot so that policymakers will not have to make regular decisions on the pace of redemptions, ensuring interest rates will remain their key tool.

HOW MUCH MONEY ARE WE TALKING ABOUT HERE?

The ECB bought 3.3 trillion euros worth of assets under APP, most of which are government bonds.

These have an average maturity of just over seven years and analysts expect the ECB to reduce its portfolio by only 15-20 billion euros per month on average. That means it will take the ECB a long time to run down its balance sheet if it doesn’t sell assets.

The ECB also has a separate Pandemic Emergency Purchase Programme, worth 1.7 trillion euros. It has said it will keep reinvesting proceeds from that scheme until the end of 2024.

WHAT DOES IT MEAN FOR BORROWERS?

The ECB has been a major buyer of government bonds since 2015. For some months at the height of the pandemic, it was buying more sovereign debt than countries were issuing.

This is set to change under QT, forcing euro zone governments – most of which are still running deficits – to raise money from private investors.

UniCredit estimates the market will need to absorb an additional 500 billion euros’ worth of euro zone government bonds next year, the biggest increase since 2010.

SHOULD WE EXPECT MARKET TURMOIL?

Markets seem to have already priced in some QT, with yields on government bonds across the euro zone climbing to multi-year highs in September before a pullback in recent weeks.

Germany’s 10-year bonds are currently yielding 1.8% compared to minus 0.4% a year ago while similar bonds for highly indebted Italy are at 3.7%.

But the ECB has already provided a safety net for these countries, in the form of a scheme that would let it buy unlimited amounts of their bonds if the market seized up.

(USD 1 = 0.9497 euros)

(Reporting by Francesco Canepa; Editing by Catherine Evans)

Nikkei ends at 3-week low on yen strength

TOKYO, Dec 2 (Reuters) – Japan’s Nikkei index closed at its lowest in three weeks on Friday, led by declines in technology stocks, while the yen’s sharp gains hurt automakers.

Investors were also cautious ahead of key US monthly jobs data, which could offer cues on the Federal Reserve’s stance on interest rate hikes.

The Nikkei fell 1.59% to 27,777.90, its lowest close since Nov. 10, and posted a 1.59% weekly fall.

The Topix lost 1.64% to 1,953.98, after losing as much as 2.06%, a level that could trigger the Bank of Japan to step in the market. The index fell 1.64% for the week.

Japan’s shock win over Spain in the soccer World Cup overnight lifted shares of online broadcaster CyberAgent and British-style pub chain Hub.

CyberAgent — the social media and online ad company that is broadcasting all of the Qatar World Cup matches on its Ameba app — rose 3.95%, while Hub 3030.T jumped 7.03%.

“Many Japanese companies have their assumed dollar-yen rate set around 135, so additional yen strength has a very high probability of a becoming a drag on earnings,” Kazuo Kamitani, a strategist at Nomura, said in a conference call with journalists.

Investors globally will be closely watching Friday’s US non-farm payrolls for any further evidence of a peak in inflationary pressures to support Fed Chair Jerome Powell’s comments this week that it is time to slow rate hikes.

On the Nikkei, Mitsubishi Motors was the worst performer, sliding 5.91%. Nissan fell 2.98% and Toyota lost 1.38%.

The biggest drag was Uniqlo store operator Fast Retailing <9983.T), which shaved 48 points off the Nikkei with its 1.72% decline.

Mobile phone company KDDI lost 1.91%.

(Reporting by Kevin Buckland and Junko Fujita; Editing by William Mallard and Uttaresh.V)

Oil prices mixed on easing COVID curbs in China, firm dollar

Dec 2 (Reuters) – Oil futures were mixed on Friday, as hopes for further relaxation of COVID curbs in China, which could help demand recover in the world’s second biggest economy, boosted market sentiment, but a firmer US dollar capped gains.

Brent crude futures were down 1 cent, or 0.01%, at USD 86.87 per barrel by 0731 GMT, after earlier rising to $87.40.

US West Texas Intermediate (WTI) crude futures slipped 21 cents, or 0.3%, to USD 81.01 per barrel, after climbing to USD 81.63 earlier in the session.

Both benchmarks were on track for their first weekly gains after three consecutive weeks of decline.

China is set to announce an easing of its COVID-19 quarantine protocols in coming days and a reduction in mass testing, sources told Reuters, which would be a major shift in policy following the widespread protests and public anger over the world’s toughest curbs.

IMF managing director Kristalina Georgieva said on Friday a further calibration of China’s COVID strategy would be critical to sustaining and balancing the economy’s recovery.

“Oil demand has suffered under the strict measures to contain the virus, with implied oil demand currently at 13 million barrels per day (bpd), 1 million barrels bpd lower than average,” analysts at ANZ Research said in a note.

The oil market was subdued, however, by the US dollar, which typically trades inversely with oil, as the greenback edged off 16-week lows against a basket of major currencies after data showed US consumer spending increased solidly in October.

Meanwhile, European Union governments tentatively agreed on a USD 60 a barrel price cap on Russian seaborne oilwith an adjustment mechanism to keep the cap at 5% below the market price, according to diplomats and a document seen by Reuters.

All EU governments must approve the agreement in a written procedure by Friday. Poland, which had pushed for the cap to be as low as possible, had not confirmed that it would support the deal, an EU diplomat said.

BofA Global Research said in a note that capping prices for Russian crude would lead to buyers paying more for oil on the global market, and represented “a major upside risk to prices in 2023.”

If Russia ended up producing significantly less oil it could “turbocharge oil prices higher,” BoFa said. BofA assumed Russian oil output would total 10 million bpd for 2023, while the International Energy Agency has pencilled in output of 9.59 million bpd.

(Reporting by Mohi Narayan in New Delhi; Additional reporting by Laila Kearney in New York; Editing by Cynthia Osterman & Simon Cameron-Moore)

Oil dips 1.5% ahead of OPEC+ meeting, EU Russian oil ban

HOUSTON, Dec 2 (Reuters) – Oil futures slipped 1.5% in choppy trading on Friday ahead of a meeting of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) on Sunday and an EU ban on Russian crude on Monday.

Brent crude futures settled down USD 1.31, a 1.5% drop, at USD 85.57 per barrel. US West Texas Intermediate (WTI) crude futures fell USD 1.24, or 1.5%, to USD 79.98 per barrel.

Both contracts dipped in and out of negative territory, but notched their first weekly gains at around 2.5% and 5%, respectively, after three consecutive weeks of drops.

“Traders will be hesitant to be short over the weekend if there are growing rumblings that OPEC might try to shock and awe the market at their weekend meeting,” said Phil Flynn, an analyst at Price Futures group.

OPEC+ is widely expected to stick to its latest target of reducing oil production by 2 million barrels per day (bpd) when it meets on Sunday, but some analysts believe that crude prices could fall if the group does not make further cuts.

“Crude carries significantly more weekend risk and could be extremely volatile on the open next week,” said Oanda analyst Craig Erlam, a view echoed by other analysts.

Russian oil output could fall by 500,000 to 1 million bpd early in 2023 due to the European Union ban on seaborne imports from Monday, two sources at major Russian producers said.

Poland agreed to the EU’s deal for a USD 60 per barrel price cap on Russian seaborne oil, allowing the bloc to move forward with formally approving the deal over the weekend, Poland’s Ambassador to the EU, Andrzej Sados, said.

European Commission President Ursula von der Leyen said the Russian oil price cap will be adjustable over time so that the union can react to market developments.

Russian Urals crude URL-E traded at around USD 70 a barrel on Thursday afternoon. The cap was designed to limit revenues to Russia while not resulting in an oil price spike.

Sending bullish signals, China is set to announce an easing of its COVID-19 quarantine protocols within days, sources told Reuters, which would be a major shift in policy in the world’s second-biggest oil consumer, although analysts warn a significant economic reopening is likely months away.

The US oil rig count, an indicator of future production, remained unchanged this week, according to data from Baker Hughes. Worries also accelerated that US shale can no longer boost production at a short notice.

Government data also showed that US employers added more jobs than expected in November while average hourly earnings also increased, potentially giving the Federal Reserve more incentive to raise interest rates.

Money managers cut their net long US crude futures and options positions in the week to Nov. 29, the US Commodity Futures Trading Commission (CFTC) said.

(Reporting by Arathy Somasekhar in Houston; Additional reporting by Mohi Narayan in New Delhi; Editing by Marguerita Choy and Matthew Lewis)

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