Investors left scratching heads as ECB bosses spar on outlook

FRANKFURT, Nov 25 (Reuters) – The European Central Bank’s top economic thinkers are sparring over the outlook for inflation and rates, leaving investors scratching their heads over the ECB’s next policy moves.

Philip Lane and Isabel Schnabel, who lead the economic debate on the ECB’s board, gave contrasting views this week on whether the euro zone central bank should scale down its interest rate increases and even on how to measure inflation.

Lane, the ECB’s chief economist, whose view is that record price growth will start to subside next year, said many arguments for another 75-basis-point rate hike were “no longer there”.

The sequential economic shocks of the COVID pandemic and energy price spike meant current inflation readings should be taken with a pinch of salt because projections show a rapid decline, he added.

Schnabel meanwhile pushed back on the notion of smaller rate hikes and took a jab at economic projections, emphasising that the longer inflation was allowed to remain high, the greater the risk that it would take root.

They were also at odds on the prospect for wages, which Lane said should be “closely monitor(ed)” for any sign of an undue acceleration while Schnabel called on the ECB to “prevent a wage price spiral” before it even happens, given that wages are moving up “up relatively quickly”.

Their apparent disagreement added to investor uncertainty about the size of the ECB’s next interest rate hike, expected in less than three weeks’ time, and on where borrowing costs may eventually peak.

Market betting has been swinging between a 50- and a 75- basis-point increase when policymakers meet on Dec. 15.

“It’s extremely exciting but predicting the ECB for a market participant has become impossible,” Carsten Brzeski, global head of macro at ING, said.

DEEP UNCERTAINTY

The ECB surprised markets with larger-than-expected rate increases in July and September and has since said it would not provide any guidance about future moves but be “data-dependent”.

That saves it from more painful changes of tack after ECB President Christine Lagarde went from all but ruling-out rate hikes this year to presiding over the steepest tightening cycle in the euro’s history.

Danske Bank economist Piet Christiansen said the December meeting will ultimately come down to November’s underlying inflation data, due out on Nov. 30.

“The hawks have been in the driver’s seat all year and it will come down to the November inflation print,” Christiansen said. “If core inflation is higher – to me core is more significant – then the doves will have a difficult time arguing for a slowdown.

The public divergence also deals another blow to Lagarde’s aim of bringing concord among the 25 members of the Governing Council after a fractious end to the tenure of her predecessor, Mario Draghi.

Unlike in Draghi’s time, where the six-person Executive Board was mostly united behind a sometimes-domineering president, now the people who run the ECB are often at odds too.

Schnabel and Vice President Luis de Guindos have emphasised core inflation, which strips out volatile food and energy prices, as a key metric to watch.

But Lane said in a blog post on Friday it may “overstate” how persistent inflation may be.

Fellow board member Fabio Panetta has fought a long and largely lonely fight to get the ECB to take a gentler rate-hiking path, recently receiving support from several members of the Governing Council.

“Madame Lagarde was so keen to get the team spirit together and now even her own ECB colleagues are keen to get this fight out in the open,” ING’s Brzeski said.

The ECB is not alone in this, with Federal Reserve chair Jerome Powell perceived to be more “hawkish” than his deputy, Lael Brainard, in their public communication.

Dirk Schumacher, an economist at Natixis, found a public debate healthy but thought ECB policymakers were “bluffing” when they hinted at a peak rate of around 3%.

He estimated the ECB would need to be discussing a 5% rate if it single-handedly wanted to bring down inflation to 2%, but that this would cause too deep an economic recession.

“There’s an element of bluffing there because they know they also need to be lucky,” Schumacher said.

“Inflation is being driven by factors they can’t control,” he added, citing energy prices, geopolitical tensions and supply-chain disruptions as some of them.

(Writing by Francesco Canepa; Editing by Catherine Evans)

Global equity funds face weekly outflows on growth worries

Nov 25 (Reuters) – Global equity funds saw outflows in the week ended Nov. 23 on worries over a recession due to higher interest rates and fresh lockdowns as COVID cases rise in China.

According to Refinitiv Lipper data, investors withdrew USD 8.6 billion and USD 840 million respectively from US and European equity funds but invested USD 470 million in Asian equity funds.

Among equity sector funds, financials, tech, and real estate funds had outflows of USD 751 million, USD 429 million, and USD 390 million, respectively, although consumer staples received USD 600 million worth of inflows.

Meanwhile, global bond funds posted outflows for a third straight week, amounting to USD 2.52 billion.

Global short- and mid-term bond funds saw withdrawals of USD 4.84 billion, the biggest weekly outflow in five weeks, but high-yield bond funds lured inflows for a second successive week, to the value of USD 2.35 billion.

Meanwhile, global government bond funds received inflows worth USD 809 million in a third straight week of net buying.

Global money market funds saw much bigger inflows, with investors bracing for the release of the Federal Reserve’s meeting minutes.

The data showed investors accumulated global money market funds worth USD 26.4 billion, compared with an outflow of USD 9.4 billion in the previous week.

Energy funds remained in demand for the fifth consecutive week as they received net investment of USD 149 million. Investors also purchased about USD 18 million of precious metal funds after five weeks of net selling in a row.

According to data available for 24,768 emerging market (EM) funds, EM equity funds received USD 1.11 billion but EM bond funds had outflows of USD 201 million after USD 233 million worth of net purchases the previous week.

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru;Editing by Elaine Hardcastle)

Dollar could drop below a widely watched major level

Nov 25 (Reuters) – The US dollar remains vulnerable and seems poised to drop below a widely watched major technical level for the first time in many months. That would likely cause a big spike in dollar sales.

The dollar stood close to a three-month low and was headed for a weekly loss on Friday, as the prospect of the Federal Reserve slowing monetary policy tightening as soon as December preoccupied investors and kept risk mood buoyant.

The USD index, which tracks the dollar against a basket of six other currencies, looks set to slump under the 200-DMA at 105.316 for the first time since June 2021.

Fourteen-day momentum remains negative, reinforcing the underlying bearish bias. A daily close under the 200-DMA and the November 105.30 base would unmask the 104.474 Fibo, a 76.4% retrace of the 101.29 to 114.78 (May to September) rise.

The USD’s fate is pinned to the movement of the biggest components of the index: the euro, yen and pound.

(Martin Miller is a Reuters market analyst. The views expressed are his own.)

China central bank to offer cheap loans to support developers’ bonds-sources

HONG KONG/SHANGHAI, Nov 25 (Reuters) – China’s central bank will offer cheap loans to financial firms for buying bonds issued by property developers, four people with direct knowledge of the matter said, the strongest policy support yet for the crisis-hit sector.

The People’s Bank of China (PBOC) hopes the loans will boost market sentiment toward the heavily indebted property sector, which has lurched from crisis to crisis over the past year, and rescue a number of private developers, said the people, who asked not to be named as they were not authorised to speak to the media.

China has stepped up support in recent weeks for the property sector, a pillar accounting for a quarter of the world’s second-biggest economy. Many developers defaulted on their debt obligations and were forced to halt construction.

The country’s biggest banks this week pledged at least USD 162 billion in credit to developers.

The PBOC loans, through its relending facility, are expected to be at much lower than the benchmark interest rate and would be implemented in the coming weeks, giving financial institutions more incentive to invest in private developers’ onshore bonds, two sources said.

Terms such as the interest rate on the loans were not immediately known.

The PBOC is also drafting a “white list” of good-quality and systemically important developers that would receive wider support from Beijing to improve their balance sheets, two of the sources said.

The central bank did not immediately respond to a request for comment on the planned measures.

At least three private developers – including Longfor Group Holdings Ltd, Midea Real Estate Holding Ltd and Seazen Holdings – received the green light this month to raise a total of 50 billion yuan (USD 7 billion) in debt.

If there were not enough demand from investors for such new bonds, the PBOC would likely step in to provide liquidity via the relending facility for the rest of the issuance, said one of the four people and another source.

Hong Kong’s Hang Seng Mainland Properties Index was up as much as 4.7% on Friday, adding 1 percentage point after Reuters reported the PBOC moves. China’s top developer by sales, Country Garden, was up 10%, CIFI Holdings was up more than 5%, and Longfor nearly 4%.

FROM CRACKDOWN TO AGGRESSIVE SUPPORT

Relending is a targeted policy tool the PBOC typically uses to make low-cost loans to banks to support the slowing economy, as the central bank faces limited room to cut interest rates on concerns about capital flight.

The PBOC in recent months has used the relending facility to support sectors including transport, logistics and tech innovation that were hard hit by the COVID-19 pandemic or are favoured by long-term state policies.

Beijing’s aggressive support for the property sector marks a reversal from a crackdown begun in 2020 on speculators and indebted developers in a broad push to reduce financial risks.

As a result of the crackdown, though, property sales and prices fell, developers defaulted on bonds and suspended construction. The construction halts have angered homeowners who have threatened to stop mortgage payments.

The PBOC also plans to provide 100 billion yuan (USD 14 billion) in M&A financing facilities to state-owned asset managers mainly for their acquisitions of real estate projects from troubled developers, two sources said.

Chinese media reported on Monday the central bank planned to provide 200 billion yuan in interest-free relending loans to commercial banks through the end of March for housing completions.

Among other recent official support, China’s interbank bond market regulator said this month it would widen a program to support about 250 billion yuan (USD 35 billion) of debt offerings by private firms.

Much of Beijing’s previous support targeted state-owned developers.

Yi Huiman, chairman of China’s securities regulator, said on Monday the country must implement plans to improve the balance sheets of “good quality” developers.

Fitch Ratings said on Thursday private Chinese developers face higher liquidity risk, in terms of debt structure with greater short-term maturity pressure, than state-owned peers as banks and other creditors are becoming reluctant to lend.

(USD 1 = 7.1609 Chinese yuan renminbi)

(Reporting by Julie Zhu in Hong Kong and Engen Tham in Shanghai; Additional reporting by Kevin Huang in Beijing; Editing by Sumeet Chatterjee, William Mallard and Raissa Kasolowsky)

Oil prices fall 2% as Chinese demand worries linger

NEW YORK, Nov 25 (Reuters) – Oil prices fell 2% on Friday in thin market liquidity, closing a week marked by worries about Chinese demand and haggling over a Western price cap on Russian oil.

Brent crude futures settled down USD 1.71, or 2%, to trade at USD 83.63 a barrel, having retraced some earlier gains.

US West Texas Intermediate (WTI) crude futures were down USD 1.66, or 2.1%, at USD 76.28 a barrel. There was no WTI settlement on Thursday due to the US Thanksgiving holiday and trading volumes remained low.

“Because there’s light volume after the holiday, we’re giving up some of the gains here a bit,” said Phil Flynn, an analyst at Price Futures group.

Both contracts posted their third consecutive weekly declines after hitting 10-month lows this week. Brent ended the week down 4.6%, while WTI fell 4.7%.

Brent and WTI’s market structure implies current demand is softening, with backwardation, defined by front-month prices trading above contracts for later delivery, having weakened markedly in recent sessions.

For two-month spreads, Brent and WTI’s structures even dipped into contango this week, implying oversupply with near-term delivery contracts priced below later deliveries.

China, the world’s top oil importer, on Friday reported a new daily record for COVID-19 infections, as cities across the country continued to enforce mobility measures and other curbs to control outbreaks.

This is starting to hit fuel demand, with traffic drifting down and implied oil demand around 1 million barrels per day lower than average, an ANZ note showed.

Meanwhile, G7 and European Union diplomats have been discussing a Russian oil price cap between USD 65 and USD 70 a barrel, but an agreement has still not been reached. A meeting of European Union government representatives, scheduled for Friday evening to discuss the proposal, was cancelled, EU diplomats said.

The aim is to limit revenue to fund Moscow’s military offensive in Ukraine without disrupting global oil markets, but the proposed level is broadly in line with what Asian buyers are already paying.

Poland is seeking German support to slap EU sanctions on the Polish-German section of the Druzhba crude pipeline so Warsaw can abandon a deal to buy Russian oil next year without paying penalties, two sources familiar with the talks said.

Trading is expected to remain cautious ahead of an agreement on the price cap, due to come into effect on Dec. 5 when an EU ban on Russian crude kicks off, and ahead of the next meeting of the Organization of the Petroleum Exporting Countries and allies on Dec. 4.

(Reporting by Stephanie Kelly in New York; Additional reporting by Shadia Nasralla in London, Sonali Paul in Melbourne and Trixie Yap in Singapore; Editing by Marguerita Choy, Kirsten Donovan and Cynthia Osterman)

Gold flat; set for small weekly gain on hopes of dovish Fed

Nov 24 (Reuters) – Gold prices were flat on Friday, but they were set for a small weekly gain buoyed by the dollar’s overall retreat on a perceived dovish tilt to the US Federal Reserve’s interest rate hike strategy.

FUNDAMENTALS

* Spot gold was little changed at USD 1,753.47 per ounce by 0016 GMT. US gold futures rose 0.5% to USD 1,753.30.

* A “substantial majority” of Fed policymakers agreed it would “likely soon be appropriate” to slow the pace of interest rate hikes, the readout of the Nov. 1-2 meeting showed on Wednesday.

* This put the dollar on course for a weekly decline, making gold cheaper for overseas buyers.

* The Fed’s signaling of a slowdown in the pace of rate hikes takes pressure off global peers to keep on raising rates and offers relief to emerging markets, which have suffered their biggest rout in over a decade this year.

* Lower rates tend to lift appeal for bullion in comparison with other interest-bearing assets.

* Lebanon’s central bank has completed an audit of its gold reserves at the request of the International Monetary Fund that found the amount of gold in its vaults was identical to the amounts mentioned in its balance sheets, a bank statement said.

* Ghana’s government is working on a new policy to buy oil products with gold rather than US dollar reserves, Vice-President Mahamudu Bawumia said on Facebook on Thursday, in a bid to tackle dwindling foreign currency reserves.

* Spot silver eased 0.3% to USD 21.45, platinum fell 0.1% to USD 986.78, while palladium was little changed at USD 1,881.97.

* Market activity was relatively muted by the US Thanksgiving holiday.

DATA/EVENTS (GMT)

0700 Germany GDP Detailed QQ SA, YY NSA Q3

1100 France Unemp Class-A SA Oct

(Reporting by Arpan Varghese in Bengaluru; Editing by Rashmi Aich)

Wall Street gives thanks, eyes year-end whoosh: McGeever

ORLANDO, Fla., Nov 25 (Reuters) – As Wall Street reopens after the Thanksgiving holiday, investors are looking for one final push to ensure 2022 ends up being merely grim rather than the bloodbath most had feared.

Since hitting a two-year low in October, the S&P 500 has rebounded 15% even though interest rates, Fed tightening expectations and recession probabilities have all risen, and the earnings growth outlook has deteriorated.

Investors seem determined to close the year clawing back as much of their earlier losses as possible, and the good news is post-Thanksgiving trading history is on their side.

According to Ryan Detrick, chief markets strategist at the Carson Group, of the 23 years since 1950 when the S&P 500 has been down year-to-date on Thanksgiving, it has risen in the remaining weeks of the year 14 times.

The average year-to-date losses on Thanksgiving days in these years was 10.5%, and the average rise post-Thanksgiving through Dec. 31 was 1.5%.

The S&P 500’s year-to-date loss on Thanksgiving Thursday this year was 15.5%, having been down as much as 27% in mid-October. Can it keep this recovery momentum up?

“We are entering one of the seasonally bullish periods of the year and given the likelihood for a continued peak in inflation and dovish turn for the Fed soon … we are on the lookout for another strong end of year rally,” Detrick said.

If ever there was a year Wall Street was primed to register an above-average whoosh in the last few trading weeks of the year, this is it.

Even beyond investors’ instinctive “FOMO” (fear of missing out) on the upswing underway, positioning is extremely light and portfolios are historically underweight stocks. This strengthens the upward bias currently driving the market, regardless of fundamentals such as the outlook for growth or interest rates.

From a purely risk management perspective, investors will be reluctant to start a new year heavily over- or underweight, so they will be inclined to reverse that skew as the current year winds down.

CARRY THAT UNDERWEIGHT

According to Bank of America’s latest global fund manager survey, investors’ cash levels in November stood at 6.2%. That’s down a smidgen from the previous month’s 21-year high of 6.3%, but still well above the long-term average of 4.9%.

Relative to average positioning over the past 10 years, investors’ biggest underweight position this month is in stocks. Their current equity allocation is 2.4 standard deviations below the long-term average.

Their outright underweight position in tech stocks, meanwhile, is the largest since 2006.

“All manna from heaven for Q4 trading bulls,” BofA’s analysts wrote in the monthly note.

The bond market may be screaming recession – almost the entire US Treasury yield curve is inverted, some parts showing the deepest inversion in over 40 years – but Wall Street’s signals can be summed up as: keep calm and carry on buying into year-end.

Look at Wall Street’s volatility gauges. The VIX index of implied volatility hit a three-month low of 20.32 on Wednesday and has now fallen six days in a row, the longest run of declines since May.

Having significantly reduced their losses from earlier in the year, equities are not pricing in the damage higher interest rates will do. They will at some point, but not yet.

In essence, “risk free” assets are braced for the worst, risk assets aren’t. Bond investors’ glass is always half empty, while stock investors are inherently upbeat so usually fail to heed the warning signs until it’s too late.

To echo former Citigroup CEO Chuck Prince’s infamous line from 2007, as long as the music is playing, equity investors will keep dancing. The party tunes are playing.

(The opinions expressed here are those of the author, a columnist for Reuters. By Jamie McGeever; Editing by Marguerita Choy)

Dollar extends losses as Fed minutes signal slower rate hikes

LONDON, Nov 24 (Reuters) – The US dollar extended losses on Thursday after the minutes from the Federal Reserve’s November meeting supported the view that the central bank would downshift and raise rates in smaller steps from its December meeting.

The eagerly awaited readout of the Nov. 1-2 meeting showed officials were largely satisfied they could now move in smaller steps, with a 50-basis point rate rise likely next month after four consecutive 75 basis point increases.

“The Fed will be happy to move rates by 50 basis points in December and 25 basis points from the first meeting next year,” said Niels Christensen, chief analyst at Nordea, noting that the Fed will still feel it needs to do more to bring inflation down.

“As long as the Fed see a stronger labour market, they don’t have a big concern about tightening,” Christensen said.

The dollar index, which measures the greenback against six major peers, was down 0.2% at 105.75, after sliding 1.1% on Wednesday.

The Fed has taken interest rates to levels not seen since 2008 but slightly cooler-than-expected US consumer price data has stoked expectations of a more moderate pace of hikes.

Those hopes have seen the dollar index slide 5.2% in November, putting it on track for its worst monthly performance in 12 years.

“There are not that many dollar buyers around these days after the correction higher in euro-dollar in the first half of November,” Nordea’s Christensen added.

The euro held onto gains after the account of the European Central Bank’s October meeting showed policymakers feared that inflation may be getting entrenched, justifying their outlook for further rate hikes.

The single currency was last up 0.2% at USD 1.0415, while sterling GBP=D3 was trading at USD 1.2135, up 0.7% on the day. The pound rallied 1.4% on Wednesday after preliminary British economic activity data beat expectations, although it still showed that a contraction was under way.

The euro weakened 0.4% against the Swedish krone after Sweden’s Riksbank raised rates by 75 basis points, in line with expectations in a Reuters poll, but signaled additional hikes would be needed to fight surging inflation.

The yuan firmed after Chinese state media quoted the cabinet as saying that Beijing will use timely cuts in banks’ reserve requirement ratio (RRR), alongside other monetary policy tools, to keep liquidity reasonably ample.

Meanwhile, billionaire investor Bill Ackman said he’s betting the Hong Kong dollar will fall and that its peg to the US dollar could break.

Since May, the Hong Kong dollar has been pinned near the weaker end of its band, although it has lifted a bit in recent weeks as markets start to price a peak in US rates. It was last at 7.8102 per dollar.

The Japanese yen was one of the strongest gainers among major currencies, climbing 0.9% against the dollar to 138.285.

US markets will be closed on Thursday for Thanksgiving and liquidity will likely be thinner than usual.

(Reporting by Samuel Indyk in London and Ankur Banerjee in Singapore; Editing by Edwina Gibbs, Edmund Klamann and Marguerita Choy)

India’s bond yields ease, traders adjust position ahead of debt auction

MUMBAI, Nov 24 (Reuters) – India’s bond yields ended lower on Thursday after minutes of the US Federal Reserve’s November meeting signaled a slower pace of rate hikes moving forward.

During the day, yields moved in a narrow range as traders adjusted their positions ahead of the weekly debt auction on Friday.

The benchmark 10-year government bond yield ended at 7.2548% versus its close of 7.2910% on Wednesday. The yields opened at an intraday low of 7.2504%.

The Fed minutes showed that a “substantial majority” of policymakers agreed it would “likely soon be appropriate” to slow the pace of interest rate hikes. The US central bank raised its policy rates by 75 basis points (bps) for the fourth straight time in November.

The market had largely factored in the slower pace of hikes, but the broader sentiment was supported by positive factors such as the decline in US Treasury yields and oil prices, said a trader with a primary dealership.

Some market participants also placed short bets ahead of the weekly auction, which weighed on prices and yields recovered during the session, the trader said.

“The overall view of the market is broadly positive. I see momentum to go till the 7.20%-level and then we may see some reversal. Any level that is above 7.35% is, in my view, a good level to buy,” said Ritesh Bhusari, deputy general manager for treasury at South Indian Bank.

He expects yields to remain in the 7.20%-7.40% range till the Reserve Bank of India’s policy outcome on Dec. 7.

New Delhi aims to raise 280 billion Indian rupees (USD 3.43 billion) through the sale of bonds on Friday, which includes the benchmark 10-year paper.

During the day, India’s 5-year overnight index swap fell to 6.28%, its lowest level since mid-September, tracking overnight fall in oil prices and Treasury yields, dealers said.

(USD 1 = 81.6750 Indian rupees)

(Reporting by Bhakti Tambe; Editing by Janane Venkatraman)

The dollar’s uptrend looks set to resume next year

Nov 24 (Reuters) – What appears to be the end of the US dollar uptrend could lay the foundations for a resumption of the trend next year.

There has been little change in factors supporting the dollar but huge and rapid change in its value most likely due to how traders were positioned.

The number invested in the dollar is said to be enormous with Bank of America’s survey showing dollar longs extremely overcrowded, while CFTC data showed longs close to 2022’s high in August.

The motivation to alter these bets dramatically came from small changes in fundamentals that continue to support the dollar, and the US currency is now approaching the target for minimum technical correction of its prior decline. Because many traders were booking profits and profitable bets are often re-established, this is a likely point for a resumption of the uptrend.

The other major weight on the dollar was the hundreds of billions sold by central banks intervening, recently spearheaded by the Bank of Japan. This will ebb or stop altogether as yen strength is counterproductive to the BOJ’s own policy, while other central banks intervening massively – like India – need to rebuild foreign exchange reserves, supporting the dollar.

Yet, the biggest potential support for the dollar is the Federal Reserve that has to deal with the inflationary impact of a weaker currency, which may require interest rates to rise even more – or to stay high for longer – than currently expected.

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own.)

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