Investors ignore China Covid spike at their peril

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates to add chart.

By Pete Sweeney

HONG KONG, Nov 18 (Reuters Breakingviews) – The blistering relief rally underway in Chinese equities is understandable. President Xi Jinping had implemented a mixture of harsh policies targeting Covid-19, technology entrepreneurs and real estate developers that kept equity indexes in the basement and aggravated capital flight – roughly $101 billion was pulled out the country, reading between the lines of official balance of payments data for the first six months of the year. Tentative relaxations on all the main fronts have investors cheering; the Golden Dragon index .HXC of New York-listed Chinese companies is up 37% since late October. Yet biology could ruin this party yet.

Most of China’s trading partners have moved on to living with the virus, but Xi still aspires to keep it out. Unfortunately, highly contagious new strains took advantage of the travel surge during the October national holiday week to go on a tour around the country. Surveys by consultancy Dragonomics logged over 200 cities per day reporting outbreaks in November, more than double the number seen during the traumatic lockdown in Shanghai in April. New cases have officially multiplied from roughly 1,000 per day in October to 25,353 on Thursday. There are reasons to suspect the real numbers are higher. Some cities reported suspiciously low case figures which were belied by severe quarantine polices. Others want to accelerate away from zero-Covid to relieve their local economies, as the city of Shijiazhuang in Hebei tried to do, which could lead to underreporting.

Unfortunately state propaganda organs have invested two years in terrifying citizens about the virus, which means not everyone is relaxed about relaxing epidemic controls. Local media catered to conspiracy theories about foreign vaccines while pandering to the local traditional medicine industry. As a result many elderly declined to get jabbed. Partial success at containment has slowed development of herd immunity while vaccination rates have flattened.

Unless infections get tied down quickly with existing methods, there are three ugly scenarios worth considering. In the first, Beijing quarantines even more tightly. In the second, Covid-19 finally runs wild in China, killing the unvaccinated elderly as it did in Hong Kong earlier this year. Alternatively, current virus strains could turn out to be less lethal, keeping the ultimate death rate low, but having no way to know this in advance, many Chinese people would probably sequester themselves in panic anyway.

Economically, any of these scenarios could re-enact the first quarter of 2020, when GDP contracted 6.8%, wreck any relief rally and further squeeze earnings at consumer-facing companies like Alibaba and Starbucks. They will fuel unrest that has erupted on the streets and hobbled production lines at iPhone maker Foxconn 2317.TW. It was past time to revise Beijing’s approach to the pandemic, to its companies and its economy. It may also be too late.

CONTEXT NEWS

China logged 25,353 new Covid-19 infections on Nov. 17, per National Health Commission data published on Nov. 18, compared to roughly 1,000 new cases per day in mid-October. That is comparable to the high national contagion rates in April when Shanghai was forced into a draconian lockdown from the beginning of April through June.

Beijing announced minor relaxations of the country’s pandemic policy on Nov. 11, including shorter quarantine periods and more narrowly targeted lockdowns.

The Hang Seng China Enterprises Index in Hong Kong has risen nearly 30% in the past 14 trading days, Refinitiv data show, while the onshore benchmark CSI300 index gained 9%. The yuan has also firmed slightly against the dollar after an extended period of decline.

(Editing by Una Galani and Katrina Hamlin)

Gold faces weekly dip as recent rally subsides on hawkish Fed

Nov 18 (Reuters) – Gold was headed for a weekly fall on Friday as the recent rally fizzled after several US Federal Reserve officials suggested that interest rates would continue to rise, pouring cold water on market expectations that the US central bank would pivot.

FUNDAMENTALS

* Spot gold was steady at USD 1,761.29 per ounce, as of 0017 GMT. US gold futures were flat at USD 1,763.40 per ounce.

* Bullion is on track for a weekly decline of about 0.6%, despite surging to its highest level since mid-August on Tuesday.

* After months of decline, prices of bullion shot up as markets bet that US interest rate hikes will slow, but analysts said institutional investors are wary and further gains could be elusive.

* Even under a “generous” analysis of monetary policy, the Fed needs to keep raising interest rates given that its tightening so far “had only limited effects on observed inflation,” St. Louis Fed President James Bullard said on Thursday.

* Minneapolis Fed Bank President Neel Kashkari said the US central bank should not stop rate hikes until it’s clear that inflation has peaked.

* High interest rates discourage investing in gold, which does not bear any interest.

* Swiss gold exports to China and Turkey remained strong in October while shipments to India fell, Swiss customs data showed on Thursday.

* Nornickel is looking for alternative ways to deliver Russian raw materials to its Finnish Harjavalta plant starting from 2023 as Finnish railway operator VR is due to stop providing this service to it in six weeks. Nornickel is the world’s largest palladium producer.

* Spot silver rose 0.2% to USD 20.98 per ounce, platinum gained 0.5% to USD 985.41 and palladium added 0.5% to USD 2,015.12. All were, however, on course to end the week lower.

DATA/EVENTS (GMT)

0700 UK Retail Sales MM, YY

0700 UK Retail Sales Ex-Fuel MM

1500 US Existing Home Sales

(Reporting by Swati Verma in Bengaluru; Editing by Sherry Jacob-Phillips)

Australia shares jump on boost from financials, energy stocks

Nov 18 (Reuters) – Australian shares rose marginally on Friday, with banks leading the gains, even as hawkish comments from US Federal Reserve officials and a persisting tight labour market raised fears of a prolonged monetary policy tightening.

The S&P/ASX 200 index was up 0.2% at 7,147.50 by 2358 GMT. The benchmark ended 0.2% higher on Thursday. It was, however, set to end the week 0.2% lower, snapping a three-week gaining streak.

Hawkish comments from Fed officials to continue raising rates by at least another full percentage point as data indicates tightness in the labour market cast a shadow on hopes of a pivot in Fed’s aggressive stance.

Data also showed Australia’s net employment rose better-than-expected in October, raising speculation that the Reserve Bank of Australia might continue with rate hikes.

Miners were down 0.5%, even as iron ore prices inched higher on hopes that China will roll out more measures to support its economy.

Copper-gold miner OZ Minerals jumped 3.8% on receiving a hiked buyout offer of AUSD 9.60 billion (USD 6.43 billion) from global miner BHP Group.

Also, Rio Tinto edged down after it said it will proceed with acquiring the remaining 49% in Turquoise Hill Resources for USD 3.3 billion.

Financials jumped 0.4% with the “Big Four” banks gaining between 0.1% and 1%.

Shares of Perpetual Ltd. fell 20.7% this week, as an Australian court on Thursday said fund manager Pendal Group could enforce Perpetual to honor its AUSD 2.34 billion takeover deal.

Local energy stocks gained 0.1% despite oil prices falling amid demand concerns over rising COVID-19 cases in China. O/R

Santos gained 0.3%, while Woodside Energy fell 0.2%.

In New Zealand, the benchmark S&P/NZX 50 index .NZ50 rose 0.2% to 11,319.58.

Fonterra Co-operative Group jumped 0.8% after it said it was selling its dairy operations in Chile to Peru’s Gloria Foods for USD 641.4 million.

(USD 1 = 1.4939 Australian dollars)

(Reporting by Echha Jain in Bengaluru; Editing by Rashmi Aich)

Bankrupt FTX’s new CEO outlines fund abuses, untrustworthy records

Nov 17 (Reuters) – The executive hired to steer FTX Group through bankruptcy offered his first findings of improper fund transfers and poor accounting at the collapsed crypto exchange on Thursday, describing it as a “complete failure” of controls.

John Ray, who was named FTX’s chief executive after the company filed for bankruptcy on Nov. 11, said in a court filing that the lapses in oversight, security, and corporate governance he identified were greater than in any other process he has managed in his 40 years as a bankruptcy specialist, including at Enron.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray said in the filing, with the District of Delaware bankruptcy court.

FTX collapsed after its founder Sam Bankman-Fried used USD 10 billion in client funds to prop up his hedge fund Alameda Research, which had suffered losses when its bets on crypto ventures soured, Reuters has previously reported. That left FTX with insufficient funds to cover withdrawals when a plunge in the value of one of its currencies, FTT, triggered a bank run.

While Ray’s filing does not provide a full account of FTX’s demise, it details several lapses that contributed to the downfall.

An Alameda entity had lent USD 2.3 billion to an FTX entity, while Bankman-Fried and FTX co-founders and top executives Nishad Singh and Ryan Salame had collectively borrowed USD 1.6 billion from Alameda, according to the filing. More such “related party” transactions are listed in the filing, though details are not offered.

Bankman-Fried, Singh and Salame did not respond to requests for comment on Thursday.

FTX funds were also used to buy homes and other personal items for employees and advisors, Ray wrote. Some of this money transfers were not documented as company loans, while the homes were registered under the names of the employees, Ray added.

Proper checks and balances were absent, according to the filing. Employees submitted payment requests through an on-line “chat” platform and supervisors approved them with personalized emojis, the filing states.

Bankman-Fried often communicated through applications that were set to auto-delete after a short period of time and encouraged employees to do the same, Ray wrote.

Most of the financial statements Ray reviewed were not audited. He said he harboured “substantial concerns” for statements he found that were audited because they relied on Prager Metis, an accounting firm operating in the virtual world, in metaverse platform Decentraland.

Ray also wrote that Bankman-Fried had made “erratic and misleading public statements,” citing an exchange with a reporter on Twitter.

Vox on Wednesday published an interview with Bankman-Fried in which he said he regretted his decision to file for bankruptcy protection and criticized regulators.

He later attempted to backtrack, saying he was “venting” and thought his exchange of messages with the reporter that made the basis of the interview were private.

FTX had 1 million users in the United States and many more across the world, according to the filing. It’s unclear how many will be able to recover their funds through the bankruptcy.

‘MISPLACED’

Singapore state investor Temasek Holdings, an FTX investor, also criticized Bankman-Fried on Thursday as it announced it would write down the value of its USD 275 million stake.

“It is apparent from this investment that perhaps our belief in the actions, judgment and leadership of Sam Bankman-Fried … would appear to have been misplaced,” Temasek said.

Other investors including Softbank Group’s Corp’s vision fund and Sequoia Capital have also written down their investments in the exchange to zero, as ripples from FTX’s bankruptcy continue to be felt around the world.

Major crypto player Genesis Global Capital suspended customer redemptions in its lending business on Wednesday, in response “to the extreme market dislocation and loss of industry confidence caused by the FTX implosion”.

Financial and markets authorities around the world scrambled on Thursday to draft responses to FTX’s failure, with Singapore’s finance minister saying that its collapse has raised “very serious allegations that amount to potential fraud”.

Indonesia ordered crypto exchanges to stop trading FTX tokens. Brazilian crypto advocates cited FTX’s implosion in a push to persuade lawmakers to give final approval on a bill to boost oversight of the cryptocurrency industry.

(Reporting by Niket Nishant in Bengaluru and John McCrank in New York, additional reporting by Alun John in London and Hannah Lang in Washington; Editing by Shinjini Ganguli, Anil D’Silva and Alexander Smith and Anna Driver)

Wall Street drops as hawkish Fed official comments weigh

Nov 17 (Reuters) – Wall Street’s main indexes ended modestly lower on Thursday in a choppy session as hawkish comments from a U.S. Federal Reserve official and data showing the labor market remained tight led some investors to worry about more aggressive interest rate hikes.

St. Louis Fed President James Bullard said the central bank needs to keep raising rates given that its tightening so far “had only limited effects on observed inflation.”

Stocks have retreated in recent days after a strong month-long rally spurred by softer-than-expected inflation reports that raised hopes the Fed would temper its rate hikes.

“The Fed is still talking up, generally, interest rates,” said Paul Nolte, portfolio manager at Kingsview Investment Management in Chicago. “There might be some disagreement about the pace. But interest rates are not coming down anytime soon.”

Stocks reduced losses late in the session but the major indexes still ended in negative territory.

The Dow Jones Industrial Average fell 7.51 points, or 0.02%, to 33,546.32, the S&P 500 lost 12.23 points, or 0.31%, to 3,946.56 and the Nasdaq Composite dropped 38.70 points, or 0.35%, to 11,144.96.

Data showed the number of Americans filing new claims for unemployment benefits fell last week, suggesting the labor market remained tight. A report on Wednesday detailed strong retail sales growth last month, indicating the economy has weathered rate hikes.

Bets from traders of a 75 basis point hike at the Fed’s next meeting climbed to 19% from about 15% a day earlier, according to the CME Group’s FedWatch tool. Most investors still expect a 50 basis point increase.

Cisco Systems shares rose 5% after the company raised its full-year revenue and profit forecast with supply chain hurdles easing. The stock helped the S&P 500 information technology sector log a 0.2% gain.

Most S&P 500 sectors ended lower, however, with utilities shedding 1.8% and consumer discretionary dropping about 1.3%.

In company news, shares of Macy’s surged 15% after the department store chain raised its annual profit forecast on resilient demand for high-end clothes and beauty products.

Declining issues outnumbered advancing ones on the NYSE by a 2.06-to-1 ratio; on Nasdaq, a 1.65-to-1 ratio favored decliners.

The S&P 500 posted 1 new 52-week highs and 1 new lows; the Nasdaq Composite recorded 46 new highs and 169 new lows.

About 10.3 billion shares changed hands in U.S. exchanges, compared with the 12.1 billion daily average over the last 20 sessions.

(Reporting by Lewis Krauskopf in New York, Bansari Mayur Kamdar, Ankika Biswas and Amruta Khandekar in Bengaluru; Editing by Vinay Dwivedi, Arun Koyyur and David Gregorio)

Political gridlock may help US stocks but inflation still in driver’s seat

NEW YORK, Nov 16 (Reuters) – Split control of the US Congress following the midterm elections may provide a tailwind for stocks at the end of a bruising year, but inflation and the Federal Reserve are likely to remain the market’s main drivers, investors said.

Republicans were projected to win a majority in the House of Representatives on Wednesday, setting the stage for two years of divided government as President Joe Biden’s Democratic Party maintains control of the Senate.

“For the economy and markets it is policy that drives outcomes, rather than politics,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments. A split government “makes major policy changes unlikely, and that stability in policy tends to be reassuring for investors.”

Historically, stocks have done better under a split government when a Democrat is in the White House: Average annual S&P 500 .SPX returns have been 14% in a split Congress under a Democratic president, according to data since 1932 analyzed by RBC Capital Markets. That compares with 10% when Democrats controlled the presidency and Congress.

On a sector basis, a Democrat-led Senate may prove favorable for utilities, consumer discretionary and health care, as well as clean energy, wrote John Lynch, chief investment officer for Comerica Wealth Management, in a note published Tuesday.

Sectors whose recent performance may have been helped by expectations of a stronger showing by Republicans, including energy, biotech, financials and defense, may take a breather as investors reassess the degree of fiscal and regulatory advantages going forward, Lynch said.

A split government could stymie Democrats from pushing through several large fiscal packages, including USD 369 billion in spending on climate and energy policies and enacting a windfall tax on oil and gas companies, analysts at UBS Global Wealth Management wrote earlier this month.

Some worried that such spending could help buoy inflation at a time when the Fed has ramped up its monetary tightening to bring down consumer prices from their highest levels in decades.

On the other hand, gridlock comes with its own set of risks, including a possible standoff over raising the US debt limit next year that could disrupt the economy at a point when Fed rates may still be at their peak.

While a split Congress may lessen the risks of a bruising debt ceiling fight, “We will sleep with one eye open,” said Goodwin, of New York Life Investments.

Still, macroeconomic concerns and monetary policy have driven markets all year, and investors believe that trend is unlikely to change anytime soon.

The S&P 500 is up more than 10% from its October low, with cooler-than-forecast inflation data last week and Tuesday’s
producer price index results boosting hopes that the Fed could temper its rate hikes sooner than expected. The index is still down nearly 17% this year as of Wednesday’s close.

“Inflation matters more than anything else right now,” said Michael Antonelli, managing director and market strategist at Baird.

Indeed, fund managers polled from Nov. 4-10 in the latest survey from BofA Global Research cited inflation staying high as the market’s top “tail risk.”

Some investors are also counting on stocks to get a boost from seasonal trading patterns: November and December have tallied the second- and third-biggest average monthly percentage gains for the S&P 500 since 1950, according to the Stock Trader’s Almanac.

Much of that seasonality boost, however, may depend on whether the period falls within a bear market – defined as when stocks have fallen 20% or more from their most recent high.

In the last five instances when the November-December period occurred in a bear market, the S&P 500 logged an average two-month decline of 2.2%.

“When we talk about end of year being generally positive, that’s the case in bull markets. If you look at bear markets there is no evidence of seasonality at the end of the year,” Antonelli said.

(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Leslie Adler)

Oil falls on worries of US rate hikes, China demand outlook

HOUSTON, Nov 17 (Reuters) – Oil prices fell more than 3% on Thursday, with demand squeezed by mounting COVID-19 cases in China and fears of more aggressive hikes in US interest rates.

Brent crude fell USD 3.08 to settle at USD 89.78 a barrel, down 3.3%. US West Texas Intermediate (WTI) crude slid USD 3.95, or 4.6%, to settle at USD 81.64 per barrel.

“It’s kind of a triple whammy. We’ve got COVID-19 cases rising in China, interest rates are continuing to rise here in the US and now we’ve got technical weakness in the market,” said Dennis Kissler, senior vice president of trading at BOK Financial.

St. Louis Federal Reserve President James Bullard said a basic monetary policy rule would require interest rates to rise to at least around 5%, while stricter assumptions would recommend rates above 7%.

The dollar also rose as investors digested US economic data. A stronger dollar makes dollar-denominated oil more expensive for holders of other currencies.

China reported rising daily COVID-19 infections and Chinese refiners have asked to reduce Saudi crude volume in December, Reuters has reported, while also slowing Russian crude purchases.

While China’s COVID case load is smaller than that of other countries, the world’s largest crude importer maintains stringent policies to quash early outbreaks, dampening fuel demand.

On technical indicators, US front-month futures fell below the 50-day simple moving average, triggering liquidation by funds, Kissler said, adding he expects the pressure to continue early next week.

“The market is really getting caught up for the potential of serious demand destruction, and we’re definitely seeing the mood shift to the downside,” said Phil Flynn, an analyst at Price Futures group.

Poland and NATO on Wednesday said a missile that crashed inside the country was probably a stray fired by Ukraine’s air defences and not a Russian strike, easing fears the Russia-Ukraine war could widen.

“Thankfully, those fears have abated and the situation de-escalated, which has seen oil gains unwound,” said Craig Erlam, senior market analyst at OANDA. “China remains a downside risk for oil in the near term.”

Oil gained support from official figures showing US crude stocks fell by a bigger than expected 5 million barrels in the latest week.

Supply is also tightening in November as OPEC and its allies, known collectively as OPEC+, implement their latest output controls to support the market.

(Reporting Arathy Somasekhar in Houston and Alex Lawler in London; Additional reporting by Emily Chow and Jeslyn Lerh; Editing by Kirsten Donovan, Matthew Lewis and David Gregorio)

Gold hovers near multi-month peak on softer yields

Nov 16 (Reuters) – Gold hovered near its three-month peak on Wednesday, weighed by a slightly stronger dollar while benchmark yields were lower, as the market focus shifted from global tensions to the Federal Reserve’s interest rate strategy.

Spot gold edged 0.3% lower to USD 1,773.13 per ounce by 2:08 p.m. ET (1908 GMT), while US gold futures settled down around 0.1% to USD 1,775.8.

News that stoked geopolitical tensions had a limited impact on gold, Daniel Ghali, commodity strategist at TD Securities, said, adding there would be a lull until fresh information on US inflation.

Bullion held near peaks hit on Tuesday that were the highest since Aug. 15, following reports of a missile killing two people in Poland near the border with Ukraine.

It gave up some of its gains after US President Joe Biden said the weapon may not have been fired from Russia, easing concerns of a major escalation in the war.

The dollar edged up 0.1%, making bullion more expensive for overseas buyers, yet the yellow metal got a lift as benchmark 10-year yields were near their lowest since Oct. 5.

Traders took stock of data showing US retail sales increased more than expected in October, while data on Tuesday showed a smaller than expected increase in US producer prices in October that had raised hopes the Fed could slow rate hikes.

Rising rates reduce the appeal of non-yielding bullion.

“It’s possible in the very near term that we continue to see this move higher resulting from short-covering but beyond the USD 1,850 threshold that will probably subside, and we are looking for gold prices to weaken thereafter,” Ghali added.

Silver fell 0.6% to USD 21.41 per ounce, platinum was down 1.2% to USD 1,002.47 and palladium slipped 1.1% to USD 2,075.55.

(Reporting by Seher Dareen and Kavya Guduru in Bengaluru; editing by Barbara Lewis and Sandra Maler)

Trump-linked stocks slip after initial gains from 2024 bid

Nov 16 (Reuters) – Shares of companies tied to former US President Donald Trump reversed course to fall on Wednesday, following a recent rally in the run-up to him launching a bid to regain the presidency in 2024.

Trump made the announcement on Tuesday, aiming to preempt potential Republican rivals, a week after midterm elections showed that the party had failed to win as many seats in Congress as it had hoped.

“The likelihood of a Trump victory has been slimmed after the Trump-supported candidates failed in the latest midterm elections. Therefore, I believe that the knee-jerk reaction will remain short-lived,” said Ipek Ozkardeskaya, senior analyst at Swissquote.

Shares of Digital World Acquisition Corp DWAC.O, the blank-check company looking to take Trump’s social media venture Truth Social public, fell 4.8% in early trading. The stock was 10% higher in premarket hours.

It was still the most trending ticker on retail investor-focused social media forum Stocktwits.

Earlier this week, DWAC reminded stockholders to vote in favor of extending the completion deadline for the proposed deal with Truth Social.

Software developer Phunware Inc., which was hired by Trump’s 2020 presidential re-election campaign to build a phone app, shed 10.6%.

Rumble Inc., a Canadian video platform popular with conservatives, dropped 10.9%. Trump’s Truth Social said in August it would join Rumble’s new ad platform as its first publisher.

Artificial intelligence solutions company Remark Holdings, which has been linked to the former president on social media sites, fell 2.6%. Reuters could not independently verify the link between Trump and Remark.

Remark and Phunware had gained 5% and 13% before the opening bell.

(Reporting by Shreyashi Sanyal in Bengaluru; Editing by Devika Syamnath)

US retailers take a knock after Target’s sales warning

Nov 16 (Reuters) – Shares in several US retailers slid on Wednesday after Target Corp. (TGT) warned of a gloomy outlook for the crucial holiday quarter with surging inflation hitting sales and as it announced plans to save up to USD 3 billion in cost cuts to shore up profits.

Target shares tumbled 15% after the open and are now down by about a third so far this year, while Macy’s Inc. (M) and Best Buy (BBY) dropped more than 6% in early trade. Dollar Tree (DLTR) slid 2%, while the retail index slipped more than 2%.

But shares in Target’s larger competitor Walmart (WMT) edged up 1.1%, a day after lifting its annual sales and profit forecast as demand for groceries held up despite higher prices.

“After so many emergency rate hikes it’s now affecting the consumer a little bit and I think it’s evidenced in Target today,” said Thomas Hayes, managing member at Great Hill Capital LLC in New York.

Target, which said third-quarter profit halved, warned of “dramatic changes” in consumer behavior that was hurting demand for everything from toys to home furnishings.

Target’s update echoed its quarterly report in August when it posted a bigger-than-expected 90% fall in earnings.

With annual inflation running at 7.7% in October and high interest rates, shoppers are reining in discretionary spending, bad news for retailers that rely on year-end shopping to boost annual sales.

US Commerce Department data showed US retail sales improved more than expected after no growth in September.

“There was an expectation already that retailers are going to have a tough holiday quarter. I do think that overall the sentiment will be overshadowed by hopes of less aggressive Federal Reserve and inflation,” said Fiona Cincotta, market analyst at City Index in London.

Bucking the retail trend, home improvement chain Lowe’s Cos Inc LOW.N added more than 4% after raising its annual profit forecast, while discount store operator TJX Cos Inc. (TJX) bumped up annual same-store sales forecast, rising almost 1%.

(Reporting by Medha Singh in Bengaluru; Additional reporting by Bansari Mayur Kamdar)

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