Bank of Japan to conduct emergency bond buying after key yield breaches policy cap

TOKYO, Feb 22 (Reuters) – The Bank of Japan said on Wednesday it would conduct emergency bond buying after the yield on benchmark 10-year government bonds breached the top end of the central bank’s policy band for a second straight session.

Investors have renewed their attack on the BOJ’s ultra-loose interest rate stance, expecting the central bank to abolish its yield curve control (YCC) policy after incoming governor Kazuo Ueda takes the helm in April.

Ueda will testify before Japan’s lower house on Friday.

The yield on 10-year JGBs climbed to 0.505% on Wednesday, breaking through the central bank’s 0.5% cap and marking its highest level since Jan. 18.

The BOJ said it would buy 300 billion yen (USD 2.2 billion) of Japanese government bonds with maturities of five to 10 years and 100 billion yen of bonds with maturities of 10 to 25 years.

Masayuki Koguchi, general manager of Mitsubishi UFJ Kokusai Asset Management’s fixed income division, said he expects the BOJ to conduct emergency operations when yields rise at least until the next policy meeting in March.

“But it is questionable whether that is effective,” he added.

Foreign investors have been particularly active in attacks on the BOJ’s policy. They sold a monthly record of more than 4 trillion yen in JGBs in January, data from the Japan Securities Dealers Association showed.

In order to deter speculation, the BOJ last week quadrupled the minimum fee charged to financial institutions for borrowing some 10-year Japanese government bond notes, effective from Feb. 27.

The five-year JGB yield rose to 0.245% on Wednesday, its highest since Jan. 18, exceeding a level that has prompted the BOJ to conduct loan operations.

The BOJ has provided loans maturing in five years to financial institutions three times since last month after amending rules for its funds-supply operation.

(USD 1 = 134.6800 yen)

(Reporting by Junko Fujita; Editing by Muralikumar Anantharaman and Edwina Gibbs)

Gold inches up as investors await US economic data

Feb 20 (Reuters) – Gold prices edged higher on Monday on a slightly weaker dollar, as investors looked out for upcoming US economic data for clues on the Federal Reserve’s rate hike path.

Spot gold was up 0.2% to USD 1,845.93 per ounce at 9:43 a.m. ET (1443 GMT), after falling to its lowest since late December in the previous session. US gold futures gained 0.3% to USD 1,855.10.

“We still look for higher prices over the coming quarters, but near term, I think gold will stay volatile until US economic data indicates a slowdown in economic activity,” said UBS analyst Giovanni Staunovo.

Economic data last week showed signs of a resilient US economy and a tight labour market, sparking speculation the Fed would keep interest rates higher for longer.

Investor attention will be on the release of the Federal Open Market Committee’s January meeting minutes and US GDP data.

Several Fed officials last week signaled that more rate hikes were needed to bring inflation down to the central bank’s 2% target.

“Further dollar-led weakness could see gold target support in the USD 1,792 to USD 1,776 area with resistance at USD 1,872,” Saxo Bank analyst Ole Hansen said in a note.

The dollar index was slightly lower on the day, making greenback-priced gold less expensive for holders of other currencies.

Markets expect the Fed funds rate to peak just under 5.3% by July, with analysts seeing the dollar having run its course for now.

Benchmark US Treasury yields reached their highest in over three months on Friday as well.

Higher interest rates discourage investment in non-yielding gold, although it is considered a hedge against soaring prices.

Spot silver rose 0.4% to USD 21.80 per ounce, platinum jumped 1.4% to USD 929.53, and palladium was up 1.3% to USD 1,517.87.

Liquidity is expected to be thin on Monday, with US markets closed for Presidents’ Day.

(Reporting by Seher Dareen in Bengaluru; Editing by Shounak Dasgupta and Mark Potter)

Euro zone bond yields hold near multi-year highs ahead of busy data week

Feb 20 (Reuters) – Euro zone government bond yields held close to their highest levels in over a decade on Monday, as investors scaled back expectations of a short monetary tightening cycle.

Trading was fairly subdued with US markets closed for Presidents’ Day, and ahead of the release of several data points that could affect central banks’ policy outlook.

Flash PMI data from the euro area and elsewhere are due Tuesday, Federal Reserve minutes on Wednesday and the US Personal Consumption Expenditures index — the Fed’s preferred measure of inflation — on Friday.

A higher growth and inflation outlook in the US has been driving global fixed income markets and hawkish remarks from the European Central Bank’s (ECB) further contributed to last week’s bond selloff, according to analysts.

Finnish central bank chief Olli Rehn was the latest policy maker to give public comments about the rate outlook, telling a German newspaper that the ECB should keep raising interest rates beyond March, and stay at a restrictive level for some time due to high inflation.

Germany’s 10-year government bond yield, the bloc’s benchmark, was little changed at 2.457%. It hit 2.569%, its highest since August 2011, at the beginning of January.

The German 2-year yield, more sensitive to changes in policy rates, rose 1 basis point (bp) to 2.89% after hitting a new 14-year high of 2.943% last Friday. It first rose to levels last seen in late 2008 at the end of September 2022.

Last Friday, the ECB’s Isabel Schnabel said markets could underestimate inflation, supporting an upward repricing of the terminal rate. At the same time, Bank of France governor Francois Villeroy de Galhau flagged excess volatility in expectations about the level where rates will peak capping a further rise in bond yields.

“As Villeroy’s statements have been good indications about the bipartisan consensus in the Council, this should take some steam out of ECB terminal rate expectations of 3.75% for the time being,” said Rainer Guntermann, rates strategist at Commerzbank.

According to ECB short-term euro rate (ESTR) forwards, the ESTR will peak in September at 3.6%, implying expectations for a depo rate of around 3.7%.

The ESTR published by the ECB reflects banks’ wholesale euro unsecured overnight borrowing costs. It is usually around 10 bps below the deposit rate.

Consumer price dynamics remain the primary concern for policy makers.

A key market gauge of inflation expectations has been above 2.4% since late last week.

Italy’s 10-year government bond yield, seen as the benchmark for the euro area periphery, rose 3 bps to 4.33%, with the spread between Italian and German 10-year yields at 186 bps.

The Italian 2-year yield was up 2 bps at 3.45% after hitting its highest since August 2012 at 3.558% on Friday.

(Reporting by Stefano Rebaudo, additional reporting by Alun John, editing by Ed Osmond, Sharon Singleton and Christina Fincher)

China’s new rules for offshore listings spark concern about lengthy approval process

SYDNEY/HONG KONG, Feb 20 (Reuters) – New rules laying out how Chinese companies can list outside mainland China will often mean getting a nod from several domestic government agencies, potentially making for a lengthy approval process, investment bankers say.

On one hand, the rules provide clarity after a regulatory crackdown by Beijing since mid-2021 that has slowed US listings by Chinese firms to a trickle.

But where once – before the crackdown – there was very little in the way of regulatory requirements, there are now more hoops for companies to jump through. Those hoops, combined with US-Sino tensions over a multitude of issues from suspected spy balloons to trade friction, means a rush of Chinese firms seeking initial public offerings in New York is unlikely.

“It’s not exciting news because now you need to go through some additional, complicated procedures,” said Guo Yi, chief operating officer at Univest Securities, a boutique investment bank that helps Chinese firms list in New York.

The long-awaited finalized rules, which come into effect from March 31, stipulate that firms wanting to list in markets like the United States or Hong Kong will need to make a filing with the China Securities Regulatory Commission (CSRC) as well as gain approval from other relevant regulators.

“Previously, you only needed to worry about setting up an offshore structure for listing. Now, you need to report everything,” said Guo.

Under the new rules, a host of government authorities would become involved in approving applicants looking to raise capital via the popular VIE route, said Winston Ma, an adjunct professor at NYU Law School.

So-called variable interest entity (VIE) structures are common among overseas-listed Chinese technology companies such as Alibaba Group Holding Ltd. and JD.com Inc. as they enable companies to skirt Chinese restrictions on foreign investment in certain sectors.

Other agencies that could get involved in the VIE approval process include the National Development and Reform Commission, which supervises foreign ownership in Chinese companies, the Cyberspace Administration of China (CAC) and industry-specific regulators, said Ma.

The involvement of more regulators beyond the CSRC could also lead to more uncertainty around approval as some agencies could have different priorities such as national security or data protection, bankers said.

The CSRC did not immediately respond to a Reuters request for comment.

NEW YORK OR CHINA?

New York for decades had been a lucrative listing venue for Chinese companies attracted to its deep liquidity and the prestige of a share sale in the world’s largest economy.

That all but ground to a standstill after mid-2021 when ride-hailing company Didi Global pressed on with an IPO despite being urged by Chinese authorities to put the deal on hold, prompting a regulatory backlash and Didi to delist from the US market.

Last year, US listings of Chinese firms were worth less than USD 230 million, according to Refinitiv data, a massive drop from USD 12.9 billion in 2021.

Enacted in the wake of the Didi debacle, current rules also require companies with data of more than 1 million customers to undergo a review by the CAC before they can sell shares overseas.

Wilson Yu, a private equity investor in a startup working on software for intelligent driving, said the startup is now seeking a domestic listing instead of New York which had been under consideration earlier.

“I don’t think an overseas listing for the start-up would get the Chinese regulatory nod due to data security. China doesn’t want data-sensitive companies to list overseas,” he said.

Despite the prospect of more red tape, however, some advisers note that the guidelines are clear and are preferable to the regulatory uncertainty that has prevailed since mid-2021.

“Requiring approvals from more regulators is an extra burden companies will comply with as there is relatively clear guidance from the Chinese regulators in terms of the qualifications to be listed,” said Frank Bi, a partner at law firm Ashurst.

(Reporting by Scott Murdoch in Sydney, Samuel Shen in Shanghai and Selena Li in Hong Kong; Editing by Sumeet Chatterjee and Edwina Gibbs)

Cheap gas may be at the heart of future FX moves

Feb 20 (Reuters) – The price of liquid and natural gas, which had enormous influence on currencies last year, has slumped far below levels traded when Russia invaded Ukraine. Cheap gas may be at the heart of future FX moves, supporting those which fell steeply last year like the euro, yen and currencies of Ukraine’s close neighbors.

Gas was last cheaper in July 2021 when markets were still being heavily influenced by COVID-19 and the negative consequences of the tightening cycle the Federal Reserve had announced in June.

Charts suggest that LNG and natural gas could fall much further, indeed recent breaks in LNG markets suggest prices could drop towards all-time lows.

Given the speed of the drop, there’s no way this degree of change is factored into currencies, or inflation expectations. Most traders remain focused on the risk of further rate hikes and recessions.

For currencies that collapsed last year and remain very weak like yen, yuan, rupee, those in Central and Eastern Europe and, to a lesser degree, euro, cheap gas should support rebounds.

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own, editing by Ed Osmond)

Oil rises 1% on China demand hopes and supply concerns

NEW YORK, Feb 20 (Reuters) – Oil prices rose over 1% on Monday, buoyed by optimism over Chinese demand, continued production curbs by major producers and Russia’s plans to rein in supply.

Brent crude settled up USD 1.07, or 1.3%, at USD 84.07 a barrel. US West Texas Intermediate crude (WTI) for March, which expires on Tuesday, last rose 85 cents, or 1.1%, at USD 77.19.

Volumes were muted on Monday because of a US market holiday for Presidents’ Day.

Both crude benchmarks settled USD 2 lower on Friday for a decline of about 4% over the week after the United States reported higher crude and gasoline inventories.

Analysts expect China’s oil imports to hit a record high in 2023 to meet increased demand for transportation fuel and as new refineries come on stream.

“The optimism around China today may be responsible for the gains we’re seeing in crude, which would make a lot of sense given it’s the world’s largest importer and expected to recover strongly from the COVID transition,” said Craig Erlam, senior markets analyst at OANDA in London.

China and India have become major buyers of Russian crude amid Western sanctions on Russian oil and more recently, embargoes and price caps because of the Ukraine war.

In India, the world’s third-biggest oil importer, crude imports rose to a six-month high in January, government data showed.

China’s commerce ministry has met independent oil refiners to discuss their deals with Russia, five sources with knowledge of the matter said, imports which have saved Chinese buyers billions of dollars.

“The government wants to understand how much independent refiners could possibly buy and their actual appetite for such imports,” said one source with direct knowledge of the discussions.

Russia plans to cut oil production by 500,000 barrels per day (bpd), equating to about 5% of its output, in March after the West imposed price caps on Russian oil and oil products.

Russia is part of the OPEC+ producer group comprising the Organization of the Petroleum Exporting Countries (OPEC) and allies, which agreed in October to cut oil production targets by 2 million bpd until the end of 2023.

Future oil supply shortages are likely to drive prices toward USD 100 a barrel by the end of the year, Goldman Sachs analysts said in a Feb. 19 note.

Prices will move higher “as the market pivots back to deficit with underinvestment, shale constraints and OPEC discipline ensuring supply does not meet demand”, they wrote.

(Reporting by Stephanie Kelly in New York; additional reporting by Noah Browning, Florence Tan and Emily Chow; Editing by Marguerita Choy and Mark Potter)

Gold set for third weekly fall on dollar strength, hawkish Fed worries

Feb 17 (Reuters) – Gold prices edged higher on Friday but were still on track for their third straight weekly dip, weighed down by an overall stronger dollar and bond yields following fresh hawkish rhetoric from US Federal Reserve officials.

Spot gold was up 0.3% at USD 1,842.27 per ounce by 2:40 p.m. ET (1940 GMT), after earlier falling to its lowest since late December. Prices have fallen 1.2% so far this week.

US gold futures settled 0.1% lower at USD 1,850.20.

The dollar’s advance, paired with the hawkish outlook from members of the Fed, was weighing on the market, said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

Fed officials this week said the US central bank likely should have lifted interest rates more than it did early this month, with Fed Governor Michelle Bowman reiterating the 2% inflation goal.

The dollar index was on track for its third straight week of gains, making bullion less attractive for overseas buyers, while bond yields also climbed.

Higher interest rates increase the opportunity cost of holding zero-yield bullion. Prices of the precious metal are down about 7.3% since its nine-month peak earlier this month.

Goldman Sachs said it expected the Fed to raise rates three more times this year by a quarter of a percentage point each.

Traders await next week’s release of the latest FOMC minutes and US GDP data for more clues on the path of rate hikes.

“The test for the Fed will occur if and when the economy weakens without inflation declining rapidly … should the Fed react to those potential outcomes by easing policy, then gold should perform well,” said Caesar Bryan, portfolio manager of the Gabelli Gold Fund.

Spot silver gained 0.7% to USD 21.7586 per ounce, while palladium was down 0.8% at USD 1,499.21.

Platinum was steady at USD 919.00, after earlier touching its lowest since November.

Russia is likely to limit exports of key metals such as palladium if the United States imposes steep taxes on imports of aluminium from Russia, analysts said.

(Reporting by Seher Dareen in Bengaluru; Editing by Shounak Dasgupta, Mark Potter and Susan Fenton)

Investors pull cash from classic risk plays as Fed rate picture shifts

LONDON, Feb 17 (Reuters) – Investors turned more cautious in the week to Wednesday, according to data from Bank of America, as a run of data prompted many to raise their forecasts for how high the US Federal Reserve will take interest rates.

BofA Global Research’s weekly “Flow Show”, released on Friday, showed the largest outflows from technology funds since September, the largest outflows from emerging market debt funds in 14 weeks, and the largest outflows from junk debt funds in eight weeks.

Stronger-than-expected data on US employment, retail sales and inflation this month have pushed up expectations for how much higher the Fed will need to raise rates, a development that is typically bad news for riskier stocks and emerging market assets.

BofA analysts said the data means it is “mission very much unaccomplished for the Fed” despite its 450 basis points of monetary tightening in this cycle so far.

“Fed tightening always ‘breaks’ something,” they add.

Emerging market debt funds saw outflows of USD 700 million, the largest weekly outflow in 14 weeks, according to the report which attributed the decline to debt investors reducing risk.

High yield – or junk – debt saw outflows of USD 2.6 billion, the largest in eight weeks, and tech funds had USD 1.1 billion of outflows, the most since September.

Elsewhere, there were USD 5.5 billion inflows to bonds, USD 1 billion inflows to cash, USD 300 million to equities and USD 45 million to gold.

Equity markets have largely shrugged off fears of the impact of higher for longer rates, so far.

The tech heavy Nasdaq is set for a weekly gain and is trading near the five-month high hit in early February, and France’s benchmark CAC 40 index hit a record high on Thursday boosted by solid results at some of the country’s biggest companies, including luxury names and energy firms.

However, BofA analysts said: “Remember ‘buy humiliation, sell hubris’ … this time last year, likes of Moderna, Tesla, Apple widely viewed as “must-own” stocks; this year, it’s likes of Exxon, Raytheon, Hermes … always hedge hubris.”

(Reporting by Alun John; editing by Amanda Cooper and Susan Fenton)

China publishes rules to revive offshore listings

BEIJING, Feb 17 (Reuters) – China’s securities watchdog published rules on Friday to regulate offshore listings, reviving foreign initial public offerings (IPOs) by Chinese firms after a regulatory freeze imposed in July 2021.

The trial rules, published by the China Securities Regulatory Commission (CSRC) and effective from March 31, are designed to guide companies wanting to access liquid capital markets.

That includes in the United States after Beijing and Washington solved a long-standing audit dispute in December, lessening the risk of U.S. delisting for Chinese companies.

“Offshore listing is a key component of China’s capital markets opening,” the CSRC said in a statement.

It said the rules showed China was pursuing “its direction of opening up” in spite of growing uncertainty in the world and that companies will be able to choose listing venues freely as long as they abide by the law.

Under its new filing system, which effectively ends decades of unregulated overseas IPOs by Chinese companies, the CSRC will vet offshore listings.

“With clearer guidelines and less uncertainties, I believe Chinese companies are still inclined to list overseas … geopolitical concerns notwithstanding,” said Daniel Tu, founder of Active Creation Capital.

Law firm Wilson Sonsini’s senior partner Weiheng Chen said the CSRC, and other relevant regulators have the “ultimate gatekeeping power” and can stop any overseas listings that are not compliant or against national or public interests.

Friday’s rules, amending a December draft, stipulate that overseas listings should not jeopardize China’s national interests.

S&P China ADR Index, a gauge of U.S.-listed Chinese enterprises, fell 3.02% after the rules were announced, while the wider market was off 0.28%. Alibaba, the largest U.S.-listed Chinese firm, shed 3.01%.

MASSIVE DROP IN US LISTINGS

Chinese companies raised nearly $230 million in U.S. listings last year, according to Refinitiv data, a massive drop from $12.85 billion in 2021.

Chinese offshore listings ground to a halt after Didi Global Inc’s (DIDI) New York listing in June 2021 that triggered Beijing’s regulatory backlash over data security concerns. It was delisted last June.

China’s tech crackdown also contributed to a near freeze in overseas listings by Chinese companies.

But the decision to allow overseas listings, together with a reduced U.S. risk, has made dealmakers hopeful that Chinese companies will reignite their ambitions to list in major markets such as New York.

On Dec. 15, the U.S. accounting watchdog said it had full access to inspect and investigate firms in China for the first time, countering the risk that around 200 Chinese companies could be kicked off U.S. stock exchanges.

The CSRC said on Friday that companies in sensitive sectors should also undergo data security reviews or obtain clearance from relevant authorities before filing for foreign listings.

It said it would strengthen cooperation with overseas regulators to crack down on misbehaviour such as accounting fraud and book-cooking.

VIE STRUCTURE

The new rules grant the CSRC oversight of offshore listings to Chinese firms with variable interest entity (VIE) structures.

VIE is a structure adopted by most overseas-listed Chinese tech companies, such as Alibaba and JD.com, to skirt Chinese restrictions on foreign investment in certain sectors.

The CSRC said on Friday that some Chinese enterprises “intentionally circumvented” its supervision in recent years, violating industry policies and even jeopardized China’s national security.

However, the regulator said it would allow filings by VIE-structured companies that comply with rules, and support companies’ capital-raising at home and abroad.

Winston Ma, an adjunct professor at NYU Law School, told Reuters that at least a handful of Chinese authorities – in addition to the CSRC – have become relevant in regulating VIE listings, as the securities regulator will seek the opinions of “related supervisory agencies”.

The list includes Ministry of Finance and regulator of data-intensive industries Cyberspace Administration of China, he said.

(Reporting by Scott Murdoch, Samuel Shen, Selena Li, Kane Wu, Ella Cao and Liz Lee; Additional reporting by Bansari Kamdar; Editing by Raissa Kasolowsky, Barbara Lewis and William Mallard)

Retailers’ results may be next test for rally in US stocks

NEW YORK, Feb 17 (Reuters) – Earnings results from major retailers in the coming weeks will test the strength of the US stock market rally, as investors gain insight into the health of consumer spending and the fallout on company bottom lines from inflation.

As a tepid fourth-quarter results season comes to an end, Walmart (WMT) and Home Depot (HD) are set to report in the coming week, with other high-profile retailers including Best Buy (BBY) and Lowe’s (LOW) due the following week.

How consumers are faring amid soaring prices will be a critical topic for investors, as some have become more confident that the economy will be able to avoid a severe downturn even as the Federal Reserve continues hiking rates to tamp down inflation.

One sign of economic resilience came in the past week, when monthly data showed US retail sales increased by the most in nearly two years in January.

“The retail sales numbers were reasonably strong, and we want to see that confirmation come from the retailers themselves,” said Paul Nolte, market strategist at Murphy and Sylvest Wealth Management.

Nolte is considering buying home-improvement retailer stocks that were hit hard in 2022 as the housing market struggled.

Stocks have run up despite underwhelming fourth-quarter earnings that has S&P 500 firms on track to post a 2.8% drop in profits from the year-ago period, according to Refintiv IBES. Other companies set to report next week include chip company Nvidia (NVDA), COVID-19 vaccine maker Moderna (MRNA) and e-commerce firm eBay (EBAY).

The S&P 500 has gained 6.5% so far in 2023 as of Thursday, with stocks bouncing back from a brutal performance last year.

Retail stocks have put up mixed returns so far in 2023. The SPDR S&P Retail ETF (XRT), which weights small and large companies fairly evenly, has jumped 17% this year. But the performance has been less rosy for some of the biggest companies.

Shares of Walmart, the world’s largest retailer by sales, have gained only 1.7% in 2023, while shares of Home Depot, the top US home improvement chain, are also up 1.7%. Both companies are set to report on Tuesday and will “set the stage for everyone else,” according to JPMorgan retail analysts.

“We expect HD and WMT’s tone on guidance and the consumer to be cautious at best,” the JPMorgan analysts wrote in an earnings preview note this week. They rate Walmart shares “neutral” and Home Depot as “overweight.”

Among the other retailers set to report in the coming week are TJX Companies (TJX) and Bath & Body Works (BBWI).

Peter Tuz, president of Chase Investment Counsel, said he will be watching to see if retailers have been able to push up prices to match their costs.

His firm holds shares of a variety of retailers including discounter Dollar Tree (DLTR) and specialty retailers Crocs (CROX) and Ulta Beauty (ULTA) but does not own broad retailers like Walmart and Amazon (AMZN).

“We are clearly emphasizing retailers in select industries versus the mass market retailers,” Tuz said. “With the mass retailers, it’s just harder to identify what is going to make them grow.”

Investors next week will also focus on Wednesday’s release of minutes from the Fed’s latest meeting, when the central bank scaled back its rate hikes to a quarter-point after a year of heftier raises.

Since that meeting, data has shown US consumer prices accelerating and monthly producer prices increasing by the most in seven months in January.

Together with a strong US jobs report, the data has led investors to push up expectations for how high the Fed will raise rates and how long they will stay elevated, with futures now pricing in a peak rate of over 5.2% in July.

Extremely robust retailer earnings could fuel worries about a more hawkish response from the Fed, said Chuck Carlson, chief executive officer at Horizon Investment Services.

“If those numbers come in and are really, really, really strong, that could be this idea that too much good news is bad news from a Fed perspective,” Carlson said.

(Reporting by Lewis Krauskopf; Editing by Bill Berkrot)

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