Oil climbs ahead of OPEC+ meeting next week

NEW YORK, Sept 2 (Reuters) – Oil prices rose on Friday on expectations that OPEC+ will discuss output cuts at a meeting on Sept. 5, though concern over China’s COVID-19 curbs and weakness in the global economy loomed over the market.

Brent crude futures rose 66 cents to settle at USD 93.02 a barrel, while US West Texas Intermediate (WTI) crude futures rose 26 cents to settle at USD 86.87 a barrel.

Both benchmarks slid 3% to two-week lows in the previous session. Brent posted a weekly drop of 7.9%, and WTI of 6.7%.

A weekly chart shows that US crude futures surpassed last week’s high and have since retreated, and closed below last week’s closing level. That is a bearish signal, according to Eli Tesfaye, senior market strategist at RJO Futures in Chicago.

“When you take out the week’s high and week’s low and then close lower, that’s a reversal down – it’s a signal that there’s weakness, and that’s telling you it’s a weak market,” he said.

The Organization of the Petroleum Exporting Countries and allies led by Russia – a group known as OPEC+ – are due to meet on Sept. 5 against a backdrop of expected demand declines, though top producer Saudi Arabia says supply remains tight.

OPEC+ is likely to keep oil output quotas unchanged for October at Monday’s meeting, three OPEC+ sources said, although some sources would not rule out a production cut to bolster prices that have slid from sky-high levels hit earlier this year. nL8N30926W

OPEC+ this week revised market balances for this year and now sees demand lagging supply by 400,000 barrels per day (bpd), against 900,000 bpd forecast previously. The producer group expects a market deficit of 300,000 bpd in its base case for 2023.

Meanwhile, Iran said it had sent a “constructive” response to US proposals aimed at reviving Tehran’s 2015 nuclear deal with world powers. The United States gave a less positive assessment.

The news made some investors skeptical that a deal was imminent, which supported oil prices, said Phil Flynn, an analyst at Price Futures group in Chicago.

“There’s less confidence that we’re going to get a deal with Iran and that’s leading to some short-covering,” Flynn said.

G7 finance ministers agreed on Friday to impose a price cap on Russian oil, but provided few new details to the plan aimed at curbing revenue for Moscow’s war in Ukraine while keeping crude flowing to avoid price spikes.

In the United States, employers hired more workers than expected in August, but moderate wage growth and a rise in the unemployment rate to 3.7% could ease pressure on the Federal Reserve to deliver a third 75 basis-point interest rate hike this month.

US energy firms this week cut the number of oil and natural gas rigs operating for the fourth time in five weeks. The US oil and gas rig count, an early indicator of future output, fell by five to 760 in the week to Sept. 2, Baker Hughes Co. said on Friday.

Russia’s Gazprom said on Friday that natural gas supplies via the Nord Stream 1 pipeline would remain shut off after the main gas turbine at Portovaya compressor station near St Petersburg was found to have an oil leak.

Investors remain worried about the impact of the latest COVID-19 restrictions in China. The city of Chengdu on Thursday ordered a lockdown that has hit manufacturers such as Volvo.

Data showed Chinese factory activity in August contracted for the first time in three months in the face of weakening demand, while power shortages and COVID-19 outbreaks also disrupted output.

Money managers cut their net long US crude futures and options positions by 10,607 contracts to 168,431 in the week to Aug. 30, the US Commodity Futures Trading Commission (CFTC) said on Friday.

(Reporting by Stephanie Kelly in New York; additional reporting by Noah Browning in London, Sonali Paul in Melbourne and Jeslyn Lerh in Singapore; Editing by Louise Heavens, Matthew Lewis and Jonathan Oatis)

Gold advances as dollar retreats after US jobs data

Sept 2 (Reuters) – Gold bounced over 1% on Friday as the dollar retreated after US jobs data came mostly in line with expectations, but it was still bound for a third consecutive weekly fall pressured by an elevated interest rate environment.

Spot gold rose 0.8% to USD 1,710.29 per ounce by 1:45 p.m. ET (1745 GMT). Prices were still down 1.5% for the week.

US gold futures settled up 0.8% at USD 1,722.6.

“The jobs numbers were very close to market expectations. The market is deeming it as a goldilocks number as it doesn’t suggest weakness, but is not too strong to prompt an even more aggressive Fed,” said Jim Wyckoff, senior analyst at Kitco Metals.

“Gold is kind of seeing a relief-short covering rally.”

Nonfarm payrolls increased by 315,000 jobs last month, the Labor Department said in its closely watched employment report. Economists polled by Reuters had forecast payrolls increasing 300,000.

The dollar index was down around 0.1%, making gold cheaper for overseas buyers while US Treasury yields were also lower for the day.

“A slightly weaker US dollar and US short-term Treasury yields have given gold some relief recently. However, this has not changed the underlying downward trend in gold prices,” said Capital.com analyst Piero Cingari.

Gold has been pressured off late as global central banks raise interest rates to fight soaring inflation. Higher rates increase the opportunity cost of holding the non-yielding asset.

On the technical front, prices need to break above the trendline from the March peak, currently at USD 1,770, before signalling a recovery, Saxo Bank analyst Ole Hansen said in a note.

In physical markets, gold premiums jumped in top consumer China, while a drop in local prices boosted demand in India.

Spot silver rose 0.8% to USD 17.99 per ounce, platinum was also up 0.8% at USD 834.77 per ounce, while palladium gained 0.5% to USD 2,022.43. All three metals were bound for a third straight weekly dip.

(Reporting by Ashitha Shivaprasad and Arundhati Sarkar in Bengaluru; Editing by Krishna Chandra Eluri and Shailesh Kuber)

Bond bear market: ‘Worst year in history’ for asset as inflation bites

NEW YORK, Sept 2 (Reuters) – An accelerating decline in bond markets is bringing fresh pain for fixed income investors in a year when global bonds have already lost a fifth of their value.

Yields on US government bonds have surged since Fed Chairman Jerome Powell sent an unambiguously hawkish message to markets during August’s Jackson Hole symposium, with the ICE BoFA US Treasury Index on track for its worst annual performance on record.

Bonds in many European countries, meanwhile, marked their worst monthly performance in decades in August, helping send the closely watched Bloomberg Global Aggregate Bond Index down more than 20% from its peak for the first time ever.

“This is the worst year in history by far for fixed income,” said Lawrence Gillum, fixed income strategist for LPL Financial. “If that’s not a bear market in bonds I don’t know what is.”

The devastating sell-off in bonds had seen yields on the benchmark 10-year Treasury, which move inversely to prices, hit an 11-year high in June, rally along with stocks over the summer only to sell off again, sparking fears that new lows may be coming.

While declines of more than 20% are typically called bear markets when they hit stocks, they are virtually unknown in bonds, an asset class that emphasizes stability and reliable returns. From 1990 to its peak in January 2021 – a period spanning much of a generation-long bull market in bonds – the global index had delivered an aggregate total return of nearly 470%.

Many investors are betting the weakness in bonds will continue as central banks tighten monetary policy to bring down inflation in the United States and across the world.

Investors broadly expect the Fed to raise rates by 75 basis points later this month, and some believe an equally large hike could be in store from the European Central Bank next week. A US jobs report on Friday is also being closely watched by investors.

Net bearish positioning among hedge funds and other speculative investors is up 30% since the end of July, according to Commodity Futures Trading Commission data.

Gregory Whiteley, a portfolio manager at DoubleLine, believes US inflation, which showed signs of ebbing in the latest consumer prices report, will likely persist, taking two-year yields to 4%. Longer-dated Treasuries, however, may be nearing a bottom, he said.

The Bloomberg US Aggregate Bond Index is down 12.5% from its highs, more than double any previous peak-to-trough decline going back to the 1970s.

Simeon Hyman, head of investment strategy at ProShares, has focused on higher quality corporate credit and is underweight longer-dated Treasuries.

Hyman believes additional pressure on bonds could come as the Fed reduces its balance sheet, a process known as quantitative tightening that hits its full stride in September as the central bank trims USD 95 billion a month from its holdings.

“When you take the little bit more hawkish tone from the chair and put that together with the doubling of size of quantitative tightening, you have to say to yourself ‘there’s more room for interest rates to rise,'” he said.

Some investors think the recent sell-off is a time to buy bonds on the cheap, a bet that partially hinges on the Fed slowing its policy tightening once it sees the US economy beginning to weaken.

Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments, is betting declines in the housing market and weaker car sales are the first signs that the Fed’s rate hikes are filtering through the economy. He is favoring high-grade corporate bonds and mortgage-backed securities.

Anders Persson, chief investment officer for global fixed income at Nuveen, is adding to Treasury positions, betting that yields are unlikely to go much higher.

“Treasury markets have done a quite good job of pricing in that we won’t see a Fed pivot anytime soon.”

(Reporting by David Randall; additional reporting by Dan Burns in New York and Dhara Ranasinghe in London; editing by Ira Iosebashvili, Megan Davies and Richard Chang)

China broadens foreign access to financial, commodity derivatives market

SHANGHAI, Sept 2 (Reuters) – China opened its financial and commodity markets further to foreign investors on Friday, allowing qualified overseas institutions to trade broadly domestic futures and options instruments.

The move is part of the Beijing’s plan to liberalize its vast capital market, the world’s second-largest, and to deepen China’s pricing power in commodities such as crude oil and iron ore.

The China Financial Futures Exchange said in a statement it allowed foreign access to stock index options.

Targeted investors are those under the Qualified Foreign Institutional Investor (QFII) scheme and its yuan-denominated sibling, RQFII.

The two groups of investors have been allowed in stock index futures trading since November of 2020.

Also on Friday the country’s key commodity exchanges announced a wider range of products open for foreign participation.

These include crude oil, low sulfur, fuel oil, rubber and copper on the Shanghai International Energy Exchange, soybean and iron ore on the Dalian Commodity Exchange, and copper and aluminum on the Shanghai Futures Exchange.

Contracts on the Zhengzhou Commodity Exchange, such as PTA, methanol, sugar and rapeseed oil, are among the ones opening up.

(Reporting by Shanghai newsroom; additional reporting by Chen Aizhu in Singapore; Editing by Frank Jack Daniel, William Maclean)

Faltering US stocks rally could see volatility-control funds turn sellers

NEW YORK, Sept 2 (Reuters) – Certain volatility-linked investment strategies could ramp up selling of equities if turbulence in the stock market, which has been stoked by the US Federal Reserve’s hawkish stance on interest rate rises, gets much worse.

“Volatility control funds,” systematic investment strategies that take their trading cues from market volatility levels, had been steady buyers of equities since mid-June, when US stocks entered a bear market rally, rebounding 17.4% up until Aug. 16.

But the S&P 500’s sharp retreat of 8% over the last two weeks, driven by worries the Fed will continue to hike interest rates in a bid to tame inflation, is pushing these funds closer to the levels of market turbulence at which they start to shed stocks at an accelerated pace.

That’s a worry for investors since there is evidence volatility-control funds can be a strong pro-cyclical force in bear markets, helping to further exacerbate sell-offs. And September has historically been the toughest month for the US stock market.

“As volatility has trended lower over the last month to month and a half, these strategies had started to innately dip their toes into the market again, buying around USD 3 billion a day per our model,” said Max Grinacoff, equity derivative strategist at BNP Paribas.

“To the extent that realized volatility starts to pick up again, that buying could cease.”

One-month realized volatility for S&P 500, a measure of actual stock swings over the past month, dipped to a four-month low of around 16 in mid-August, but has rebounded to 20, as of Thursday.

The exact level of turbulence at which volatility-control funds turn sellers in a big way is hard to estimate, since it depends on various factors, including the funds’ current equity exposure and the amount of risk individual funds target.

But Grinacoff estimates that a pickup in S&P 500 one-month realized volatility to between 35 and 40 could cause these funds to sell around USD 10 billion over the course of a week.

Barclays estimates that volatility-control funds currently have around USD 200 billion in assets under management (AUM), while Deutsche Bank pegs it at about USD 250 billion.

Although that is modest relative to the roughly USD 35 trillion value of the S&P 500 alone, such funds bear watching. As buyers in rising markets and sellers when stocks tumble, they can often accelerate price swings in either direction, said analysts.

“That makes them punch well above their AUM weight,” said Parag Thatte, a strategist at Deutsche Bank.

Some market participants might anticipate that these funds will sell and try to sell ahead of them, Barclays equity derivatives strategist Stefano Pascale.

“There may be a psychological aspect to it,” Pascale said.

DOWNWARD PRESSURE

History suggests, however, that these funds are a more potent force in falling markets than when stocks are rising.

That’s because markets tend to turn volatile quickly but then take time to calm down, meaning such funds can deliver more concentrated selling pressure as they react to accelerating volatility than the buying force they exert when markets stabilize.

During the first quarter — the most intense period of selling this year — volatility-control funds were shedding as much as USD 25 billion a day, according to Pascale. But when volatility started to settle down from mid-June, they had been adding only about USD 0.5 billion a day, Pascale said.

“We think if these funds have some impact, it will probably be more in a scenario where volatility continues to rise,” he said.

(Reporting by Saqib Iqbal Ahmed; editing by Michelle Price and Jonathan Oatis)

Philippine central bank chief: Fed move ‘big factor’ in Sept. policy decision

MANILA, Sept 2 (Reuters) – The magnitude of a widely expected US interest rate hike this month will be a “big factor” in the Philippine central bank’s decision on whether to tighten policy further, its governor said on Friday, ahead of a rate-setting meeting on Sept. 22.

“You cannot not react to what the Fed is doing,” Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla, said at a virtual Reuters Newsmaker event, referring to the US Federal Reserve’s anticipated rate increase.

Medalla’s remarks came as the Philippine peso hit a record low of 56.90 on Friday, after US data increased the chances of further Fed policy tightening and pushed the dollar to a two-decade high.

“We are concerned about the effects of the exchange rate on the inflation,” Medalla said. Higher costs of imports, including fuel and some food items, have added upward pressure on consumer prices.

The peso is the third worst-performing Asian currency this year, having fallen more than 10% so far.

Based on how the peso moved following BSP’s rate hikes, “we can say we have done enough,” Medalla said. “There is no peso problem, it’s a dollar problem.”

The dollar index firmed ahead of Friday’s US labour data that could bolster the case for the Fed to deliver a third 75 basis point interest rate hike when it holds a Sept. 20-21 policy meeting.

Seeking to bring inflation back within target, the BSP has raised interest rates by a total of 175 basis points this year, taking the benchmark overnight reverse repurchase facility rate to 3.75%.

Philippine inflation averaged 4.7% in the January to July period, above the BSP’s 2%-4% target band for the year. The BSP expects inflation to average 5.4% this year, and ease to average 4.0% next year and 3.3% in 2024.

Medalla said inflation was expected to remain above 4% in the first half of 2023 before decelerating in the second half.

Despite the external headwinds, Medalla said 6.5% growth in Philippine gross domestic product this year remains “doable”, with the economy likely to be supported as the government resists re-imposing pandemic lockdowns.

(Reporting by Karen Lema and Neil Jerome Morales; Editing by Martin Petty, Ed Davies)

Investors flock fixed maturity funds on lofty yields, economic concerns

SINGAPORE, Sept 2 (Reuters) – Fixed maturity funds are drawing some of their heaviest flows since the pandemic started as investors, nervous about the global outlook, seek to lock in income at some of the most attractive yields in years.

Such funds, which bundle corporate and government bonds of similar maturities, drew nearly USD 3 billion between May and July, according to Refinitiv data, marking three straight months of net inflows.

While preliminary data showed about USD 1 billion of net outflows in August, money managers sound confident that the heavy outflows of 2021 and early 2022 are reversing.

Yield is the primary drawcard and it has increased as central banks around the world have lifted interest rates to tame rising inflation.

Fixed maturity funds are also considered relatively safe as they offer a predictable income stream over a fixed horizon and a diversified portfolio which reduces credit risk.

With US dollar investment grade yields at about 4.8% on three-year debt, compared with three-year Treasuries at 3.5%, investors feel the price is right.

“Inflationary pressures and recent Fed moves have finally put an end to an extended period of declining interest rates, putting interest rates nearer to the higher end within the last decade since the Global Financial Crisis,” said Doreen Saik, a senior credit analyst at global fund manager M&G Investments in Singapore.

“Coupled with a weaker macro and credit outlook and a clear Fed path, we have seen a flight to quality in IG fixed maturity funds, which are relatively more attractive vis-a-vis other asset classes.”

Turmoil in stock markets – with world shares and emerging market shares each down about 20% this year – also makes a decent steady income more alluring.

“I think as we move into the current interest rate environment, we could possibly see more fixed maturity products offered to investors,” said Benny Gay, Vontobel Asset Management’s Asia head of intermediary clients.

“Investors could get yields that are more attractive than two years ago,” he added.

“STRONG CASE”

Part of the reason investors wish to lock in yields now is that they could fall in future if inflation slows down, of which there are some tentative signs in the United States.

Of course that is not yet clear and there are no such signs in Europe yet — so both runaway inflation and the likelihood that any economic slowdown could lead to companies defaulting on their debt present risks to fixed maturity funds.

Still, the flows suggest a degree of comfort.

“You can create a portfolio of higher quality and shorter duration,” said Marcelo Assalin, head of emerging markets debt at asset manager William Blair who has noticed an uptick in client enquiries about fixed maturity funds, especially in Asia.

“The critical thing is to run a diversified portfolio with concentration to a minimum and there’s a strong case for that type of product now,” he said.

For most, that has meant buying into bundles of global bonds though there are some willing to take on more risk in Asia’s emerging markets, where some managers expect a rally once markets price a stable peak for US rate expectations.

“We … see value outside of China in both investment grade and high yield following the recent sell off,” said Luke Chua, senior investment manager at Pictet Asset Management’s emerging corporate bonds team.

“When US Treasuries stabilise, we can rebound here.”

(Reporting by Rae Wee; Additional Reporting by Tom Westbrook and Gaurav Dogra in Bengaluru; Editing by Ana Nicolaci da Costa)

Dollar near two-decade high ahead of US jobs data

LONDON, Sept 2 (Reuters) – The dollar was headed for its third weekly gain in a row and was near two-decade highs against other major currencies, as investors focused on US jobs data due later on Friday that could bolster the case for aggressive interest rate hikes.

The US currency has been riding high since Federal Reserve Chair Jerome Powell said at the Jackson Hole symposium in Wyoming last Friday that rates would need to be high “for some time” to combat inflation.

The dollar index – which tracks the currency against six counterparts – leapt to a fresh 20-year high on Thursday of 109.99, bolstered by robust US data showing a fall in unemployment claims.

The index came off the boil in early European trading hours on Friday, slipping 0.2% to 109.43. However, the index is still on track for around a 0.5% weekly gain.

US non-farm payrolls data will be closely watched, analysts said. Economists expect 300,000 jobs were added in August, which would extend a strong run of data.

“We would have to see clearer signs of an economic downturn in the US with the addition of more cautious comments on the part of the Fed to end the USD rally,” You-Na Park-Heger, currency analyst at Commerzbank, said in a note.

Fed funds futures are pricing about a 75% chance that the Fed hikes rates by 75 bps this month and it has been a week of heavy selling in the US Treasury market.

The moves have supported the dollar’s march on the yen in particular, since Japan’s yields are anchored near zero.

The dollar surged above JPY 140 for the first time since 1998 on Thursday, and the yen fell to a fresh trough of 140.43 on the day. It was last broadly flat at 140.275.

Japan’s government will take “appropriate” action as needed, Japanese finance minister Shun Suzuki said on Friday.

The euro retraced some of the previous day’s losses against the dollar and inched back towards parity, up a third of a percent to USD 0.99780.

The European Central Bank is due to meet next week, with money markets betting on an unprecedented 75 basis point hike.

Sterling was broadly flat on the day versus the dollar at $1.15520 and remains down around 1.5% this week.

(Reporting by Iain Withers, Additional reporting by Tom Westbrook in Singapore; editing by Philippa Fletcher)

Philippine c.bank chief says 6.5% GDP growth this year “doable”

MANILA, Sept 2 (Reuters) – Growth of 6.5% in Philippine gross domestic product remains “doable” this year, with the economy likely to be supported as the government resists re-imposing pandemic lockdowns, its central bank governor told Reuters at a virtual Newsmaker event on Friday.

Bangko Sentral ng Pilipinas Governor Felipe Medalla also said Philippine inflation was expected to decelerate in the second half of 2023.

(Reporting by Karen Lema and Neil Jerome Morales; Editing by Martin Petty)

Euro zone bond yields near two-month highs ahead of US jobs data

Sept 2 (Reuters) – Euro zone bond yields held near two-month highs on Friday ahead of US jobs data that kept market focus squarely on inflation.

A Reuters poll expects the US economy will have added 300,000 jobs in August, down from the 528,000 in July that had come as an upward surprise, and a slight decline in average earnings on a monthly basis.

“The market’s probably expecting a fairly strong set of labour market numbers from the data we already have out this week,” said Peter McCallum, rates strategist at Mizuho in London.

US money markets currently price in over a 70% chance of a 75 bps Fed move this month. Another strong labour market print would cement expectations for the 75 bps move.

In the euro zone, bond yields edged lower from two-month highs reached on Thursday. Germany’s 10-year yield, the benchmark for the bloc, was up around 2 basis points (bps) to 1.59%, after rising to 1.63% on Thursday, the highest since end-June.

“I think we’re going to be range-bound in outright yields until the ECB meeting,” McCallum at Mizuho said.

“In Europe it’s more a story about the market viewing things as more fairly priced given how much has been factored in for the ECB meeting,” he added.

Italy’s 10-year yield was up 6 bps to 3.94%, after a brief rise above 4% on Thursday.

The closely-watched spread to German peers was at 235 bps, after rising to 243 bps on Thursday, when it neared levels at which the ECB first promised its new tool, now called the Transmission Protection Instrument, to contain large divergences between member states’ borrowing costs it sees as unwarranted.

The bloc’s bond yields have delivered a third week of sharp rises this week as investors sharply raised their bets on a large 75 bps rate hike from the ECB at its policy meeting next Thursday following hawkish rhetoric from policymakers and another higher-than-expected rise in August inflation.

Money markets price in around an 80% chance of a 75 bps hike at the meeting, levels similar to Thursday, according to Refinitiv data, compared to less than 50% last Friday.

BNP Paribas became the latest bank to revise its call for a 75 bps move next week.

(Reporting by Yoruk Bahceli; Editing by Angus MacSwan)

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