Oil and interest rate futures point to cyclical downturn before end of 2022: Kemp

LONDON, July 22 (Reuters) – Recent moves in crude oil and interest rate futures anticipate a downturn in the business cycle that will cause oil consumption to dip before the end of the end of the year and into the first three months of 2023.

Federal funds futures prices imply US interest rates are expected to peak at 3.50-3.75% in the first quarter of 2023, up from 1.50-1.75% at present, before declining around 50 basis points by the end of 2023.

The interest rate path implies that a significant cyclical slowdown will be underway by the end of 2022, bearing down on inflation and allowing the central bank to ease policy to support activity from the second quarter.

Since early June, rising expected interest rates have correlated closely with the softening of Brent calendar spreads from the first and second quarter of 2023 onwards.

Oil futures prices are anticipating slower growth by the end of 2022 – leading to an accumulation of inventories from early 2023 relieving some of the tightness in the market.

Brent’s spread for the first quarter of 2023 has softened to a backwardation of less than USD 3.80 per barrel from more than USD 5.40 in early June.

The spread for the second quarter of 2023 has come in even more sharply to a backwardation of less than USD 2.30 from nearly USD 4.30.

Purchasing managers’ surveys show the manufacturing sector losing momentum in the United States and already contracting in the euro zone.

In the United States, the Institute for Supply Management’s composite manufacturing index slipped to 53.0 in June (53rd percentile for all months since 1980) from 56.1 in May (76th percentile) and 57.6 in January (84th percentile).

The euro zone index has slumped to 49.6 in July (28th percentile for all months since 2006) from 52.1 in June (48th percentile) and 58.7 in January (95th percentile).

The forecast timeline for a slowdown implied by interest rate and oil futures appears reasonable and there are already signs that it is underway.

The only question is whether it is mild enough to count as a mid-cycle soft patch, prolonging the current cycle into 2023 and 2024, or severe enough to end the current cycle and start a new one later in 2023.

The cycle’s evolution depends on (a) the course of Russia’s invasion of Ukraine; (b) sanctions imposed by the United States and European Union in response; (c) the pace of disinflation; and (d) how far consumers and businesses pull back spending in response to higher inflation and a deteriorating economic outlook.

These four factors will determine whether the slowdown is brief and shallow or longer and deeper – and whether the accumulation of petroleum inventories is relatively modest or much larger.

(John Kemp is a Reuters market analyst. The views expressed are his own. Editing by David Evans)

No longer silent, Japan asset managers flex muscle in legacy to Abe

TOKYO, July 25 (Reuters) – Japan’s asset managers nudged the volume up another notch at shareholder meetings this year, increasingly opposing management proposals and adding momentum to a policy of attracting foreign investors initiated by slain former Prime Minister Shinzo Abe.

Nikko Asset Management, Asset Management One and others have become distinct voices in Japan’s new-found activism, countering foreign criticism of asset managers’ rubber-stamp voting.

The pair opposed management at a domestic firm by voting for board nominees proposed by a foreign investor, while in another high-profile case, company management canned a proposal after some asset managers supported a foreign investor’s objection.

This year’s cases add to a gradual change in voting sparked by Abe’s corporate stewardship code in 2014, and which gained impetus in 2017 with a revision requiring the disclosure of voting records for each agenda item at shareholder meetings. Abe was shot and killed this month during an election campaign.

The revision “raised asset managers’ commitment because every manager is held accountable for each voting decision,” said Katsuya Kikuchi, associate director at Tokio Marine Asset Management.

Increased domestic activism is likely to help firms burnish credentials on issues as varied as the environment, society and governance, raising their appeal for foreign investors looking to increase exposure to Japan, asset managers said.

Domestic asset managers have voted “against management in increasing amounts every year for the last five years,” said Seth Fischer, founder of Hong Kong-based Oasis Management, which has invested in Japanese firms including Toshiba Corp.

Still, only a fraction of shareholder proposals gain support from domestic institutional investors. Last year, these investors supported just 6.8% of such proposals on average at shareholder meetings served by electric voting platform operator ICJ, versus 15% among foreign counterparts.

SUPPORTING ROLE

Foreigners lead shareholder activism in Japan with domestic asset managers mainly playing a supportive role, though some investors have said they hope domestic managers will take more initiative and make their own proposals for company management.

Some domestic asset managers supported Oasis which queried related-party transactions at Fujitec Co Ltd 6406.T and opposed a management proposal to nominate its chief executive to the board of directors. The elevator maker withdrew the proposal an hour before its annual shareholder meeting last month.

In another vote this year, Singapore-based 3D Investment Partners’ campaign to bring its nominees onto the board of IT firm Fuji Soft Inc. received unexpectedly high support of nearly 40%.

Those voting in favour included Mitsubishi UFJ Financial Group Inc’s 8306.T Mitsubishi UFJ Trust and Banking, Mizuho Financial Group Inc’s Asset Management One and Sumitomo Mitsui Trust Holdings Inc’s Nikko Asset Management.

“Before 2014, we’d hear investee firms moan about foreign investors’ strict voting policies,” said Hidenori Yoshikawa, corporate governance consultant at Daiwa Institute of Research. “But as domestic institutional investors tightened their stance, we now hear investees say domestic investors are stricter.”

Domestic asset managers have been less supportive of company management than some global peers, showed a report by shareholder advisory SquareWell Partners which analysed voting for incumbent director elections at Japan’s 100 biggest firms.

Average support rates from 2019 to 2021 stood at 95.9% at Asset Management One, 94.2% at Nikko Asset Management and 88.9% at Sumitomo Mitsui DS Asset Management. That compared with 99.9% and 99.7% at US peers Vanguard and BlackRock respectively.

GREATER SCRUTINY

Still, it is rare for an activist shareholder motion to win approval in Japan where only four cases have been successful, partly as management is often insulated by passive ownership.

But domestic asset managers are increasingly turning on management-protecting schemes, such as takeover defences and cross-shareholding arrangements.

Daiwa Securities Group Inc’s Daiwa Asset Management and other major asset managers this year tightened rules for director voting at firms engaged in cross-shareholding, which still account for about 30% of Japan’s USD 6 trillion stock market.

Also driving change is greater scrutiny from asset owners such as the Government Pension Investment Fund and Pension Fund Association for Local Government Officials, asset managers said.

There is also room for improvement in board independence and diversity, said Takuya Iyoda, chief analyst at Nissay Asset Management. Rules could be tightened to the extent that boards must have a majority of independent directors, he said.

“I wouldn’t be surprised if requirements for diversity eventually expand to include not just women but also non-Japanese.”

(Reporting by Makiko Yamazaki; Editing by Sumeet Chatterjee and Christopher Cushing)

US to host virtual meeting on Tuesday of Indo-Pacific trade, economic ministers

WASHINGTON, July 24 (Reuters) – The United States will host a virtual meeting on Tuesday of officials representing the 14 countries that have joined the Indo-Pacific Economic Framework, as Washington seeks to expand its engagement with Asia.

The ministerial meeting will be hosted by US Trade Representative Katherine Tai and Commerce Secretary Gina Raimondo, their offices announced in a statement on Sunday.

President Joe Biden, who launched the IPEF in May on a trip to Tokyo, wants to use it as a way to raise environmental, labor and other standards across Asia.

Washington has lacked an economic pillar to its Indo-Pacific engagement since former President Donald Trump quit a multinational trans-Pacific trade agreement, leaving the field open to China to expand its influence.

In addition to the United States, the IPEF members comprise Australia, Brunei, Fiji, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand and Vietnam.

Topics for discussion at Tuesday’s meeting include trade, supply chains, clean energy, infrastructure, taxes and combating corruption, the statement said.

(Reporting by Eric Beech; editing by Diane Craft)

Benchmark US yield hits 8-week low on weak data, recession fears

NEW YORK, July 22 (Reuters) – The US 10-year Treasury note yield was on track to end the week near its lowest since late May after weak data on Friday added to worries about the global economy and traders reassessed the Federal Reserve’s ability to raise rates much further.

Data on Friday showed the global economy teetering into a slowdown at a time when central banks are focusing on battling inflation by limiting access to cash.

Business activity in the United States contracted this month for the first time in nearly two years, S&P Global’s US Composite PMI Output Index showed. Euro zone activity contracted for the first time in more than a year and growth in Britain was at a 17-month low.

Separately, Japan’s government is expected to sharply cut its forecast for domestic growth, while China’s strict COVID-19 lockdowns and Russia’s invasion of Ukraine have further damaged global supply chains.

“There was a pretty sharp correction after the PMIs,” said Subadra Rajappa, head of US rates strategy at Societe Generale in New York. “The market is quickly pricing out the possibility of the Fed being able to raise rates aggressively for the remainder of the year.”

A 75 basis-point hike from the Fed is all but priced in according to traders, with the probability of a larger move dwindling down into the single digits.

Yields were lifted off their lows in part by comments from European Central Bank President Christine Lagarde, who committed to fighting inflation despite growing fears of a recession in the euro bloc.

But yields across the US curve ended near their lowest in the session.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 12.1 basis points at 2.974%.

The yield on 10-year Treasury notes was down 15 basis points to 2.758%. The yield on the 30-year Treasury bond was down 9.7 basis points to 2.975%.

The two- and 10-year Treasury notes yield spread, seen as an indicator of economic expectations, was at -22.0 basis points.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.585%, after closing at 2.591% on Thursday.

The US dollar 5 years forward inflation-linked swap, seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2.367%.

(Reporting by Rodrigo Campos; Editing by Nick Zieminski and Will Dunham)

Strong dollar looms over U.S. earnings season

NEW YORK, July 21 (Reuters) – Companies reporting earnings in coming weeks are likely to mention one common factor gouging their results: the strong dollar.

The US currency stands near a 20-year high against a basket of its peers and is up 15.1% in the past year, lifted by a hawkish Federal Reserve and investors seeking shelter from turbulent markets.

A strong dollar can be a headwind for US companies as it makes exporters’ products less competitive abroad and hurts multinationals that need to convert their foreign profits back into the US currency.

Each percentage point of year-on-year increase in the US Dollar Index, which measures the dollar against six other currencies, translates to a 0.5 percentage point hit to S&P 500 earnings growth, analysts at MorganStanley estimated.

“You seemingly can’t get a break right now. We’re starting to get some relief from oil prices, but you’ve still got the dollar banging on you,” said Bill Stone, chief investment officer at the Glenview Trust Company.

International Business Machines Corp. (IBM), Netflix Inc. (NFLX) and Johnson & Johnson (JNJ) were among the companies that in the past week cited the dollar’s strength as a headwind, with Johnson & Johnson joining Microsoft Corp MSFT.O by cutting its guidance due to the impact of the greenback’s rise.

Next week’s results from Apple Inc. (AAPL), Microsoft Corp. (MSFT), Coca-Cola Co (KO) and a slew of other companies will give investors a better picture of how businesses are holding up in the face of the strong dollar and soaring inflation.

Investors are also awaiting what the Fed will have to say on those topics at its monetary policy meeting next week, at which it is widely expected to deliver another jumbo-sized 75 basis-point rate increase.

DOLLAR DOLDRUMS

Overall, some 40% of S&P 500 revenues come from overseas, data from FactSet showed. Information technology leads all sectors with 58% of revenues derived internationally, followed by materials with 56%, while utilities companies source just 2% of their revenues out of the United States, according to FactSet.

The dollar’s strength threatens to combine with high inflation, supply chain issues and other factors to weigh on earnings, analysts said.

“The rate of change on the dollar exhibits a strong negative correlation over time vs. S&P 500 earnings revisions. USD strength comes at an inopportune time for corporates already facing margin pressure and increasingly weaker demand,” Morgan Stanley’s analysts wrote.

So far, 5.1% of the S&P 500 companies that have reported their second quarter results have posted earnings above expectations, nearly half the average of 9.5% over the prior four quarters, according to Refintiv data.

Few can say when the dollar will turn, as the inflation-fighting Fed is expected to raise interest rates more aggressively than other central banks, boosting the US currency’s appeal to yield-seeking investors.

Still, some are betting that signs of a peak in the dollar’s rally could balance out some of the damage caused by the burgeoning greenback.

Dollar peaks over the past 40 years have been followed by rallies in the S&P 500, with the benchmark index climbing by an average of 10% in the next 12 months on increased risk appetite and expectations of improving earnings, wrote John Lynch, chief investment officer for Comerica Wealth Management.

Jim Paulsen, chief investment strategist at The Leuthold Group, said the dollar is trading at a nearly 120% “safe-haven premium” based on its historical relationship to the consumer sentiment index.

The dollar has declined by an average 4.5% over 12 months each time its premium rose over 20% since 1988, he added.

Others are looking at the bright side of dollar strength, which some see reflects the belief that the United States can weather a looming global slowdown better than other countries.

Sameer Samana, senior global market strategist at Wells Fargo Investment Institute, has been increasing his overweight in US equities, betting that any the effects of a strong dollar will be outweighed by better economic growth over the long run.

“We think investors get too focused on the dollar’s impact on earnings,” he said.

(Reporting by David Randall; Additional reporting by Sinead Carew; Editing by Ira Iosebashvili and Jonathan Oatis)

Gold set to snap 5-week losing streak on softer dollar, yields

July 22 (Reuters) – Gold headed for its first weekly gain in six on Friday as a pullback in US Treasury yields and the dollar’s decline bolstered non-yielding bullion’s safe-haven appeal as economic risks persisted.

Spot gold rose 0.2% to USD 1,721.29 per ounce by 2:21 p.m. EDT (1821 GMT). It was up about 1% so far this week, following a strong rebound from a more than one-year low of USD 1,680.25 on Thursday.

US gold futures settled 0.8% higher at USD 1,727.4.

Gold’s uptick was helped by a retreat in US 10-year Treasury yields.

Boosting gold’s allure for overseas buyers, the dollar index, also a rival safe haven, headed for its first weekly fall in four as disappointing US data dampened expectations of a large 100-basis-point interest rate hike by the Federal Reserve at its July 26-27 policy meeting.

The lower dollar, declining growth stocks and the dip in yields are all helping gold, said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

While the Fed meeting is likely to be a “high-volatility event” for gold, there may not be many steep hikes after the one next week, Streible added.

Rising US rates increase the opportunity cost of holding non-yielding bullion.

“Assuming the Fed hikes by 75 bps in July, we believe the bulk of the near-term downside risk has been priced in; but the longer-term trend is still to the downside,” Standard Chartered analyst Suki Cooper said in a note.

But gold could also find support from a price-responsive physical market and if recession risks deepen, Cooper added.

In physical markets, demand picked up in some Asian hubs this week amid softer prices.

Spot silver fell 1.7% to USD 18.53 per ounce, bound for its eight straight weekly decline.

Platinum shed 0.3%, to USD 869.56, while palladium XPD= rose about 5% to USD 1,986.50, en route to an about 9% gain for the week.

(Reporting by Ashitha Shivaprasad and Arpan Varghese in Bengaluru; Additional reporting by Arundhati Sarkar and Rahul Paswan; Editing by Paul Simao and Krishna Chandra Eluri)

Dollar tests supports vs yen, needs a PMI beat to avert bigger retreat

July 22 (Reuters) – USD/JPY fell with Treasury and government yields across the major economies, save for BOJ-corralled JGBs.

Global growth prospects have dimmed amid inflation, broadening central bank rate hikes and below-forecast S&P Global July PMIs in Japan and Europe, leaving the U.S. PMI reading as the last defense against a broader USD/JPY fall.

Prices are already probing below the 21-day moving average and daily on-close pivot point supports at 136.76/69, with the 38.2% Fibo of the post-June Fed meeting range at 136.56.

A close below those supports, particularly if U.S. PMI also comes in weaker-than-forecast, as Japan and the euro zone readings did, would put in play the daily kijun, now at 135.77, and perhaps the 55-DMA at 133.22.

Key is whether today’s dive in bund and Treasury yields versus nearly static JGB yields lowers the terminal Fed funds rates further in the wake of Thursday’s weak U.S. data and the ECB’s belated 50bp flail at inflation and doubts about the structural inertia of its TPI anti-fragmentation plan.

If U.S. PMI data beat that could cushion USD/JPY’s fall and broader risk-off flows, but top-heavy daily and weekly charts put the burden of proof on bulls ahead of Wednesday’s Fed meeting.

(Randolph Donney is a Reuters market analyst. The views expressed are his own.)

US equity funds post biggest weekly outflow in five weeks

July 22 (Reuters) – US equity funds witnessed their biggest weekly outflow in five weeks in the week to July 20, as cautious investors gear up ahead of the Federal Reserve’s policy meeting next week.

According to Refinitiv Lipper data, US equity funds recorded USD 8.45 billion worth of net selling, which was the biggest weekly outflow since June 15.

The Fed is expected to raise policy rates by another 75 basis points at the end of the July 26-27 meeting, as it seeks to balance the risks of a stubbornly high inflation and the likelihood of a recession.

US growth funds booked outflows of USD 3.46 billion after small purchases in the week before, while investors exited value funds worth USD 1.62 billion in a fourth subsequent week of net selling.

Selling in bond funds stood at a net USD 4 billion, much higher than the outflows of USD 371 million in the previous week.

Investors disposed of US municipal bond funds of USD 897 million, marking their first weekly net selling in three weeks, while US taxable bond funds recorded outflows of USD 3.43 billion.

US short/intermediate investment-grade funds, short/intermediate government & treasury funds and high yield funds suffered outflows of USD 3,008 million, USD 1,998 million and USD 1,060 million, respectively.

Meanwhile, money market funds lured a third weekly inflow of USD 4.28 billion, although purchases reduced by about 57% from the previous week.

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru; Editing by Shailesh Kuber)

Oil prices steady after sharp declines on weak US demand

MELBOURNE, July 22 (Reuters) – Oil prices were roughly unchanged in early trading on Friday after sliding around 3% in the previous session on weakened demand in the United States, the world’s top oil consumer, and a pick-up in supply from Libya.

Brent crude futures rose 17 cents, or 0.2%, to USD 104.03 a barrel at 0041 GMT, while US West Texas Intermediate (WTI) crude futures were flat at USD 96.35 a barrel.

WTI has been pummeled over the past two sessions after data showed that US gasoline demand had dropped nearly 8% from a year earlier in the midst of the peak summer driving season, hit by record prices at the pump.

“At 8.52 million barrels per day, demand is at its lowest seasonal level since 2008, as high gasoline prices take their toll on consumers,” ANZ Research analysts said in a note.

The drop in WTI put the contract on track for a 1.3% drop this week, which would be its third consecutive weekly loss.

In contrast, signs of strong demand in Asia propped up the Brent benchmark, putting it on course for its first weekly gain in six weeks.

Demand in India for gasoline and distillate fuels rose to record highs in June, despite higher prices, with total refined product consumption running at 18% more than a year ago and Indian refineries operating near their busiest levels ever, RBC analysts said.

“This signals much more than a strong recovery from COVID-plagued years,” RBC analyst Michael Tran said in a note.

On the supply side, the restart of output at several oilfields in Libya this week kept a lid on Brent’s gains.

Meanwhile the European Central Bank (ECB) raised rates more than expected on Thursday looking to rein in inflation, with ECB President Christine Lagarde warning that inflation risks had intensified, with the Ukraine war likely to drag on and energy prices likely to stay high for longer.

“Is the horizon clouded? Of course it is,” Lagarde said.

However, she said, the central bank’s base case is there will be no recession this year or next year.

(Reporting by Sonali Paul in Melbourne; Editing by Kenneth Maxwell)

US yields slide on weak data, ECB move

NEW YORK, July 21 (Reuters) – US Treasury yields fell on Thursday, with the benchmark 10-year note below 2.9%, weighed by soft economic data and after the first interest rate hike in 11 years by the European Central Bank turned investors’ focus toward an economic slowdown.

The 16 basis points drop in the 10-year yield was its largest for any day since March 2020.

The number of Americans enrolling for unemployment benefits rose last week to the highest in eight months and a gauge of factory activity slumped this month, the latest indications the US economy is slowing under the weight of rising interest rates and high inflation.

The ECB raised its benchmark deposit rate by 50 basis points to zero percent, breaking its own guidance for a 25 basis points move, as concerns about runaway inflation trumped worries about growth.

But even as the ECB moved more than expected, the terminal rate was not changed.

“(ECB President Christine) Lagarde said that the size of the move today does not mean that we’re going to necessarily see a higher terminal rate, and I think the market focused on that mostly,” said Ben Jeffery, rates strategist at BMO Capital Markets in New York.

He said the ECB’s move took any lingering pressure away from the Federal Reserve to raise its benchmark overnight interest rate next week by more than the expected 75 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 16.5 basis points at 3.085%.

The yield on 10-year Treasury notes was down 15.9 basis points to 2.877%. The yield on the 30-year Treasury bond was down 12.2 basis points to 3.048%.

The two- and 10-year Treasury notes yield spread, seen as an indicator of economic expectations, was at -21.0 basis points.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.59%, after closing at 2.682% on Wednesday.

(Reporting by Rodrigo Campos; Editing by Paul Simao and Jonathan Oatis)

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