A look at the day ahead in U.S. and global markets by Mike Dolan
A renewed surge in long-term Treasury yields is stifling world markets yet again as Federal Reserve officials hang tough on one more rate rise, some $134 billion of new government debt sales hit this week and a government shutdown looms.
The yield spike has supercharged the U.S. dollar worldwide – both a reflection and aggravator of mounting financial stress far and wide.
Despite wariness of Bank of Japan intervention, the dollar/yen exchange rate hit its highest for the year on Tuesday – as did the dollar’s DXY (.DXY) index and the dollar’s rate against the South Korea’s won . Sterling hit a 6-month low.
Treasury tremors continue to reverberate from last week’s upgraded Fed forecasts, its insistence on signalling one more rate rise in the current tightening cycle and an uncompromising ‘higher-for-longer’ mantra.
Short term Fed futures haven’t moved much. All the action is in longer-dated U.S. Treasuries, which may now be repricing the economy’s resilience over multiple years and more persistent inflation pressures.
Ten-year Treasury yields , which have added a whopping 25 basis points in just a week, hit another 16-year high at 4.5660% early on Tuesday. As Deutsche Bank notes, this is historically significant territory as the average of the 10-year yield going back to 1799 is around 4.50%.
Thirty-year bond yields , meantime, have jumped over 30bp in a week to a 12-year high of 4.6840%.
And as an indication of how the long-term sustainable interest rate structure as whole is being re-thought, the 10-year real, inflation-adjusted yield has also leaped 26bp to 2.20% – its highest since 2009.
Significantly, this is shifting the deeply-inverted 2-to-10 year yield gap – which has for more than a year indicated recession ahead but which now looks to be closing that negative spread to its smallest since May.
The latest wobble – which has seen exchange-traded funds in U.S. Treasuries deepen year-to-date losses to more than 6% and losses over three years to more than 20% – comes as another heavy supply of new paper goes up for auction this week.
The Treasury sells $48 billion in two-year notes on Tuesday, $49 billion in five-year paper on Wednesday and $37 billion in seven-year notes on Thursday.
A government shutdown from this weekend is still looming with no budget deal in Congress yet to avert it and Moody’s warning of sovereign credit rating implications.
The Fed seems in no mood to calm the horses.
Minneapolis Fed Bank President Neel Kashkari said on Monday the Fed probably needs to raise borrowing rates further.
“If the economy is fundamentally much stronger than we realized, on the margin, that would tell me rates probably have to go a little bit higher, and then be held higher for longer to cool things off,” Said Kashkari.
Even a typically more dovish Chicago Fed boss Austan Goolsbee sounded hawkish. “The risk of inflation staying higher than where we want it is the bigger risk,” he said, adding the Fed would now have to “play by ear” in conducting policy.
Private sector bankers are starting to brace for the worst, with JP Morgan chief Jamie Dimon reported overnight as warning: “I am not sure if the world is prepared for 7% (Fed rates).”
Even though the European Central Bank seems shier of even higher rates, the higher-for-longer message there too is clear. ECB chief Christine Lagarde said on Monday the central bank can meet its 2% inflation target if record high rates are maintained for “a sufficiently long duration.”
In a thin data diary on Monday, the Dallas Fed’s September manufacturing survey showed a deterioration of activity there this month. The Chicago Fed’s national business poll for August also fell.
And a retreat in energy prices would have soothed some inflation worries, with U.S. crude falling back to $88 per barrel for the first time in almost two weeks,
Nationwide consumer confidence tops the slate on Tuesday.
Despite a late rally in Wall St stocks on Monday, futures are back about 0.5% in the red – as were bourses in Asia and Europe as the end of the third quarter hoves into view on Friday.
China Evergrande (3333.HK) shares slid for a second day, dropping as much as 8% after a unit of the embattled property developer missed an onshore bond repayment.
There was no sign of a breakthrough in the widening U.S. autoworkers labor dispute, seen as inflationary by some due to potential supply outages.
Key developments that should provide more direction to U.S. markets later on Tuesday:
* US Sept consumer confidence, US Aug new home sales, July house prices, Richmond Fed Sept business survey, Dallas Fed Sept service sector survey, Philadelphia Fed Sept services survey
* Federal Reserve Board Governor Michelle Bowman gives pre-recorded remarks to Washington conference
* U.S. Treasury auctions $48 billion of 2-year notes
* U.S. corporate earnings: Costco, Cintas
Reporting by Mike Dolan; Editing by Christina Fincher
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
LITTLETON, Colorado, Sept 19 (Reuters) – The deepening debt crisis in China’s construction sector – a key engine of economic growth, investment and employment – may trigger an unexpected climate benefit in the form of reduced emissions from the cement industry.
Cement output and construction are closely correlated, and as China is by far the world’s largest construction market it is also the top cement producer, churning out roughly 2 billion tonnes a year, or over half the world’s total, data from the World Cement Association shows.
The heavy use of coal-fired kilns during manufacturing makes the production of cement a dirty business. China’s cement sector discharged 853 million tonnes of carbon dioxide in 2021, according to the Global Carbon Atlas, nearly six times more than the next largest cement producer, India.
The cement sector accounts for roughly 12% of China’s total carbon emissions, according to Fidelity International, and along with steel is one of the largest greenhouse gas emitters.
But with the property sector grinding to a halt due to spiralling debt worries among major developers, the output and use of cement are likely to contract over the next few months, with commensurate implications for emissions.
HOUSING SLUMP
The property markets account for roughly a quarter of China’s economy, and for years Beijing has used the sector’s substantial heft to influence the direction of the rest of the economy by spurring lending to would-be home buyers and fostering large scale construction projects.
But the big property developers racked up record debt loads in recent years that have forced borrowing levels to slow, stoked concerns among investors, and slowed spending across the economy.
China Evergrande Group, once the second largest developer, defaulted on its debt in late 2021, while top developer Country Garden has drained cash reserves to meet a series of debt payment deadlines in recent months.
Fears of contagion throughout the property industry has spurred households to rein in consumer spending, which has in turn led to deteriorating retail sales and further economic headwinds.
Beijing has stepped in with a slew of measures designed to right the ship, including easing borrowing rules for banks and lowering loan standards for potential home buyers.
But property prices in key markets remain under pressure, which has served to stifle interest among buyers and add to the pressure on investors and owners.
CEMENT CUTS
With construction activity across China slowing, and several major building sites stopped completely while tussles over debt payments among developers continue, cement output is likely to shrink to multi-year lows by the end of 2023.
During the March to August period, the latest data available, total cement output was 11.36 million short tons, down 2 percent from the same period in 2022 and the lowest for that period in at least 10 years, China National Bureau of Statistics data shows.
In addition to curtailing output in response to the bleak domestic demand outlook in the property sector, cement plants may be forced to curb output rates over the winter months as part of annual efforts to cap emissions from industrial zones during the peak season for coal heating.
Some cement producers will likely look to boost exports in an effort to offset lower domestic sales, and in July China’s total cement exports hit their highest since late 2019.
But Chinese firms will face stiff competition from lower-cost counterparts in Vietnam, which are by far the top overall cement exporters and already lifted overall cement shipments by close to 3% in the first half of 2023, data from the Vietnam National Cement Association (VNCA) shows.
Some Chinese firms may be prepared to sell exports at a loss for a spell while they await greater clarity over the domestic demand outlook.
But given the weak state of global construction activity amid high interest rates in most countries, as well as the high level of cement exports from other key producers such as India, Turkey, United Arab Emirates and Indonesia, high-cost Chinese firms may be forced to quickly contract output to match the subdued construction sector.
And if that’s the case, the sector’s emissions will come down too, yielding a rare climate benefit to the ongoing property market disruption.
The opinions expressed here are those of the author, a columnist for Reuters.
Reporting By Gavin Maguire; Editing by Miral Fahmy
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
Zhao Youming, 60, looks at an unfinished residential building where he bought an apartment, at the Gaotie Wellness City complex in Tongchuan, Shaanxi province, China September 12, 2023. REUTERS/Tingshu Wang/File Photo Acquire Licensing Rights
HONG KONG, Sept 18 (Reuters Breakingviews) – Chinese developers are in trouble. Many are struggling to stay afloat as both financing and sales dry up. Why don’t they simply slash prices and sell down their bloated inventory? Well, they can’t. Restrictions imposed after the last property crisis in 2016 were intended to contain runaway home prices. Those limits endured and are now obstructing a recovery in the world’s second largest economy.
“Guidance” set by local governments helped officials to achieve price stability. Average new home prices in the 70 major cities, per official data, have fluctuated around just 2% on a monthly basis for more than a year even as top developers wrestle to restructure their debt. Evergrande (3333.HK) and Country Garden (2007.HK) alone have combined liabilities worth 3.8 trillion yuan ($524 billion).
Yet the restrictions hid distortions. When the mood was bullish, price caps in major cities were far below what people were willing to pay. Crowds of buyers typically flocked to project launches. Those who were lucky enough to be allocated a new apartment could then flip it for a handsome profit in the limited secondary market.
That’s one reason many Chinese viewed caps as a “subsidy” for prospective homeowners. Fast forward, and these controlled prices are much higher than the perceived market value. Some developers have tried to work around the problem, by offering homebuyers “discounts” including car parking lots or even gold bars. Home sales last year fell 27% to return to 2017 level, per National Bureau of Statistics, and sales this year are on course to be worse.
Scrapping the price caps would be a cleaner fix and officials are weighing up such a move, Reuters reported this month. The Guangzhou government has already quietly abandoned its seven-year-old policy in regulating new home prices, according to Caixin, a financial publication. Hard up developers will be able to start generating much-needed cash if more cities follow. Take Country Garden, it had a 202 million square metre landbank at the end of 2022, including 3,000 projects under construction. How quickly it can monetise some of those assets ultimately depends on how attractive the selling prices are.
A price slump would spur demand but the government would need to brave enormous fallout. Existing owners will be unhappy to see the value of their homes tumble: China’s homeownership rate reached 90% by 2020, and real estate accounts for 70% of household wealth. In a weak economy, it is unclear where an undistorted price will settle. Still, finding the bottom of the market looks crucial to any property market revival.
CONTEXT NEWS
China’s Guangzhou city has cancelled price caps on new residential projects, Caixin reported on Sept. 12. Developers still need to share their planned selling prices with authorities but regulators will no longer provide price guidance, the financial publication said.
Price caps of various kinds were introduced in many Chinese cities from 2016 following the central government’s call for a stable residential market.
Editing by Una Galani and Thomas Shum
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
Paramilitary police officers stand guard in front of the headquarters of the People’s Bank of China, the central bank (PBOC), in Beijing, China September 30, 2022. REUTERS/Tingshu Wang/File Photo Acquire Licensing Rights
Sept 15 (Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.
Asian markets are set to end the week strongly following risk-friendly moves in the U.S. and Europe on Thursday, although a deluge of top-tier economic data from China on Friday could sour the mood at a stroke.
The latest indicators from the region’s largest economy to be released include house prices, fixed asset investment, retail sales, industrial production and unemployment, all for August.
The annual pace of retail sales and industrial production growth is expected to pick up, but fixed asset investment growth is predicted to slow to a new low of 3.3% going back to the 1990s, if pandemic-related distortions in early 2020 are excluded.
The People’s Bank of China insists it will take “appropriate” steps to support the economy, although a growing number of economists are skeptical Beijing will meet its 5% GDP growth target this year and many are cutting their 2024 outlooks.
The PROC on Thursday announced its second 25-basis point cut to banks’ reserve requirement ratio this year. Unsurprisingly, the move stopped the yuan’s recent mini-revival in its tracks, and pressure on the currency on Friday will probably be to the downside again.
China’s deteriorating trade relations with the West, meanwhile, is a darkening cloud that shows no sign of lifting.
Beijing has hit back at a European Commission probe into China’s electric vehicle subsidies as protectionist, warning it would damage economic relations, and analysts have warned that if the probe results in punitive tariffs, Beijing will take retaliatory action.
However, all that could be parked for another day if investors decide to run with Thursday’s bullish momentum.
It was a case of ‘good news is good news’ for Wall Street as investors welcomed hot U.S. retail sales and accelerating producer prices as a sign of economic resilience rather than fret about the hawkish rate implications.
Coupled with falling euro zone bond yields and implied rates after the European Central Bank’s ‘dovish hike’ – perhaps the central bank’s last in the cycle – risk assets got a shot in the arm, paving the way for a positive open in Asia on Friday.
The big three U.S. indexes rose between 0.8% and 1.0%, European stocks had their best day in six months and the MSCI Asia ex-Japan Index had its best day in 10 days on Thursday. The rise in oil to new 2023 highs and another dollar surge failed to dampen investors’ mood.
Another positive portent for Asian markets on Friday: the VIX gauge of implied S&P 500 equity volatility – Wall Street’s so-called ‘fear index’ – registered its lowest close on Thursday since before the pandemic.
Here are key developments that could provide more direction to markets on Friday:
– China ‘data dump’ (August)
– Indonesia trade (August)
– New Zealand manufacturing PMI (August)
By Jamie McGeever; Editing by Josie Kao
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
LONDON, Sept 13 (Reuters Breakingviews) – Where is Wen Jiabao when you need him? China’s former premier is remembered for his decision to unleash a huge state spending plan after the 2008 financial crisis. Today’s leaders wish they could deploy similar fiscal firepower to kickstart their sputtering economy. The options before President Xi Jinping aren’t great. Yet letting some heavily indebted local governments’ investment arms fail would be better than keeping them on pricey life support or counting on an elusive rebound in consumption.
Wen exited the political stage a decade ago but his legacy lives on, for better and, mostly, for worse. His plan to throw 4 trillion yuan ($555 billion), or about 13% of China’s GDP in 2008, at everything from railroads to airports contributed to a debt overhang that’s still haunting Beijing today. In the 15 years since, China’s debt-to-GDP ratio has doubled to a whopping 280%, with the bulk of liabilities held by local government financial vehicles (LGFVs).
Most of these 3,000-plus entities were created by local governments during the 2008 crisis to skirt a central government ban on direct state borrowing. They were then contracted by regional governments to build public infrastructure, from uneconomical leisure parks and roads to slightly more cost-effective highways, subway stations and high-speed bullet trains. Many also developed land for regional governments before it was sold on to residential developers. Today those vehicles are a ticking time bomb that hampers China’s ability to spend its way out of the current economic doldrums. Economists are busy downgrading the country’s full-year growth to below the official goal of around 5%, which was already seen as modest, because an initial recovery following December’s pandemic reopening quickly faded. China is flirting with deflation as the property sector – which accounts for a quarter of GDP – has sunk and pandemic-scarred consumers and businesses hesitate to spend.
Xi’s dilemmas are compounded by his belief that the traditional stimulus playbook of boosting real estate has run its course. He has frowned at house prices that made Shanghai less affordable than New York and made an example of over-leveraged developers that disrupted the market, such as China Evergrande (3333.HK), which is struggling to restructure some $300 billion in liabilities. He has eased home purchase curbs recently to stabilise property sales, but they are still on course to decline around 10% this year, per Gavekal Dragonomics.
That leaves much of the heavy lifting to fiscal spending. Yet LGFVs’ debt stands in the way. These vehicles had already accumulated 80 trillion yuan of liabilities at the end of 2022, according to analysts at Guosheng Securities. Of that, 54 trillion yuan was interest-bearing, mostly owed to Chinese banks.
The bulk of these debts are separated from local governments’ balance sheets, but Beijing’s decade-long efforts to sever the implicit guarantee between local governments and their LGFVs have been largely unsuccessful. A third of LGFVs didn’t generate positive cash flow last year, according to Guosheng. And 60% of them, holding about 32 trillion yuan of outstanding debt, would struggle to pay interest with their own EBITDA, Citi analysts estimated. Yet local officials remain reluctant to let them default on public markets, for fear that such a shock would shut their regions’ funding access and even trigger a run on government bonds.
Beijing wants to buy time. Its latest move includes a mooted plan to allow local governments to raise 1 trillion yuan in total through bond sales to repay LGFV debt. The Ministry of Finance may also ask banks to extend loans and slash the interest. Zunyi Road and Bridge Construction, a LGFV in China’s Southwestern Guizhou province, set a precedent earlier this year, as its creditor banks agreed to roll over its loans for 20 years and halved interest on them. Xi could also help by letting local governments shuffle their debt into the state’s balance sheet since the central government has a debt-to-GDP ratio of just 20%.
The problem with these measures is that they wouldn’t reduce LGFVs’ pile of debt. A harsher medicine is needed. The shock therapy option for Beijing is to force a fire sale to raise much-needed cash. LGFVs have 133 trillion yuan in total assets, around 60% of which are in land and physical assets such as industrial parks, transport infrastructure and investment properties, according to Guosheng.
Local officials have pushed back at Beijing’s requests to sell, arguing most of these assets are illiquid, according to the Financial Times. But even if the portfolio of land and fixed assets was put up for sale at a massive 80% discount to entice vulture and bad debt investors, that would raise around 16 trillion yuan, enabling the LGFVs to pay back all their outstanding bonds. At a more optimistic 30% discount, the proceeds would jump to 55 trillion yuan, which would cover all outstanding interest-bearing debt.
Even with asset sales, it’s inevitable that some LGFVs, especially in poorer regions, will have to fail. Beijing fears that would break the banks. S&P analysts calculate that about 20 trillion yuan of LGFVs’ loans may be at risk of restructuring. Letting these loans roll over with interest slashed – as in Zunyi’s case – would result in a 5 trillion yuan hit to bank capital, and reduce banks’ average capital adequacy ratio by 2.6 percentage points to 12.6%; that’s still within regulatory requirements.
The stakes are high. Despite Xi’s distaste for propping up the economy through real estate, the danger is that a fire sale of LGFVs’ assets could spark a widespread fall in the value of collateral for bank loans and cause a deeper crisis of confidence. That, in turn, might deal a considerable blow to lenders’ balance sheets and destabilise the financial system.
That said, the banking sector is sitting on 335 trillion yuan of total assets, and bad loans, impairments and provisions will only be an issue once lenders come clean on them. So far, they are not. As of June 2023, Chinese commercial banks claimed that non-performing loans were just 1.6% of all loans. Investors have already priced in more damage and pushed the average valuation of those listed to less than half of book value.
The makeup of China’s growth makes drastic action on LGFVs even more imperative. Unlike in the United States and other Western countries, China’s growth is still driven by investment rather than consumption. Investment as a share of GDP is a lofty 40%, according to Oxford Economics, double that of the United States.
Chinese households have ample savings, having accumulated 17.8 trillion yuan of bank deposits last year alone. But darkening job prospects, a diminishing wealth effect from real estate, and scars from years of pandemic lockdowns have made them extremely reluctant to spend them.
If Xi won’t boost property wholeheartedly and is not able to count on consumers, his efforts to revive China’s growth have to focus on smashing the great wall of local debt.
Follow @ywchen1 on X
CONTEXT NEWS
Global rating agency Moody’s on Sept. 1 revised down its 2024 GDP forecast for China to 4% from 4.5%. It maintained that China’s economy will grow at the rate of 5%, the official government target, in 2023.
China’s monthly economic update for August, including that on industrial output, fixed asset investment, property investment, retail sales and others, will be released on Sept. 15.
Editing by Peter Thal Larsen, Sharon Lam and Aditya Sriwatsav
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
An Airbus A319 can be seen flying 500 feet above the ground while on final approach to land at LaGuardia Airport in New York City, New York, U.S., January 6, 2022. REUTERS/Bryan Woolston Acquire Licensing Rights
BRUSSELS, Sept 4 (Reuters Breakingviews) – Short flights within Europe are frequent flyers on wish lists of things to ban. In the name of cutting carbon dioxide emissions, countries from Germany to Spain are proposing to prevent brief air trips, and lobbyists like Greenpeace say governments should require travellers to choose trains or other ground transport for shorter journeys. But not all short flights are alike, and banning commercial hops makes less sense than targeting private jets.
In 2022 aviation emitted 800 million metric tons of CO2, around 10% of the world’s 8 billion tons of CO2 emitted annually by various means of transport, according to the International Energy Agency. In the same year European Union emissions were around 2.5 billion tons and in the recent past flying has contributed about 4%. But most of that is long-haul flights. A 2022 study of 31 European countries found that flights shorter than 500 km account for 28% of departures, but under 6% of fuel burnt.
Commercial jets do pollute more than ground transit, but they also have advantages that can’t be easily matched. To avoid a disproportionate impact on disabled passengers and others en route to more distant destinations, train services need to catch up first. Denying a short flight to connecting passengers could just send them to their cars, according to KLM CEO Marjan Rintel.
Limiting private jet travel would make a bigger difference, with fewer broad-based disruptions. Private jets have a far bigger impact per passenger on the environment than their flying-bus counterparts: as much as 45 times the amount of emissions per passenger, according to the Institute for Policy Studies. Greenpeace data shows that private jet flights in Europe put out 3.4 million tons of CO2 in 2022, twice 2021 levels, and mostly on flights with a range of less than 750 km.
Short-haul bans are especially beside the point when they look more like industrial policy than climate action. In France, where domestic connections are already prohibited for journeys of under two and a half hours, only three routes were actually banned, with projected savings of just 55,000 tons of carbon dioxide output per year. Shuttering unprofitable routes and prohibiting new competition on those legs acted more like a leg-up for Air France’s business plan, according to Davy transport analyst Stephen Furlong.
In any case, there’s a positive non-climate economic case for short-haul flights. They have allowed upstart carriers like Norwegian Air to challenge legacy airlines and rebuild after the pandemic. Connecting flights also make it possible for Brussels Airlines to serve as a hub for passengers in and out of Africa, a lifeline for countries whose livelihoods depend on travel routes.
There’s a case for phasing out shorter flights over time, and for surcharges like Belgium’s 10 euro tax on flights of less than 500 km. But banning brief mass-transit trips now is a hop too far.
Follow @rebeccawire on X
CONTEXT NEWS
Countries such as France, Spain, Belgium and Germany have enacted or are considering measures to reduce or ban short flights. The European Union’s long-term mobility plan calls for discouraging plane travel where lower-impact alternatives exist.
Direct emissions from aviation accounted for 3.8% of the EU’s total carbon dioxide emissions in 2017, according to the European Commission. Aviation is responsible for 14% of transportation-sector emissions.
Greenpeace research found that the number of European private jet flights jumped from 118,756 in 2020 to 572,806 in 2022, with carbon dioxide emissions going from about 355,000 metric tons to 3.4 million tons over the same period. More than half of 2022 private jet travel was for distances of less than 750 km.
Editing by George Hay and Oliver Taslic
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
A sign is seen outside the 11 Wall St. entrance of the New York Stock Exchange (NYSE) in New York, U.S., March 1, 2021. REUTERS/Brendan McDermid Acquire Licensing Rights
A look at the day ahead in U.S. and global markets from Mike Dolan
World markets stayed remarkably buoyant even as the chances of one more U.S. interest rate hike have moved firmly onto the radar, with China’s bourses extending Monday’s rally and the state of U.S. employment now top of mind.
For the first time since before the regional banking crisis in March, U.S. futures now see more than a 50% chance of yet another Federal Reserve rate rise to 5.5-5.75% – where the median of Fed policymaker forecasts from their June meeting still lies. Early Tuesday, futures priced almost a two-thirds chance of that additional quarter-point move in November.
After almost two months of stability in assuming peak rates would be where they are now, the chances of another tightening have been creeping higher again over the past 10 days and appear to be cementing following Fed Chair Jerome Powell’s relatively hawkish speech at Jackson Hole on Friday.
And yet – perhaps with the uncertainty dissipating, the economy still robust and bond markets better priced – world markets appear to be taking the tighter odds in their stride.
Wall St’s S&P500 (.SPX) clocked only its second-consecutive gain of the month so far on Monday, while MSCI’s all-country index (.MIWD00000PUS) is on course for its sixth gain in seven trading days.
More impressively in the circumstances, restive bond markets calmed down and bond yields continued to dial back from their highest in over a decade last week. Two-year Treasury yields fell back below 5%, with 10-year yields eyeing their lowest in almost two weeks at 4.17% and equity risk gauges such as the VIX (.VIX) of implied volatility touching two-week lows too.
The dollar (.DXY) was firm, but stayed off last week’s near three-month high.
With the Atlanta Fed’s real-time estimate of quarterly real GDP growth running as high as 5.9% – about 9% in nominal terms – the Fed will likely need to see some considerable softening of incoming economic data to prevent it moving again.
This week the onus falls largely on the labor markets, with the national payrolls report due Friday but with July readings on job openings due later on Tuesday – alongside August consumer confidence numbers and June house price data.
Friday’s August payrolls report is expected to show a slowdown in monthly hiring to about 150,000 but an unchanged unemployment rate of just 3.5%.
Overseas, China’s embattled stock markets managed to advance for a second day – lifted by a series of support measures and hopes of some detente in the economic and financial standoff between Washington and Beijing amid a three-day visit to China by U.S. Commerce Secretary Gina Raimondo.
Although it gave back the bulk of Monday’s 5% early surge by the close of business, China’s CSI300 (.CSI300) push 1% higher again on Tuesday after weekend measures to slash stamp duty on stock purchases and limit new stock listings. With tech and healthcare sectors leading the way, foreigners were net buyers again on Tuesday.
Just how cash-strapped embattled Country Garden Holdings (2007.HK) is will be the focus when China’s largest private property developer is due to report its first-half results on Wednesday.
Asia bourses more widely and European indices were higher, while Wall St futures were flat ahead of the open.
Tropical Storm Idalia closed in on Florida’s Gulf Coast on Tuesday after skirting past Cuba, headed for a U.S. landfall as a powerful Category 3 storm, prompting authorities to order evacuations of vulnerable shoreline areas.
Events to watch for on Tuesday:
* U.S. August consumer confidence, July JOLTS job openings data, June house prices, Dallas Fed Aug service sector survey
* Federal Reserve Vice Chair for Supervision Michael Barr speaks
* U.S. Treasury auctions 7-year notes
* U.S. corporate earnings: Best Buy, HP, JM Smucker, Catalent, Pinduoduo
By Mike Dolan, editing by Susan Fenton <a href=”mailto:mike.dolan@thomsonreuters.com” target=”_blank”>mike.dolan@thomsonreuters.com</a>. Twitter: @reutersMikeD
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
A look at the day ahead in U.S. and global markets from Mike Dolan, Editor-at-Large, financial industry and financial markets
As investors switch attention to the health of the U.S. consumer, a funk in China’s economy, markets and currency appeared to deepen and emerging market ructions spread.
After another disappointing reading for industrial production and retail sales this month, China’s central bank scrambled to cut 1-year lending rates by 15 basis points to 2.50% – the second cut in policy rates in three months – and sent the yuan sliding to 2023 lows against the dollar.
China stocks fell again (.CSI300) and 10-year government bond yields fell to three-year lows.
Perhaps more worrying for those fretting about the broader stability of China’s economy, the corrosive real estate bust saw property investment fall for the 17th straight month amid creeping deflation fears and the government suspended publication of spiralling youth unemployment rates.
The contrast with the U.S. picture is stark right now.
The ongoing reassessment of the U.S. economy now has as many as three in four fund managers around the world assuming there will either be a soft landing or even no landing for the economy over the next 12 months, according to Bank of America’s latest monthly investor poll.
As cash holdings have been reduced in August, asset managers have reduced their underweight equity positions and, rather surprisingly given the hit to bond prices this month, upped global bond allocations to a net 5% overweight. The latter is now some 2.2 standard deviations above long-term averages.
And yet, in part due to a rethink of the long-term sustainable interest rate over the horizon, long-term U.S. Treasury yields continue to climb – even in tandem with a tech-led rebound in stock prices (.SPX) on Monday. Ten-year Treasury yields hit their highest for the year at 4.23%.
With inflation expectations subdued , 10-year inflation-adjusted Treasury yields hit their highest in 14 years at 1.87% – with eyes now trained on any long-term Fed guidance from its annual Jackson Hole conference later this month.
A combination of rising real U.S. yields and robust readings for the U.S. economy – which should be reinforced by the July retail sales report on Tuesday – and increasingly turbulence in China and many emerging economies is supercharging the dollar in many quarters.
Despite news of forecast-beating accelerating growth in Japan in the second quarter, the yen skidded to its lowest in 10 months on Tuesday alongside the yuan slide.
Elsewhere in the so-called BRICS emerging economies – the grouping of Brazil, Russia, India, China and South Africa – the dollar was also in command.
Isolated economically and financially from the West for over a year after its invasion of Ukraine, Russia raced to shore up its plummeting rouble on Tuesday with an emergency interest rate hike of 3.5 percentage points to 12% – with only modest success so far.
Jarred by the surprise emergence of a far-right presidential candidate in Argentina’s primary elections – who has an agenda to dollarize the hyperinflation-dogged economy – the peso was devalued again on Monday. Argentina’s incumbent government wants to join the BRICS grouping too.
And even India’s rupee was on the slide to a 10-month low.
Back stateside, the retail sales report will be accompanied by an earnings update from Home Depot – the first of the big retailers to report this week. Housing market sentiment indicators are also out.
S&P500 futures were off a touch before the open.
Events to watch for on Tuesday:
* U.S. corporate earnings: Home Depot, Agilent Technologies, Cardinal Health, Jack Henry
* U.S. July retail sales, July import/export prices, NAHB August housing index, NY Fed August manufacturing, June TIC data on Treasury holdings, June business inventories; German August ZEW investor survey; Canada July inflation, home sales and June manufacturing
* Minneapolis Federal Reserve President Neel Kashkari speaks
By Mike Dolan, editing by Susan Fenton; <a href=”mailto:mike.dolan@thomsonreuters.com” target=”_blank”>mike.dolan@thomsonreuters.com</a>. Twitter: @reutersMikeD
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
A man wearing a face mask is seen inside the Shanghai Stock Exchange building, as the country is hit by a novel coronavirus outbreak, at the Pudong financial district in Shanghai, China February 28, 2020. REUTERS/Aly Song
Aug 14 (Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.
Asian markets will get key economic signals this week that could determine monetary policy in the continent’s two biggest economies – retail sales and industrial production and house prices from China, and Japanese GDP and inflation.
Markets also will watch for interest rate decisions from New Zealand and the Philippines, inflation figures from India and major corporate earnings reports from China, including Tencent, Lenovo CNOOC and JD.com.
The biggest fireworks on Monday’s economic data calendar could come from India. Annual consumer price inflation is expected to show a sharp rebound in July to 6.40% from 4.8%, and a slowdown in wholesale price deflation to -2.4% from -4.1%.
The wider market mood will likely be one of caution after last week – the Nasdaq posted its first back-to-back weekly decline of the year, and the MSCI Asia ex-Japan equity index lost 2% on its way to a one-month low.
Caution may morph into outright gloom on Monday, however, after China’s biggest privately-owned developer Country Garden said it will suspend trading of its 11 onshore bonds.
The firm’s shares are at a record low, it didn’t pay two dollar bond coupons due on Aug. 6 totalling $22.5 million, it has liabilities of around $200 billion and last week warned it could report a loss of up to $7.6 billion for the first half.
Investors are wondering how long Beijing will resist pressure to inject any kind of stimulus into an economy that is now officially in deflation with the weakest credit impulse since 2009.
Another batch of sub-par data this week could force authorities’ hand.
Investors and the Bank of Japan, meanwhile, will be paying close attention to Japanese inflation data later in the week. Economists polled by Reuters expect the annual rate of core CPI inflation to slow to 3.1% in July from 3.3% in June.
A lower print could tempt the market to price in a more gradual change to the BOJ’s ‘yield curve control’ policy, stickier inflation could have the opposite effect.
Either way, the yen will be under scrutiny – it slumped to a 15-year low against the euro lat week and is flirting with levels against the dollar that last year prompted massive yen-buying intervention from Japanese authorities.
Asian stocks have badly underperformed this year, largely due to worries over China which is battling weak growth, deflation, and capital outflows. Chinese blue chip stocks are flat this year and Hong Kong’s Hang Seng index is down 4%.
The MSCI Asia ex-Japan equity index index has now fallen two weeks in a row for the first time since April, and is up only twice in the last eight weeks.
Here are key developments that could provide more direction to markets on Monday:
– India consumer inflation (July)
– India wholesale inflation (July)
– Germany wholesale inflation (July)
By Jamie McGeever; editing by Diane Craft
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
HONG KONG, June 29 (Reuters Breakingviews) – There’s plenty to like about Swire Pacific’s (0019.HK) Coca-Cola sale. The Hong Kong-based property-to-aviation conglomerate on Wednesday evening said it is handing its U.S. drinks subsidiary to its parent for $3.9 billion, allowing it to pay a tasty dividend, cut net debt and still run the division for a fee. It’s a sweet deal for investors, as long as property, airline Cathay Pacific (0293.HK) and other holdings recover soon.
Around $1.5 billion from the expected proceeds will be distributed back to shareholders, while the rest will go towards strengthening Swire’s balance sheet. Both are welcome moves. Net debt at Swire is expected to fall by a third, to HK$38 billion ($4.9 billion) after the sale. The expanded cash pile will be able to cover 7.3 times the company’s borrowing costs, compared to 6 times at the end of last year – a useful buffer amid rising interest rates. Moreover, a special dividend equal to more than what the company has paid out over the past three years combined looks generous for investors who have seen Swire’s Hong Kong shares return a negative 13% since the start of 2023.
Operationally, not much changes. As part of the transaction the Hong Kong-based group has a 13-year contract to keep running Swire Coca-Cola USA, which will allow the conglomerate to maintain its lucrative manufacturing, marketing and distribution deals with the global drinks behemoth. It’s a clever way to dispose an asset without having to part with the business.
For such a cosy deal – the buyer is Swire’s 60%-controlling shareholder John Swire & Sons – the price looks satisfying too. At the implied 12.4 times enterprise value to adjusted 2022 EBITDA, the unit is valued just shy of $30 billion Coca-Cola Europacific Partners (CCEPC.L), which boasts superior margins and growth.
Little wonder Swire’s Hong Kong shares rallied as much as 8% on Thursday morning. Even so, the stock still trades at a dismal 50% discount to its net asset value, per Citi estimates. A property slump in Hong Kong and China, combined with a tough recovery for Cathay Pacific to bounce back to pre-pandemic levels, has weighed on the conglomerate, which owns 45% of the city’s troubled flagship carrier. The Coke sale is refreshing for investors, but only until the rest of Swire Pacific regains its fizz.
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CONTEXT NEWS
Hong Kong conglomerate Swire Pacific on June 28 announced it will sell its Swire Coca-Cola USA subsidiary for HK$30.4 billion ($3.9 billion) in cash to its 60%-controlling shareholder, John Swire & Sons. The company expects a gain of HK$$22.8 billion.
Upon completion of the sale, Swire Pacific will distribute HK$11.7 billion in special dividends to its shareholders. The company also plans to enter into a 13-year agreement to provide management services to Swire Coca-Cola USA and receive an annual fee of at least HK$117 million.
The deal is conditional upon the approval of independent shareholders.
Swire Pacific’s Hong Kong shares were up 5.5% to HK$61.00 on during early morning trading on June 29.
Editing by Antony Currie and Thomas Shum
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
