[1/2]The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, September 26, 2023. REUTERS/Staff/File Photo Acquire Licensing Rights
LONDON/HONG KONG, Sept 27 (Reuters) – Global stocks inched higher on Wednesday as investors found a footing after a sharp sell-off the previous day, while U.S. Treasury yields dipped after hitting their highest level since 2007.
Stocks and bonds have dropped in recent weeks as investors come to terms with the idea that central banks will hold interest rates “higher for longer” than previously expected, as officials try to squeeze inflation out of economies.
The Europe-wide STOXX 600 index (.STOXX) was up 0.2% on Wednesday, after falling 0.6% in the previous session in its fourth straight daily drop.
MSCI’s index of global stocks (.MIWD00000PUS) was little changed after falling 1.2% the previous day. The index has fallen 4.5% since the start of September.
Germany’s Dax index (.GDAXI) was up 0.05% while Britain’s FTSE 100 (.FTSE) was flat. In Asia overnight, Japan’s Nikkei 225 index (.N225) rose 0.18%.
At the root of the recent equity sell-off, said Jan von Gerich, chief analyst at Nordea, has been a sharp rise in bond yields as traders have cut their bets that central banks will lower interest rates any time soon.
“The latest catalyst has been the increase in bond yields, so if that stabilises then maybe the equity market stabilises as well,” he said.
“The big picture outlook is that we’re probably close to the peak (in bond yields) but the near-term momentum is still upwards.”
On Wednesday, the yield on the 10-year U.S. Treasury note was down 5 basis points to 4.507%, after touching its highest level since October 2007 on Tuesday at 4.566%. A bond’s yield rises as its price falls, and vice versa.
Also on investors’ minds is a looming U.S. government shutdown; further signs of an economic slump in China; and a recent rise in oil prices.
U.S. equity futures picked up as bond yields fell, with contracts for the benchmark S&P 500 stock index 0.43% higher. Dow Jones futures were 0.35% higher while Nasdaq futures were up 0.46%.
The Dow posted its biggest one-day percentage drop since March on Tuesday, while all three major averages ended at their lowest closing levels in well over three months.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was 0.12% higher. The index is down 3.7% so far this month.
Chinese corporate health was a focal point. Profits at China’s industrial firms fell 11.7% in the first eight months of the year, albeit a smaller decline than the 15.5% drop for the first seven months.
“The stabilising industrial profits are simply not significant enough to override concerns about risks, especially in real estate,” said Gary Ng, Asia Pacific senior economist at Natixis.
As stress spreads in the Chinese property sector, Bloomberg reported that the chairman of beleaguered Chinese property group Evergrande has been placed under police surveillance.
The dollar index , which tracks the greenback against a basket of currencies, was roughly flat at 106.2. It climbed to 106.32 earlier in the session, its highest since Nov. 30.
U.S. crude oil was 1.14% higher to $91.42 a barrel. Brent crude rose 0.85% to $94.76 per barrel.
The U.S. Senate on Tuesday took a step forward on a bipartisan bill meant to stop the government from shutting down in just five days, but the House remains hamstrung by divisions between Republican members.
Meanwhile, investors were also on the lookout for government intervention in the Japanese yen after it fell past the 149 per dollar mark on Tuesday for the first time in just under a year.
Reporting by Harry Robertson in London and Julie Zhu in Hong Kong; Editing by Jamie Freed, Edwina Gibbs and Anil D’Silva
Our Standards: The Thomson Reuters Trust Principles.
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
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.
WASHINGTON, Sept 21 (Reuters) – The number of Americans filing new claims for unemployment benefits dropped to an eight-month low last week, pointing to persistent labor market tightness even as job growth is cooling.
The report from the Labor Department on Thursday also showed unemployment rolls in early September were the smallest since January. It was published a day after the Federal Reserve held interest rates steady but stiffened its hawkish stance, with a further rate increase projected by the end of the year and monetary policy to be kept significantly tighter through 2024 than previously expected.
“This economy is just not showing any sign of slowing down which hints that inflation will not be coming back down to target,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “The Fed was wise to keep another interest rate hike in their back pockets just in case, and it now looks like another rate hike is warranted.”
Initial claims for state unemployment benefits dropped 20,000 to a seasonally adjusted 201,000 for the week ended Sept. 16, the lowest level since January. Economists polled by Reuters had forecast 225,000 claims for the latest week. Claims are in the lower end of their 194,000-265,000 range for this year.
Claims could, however, increase in the coming weeks as a partial strike by the United Auto Workers (UAW) union forces automobile manufacturers to temporarily lay off workers because of shortages of some materials.
The UAW last week launched a targeted strike against Ford (F.N), GM (GM.N) and Stellantis (STLAM.MI), impacting one assembly plant at each company. It has threatened to broaden the work stoppages, which for now only involve about 12,700 of the affected 146,000 UAW members.
Though striking workers are not eligible for unemployment benefits, the walkout has snarled supply chains.
Ford has furloughed 600 workers who are not on strike, while GM expected to halt operations at its Kansas car plant, affecting 2,000 workers. Chrysler parent Stellantis said it would temporarily lay off 68 employees in Ohio and expects to furlough another 300 workers in Indiana.
Unadjusted claims rose by only 67 to 175,661 last week. There were notable declines in filings in Indiana and California, which mostly offset sizeable increases in South Carolina, New York and Georgia.
Fed Chair Jerome Powell said on Wednesday that “the labor market remains tight, but supply and demand conditions continue to come into better balance.”
Employment growth has been slowing and job openings falling. Labor market resilience is propping up the economy even as recession fears linger. The leading indicator, a gauge of future U.S. economic activity, fell 0.4% in August after dropping 0.3% in July, the Conference Board said in a second report on Thursday.
It has dropped for 17 straight months. Since March 2022, the U.S. central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range.
The claims data together with the Fed’s hawkish stance pushed stocks on Wall street lower. The dollar gained versus a basket of currencies. U.S. Treasury prices fell, with the yield on the benchmark 10-year bond rising to a nearly 16-year high.
HOUSING FALTERING
The claims data covered the period during which the government surveyed business establishments for the nonfarm payrolls component of September’s employment report.
The strike is unlikely to have an impact on payrolls as it started towards the end of the survey week. Workers most likely received pay for that week. Claims fell between the August and September survey period.
Data next week on the number of people receiving benefits after an initial week of aid, a proxy for hiring, will offer more clues on the state of the labor market in September.
The so-called continuing claims declined 21,000 to 1.662 million during the week ending Sept. 9, also the lowest level since January, the claims report showed. That suggests laid-off workers are quickly finding employment.
While the labor market remains unbowed, the housing market is faltering after showing signs of stabilizing earlier this year as mortgage rates resume their upward trend in tandem with the 10-year Treasury note, which has spiked on worries soaring oil prices could hamper the Fed’s fight against inflation.
Existing home sales slipped 0.7% last month to a seasonally adjusted annual rate of 4.04 million units, the National Association of Realtors said in a third report.
Existing home sales are counted at the closing of a contract. Last month’s sales likely reflected contracts signed in July, before the recent run-up in mortgage rates, which lifted the rate on the popular 30-year fixed mortgage above 7%.
Home sales last month were restrained by persistently tight supply, with inventory falling 14.1% from a year earlier to 1.1 million, the lowest on record for any August.
As a result, the median house price accelerated 3.9% from a year earlier to $407,100, the fourth-highest reading. It hit a record $413,000 in June 2022.
“The prospects for improved sales in the coming months look bleak,” said Ben Ayers, senior economist at Nationwide in Columbus, Ohio. “2023 could end in a whimper for the real estate sector as any substantial pull-back in rates is likely far off into 2024.”
News on manufacturing was downbeat. Manufacturing together with housing have borne the brunt of the Fed’s aggressive monetary policy tightening.
A fourth report from the Philadelphia Fed showed factory activity in the mid-Atlantic region slumped in September. Firms in the region that covers eastern Pennsylvania, southern New Jersey and Delaware reported decreases in new orders and shipments. They continued to report a decline in employment.
The Philadelphia Fed’s business conditions index fell to -13.5 this month from 12.0 in August. It was the index’s 14th negative reading in the past 16 months.
“Softer demand for goods and higher borrowing costs are hurdles for activity,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York. “But re-shoring of supply chains, infrastructure projects and a stabilization in demand could provide support to manufacturing output over time.”
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Paul Simao and Andrea Ricci
Our Standards: The Thomson Reuters Trust Principles.
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
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.
TOKYO, Sept 19 (Reuters) – Asian shares sank on Tuesday as worries about the Chinese property sector weighed on markets from Hong Kong to Australia, while Japanese investors sold chip stocks on their return from a holiday-extended weekend.
Benchmark U.S. Treasury yields hovered near 16-year peaks and the dollar held close to six-month highs as traders braced for a Federal Reserve rate decision on Wednesday, in a week that also sees policy decisions from the Bank of Japan and Bank of England, among others.
Crude oil continued its rally amid tightening supply, stoking worries about stagflation.
MSCI’s broadest index of Asia-Pacific shares (.MIAP00000PUS) slipped 0.3%.
Japan’s Nikkei (.N225) tumbled 1.1% under the weight of big losses for chip-related stocks including Tokyo Electron (8035.T) and Advantest (6857.T).
Japanese markets were closed Monday, when Asian tech stocks sold off following a Reuters report that TSMC (2330.TW) had asked its major vendors to delay deliveries.
That stock sank 0.4% on Tuesday, flipping from an earlier gain of as much as 0.6%. It tumbled 3.2% on Monday.
John Pearce, CIO at Unisuper, called the TSMC news “surprising.”
“The one thing you were almost certain of was that demand for semiconductors was only one way,” he said.
Hong Kong’s Hang Seng (.HSI) declined 0.1%, with a subindex of tech stocks (.HSTECH) sliding 0.6%. An index of mainland blue chips (.CSI300) fell 0.3%.
Chinese property stocks were volatile, with a subindex of Hang Seng developers (.HSMPI) dropping as much as 1.2% at one point, before flipping to positive territory around lunchtime, although it was last off 0.4%.
Australia’s stock benchmark (.AXJO) dropped 0.4%, sagging under the weight of mining stocks (.AXMM) amid pessimism over Chinese demand.
Providing some rays of hope, though, Country Garden (2007.HK) won approval from creditors to extend repayment on another onshore bond, the last in the batch of eight bonds it has been seeking extensions for, sources said.
Peer Sunac China Holdings (1918.HK) got creditor approval for its $9 billion offshore debt restructuring plan, the first green light of a debt overhaul by a major Chinese developer.
Weakness in Asian equities weighed on U.S. stock futures , which pointed 0.1% lower. Pan-European Stoxx 50 futures were flat.
Currency markets were subdued, with the U.S. dollar index – which measures the currency against six major peers – rising 0.09% to 105.17, edging back toward last week’s six-month peak of 105.43.
The dollar added 0.1% to 147.75 yen , bringing it closer to last week’s 10-month top of 147.95.
The euro eased 0.1% to $1.0679.
Ten-year yields were little changed at just above 4.31%, holding close to the 4.366% level reached on Aug. 22, which was the highest since 2007.
“You can’t blame people for keeping to the sidelines for now,” with the Fed headlining a parade of central bank meetings this week, Kyle Rodda, senior financial market analyst at Capital.com, wrote in a note.
“Given the variability in outcomes, there will inevitably be crosscurrents in the markets,” Rodda said. “Price action could be choppy, with risk needing to be managed more carefully.”
Traders are all but certain the Fed will leave rates steady again at the conclusion of a two-day meeting that begins later Tuesday, but are split on the chances on another quarter-point increase by year-end.
Fed officials will also release their latest predictions on the economy and where rates are likely to be over the coming quarters.
Meanwhile, oil prices rose in early trade on Tuesday for the fourth consecutive session, as weak shale output in the U.S. spurred further concerns about a supply deficit stemming from extended production cuts by Saudi Arabia and Russia.
U.S. West Texas Intermediate crude futures rose 99 cents, or 1.1%, to $92.47, while global oil benchmark Brent crude futures rose 58 cents, or 0.61%, to $95.01 a barrel.
“Given how supply-constrained energy markets are likely to become, especially amidst harsher weather approaching the end of the year, higher oil prices are both an upside risk to inflation and a downside risk to growth,” Capital.com’s Rodda said.
“Markets that don’t export energy and suffer from energy insecurity could underperform.”
Reporting by Kevin Buckland; Additional reporting by Lewis Jackson; Editing by Stephen Coates
Our Standards: The Thomson Reuters Trust Principles.
A woman walks past a screen displaying the Hang Seng Index at Central district, in Hong Kong, China March 21, 2023. REUTERS/Tyrone Siu/File Photo Acquire Licensing Rights
SYDNEY, Sept 18 (Reuters) – Asian shares fell and the dollar was firm on Monday as investors looked ahead to policy meetings from the Federal Reserve, the Bank of Japan and other central banks this week.
Europe is set for a subdued open, with EUROSTOXX 50 futures off 0.1%. S&P 500 futures advanced 0.2% while Nasdaq futures edged up 0.1%.
Oil prices hit fresh 10-month peaks, further stoking inflationary pressures. U.S. West Texas Intermediate crude futures gained 0.8% to $91.52, their highest level since November, while Brent crude futures rose 0.7% to $94.55 per barrel.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 0.7%. Japan’s Nikkei (.N225) is closed for a public holiday.
Technology shares in the region retreated, with Taiwan’s TSMC (2330.TW), the world’s top contract chipmaker, falling 3% after Reuters reported that it has told its major suppliers to delay the delivery of high-end chipmaking equipment
In China, better-than-expected factory output and retail sales in the world’s second largest economy have aided Chinese bluechips (.CSI300) which were up 0.4%.
But property sector woes dragged Hong Kong’s Hang Seng (.HSI) 1% lower.
Zhongrong International Trust, which has exposure to Chinese property developers, said over the weekend it was unable to make payments on some trust products on time.
“Despite the encouraging sign of stabilization, the property market continues to be the missing puzzle piece in the economic picture,” said Tommy Xie, head of Greater China Research at OCBC Bank.
“The on-the-ground feedback indicates a rise in property viewing activities; however, most prospective buyers are not in a hurry to finalize deals due to the increasing supply of apartments post relaxation.”
Shares in embattled China Evergrande Group (3333.HK) fell as much as 25% after police in southern China detained some staff at its wealth management unit, though they later pared losses to be down 1.6%.
This week, global central banks will take centre stage, with five of those overseeing the 10 most heavily traded currencies holding rate-setting meetings. A swathe of emerging market central banks will also hold meetings.
Markets are fully priced for a second straight pause from the Fed on Wednesday, with its targeted range expected to be unchanged at 5.25% to 5.5%, so the focus will be on the updated economic and rates projections. They see about 80 basis points of cuts next year.
“In theory, the FOMC meeting should be a low-volatility affair, but it is a risk that needs to be managed,” said Chris Weston, head of research at Pepperstone.
Weston added that if the Fed revises up its rate projections for 2024, that would see rate cuts being priced out, resulting in renewed interest in the U.S. dollar and downward pressure on global shares.
On Thursday, Bank of England is tipped to hike for the 15th time and take benchmark borrowing costs to 5.5%.
Bank of Japan is the key risk event on Friday. Markets are looking for any signs that the BOJ could be moving away from its ultra-loose policy faster than previously thought, after recent comments by Governor Kazuo Ueda sent yields much higher.
Last Friday, Wall Street ended sharply lower as U.S. industrial labour action weighed on auto shares. Rising Treasury yields also pressured Amazon (AMZN.O) and other megacap growth companies.
Cash Treasuries were not traded in Asia with Tokyo shut. Treasury yields edged higher on Friday, with the two-year above the 5% threshold.
In the currency markets, the U.S. dollar was still standing strong near its six-month top at 105.25 against a basket of major currencies.
The euro gained 0.1% to $1.0667, after slumping to a 3-1/2 month low of $1.0632 last week as the European Central Bank signalled its rate hikes could be over.
The price of gold was 0.2% higher at $1,928.13 per ounce.
Reporting by Stella Qiu; Editing by Shri Navaratnam and Edwina Gibbs
Our Standards: The Thomson Reuters Trust Principles.
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
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.
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
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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.
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.
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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
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.
SYDNEY, Sept 11 (Reuters) – Asia stock markets started to turn positive later on Monday even though investors in China sold off shares in property developers, remaining unconvinced by authorities’ efforts to revive activity in the mainland real estate market.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) reversed earlier losses and was up 0.3%, after U.S. stocks ended the previous session with mild gains.
Australian shares (.AXJO) gained 0.36% and Japan’s Nikkei stock index (.N225) slid 0.49%.
The yen appreciated sharply against the dollar after Bank of Japan governor Kazuo Ueda stoked hopes the central bank could soon see a shift away from negative rates.
The dollar on Monday dropped 1.12% to 146.16 yen and it remains some way off its high this year of 147.87 reached earlier this month.
In Hong Kong, the Hang Seng Index (.HSI) halved its loss from earlier in the day to be off 0.66% by the afternoon session, as investors remained wary of China’s troubled property sector.
A more positive tone was seen across futures markets which pointed towards a better start for most major European indexes.
In early trades, Euro Stoxx 50 futures were up 0.26%, German DAX futures were up 0.17% and FTSE futures were up 0.29%
U.S. stock futures, the S&P 500 e-minis , were up 0.24% at 4,472.3.
Hong Kong’s Hang Seng Property Index (.HSNP), a gauge of Hong Kong’s top developers, was still down 3.24% while the mainland property index (.HSMPI) was off 1.9%. It was earlier more than 3% in the red.
“We need the property market to stabilize first in order for any meaningful kind of economic rebound to happen in China,” said David Chao, Invesco’s Asia Pacific market strategist.
In recent weeks China’s authorities – including the housing ministry, central bank and financial regulator – have rolled out a series of measures, such as easing borrowing rules, to support the debt-riddled property sector, and there are some expectations for more steps to revive demand in major cities like Beijing, Shanghai and Shenzhen.
Hong Kong stocks were also dampened as e-commerce giant Alibaba Group (9988.HK) dropped 2.5% on the surprise departure of outgoing CEO Daniel Zhang from its cloud unit.
China’s bluechip CSI300 Index (.CSI300) rallied during the session and was up 1.23% as investors expected more economic stimulus.
“In the near term investors are cautious towards China but we are quite encouraged that the policies have turned from more piecemeal to more targeted in the past few weeks, especially with property,” said Marcella Chow, JPMorgan Asset Management market strategist said.
In the United States, the Consumer Price Index (CPI) for August, due out on Wednesday, is expected to rise 0.6% month-on-month for August, which would take the year on year rate to 3.6%, according to a Wells Fargo research note.
Investors are pricing in a 93% probability that the Fed will keep rates at current levels after its next meeting ends on Sept. 20 but only a 53.5% change for another pause at the November meeting, according to CME group’s FedWatch Tool.
The yield on benchmark 10-year Treasury notes rose to 4.294% compared with its U.S. close of 4.256% on Friday. The two-year yield , which rises with traders’ expectations of higher Fed fund rates, touched 4.9948% compared with a U.S. close of 4.984%.
The European single currency was up 0.3% on the day at $1.0709, having lost 1.09% in a month, while the dollar index , which tracks the greenback against a basket of currencies of other major trading partners, was down 0.23% at 104.61.
In China, there was an easing of deflationary pressures with consumer price index (CPI) rising 0.1% in August from a year earlier. That was slower than the median estimate for a 0.2% increase in a Reuters poll but much stronger than a 0.3% decline in July.
China also had its smallest drop in factory prices in five months. The producer price index fell 3.0% from a year earlier, in line with expectations, after a drop of 4.4% in July.
China’s central bank yanked the yuan off a 16-year low against the dollar on Monday by setting a daily midpoint guidance rate with the strongest bias on record, signaling increasing discomfort with the currency’s recent weakness.
In the spot market, the onshore yuan was changing hands at 7.3245 per dollar at 0210 GMT, after hitting 7.3510 on Friday, which as 6.1% down from the start of the year and a level last seen during the global financial crisis.
U.S. crude dipped 0.19% to $87.34 a barrel. Brent crude shifted into positive territory to be up 0.2% $90.80 per barrel.
Spot gold was trading slightly higher at $1,927.08 per ounce.
Reporting by Scott Murdoch in Sydney; Editing by Edwina Gibbs & Simon Cameron-Moore
Our Standards: The Thomson Reuters Trust Principles.
