Asia gains as Wall Street slide halts, kiwi tumbles

TOKYO (Reuters) - Asian stocks rose on Thursday, encouraged by gains on Wall Street, while the New Zealand dollar tumbled to a five-year low after the central bank cut interest rates for the first time in four years as the economy slows.... more

APAC Financial Markets • #Asia, #BusinessNews, #CentralBank, #InterestRates, #KiwiTumbles, #NewZealand, #StockMarket, #US, #WallStreet #MarketNews

Emerging markets throw a Fed rate hike sulk

Saft:  The sulk could rapidly turn into a tantrum.

With the prospect of a US interest rate rise this year becoming more realistic, emerging markets will throw, if not quite yet a tantrum, then a sulk.

Emerging market stocks suffered their 11th consecutive losing day Monday, the longest such streak since 1990. Reminiscent of, if less intense than, the ‘taper tantrum’ of 2013, when the prospect of slowing Fed bond purchases upset emerging markets.

While uncertainty in the wake of an upset election result in Turkey did not help, Friday’s better-than-expected US employment report and the ongoing dawning that interest rates are on the way up were the underlying cause of the sell-off.

The arc of the fall so far is not too terrible, with the MSCI emerging markets index down a bit less than 10% from its recent peak. If the Fed does next week give indications that a 2015 rate rise is in the offing, perhaps as early as September, emerging markets will face something they like very little: a tightening cycle with global monetary conditions becoming increasingly less welcoming.

That’s especially true for countries such as Brazil, India, Indonesia, South Africa and Turkey which depend on attracting global capital flows to finance themselves.

“Rising US interest rates will tend to put the most pressure on those countries with significant external imbalances and weak institutional frameworks. However, it is the pace of any tightening that will be most critical.

As long as policy accommodation is withdrawn slowly and long-term interest rates increase only gradually, the probability of a systemic crisis should remain low,” economists Jeremy Lawson and Nicolas Jaquier of Edinburgh-based fund manager Standard Life said in a recent update to institutional investors.

Market interest rates have risen pretty quickly in recent weeks, taking the benchmark 10-year U.S. Treasury note yield to 2.38% from 1.85% since mid-April. Yet financial markets may still have a ways to go to catch up to reality when it comes to discounting the pace at which the Fed will be forced, and forced is a reasonable term here, to raise rates.

Emerging market investors are clearly already starting to discount such a possibility, though thus far they are showing some sensitivity to which particular nations would suffer most as money becomes tighter.

Second-worst nightmare

Steven Englander, currency strategist at Citi, argues that the Fed’s “second-worst nightmare,” after a recession while rates are at zero, is being forced to play catch-up if both employment and inflation approach their targets more quickly than investors are now betting.

“The implication would be that they would have to get to neutral policy rates faster than they or the market now expect. That would be disruptive to asset markets, leading to much higher volatility and very likely to lower returns. It would also concern the Fed since it is much harder to calibrate an abrupt move in policy rates than the slow and gentle that they hope to achieve,” Englander wrote in a note to clients.

Should investors move to discount this we would not only see capital flow-dependent emerging markets suffer, but potentially a bit of an indiscriminate sell-off.

Given that all of this is in the air, Turkey chose a particularly poor moment to slide into political uncertainty, even if the weekend’s upset elections eventually bring positive policy developments. Turkey labors under the largest short-term foreign debt, as compared to its foreign currency reserves, of all emerging markets.

Longer term, the election, being a setback for President Tayyip Erdogan, who espouses unconventional ideas about how monetary policy works, may have positive implications for Turkish institutions and its economy. Despite high inflation, Erdogan had been badgering the central bank for a large cut in rates to boost growth. Turkey’s central bank did cut rates after the election, but only on foreign currency deposits and chiefly to stem the fall in the value of the lira.

As is so often the case with emerging markets, the real action will now happen in arenas entirely outside their control.

The Federal Reserve meets June 16-17, and while there is little chance of a hike, Fed Chair Janet Yellen’s press conference and the release of new economic forecasts carry the potential to move emerging market asset prices even more sharply than those in the US.

A bit of a recovery rally in emerging markets is quite possible, especially if the Fed hints at a 2015 rate rise but reassures about its subsequent pace of hikes.

If, however, the US employment data continues strong and inflation shows up, the sulk will rapidly turn into an emerging markets tantrum.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)

APAC Financial Markets • #EmergingMarkets, #InterestRates, #RakeHike, #US #MarketNews

Souring China business climate risks U.S. investment treaty talks

BEIJING (Reuters) - China and the United States will swap initial demands for an investment treaty as early as Monday, sources said, but U.S. investors are already worried that an emerging raft of Chinese regulations could threaten the future of talks.

In exchanging demands, the world"s two largest economies will outline industry sectors that each side deems to be closed to the other side"s investors. Such "negative lists" will define the scope of the treaty and are already months overdue.

China has more restrictions on foreign investment than the United States, and U.S. investors hope that a treaty will give them increased access to China"s many tightly controlled industries, from financial services to healthcare.

But three sources familiar with the treaty talks say U.S. negotiators expect Beijing to come up with an expansive "negative list", noting that it has pursued in recent months new rules that could further restrict foreign access to sensitive sectors.

"After 35 years of reform and opening in China, there are enough data points out there to suggest we are now seeing a reversal," one source said.

Beijing"s commerce ministry could not be reached for comment but it has said foreign investors enjoy ample opportunity in China. Beijing has also complained of restrictions on Chinese investment in U.S. infrastructure and technology, and says its firms are singled out in U.S. national security reviews.

However, China is pursuing legislation, including rules on national security and non-governmental organizations (NGOs), which are seen as aggressive and overreaching by some within the foreign business community.

For example, China"s draft National Security Law and Anti-terrorism Law, which could be adopted this year, call for the use of "secure and controllable" technology developed in China or which uses source code released to Chinese inspectors.

Another pending law on foreign NGOs, which includes myriad business groups, would give police broad supervisory power over their budgets, agendas and personnel decisions.

GROWING PESSIMISM

Those moves, along with fears that Chinese regulators are targeting foreign firms in competition probes, have led to decades-high levels of pessimism among foreign investors.

The American Chamber of Commerce in China wrote to the Chinese government last week to complain about the security law.

"It raises fundamental questions about whether future commitments by China to open its markets to foreign investment will produce the intended results," the chamber said in a letter seen by Reuters.

It said the draft law risked "undermining the ongoing BIT (Bilateral Investment Treaty) negotiations".

Commercial relations have also been soured by allegations from Washington that Chinese hackers have been behind recent attacks on U.S. government agencies and American companies.

Last week, U.S. officials accused Chinese hackers of a breach of government databases to steal files on four million federal employees, the latest in a string of espionage charges leveled at China. Officials in Beijing said the claims were unscientific and irresponsible.

All of this will hang over high-level U.S.-China strategic and economic talks in Washington in late June.

"This is the most difficult time I"ve seen in China for multinationals – and I"ve been here close to 30 years," said James McGregor, the chairman for U.S. public affairs consultancy APCO Worldwide in China.

"I have clients asking me whether they will be welcome here much longer," he said.

(Reporting by Michael Martina and Matthew Miller; Editing by Mark Bendeich)

APAC Financial Markets • #China, #ChineseRegulations, #InvestmentTreaty, #Risk, #US #MarketNews

Shunning Beijing’s AIIB was a mistake

Washington needs to learn from this embarrassing experience, writes Robert Zoellick.... more

APAC Financial Markets • #AIIB, #AsianInfrastructureInvestmentBank, #US #MarketNews

Bond Traders to Lagarde: You’re Wrong, the Fed Will Hike in 2015

U.S. bond traders had a very clear message for Christine Lagarde on Friday morning: Your advice to the Federal Reserve is wrong.

Lagarde, managing director of the International Monetary Fund, advised the Fed on Thursday to wait until 2016 before hiking interest rates.

Bond traders don’t think the U.S. central bank will heed that recommendation. On Friday, they quickly pulled forward their expectations for a rate increase — assigning better than even odds of a move in September after a jobs report showed American payrolls climbed the most in May in five months. That’s up from a 46 percent probability on Thursday, according to Bloomberg calculations.

As John Silvia, chief economist at Wells Fargo & Co. wrote in a note Friday morning, “Even if the Fed does not move credit markets already have moved.”

Bond traders dumped Treasuries Friday, sending yields on 10-year notes to the highest since October.

So while Lagarde may have raised some eyebrows on Wall Street Thursday by saying the Fed shouldn’t move this year, traders aren’t listening any more. After all, there’s data to examine.

by Lisa Abramowicz

APAC Financial Markets • #BondTraders, #FED, #RateHike, #US #MarketNews

China"s IPO Market Leaves U.S. in the Dust

China has overtaken the U.S. this year as the world’s top venue for IPOs, riding a steady stream of small-cap listings in Shanghai and Shenzhen together with several multibillion-dollar brokerage offerings in Hong Kong.... more

APAC Financial Markets • #China, #Equities, #IPO, #Listings, #StockMarket, #US #MarketNews

Japan-focused Oasis Value Funds to target European and US institutions

MCP Asset Company (MCP) is seeking to attract more non ­Asian investors for its Oasis Value Funds, which are both high ­conviction strategies, and has appointed Sussex Partners to spearhead a push to attract more institutional investors in Switzerland and others parts of Europe and the US.

The Oasis Value Long Fund delivered a robust 25.20% gain last year against an…. more

APAC Financial Markets • #Europe, #MCPAssetManagement, #NonAsianInvestors, #OasisValueFund, #SussexPartners, #US #AssetManagement, #Buyside

IMF asks Fed to delay rate rise

In an unusual move, the International Monetary Fund has urged the US central bank to delay any rise in interest rates until 2016.

IMF managing director Christine Lagarde said the Federal Reserve should wait until policymakers see more tangible signs of wage and price inflation.

She added that a gradual rise in the US benchmark federal funds rate would be appropriate.

Ms Lagarde also said the IMF recognised the work that the US had done.

In the IMF"s annual assessment of the US economy, she said rate decisions should be data dependent.

Many Washington watchers predict an interest rate rise this year.

But recent economic reports have been mixed, including data showing that the US economy shrank an annualised 0.7% in the first quarter.

APAC Financial Markets • #2016, #FED, #IMF, #RateHike, #US #MarketNews

Bond Dealers Enfeebled as Liquidity Breakdown Boosts Derivatives

As Wall Street retreats from its traditional role as the bond market’s middle man, investors frustrated by sudden gyrations and a lack of liquidity are turning to derivatives — in a big way.

In the world’s biggest debt markets, including the U.S., Europe and Japan, the number of futures contracts on government debt reached a post-crisis high in May after doubling since 2009. Trading of German bund options and Italian futures also hit records.

While some are using derivatives to hedge against higher U.S. interest rates, Pioneer Investment Management and BlackRock Inc. are also shifting into more obscure corners of the fixed-income world as rules to limit bank risk-taking have made it harder to trade at a moment’s notice. Since October 2013, dealers that trade with the Fed have slashed U.S. debt inventories by 84 percent.

“Liquidity risk is a big challenge,” said Cosimo Marasciulo, the Dublin-based head of fixed income at Pioneer, which oversees $242 billion. “And it’s now affecting an asset that was once considered most liquid — government bonds.”

Derivatives, contracts based on underlying assets that can provide the same exposure without tying up as much capital, have become a popular option after central banks started to purchase bonds as a way to boost growth following the financial crisis, which has sapped supply and increased volatility.

Over that time, bond buying by major central banks has inundated economies with at least $10 trillion of cheap cash, according to Deutsche Bank AG.

Open Interest

Pioneer’s Marasciulo said his team stepped up its use of derivatives as the European Central Bank said in January it would buy sovereign bonds as part of its quantitative easing.

Rather than buying euro bonds tied to inflation, which Marasciulo said were too illiquid, his team entered into five-and 10-year inflation swap contracts.

In the futures market, combined open interest on 10-year Treasuries, U.K. gilts, and Japanese bonds, as well as benchmark German bunds and Italian notes, eclipsed 5 million contracts in May, exchange data compiled by Bloomberg show. Most of the jump occurred in the past two years.

In the U.S., open interest on 10-year note futures has almost doubled in the past three years, while trading in bund options on Deutsche Boerse AG’s Eurex surged to a record 6.4 million contracts as of May 26. That’s twice as much as in May 2012, during the height of the euro debt crisis.

Bond Cutbacks

“The advantage is there’s tremendous liquidity and you know what your price is,” said Arthur Bass, New York-based derivatives trader at Coex Partners, referring to futures.

The shift into derivatives has accelerated as the world’s biggest banks scale back their bond-trading businesses to comply with higher capital requirements imposed by Basel III, which went into effect this year.

For Treasuries, the share of transactions by primary dealers has dwindled by more than half to 4 percent since the end of 2008, according to the Institute of International Finance, a lobbying group for banks.

And in the past year, JPMorgan Chase & Co., Morgan Stanley, Credit Suisse Group AG and Royal Bank of Scotland Group Plc have have either cut back their fixed-income trading desks or are weighing reductions in those businesses.

That’s made getting the bonds you want at the price you need more difficult, especially when markets are moving.

Average daily trading in Treasuries among primary dealers has been lower this year than in each of the previous five years, while volume in Germany, the euro-region’s deepest debt market, has decreased almost 25 percent in the past decade.

Price Swings

Less trading has meant more volatility. This year, price swings for Treasuries are up almost 75 percent from their lows in 2013, data compiled by Bank of America Corp. show.

“We’ve been splitting the trades into smaller pieces,” said Thanos Bardas, a Chicago-based money manager at Neuberger Berman, which oversees $104 billion of fixed-income assets. Since the crisis, Bardas said the firm has used more futures when swings in the bond market have increased.

It’s even gotten the attention of officials at the Federal Reserve. In the minutes from its April meeting released last month, they said “the tendency for bond prices to exhibit volatility may be greater than it had been in the past.”

Jim Bianco, president of Bianco Research LLC, doesn’t buy the notion that investors are turning to derivatives because the bond market is broken.

Liquidity Meme

While regulations have played a role in curtailing volume, the real reason so many investors have embraced derivatives is because everyone is trying to shield themselves before the Fed starts lifting borrowing costs.

Declining liquidity “is overplayed,” he said from Chicago. “Even if we say here’s more freedom for the dealers to make markets, we would still have people at extreme positions waiting for the Fed to raise rates.”

Whatever the reason, bond investors are increasingly looking to alternatives. At U.S. government debt auctions this year, investors bought 65 percent of Treasuries sold, the highest share on record, Treasury data compiled by Bloomberg show. Investor bidding at German auctions has also increased.

BlackRock, the world’s biggest asset manager, is taking advantage of exchange-traded funds as a way to quickly establish its positions in fixed income, according to Stephen Cohen, the New York-based firm’s chief investment strategist for international fixed income.

And it’s part of a wider trend that will only grow as trading in the bond market gets more difficult.

“This is not just BlackRock,” he said.

by Susanne Walker Barton and Anchalee Worrachate

APAC Financial Markets • #BlackRock, #BondDealers, #Bonds, #Derivatives, #Europe, #FuturesContracts, #GovernmentDebt, #InflationSwapContracts, #Japan, #LiquidityBreakdown, #US #MarketNews

Crunch time for Greece; U.S. and Chinese data in focus

LONDON (Reuters) - Years of uncertainty and economic pain spent keeping Greece in the euro zone boils down in June to a handful of make-or-break debt repayments, while a raft of key data in the next few days will point to the progress of the global economy.

The threat posed to the wider world by an eventual Greek exit from the euro may have diminished over the last few years, but last week the United States warned of an "accident" for the world economy if Greece and its creditors miss deadlines this coming month to avert a debt default.

Most analysts think Greece has enough cash and options to avoid default when a roughly 300 million euro ($330 million} payment falls due on June 5 to the International Monetary Fund. What happens in the subsequent weeks is less clear.

"We believe meeting the 1.6 billion euros in payments to the IMF by the end of June will be difficult. Payments of 3.5 billion euros on bonds held by the ECB on July 20 appear even more unlikely," said Michael Gapen, economist at Barclays.

"Without an agreement, Greece could descend into what would effectively be an exit from the euro area, where defaults and capital controls become a permanent feature."

Gauging the likelihood of a substantive agreement is difficult because of a clear difference in tone between Athens, optimistic of striking a deal soon, and its far more cautious creditors.

Greece"s left-wing government -- elected in January to fight austerity measures imposed by its international lenders -- indicated at the weekend it could compromise on some of its demands, although it didn"t specify how.

"The antipathy towards more austerity with the general public and (Greek governing party) Syriza is a major sticking point and means a quick resolution is unlikely if it means Greece has to capitulate," said Ben May, economist at Oxford Economics.

Still, analysts polled by Reuters last week put a less than one-in-three chance on Greece leaving the euro zone this year.

Mark Zandi, chief economist at Moody"s Analytics, believes that the global economy is now "largely inoculated" from Greece because European banks -- the main channel of contagion -- are in better shape than they were a few years ago.

CHINESE FORTUNES

Instead, a protracted slowdown in China, along with how financial markets respond to the U.S. Federal Reserve"s intention to raise interest rates from record low levels, are Zandi"s top worries for the world economy going into the second half of this year.

Business surveys this week will show if there are any signs that China"s vast industrial sector will shake off its recent stagnation.

"My working assumption is that the Chinese are going to be able to gracefully manage their slowdown. But if they stumble too much, that"ll make it more difficult for the global economy to kick into a higher gear for sure, including the U.S. economy," said Zandi.

The world"s largest economy contracted in the first three months of the year as it buckled under the weight of unusually heavy snowfalls, but most economists think a rebound is already underway.

Purchasing managers indexes from the United States this week should go a long way to confirming that, but even more important will be labor market data due on Friday as the Federal Reserve gauges when to raise interest rates.

Economists believe the U.S. economy added around 225,000 non-farm jobs in May -- a rate that most expect would keep the Fed on track to tighten policy by the end of the year.

But that also raises the possibility that financial markets, relatively calm during the latest Greek debt standoff, are set for a rocky few months.

Fearful of a looming tumble in stocks and bonds from multi-year highs, global investors have increased the share of safe-haven cash in their portfolios to the highest levels in seven months, according to a Reuters poll of fund managers last week.

"There is a lot of concern about the global growth outlook, and as much as people are welcoming better trends in the euro zone, they know it"s not going to be a locomotive for growth," said Marc Ostwald, strategist at ADM Investor Services.

Comments from European Central Bank President Mario Draghi after Thursday"s policy meeting will be scrutinized for the central bank"s latest views on the economic outlook and the Greek crisis.

(Editing by Crispian Balmer)

APAC Financial Markets • #BusinessNews, #China, #Greece, #US #MarketNews