Markets Daily

Westpac

Economic

Commodity

Forex

Summary:

The U.S. dollar fell against all G10 currencies on the day. Crude markets slipped again as traders focused on the chances of OPEC+ extending and deepening cuts into 2024.

U.S. bond yields fell substantially despite only minor data, weighing on the U.S. dollar. AUD/USD traded above 0.6600 for the first time since August. Today's data includes Australia October retail sales and U.S. November consumer confidence, while RBA Governor Bullock takes part in an HKMA-BIS panel.

Yesterday

Australia's data calendar was empty but there was plenty of news about the RBA from the government. Legislation to reform the RBA was announced though with no real surprises given substantial previous commentary. The surprise was in Treasurer Chalmers' selection of a Bank of England official to be RBA deputy governor, Andrew Hauser. He has lengthy experience in financial markets. AUD/USD traded a range of 0.6567 to 0.6595, for no net change at 0.6580. U.S. equity futures joined the sour mood in Asia-Pacific stocks, though most moves weren't especially large. The ASX 200 closed -0.75%, one of the weaker performances.

Currencies/Macro

The U.S. dollar fell against all G10 currencies on the day. EUR/USD rose 15 pips to 1.0955. GBP/USD rose 0.2% to 1.2630. USD/JPY followed the fall in Treasury yields, down from 149.45 to 148.65. AUD/USD rose a net 20 pips to 0.6605, its first trade above 0.6600 since 10 August. NZD/USD rose from 0.6075 to 0.6100, also printing highs since August. AUD/NZD is little changed at 1.0830.

U.S. new home sales in October fell -5.6% (est. -5.1%, prior revised down to +8.6%), the decline attributed to high mortgage rates. Inventory rose for a third month, and the median home price slipped to $409k from $422k. The Dallas Fed manufacturing index was little changed in November at -19.9 (est. -16.0, prior -19.2), the production component falling into contraction territory.

ECB President Lagarde reiterated vigilance was needed against inflation that remains too high, with risks that it could rise again in the near term. She also said bond holdings relating to the PEPP (Pandemic Emergency Purchase Programme) might be reviewed soon.

Interest rates

The U.S. 2yr treasury yield initially rose to 4.98% but then began a steady descent, to 4.88%. The 10yr yield also rose early, to 4.51%, only to roll over to 4.39%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 14 December, with a 50% of a rate cut by May 2024.

Australian 3yr government bond yields (futures) fell from 4.24% to 4.15%, while the 10yr yield fell from 4.58% to 4.48%. Markets are pricing no change at the next meeting on 5 December, but a 50% chance of one in February 2024. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 29 November, and in February, with a 40% chance of a rate cut by July 2024.

Primary markets saw an uptick after the Thanksgiving shortened week; in Europe ANZ placed a GBP1.0bn covered and Roche placed EUR1.5bn across two lines, U.S. markets saw an active session with Citibank NA issuing USD2.5bn across two lines, The Home Depot Inc issuing USD2.0bn and Brookfield placing USD700M. Itraxx Europe widened 1.5bps to 69.7bps with Unibail-Rodamco-Westfield amongst the worst performers. CDX IG widened 0.6 bps to 63.8bps; Dominion Energy and Verizon had the best performing contracts while Whirlpool and Ally Financial were a drag on the index. Cash bonds widened 0.2bps to 142.7, the best performing sectors were technology and communications, while utilities and materials were the worst performing.

Commodities

Crude markets slipped again as traders focused on the chances of OPEC+ extending and deepening cuts into 2024. The January WTI contract is down 62c at $74.92 while the January Brent contract is down 55c at $80.03. Bloomberg ran a story suggesting that Saudi Arabia is "asking others in the coalition to reduce their oil-output quotas in a bid to shore up global markets but some members are resisting, delegates said". Eurasia group said that "if the group does not announce an additional cut of about 1mbpd on top of an extension of the Saudi voluntary measure, the risk is that the $80 per barrel floor that has largely held so far will shift downward to the mid or even low $70s". Weak industrial profits data in China for October hit sentiment too. However, a storm on the Black Sea suspended loadings at the Novorossiysk and the CPC terminal used by Kazakhstan.

Metals were lower again with copper down 0.6% at $8,375 and nickel down another 0.7% to $16,025. Tin slumped another 3.8% to $22,979 and is down by a hefty 7.6% over the last 5 sessions, hitting lows back to March of this year. Nickel is down 12.3% so far this month. Goldman noted that the "combination of hitting the capacity cap and Yunnan winter cuts means that onshore primary [aluminium] production will likely grow 2% next year". Chinese production year to date is up 3.4%yy. Goldman sees a shortage of 1.23mmt of primary aluminium next year, almost double the deficit in 2023 with the price rising to $2,600 in 12 months. France was said to be moving to save a struggling nickel processing plant in New Caledonia due to weakening prices. Finance Minister Bruno Le Maire said, "I want us to get a primary agreement in the early days of January". Uganda will start issuing certification for exports of tin and a tin refinery in the west of the country is awaiting a licence to start operations.

Iron ore markets softened as China's NDRC said it had conducted research on steel, iron ore and other commodity indices. Coming on top of an announcement yesterday that it was "studying and strengthening the supervision of iron ore at port, strengthening industry self-discipline, setting up reasonable and relevant rules for the use of storage yards, speeding up the turnover of goods, resolutely preventing the use of hoarding and speculation, and effectively maintaining market order", it emphasised the lengths that the authorities are going to. The December SGX contract is down 25c at $131.40 while the 62% Mysteel index is down by $1.10 to $133.75. China will report its PMIs Thursday and Friday. Goldman sees a balanced market into 2024, noting greater risk to the upside than downside for iron ore prices. Citi noted that "any dip in iron ore from here through to at least the Chinese New Year could represent a buying opportunity".

Day ahead

RBA Governor Bullock will speak as a panel participant at the HKMA-BIS "high-level" conference in Hong Kong, from 12:18pm Syd.

At 11:30am Syd, Australia October retail sales are expected to be more subdued after the 0.9% bounce in September, which was partly attributed to transitory factors including unseasonal early spring warmth and the new iPhone model. Westpac forecasts a 0.2%mth rise, keeping the annual rate consistent with contraction in inflation-adjusted, per capita retail spending. Note however that the ABS plans to discontinue this survey in 2025 as it now accounts for only 33% of household consumption.

The Conference Board measure of U.S. November consumer confidence index may continue to reflect potential optimism after a pause in rate hikes (market f/c: 101.0). An unstable outlook for manufacturing may feature in the November Richmond Fed index (market f/c: +1).

Chicago Fed president Goolsbee (dove) and Fed governor Waller (hawk) are due to speak.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Michelle

Energy

Economic

Saudi Arabia's Grand Plan to 'Hook' Poor Countries on Oil_1

A Saudi Aramco oil refinery, one of the organisations involved in the oil demand sustainability programme.

Saudi Arabia is driving a huge global investment plan to create demand for its oil and gas in developing countries, an undercover investigation has revealed. Critics said the plan was designed to get countries “hooked on its harmful products”.

Little was known about the oil demand sustainability programme (ODSP) but the investigation obtained detailed information on plans to drive up the use of fossil fuel-powered cars, buses and planes in Africa and elsewhere, as rich countries increasingly switch to clean energy.

The ODSP plans to accelerate the development of supersonic air travel, which it notes uses three times more jet fuel than conventional planes, and partner with a carmaker to mass produce a cheap combustion engine vehicle. Further plans promote power ships, which use polluting heavy fuel oil or gas to provide electricity to coastal communities.

The ODSP is overseen by Saudi Arabia's de facto ruler, the crown prince Mohammed bin Salman, and involves its biggest organisations, such as the $700bn Public Investment Fund, the world's largest oil company, Aramco, the petrochemicals firm Sabic, and the government's most important ministries.

In publicly available information, the programme is largely presented as “removing barriers” to energy and transport in poorer countries and “increasing sustainability”, for example by providing gas cooking stoves to replace wood burning.

However, all the planned projects revealed in the investigation by the Centre for Climate Reporting and Channel 4 News involve increasing the use of oil and gas. An official said this was “one of the main objectives”.

The head of the World Bank said recently that rich countries and companies needed to help developing countries leapfrog over the fossil-fuelled economic growth of the past and roll out renewable energy. If they did not, Ajay Banga said, there was no hope of ending carbon emissions by 2050, as the world's scientists had repeatedly made clear was necessary to avoid climate catastrophe.

Saudi Arabia has said it is committed to the Paris agreement's climate goals to restrict global heating to well below 2C while aiming for a 1.5C rise at most. To achieve this, fossil fuel emission must fall rapidly and most oil and gas reserves must be kept in the ground, meaning climate policies, such as support for electric cars, pose a significant threat to the oil-rich state's revenues.

A significant issue at the UN's Cop28 climate summit, which will begin on Thursday, is whether countries can deliver a pledge to phase down – or phase out – fossil fuels. This year the climate crisis has smashed temperature records and supercharged extreme weather has taken lives and livelihoods around the world.

Mohamed Adow, the director of the thinktank Power Shift Africa, said: “The Saudi government is like a drug dealer trying to get Africa hooked on its harmful product.

“The rest of the world is weaning itself off dirty and polluting fossil fuels and Saudi Arabia is getting desperate for more customers and is turning its sights on Africa. It's repulsive.

“Africa cannot catch up with the rest of the world by trudging along in the footsteps of the polluting nations. It would mean we miss out on the benefits of modern energy solutions that Africa can take advantage of due to its massive renewable energy potential. We have the latecomer advantage, which means we can leapfrog to a genuine energy transition.”

António Guterres, the UN secretary general, said in 2021: “We need to see adequate international support so African and other developing countries' economies can leapfrog polluting development and transition to a clean, sustainable energy pathway.”

The Saudi Arabian ministry of energy did not respond to a request for comment.

The brief information on the programme's English-language website calls it the oil sustainability programme, while on the Arabic version it is described as the oil demand sustainability programme.

Its stated objective, according to the Arabic site, is to “sustain and develop the demand for hydrocarbons as a competitive source of energy, by raising its economic and environmental efficiency, while ensuring that the transition in the energy mix [is] sustainable for the kingdom of Saudi Arabia”.

An announcement in June to the Saudi stock exchange about a memorandum of understanding signed by ODSP and the Saudi Industrial Export Company initially said it would enable “activities in the fields of sustaining the demand of oil”. A correction the following day replaced this phrase with enabling “activities to increase energy access”.

Details of the ODSP's projects were exposed after undercover reporters posed as potential investors and met officials from the Saudi government. This revealed that increasing demand for oil and gas in developing countries was a thread running through the planned projects.

The presentation used by the officials said the strategy was to “unlock demand in emerging markets by removing barriers to energy access through infrastructure investments”.

When asked by the reporters whether the aim was to artificially stimulate demand in some key markets, an official said: “Yes, it's one of the main objectives that we are trying to accomplish.

“We don't believe it's possible that [developing countries] can skip this [fossil fuel] phase because, in order to implement electric vehicles fully, you'll need a ready infrastructure.

“A lot of African countries now do not have enough grid [electricity] to support their day-to-day lives. We believe they deserve the chance to get the required energy for their development now. Then in the future they can work to improve or to transit into more efficient energy sources.”

One of the criteria for the selection of the ODSP's 46 projects was the “incremental demand potential”, the officials said, with the programme facilitating the finance required for the projects.

The projects are in three categories: transport, utilities and materials, with the third promoting the replacement of some cement, steel and wood used in construction with oil-derived plastics.

“The objective of the transportation sector is to enhance the long-term sustainability of transportation fuel. We're talking about diesel, gasoline, and jet fuel,” an official said, with financing roads part of the plan.

“We aim to accelerate and enhance the impact and adoption of internal combustion engine [ICE] technology and optimisation.

“We have also an opportunity for increasing availability and adoption of low-cost cars, especially in emerging markets. Only 3% of people are owning cars in Africa.”

According to the presentation, the plan is to “partner with a car [manufacturer] in … the development and production of a highly competitive low-cost car” that will “have an oil uplift for the kingdom”.

The ODSP is additionally targeting bus, ride-sharing and delivery services, according to the presentation: “The goal is to support the deployment of ICE fleets across developing countries to capture the increasing gasoline/diesel demand.”

In aviation, the ODSP plans to increase flights by facilitating investments to “acquire or launch” a low-cost airline. The officials said work had begun on “fast-track development of commercial supersonic aviation”, which “consumes more energy per-seat-km – 3x [that] of subsonic commercial aircraft.”

The plans for electricity production include “oil-powered mini grids”, which would burn diesel or heavy fuel oil, an official said. Investments would also be facilitated in ships that provide “floating power plants” driven by heavy fuel oil or gas.

Saudi Arabia signed agreements in November with Rwanda to “develop demand for hydrocarbon resources”, with Nigeria on “promoting collaboration and strengthening our partnership in the oil and gas sector” and with Ethiopia to “cooperate on oil supply”.

“The fact that African countries are so desperate that they fall for this trick rests on the failure of the historic polluting nations to honour their climate finance pledges,” said Adow.

“But we need investment from rich countries that claim to be climate leaders. Otherwise we can expect more dodgy deals like this one, which endangers not just Africans but the global effort to ensure a safe and prosperous climate for all.”

Source: The Guardian

To stay updated on all economic events of today, please check out our Economic calendar

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Glendon

Stocks

Bond

Higher bond yields are presenting tough questions for equity investors. While the risk/reward trade-off for equities might be less favorable than in the past, historical return patterns suggest that US stocks can still do well in this environment.

Making investment decisions about any asset is a function of risk versus reward. For investors in stocks, the equity risk premium (ERP) is a common way to measure the risk/reward trade-off. Simply put, the ERP is the excess return that investors expect to earn over a risk-free rate. It measures the compensation that investors expect for investments in stocks, which are generally seen as riskier assets than bonds or cash. A higher ERP signals that investors can expect a relatively greater reward from stocks than they would in a lower-ERP environment, and vice versa.

Is Today's Lower ERP a Bad Signal for Stocks?

This year, the ERP for US stocks has declined. Our ERP metric shows the earnings yield of the S&P 500 minus the yield of the 10-Year US Treasury note, a proxy for the risk-free rate. That spread declined to 1.2 percentage points at the end of October, from an average of 3.1 percentage points between 2009 and 2022 (Display). The ERP has narrowed because rising interest rates lifted the Treasury yield from near-zero levels to 4.9% at the end of October.

Is Equity Risk Worth the Reward in a World of Higher Bond Yields?_1

To equity investors, that sounds worrying. After all, the ERP is likely to be lower in the coming years, as bond yields won't be suppressed by low inflation, ultralow interest rates and the Federal Reserve's quantitative easing programs that prevailed from the global financial crisis through the COVID-19 pandemic. From 2009 to 2022, when the ERP was much higher, US stocks returned 13.1% annualized on average. So does that mean the lower ERP is a warning sign for equity investors?

Not necessarily. We've experienced periods of lower ERPs in the past, and stocks have done relatively well. For example, from 1983 through 2008, the ERP was also low at 1.0%. Yet during that period, the S&P 500 returned an annualized average of 10.2%. Future conditions may well be different than in the past, and the lower ERP does set the bar higher for equities. Still, history suggests that stocks can still deliver solid returns in higher-bond-yield environments.

Equities Can Help Portfolios Cope with Inflation

Yes, we understand that bond yields of close to 5% these days are an attractive proposition for investors and offer a sense of safety in an unstable world. Yet we believe stocks and bonds both have important roles to play in a diversified investment portfolio today.

In particular, we think stocks offer a good hedge against inflation. Our research suggests that in periods of moderate annual inflation of between 2% and 4% between 1948 and the third quarter of 2023, the S&P 500 returned 2.5% per quarter. That's a solid real return, which helps protect the purchasing power of portfolios if inflation stays relatively high, as we expect.

Equities can also offer a rising stream of income via increasing dividends. We measure equity income by using the free-cash-flow (FCF) yield, which calculates the excess cash that a business generates after deducting all operating costs. Our research suggests that the FCF yield of US stocks should rise over time, above the Fed's long-term inflation target of 2%.

This contrasts markedly with a popular investment strategy these days—cash. Interest rates on cash are very attractive now, but they may not be for long if the Fed cuts rates, as many investors expect (Display). If yields do decline, investors who stay too long in cash would miss out on the potential for increasing dividends and the prospect of share-price appreciation along the way.

Is Equity Risk Worth the Reward in a World of Higher Bond Yields?_2

Selectivity Is Crucial When the Hurdles Are Higher

Bonds and stocks can and should coexist in a diversified investment allocation. In fact, if rates continue to fall over time, the ERP would rise, providing another impetus for equity returns.

For now, equity investors must be particularly selective to navigate a low-ERP environment. It's especially important to identify quality companies with strong balance sheets that benefit from sources of consistent growth potential and cash-flow generation, and with share prices that trade at reasonable valuations. When carefully curated in an active equity portfolio, companies like these can help provide equity investors with both resilience and the ability to deliver return potential in a world of higher macroeconomic and market hurdles.

Source: Alliance Bernstein

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FastBull Featured

Daily News

[Quick Facts]

1. Saudi Arabia's request for OPEC+ members to increase production cuts meets with resistance.

2. The temporary Israel-Hamas truce has been extended by two days.

3. BofA expects a weaker U.S. dollar but a stronger Australian dollar in 2024.

4. Russia's oil processing volume has reached its highest since August.

[News Details]

Saudi Arabia's request for OPEC+ members to increase production cuts meets with resistance

Saudi Arabia is reportedly asking other OPEC+ members to cut their crude output quotas to shore up the global market, but some members are resisting the request. The delegates said that Saudi Arabia has been unilaterally cutting oil supply by 1 million barrels per day (bpd) since July and is now seeking further support from its OPEC+ partners.

The Saudi proposal came in the tough negotiations among the oil-producing countries of the bloc. Angola and Nigeria resisted cutting their 2024 quotas, so OPEC+ had to postpone a policy meeting by four days to Nov. 30. Before the weekend, these oil producers were moving toward a compromise, but no agreement had yet been reached, delegates said. Some speculated that internal conflict could even lead to several members quitting OPEC.

The temporary Israel-Hamas truce has been extended by two days

Majed al-Ansari, spokesperson for the Foreign Ministry of Qatar, announced on Nov. 27 that Hamas and Israel agreed to extend a previously reached temporary truce by two days, following tense negotiations between the two sides over the further release of hostages held by Hamas in Gaza. Al Jazeera quoted Hamas saying that the temporary truce in the Gaza Strip has been confirmed to be extended for two days, with the same conditions as before. Ten Israeli detainees will be released each day for the next two days, totaling 20 people.

BofA expects a weaker U.S. dollar but a stronger Australian dollar in 2024

The dollar is expected to weaken in 2024 while the Australian dollar is expected to rally as the Federal Reserve cuts interest rates, according to strategists such as Athanasios Vamvakidis at Bank of America (BofA). The FOMC is expected to cut rates in 2024 as the Fed's concerns shift from inflation to economic growth, and other major central banks are likely to start cutting rates as well.

Russia's oil processing volume has reached its highest since August

Russian refineries are processing large volumes of crude oil as the seasonal maintenance has ended and the government eases restrictions on fuel exports. Russia processed 5.65 million barrels of oil a day between Nov. 16 and 22, 100,000 bpd more than the previous week, climbing to the highest level since mid-August, according to a person familiar with the matter. Russia's refining capacity stood at 5.55 million bpd in the first 22 days of November, up about 236,000 bpd from most of October, according to Bloomberg calculations based on historical data.

However, Russia's seaborne oil exports fell to the lowest level since August in the week ended Nov. 19, despite an uptick in domestic processing, tanker-tracking data monitored by Bloomberg show. Shipments decreased by 580,000 bpd from the previous week, the biggest week-on-week drop in more than four months.

[Focus of the Day]

UTC+8 15:00 Germany Gfk Consumer Confidence Index (SA) (Dec)

UTC+8 22:00 U.S. FHFA House Price Index MoM (Sept)

UTC+8 23:00 U.S. Conference Board Consumer Confidence Index (Nov)

UTC+8 23:00 FOMC Member Waller Speaks

UTC+8 23:00 FOMC Member Bowman Speaks

UTC+8 05:30 Next Day: U.S. API Weekly Crude Oil Stocks

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Michelle

Economic

We entered 2023 with a pessimistic consensus outlook for U.S. economic performance and for how rapidly inflation might recede. As it happened, there was no recession, and personal consumption posted sustained strength. Inflation, except shelter, declined dramatically from its 2022 peak.

The big economic driver in 2023 was job growth. Jobs had recovered all their pandemic losses by mid-2022 and continued to post strong growth in 2023, partly due to many people returning to the labor force.

When the economy is adding jobs, people are willing to spend money. The key for real GDP in 2023 was the strong job growth that led to robust personal consumption spending. For 2024, labor force growth and job growth are anticipated by many to slow down from the unexpectedly strong pace of 2023, leading to slower real GDP growth in 2024.

And there is still plenty of debate about whether a slowdown in 2024 could turn into a recession. Followers of the inverted yield curve will point out that it was only in Q4 2023 that the yield curve decisively inverted (meaning short-term rates are higher than long-term yields). It is often cited that it takes 12 to 18 months after a yield curve inversion for a recession to commence. Using that math, Q2 2024 would be the time for economic weakness to appear based on this theory. Only time will tell.

The rapid pace of inflation receding in the first half of 2023 was a very pleasant surprise. Indeed, inflation is coming under control by virtually every measure except one: shelter. The calculation of shelter inflation is highly controversial for its use of owners' equivalent rent, which assumes the homeowner rents his house to himself and receives the income. This is an economic fiction that many argue dramatically distorts headline CPI, given that owners' equivalent rent is 25% of the price index.

Once one removes owners' equivalent rent from the inflation calculation, inflation is only 2%, and one can better appreciate why the Federal Reserve has chosen to pause its rate hikes, even as it keeps its options open to raise rates if inflation were to unexpectedly rise again.

The bottom line is that monetary policy reached a restrictive stance in late 2022 and was tightened a little more in 2023. For a data dependent Fed, inflation and jobs data for 2024 will guide us as to what might happen next. Good numbers on inflation or a recession might mean rate cuts. Otherwise, the Fed might just keep rates higher for longer.

Source: CME Group

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Glendon

Economic

U.S. furniture company head Jordan England thinks his firm's Chinese suppliers are among the best in the game, but geopolitics and a slowing economy have pushed him to source more products from Southeast Asia, Eastern Europe and Mexico.

"I'm looking to move away from it (China)," said England, CEO and co-founder of Florida-based Industry West.

"It was always 'China plus one,'" he said, referring to the diversification strategy many businesses began implementing after Washington imposed trade tariffs on Beijing in 2018 to ensure they were not wholly dependent on Chinese suppliers.

Now "it's like 'plus-10' and then China," he added, with the latter down to providing half of Industry West's products and being trimmed more.

Foreign investors have been sour on China for most of this year, but data released over the past month has provided clear evidence of the negative impact de-risking strategies are having on the world's second-largest economy.

Activity surveys showed manufacturing unexpectedly contracted in October, while exports accelerated their decline. China recorded its first-ever quarterly deficit in foreign direct investment in July-September, suggesting capital outflow pressure.

West's De-Risking Starts to Bite China's Prospects_1

Nicholas Lardy, senior researcher at the Peterson Institute for International Economics, said in a note the new data imply that foreign firms are not only declining to reinvest earnings, but are selling existing investments and repatriating funds.

This trend could further weaken the yuan and clip China's economic growth potential, he added.

"In recent years, the scale, proportion and growth rate of foreign investment absorbed by China have all remained at a relatively high level," He Yadong, a Chinese commerce ministry spokesperson, said in response to a question from Reuters.

LONG-TERM PROSPECTS

Businesses have longstanding worries about geopolitics, tightening regulations and a more favourable playing field for state-owned companies. But for the first time in the four decades since China opened up to foreign investments, executives are now also concerned about long-term growth prospects.

A survey released last week by The Conference Board, a think tank, showed more than two-thirds of the CEOs who responded said China's demand has not returned to pre-COVID levels, with 40% expecting a decrease in capital investments in the country over the next six months and a similar proportion expecting to cut jobs.

China is outwardly confident about growth despite a global economic slowdown, with policy advisers favouring a target of about a 5% expansion of gross domestic product in 2024 and the country aiming to double the economy's size by 2035.

But England said he is concerned about how his Chinese suppliers that also produce for the domestic market will cope with the country's severe property market downturn.

"I'm worried about these factories going from 500 workers to 200, to 100," he said.

OPEN FOR BUSINESS?

Premier Li Qiang's overtures declaring China open for business to foreign investors after the pandemic have been greeted with scepticism in some Western boardrooms in light of a broader anti-espionage law, raids on consultancies and due diligence firms and exit bans, trade bodies say.

Li is expected to make a similar call on Tuesday at the country's inaugural China International Supply Chain Expo, which it is expected to use to tout its supply chain advantages.

"Foreign business executives here are eager to continue in China," AmCham President Michael Hart said. "But boards back in the U.S. are wary."

European firms have raised fair competition concerns about state-directed lending to Chinese manufacturers, while Noah Fraser, managing director of the Canada China Business Council, said "bad blood" remains over the detention of two Canadians from 2018 to 2021.

West's De-Risking Starts to Bite China's Prospects_2

In private equity, while Asia-focused funds have allocated capital to China, data from Preqin shows that as of Nov. 24, no China-focused buyout fund had been raised in 2023 in any currency, compared with $210 million in 2022 and $13.2 billion in 2019, before the pandemic.

Primavera Capital founder Fred Hu cites mounting macroeconomic uncertainty, a "murky capital market outlook," and lingering concerns over past regulatory crackdowns on high-growth industries such as technology and education.

"Tech firms and other private enterprises must be able to tap public markets for financing and liquidity, so the current market conditions in China do considerable harm to the real economy," said Hu, adding China-focused private equity firms were diverting capital to Southeast Asia, Australia and Europe.

Despite the challenges, foreign investment flows are not unidirectional. Many firms, especially in the retail sector, still target China's giant market. McDonald's said last week it had struck a deal to boost its stake in its China business.

An executive at a European hotel chain, who spoke on condition of anonymity due to the topic's sensitivity, said his firm was happy to reinvest profits in China for now.

"We know what's going on politically and yes, economically," he said, adding the latest data "was nothing to be proud of."

"It's slow, but only warrants taking a 'wait and see approach.'"

Source: REUTERS

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Justin

Central Bank

Forex

Two weeks left for the last ECB meeting for 2023

With the Thanksgiving holiday break behind us, we are on the homestretch now for 2023. The market is counting down to the last round of central bank meetings starting with the RBNZ this week and concluding with the BoJ meeting on December 19. The ECB gathering is scheduled for December 14 and the market would be very interested in any rhetoric change by President Lagarde.

Ahead of this busy period, ECB members have been flooding the airwaves with their comments. They have been trying hard to convince the market that (1) rate hikes are not completely off the table, (2) rates will probably stay at the current levels for a while and it is too early to talk about rate cuts, (3) the current weak growth patch is expected to continue in 2024 but they do not expect a recession and (4) inflation is expected to edge a bit higher over the coming months.

At the end of the day though, their approach is data dependent. Since the October ECB meeting, euro area economic data prints have been mostly mixed. The weak preliminary GDP for the third quarter of 2023 has been followed by subdued retail sales, revealing the impact of a rather long period of continued price increases. Inflationary pressures have been abating but core inflation remains stubbornly high, complicating the outlook. At least, PMI surveys have been picking up pace, although the German PMI manufacturing survey is stuck at an extremely low level.

Has Inflation Fire Been Extinguished by ECB?_1

November inflation report in focus

Τhis week we will get the preliminary inflation report for November. On Wednesday, the various German states will publish their figures with the German national figures expected after 13.00 GMT. The annual German inflation figure has been on an aggressive downward trend since the November 2022 peak of 8.8% with forecasts revolving around another deceleration to 3.5%.

The euro area aggregate print is expected on Thursday. With the headline indicator gravely affected by the weaker energy prices and thus seen recording a 2.8% YoY change, the core indicator is bound to get more attention. The core index, excluding energy, food, alcohol and tobacco, has been falling from the March 2023 peak of 5.7% and it is forecast to fall below the 4% level for the first time since July 2022.

However, it remains at an elevated level, and above the headline figure. ECB members are worried that the supply issues and stronger wage increases across the euro area are potentially supporting the stickiness of core inflation.

With the market fixated with rate cuts – the first 25bps rate cut is fully priced in by June 2024 – a possibly strong inflation report is unlikely to affect market expectations. In fact, only a combination of stronger growth indicators such the PMI surveys and repeatedly stronger inflation prints could convince the market that rate cuts are probably not around the corner at this stage.

Euro in danger of losing its recent hard-earned gains

The euro has been outperforming the pound since late August, but these hard-earned gains could be under threat now. Last week’s UK Autumn Statement appears to have invigorated the pound bulls but the next leg in the euro-pound pair will probably depend on this week’s data calendar, and predominantly the November inflation report.

A strong set of data this week could help the euro-pound pair climb above the August 23 ascending trendline and potentially open the door for a move towards the 0.8794-0.8815 area. On the flip side, weak data results and dovish rhetoric from ECB officials could mean the current correction might have legs, with 0.8635 being the next credible target.