Bulls Beat a Path to China Stock Shop but Foreigners Dare Not Go In

Economic

Stocks

Summary:

Emboldened by China's latest measures and pledges to fix the weakest parts of its struggling economy...

Emboldened by China's latest measures and pledges to fix the weakest parts of its struggling economy, domestic investors are scooping up shares in a cheap stock market, while most foreign investors are hopeful but taking it slow.

Last week's sweeping measures to support the property sector, which authorities dubbed as historic, were the latest in a series of steps China has taken since February in a bid to boost consumption, funnel state money into priority sectors and underpin the stock market.

Share prices have rebounded from multi-year lows in February on signs of more official support. The benchmark Shanghai index has climbed more than 3% since reports of the property rescue surfaced on Thursday, taking its gains to a fifth in 3-1/2 months, though the rally stalled on Tuesday as investors awaited more details on how the funding would work. Hong Kong-listed Chinese shares are up nearly 38%.

Capital flow data shows that rally has primarily been driven by mainland investors returning to a market they abandoned during the pandemic years. Foreign money has been a trickle.

"To some extent, I think what's been announced isn't yet of a scale that is going to start putting a meaningful kind of tens of percentage points onto GDP," said Sunil Krishnan, head of multi-asset funds at Aviva Investors in London. "So, for investors that's a challenge."

Krishnan says his funds do not have any active positions in China but have exposure to commodities that will indirectly benefit if its property market recovers from a prolonged slump.

But Aviva will have to move from being bearish on China to a more neutral position, as "China policy does seem to be waking up to the realities of what's needed," he said.

The latest property measures seem pivotal as China's central bank and provincial governments jointly announced steps to buy unsold homes and ease mortgage rates, suggesting Beijing was intent on reviving the sector which once accounted for a fifth of the country's economic output.

Among those was a pledge by the People's Bank of China to set up a 300 billion yuan ($41.46 billion) relending facility for state-owned enterprises to purchase completed, unsold homes.

The numbers were "slightly underwhelming", but the intent to put "money to where their mouth is” was constructive, said Zhenbo Hou, a strategist at BlueBay Asset Management.

"They're no longer denying the problems. They're recognizing the issues. They're coming towards the market view on what the solutions should be… This explains why financial assets are responding in a positive way," Hou said. Bulls Beat a Path to China Stock Shop but Foreigners Dare Not Go In_1

Bulls Beat a Path to China Stock Shop but Foreigners Dare Not Go In_1

Flows

The series of steps to put a floor under markets that began with regulatory measures to curtail short-selling and measures to stimulate strategic technology sectors, raise pensions and subsidise housing, were aimed at getting Chinese consumers to spend again.

But foreign investors, looking for signs of a more sustainable economic turnaround, are keen for more stimulus, and flow data shows the hesitation.

An analysis of flows into 3,000-odd Japan-focused funds and a similar number of China ones on LSEG's Lipper database shows Chinese funds had net inflows this month, but investors have withdrawn $1.2 billion from China so far this year and put $18 billion into Japan.

Chi Lo, senior markets strategist at BNP Paribas Asset Management in Hong Kong, says people are discernibly less negative on China, but not ready to rotate cash out of other markets.

"We've seen some increase in allocation back to China but that's out of the spare cash the investors have at this point. They are still positive on Japan. They are still positive on India."

Most long-term money managers are waiting for breakthroughs in the still-sour Sino-U.S. relationship, particularly heading into the November U.S. presidential election, and bigger stimulus proposals, said Jason Hsu, chief investment officer at Rayliant Global Advisors.

While China's domestic investors have turned bullish, they have shown a preference for Hong Kong-listed shares, which are cheaper and likely to rise harder and faster if foreigners join the rally.

Mainland investors have pumped roughly $33 billion into Hong Kong stocks via the Stock Connect scheme. Data compiled by Ping An Securities shows mainland equity ETFs drew 23.6 billion yuan of inflows in April, 10 times that seen in March.

Yet, flows into China-focused global ETFs such as Krane Funds Advisors' KraneShares ETF and Blackrock's iShares China Large-Cap ETF remain tepid, having fallen for months.

KraneShares recommends being neutral or underweight on China.

Chief Investment Officer Brendan Ahern points to inflows into mainland-listed equity ETFs as evidence "Chinese investors are buying China".

George Maris, chief investment officer and global head of equities at U.S. Principal Asset Management which manages around $651 billion assets, said negativity on China had gone too far.

Maris is bullish on several sectors, including technology, and has re-allocated capital to China since September.

But a broad re-rating of Chinese equities by global investors still hasn't happened and wouldn't until markets rallied first, he said.

($1 = 7.2365 Chinese yuan renminbi)

Source: Reuters

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Samantha Luan

Central Bank

Economic

European Central Bank President Christine Lagarde indicated that an interest-rate cut is probable next month with the rapid gain in consumer-price growth now largely contained.

“It is a case that if the data that we receive reinforces the confidence level that we have — that we will deliver 2% inflation in the medium term, which is our objective, our mission, our duty — then there is a strong likelihood” of a move on June 6, she told Ireland’s RTE One in a television interview broadcast on Tuesday.

“I’m really confident that we have inflation under control,” she said. “The forecast that we have for next year and the year after that is really getting very, very close to target, if not at target. So, I am confident that we’ve gone to a control phase.”

A move when officials next set policy has been widely telegraphed. The deposit rate — which has been at a record high of 4% since last autumn — is expected to be reduced by a quarter point, with investors pricing another step of that size in September and also leaning toward a final 2024 cut in December.

Governing Council members refuse to commit to a certain rate path — a sentiment shared by Lagarde in the RTE One interview. Many though have indicated that market bets may be similar to their own thinking.

Commenting in a separate interview with Handelsblatt also published Tuesday, Bundesbank President Joachim Nagel urged caution after a likely first reduction.

“We should not cut rates hastily and jeopardize what we have achieved,” he said, adding that uncertainty is “still high.”

So “even if rates are lowered for the first time in June, that does not mean we will cut rates further” in subsequent meetings, Nagel said. “We are not on auto-pilot.”

Lagarde also warned of uncertainty, but was more circumspect.

“We have to be data dependent,” she said. “It’s a collective decision that is taken by all members of the Governing Council together, and it’s very difficult to prescribe or forecast a path after the first cut, if there is such a cut.”

ECB’s Lagarde Sees June Rate Cut With Inflation ‘Under Control’_1

The pace of euro-area inflation has slowed drastically, though it stalled at 2.4% in April and isn’t seen retreating to the ECB’s 2% goal until the second half of next year.

Lagarde said that her aim is “2%, 2%, 2% inflation down. Mission accomplished. That’s what I want to do.”

The ECB president also defended her institution’s track record — “we didn’t do a bad job” — though she acknowledged that rate increases in 2022 could potentially have commenced more quickly, citing the option of going “three months earlier.”

“We might have started a little earlier,” she said. “But I’m not sure the outcome would have been that different.”

Source：Bloomberg

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Cohen

Economic

Political

Yellen said at the start of a meeting with bankers that the Treasury's new authority to hit banks with secondary sanctions if they aid Russian military-related transactions had helped to frustrate Russia's efforts to procure goods needed for its war in Ukraine, but more work was needed.

"Russia continues to procure sensitive goods and to expand its ability to domestically manufacture these goods. We must remain vigilant and be more ambitious," Yellen said.

"I urge all institutions here to take heightened compliance measures and to increase your focus on Russian evasion attempts," Yellen said in prepared remarks for the meeting in Frankfurt.

In an unusually direct warning, she told the executives to police sanctions compliance among their banks' foreign branches and subsidiaries and reach out to foreign correspondent banking customers to do the same, especially in high-risk jurisdictions.

"Russia is desperate to obtain critical goods from advanced economies like Germany and the United States," Yellen said. "We must remain vigilant to prevent the Kremlin’s ability to supply its defense industrial base, and to access our financial systems to do so."

Yellen's warning comes shortly after the U.S. Treasury successfully pressed Austria's Raiffeisen Bank, the biggest Western bank in Russia to ditch a deal involving a Russian tycoon.

Earlier this month, Raiffeisen Bank International (RBI) dropped a bid for a 1.5 billion euro ($1.6 billion) industrial stake linked to Russian tycoon Oleg Deripaska after intense U.S. pressure.

The deal's collapse was a fresh setback for the lender, which faces criticism for its ties to Moscow more than two years since Russia's invasion of Ukraine. The pressure also underscored Washington's willingness to take European banks to task over their Russia ties.

Raiffeisen Bank International was warned by the U.S. Treasury in writing that its access to the U.S. financial system could be curbed because of its Russia dealings, a person who has seen this correspondence told Reuters.

On May 6, Deputy Treasury Secretary Wally Adeyemo sent a letter to RBI, expressing concern about RBI's presence in Russia as well as a $1.5 billion deal.

RBI's announcement followed weeks of pressure over its plan to buy a stake in construction group Strabag, a move designed to unlock bank funds frozen in Russia.

Yellen said the most concerning Russian sanctions evasion activity was coming through China, the United Arab Emirates and Turkey, but added that the Treasury "is working to disrupt evasion wherever we see it, from Central Asia to the Caucasus and throughout Europe."

Source：Reuters

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Alex

Economic

Political

Stocks

President Joe Biden spent his first few years in office trying to reverse a hallmark of the Trump era: Touting (and taking credit) whenever the stock market hit a new milestone.

But new market highs in recent months and the opportunity to bait Donald Trump in an election year have proven simply too tempting to resist.

The latest example was the Dow Jones Industrial Average closing above 40,000 for the first time ever last week.

The Dow touching the milestone Thursday and then closing above it Friday spurred a flurry of Biden-world commentary. It closed just below 40,000 on Monday.

The marker was noted from campaign press releases to White House social media accounts to the White House press briefing.

"Record stock market highs under President Biden are good for retirement accounts and household wealth and that is just a fact," noted White House Press Secretary Karine Jean-Pierre on Thursday.

She offered her thoughts in response to a question and went on to make the case that stock highs were evidence that Biden's economic plan was working.

Stock market watchers and economists often stress that market moves in any given week or month often have little to do with the Oval Office occupant. The recent run-up, for example, is largely attributed to a cooler inflation reading across the economy.

Biden also has a long way to go to reach Trump levels of stock market punditry. The former president seemed to comment on every stock market milestone throughout his 4 years in office.

Trump has also kept up a high velocity of commentary since leaving Washington, with his take changing dramatically depending on market ups and downs. Trump has at times in recent years taken credit for market rallies and also predicting crashes because of Biden.

But Biden more and more is emulating the Trumpian patterns with commentary in recent weeks that could be used against him if — as markets sometimes do — things take a dip between now and November.

Biden's evolution on stock market punditry

Touting market highs is a temptation for all presidents, but Biden marked it early as one of the countless ways he wanted to distance himself from Trump and operate in office differently.

"I don't look at the stock market as a means by which to judge the economy like my predecessor did," he said during a speech in July 2021.

Biden did offer a not-so-subtle allusion to the strong stock market gains in those months but also added "that's not how I judge whether or not we have economic growth."

By the following January, with the market even higher, Biden couldn't resist more of a direct comment.

"By the way, the stock market — the last guy's measure of everything — is about 20 percent higher than it was when my predecessor was there," he said during a Jan. 7, 2022 speech on jobs. "It has hit record after record after record on my watch."

But that proved to be ominous timing for Biden as markets that January were about to have a bumpy year which saw the S&P 500 down about 20%, according to Yahoo Finance data.

Biden's light touting even came back to vex him and his aides.

"We know families are concerned about inflation and the stock market," Jean-Pierre acknowledged in June 2022 when she was pressed about his January comments.

Then on September 13 of that year, Biden held a celebration at the White House for his recently enacted "Inflation Reduction Act" but encountered a snag that day when a surprise inflation reading kicked off the worst day for all three major averages since June 2020.

Jean-Pierre was again pressed the next day, calling stocks just "one measure of how the economy is doing."

Trump, meanwhile, spent much of 2022 comparing the downturn to the Great Depression and charging that the US economy was collapsing.

A flood of White House commentary in recent months

Stocks, of course, regained their losses and ended 2023 back in record territory.

They reached those new highs just as an election year rematch between Biden and Trump began to take shape.

It was an irresistible combination as Biden bragged on market highs in December and resurfaced comments from Trump predicting a crash.

Then in recent weeks — as the Dow pierced the 40k barrier — the floodgates flew open.

The past week saw a flood of releases. Messages appeared on platforms ranging from Elon Musk's X to Meta's Threads and Instagram. Biden even marked the moment on TikTok.

The posts celebrated the new highs and again resurrected old video footage of Trump predicting a stock market crash under Biden.

"If he's elected," Trump said in 2020 while pointing across the debate stage at Biden in just one of the many similar examples, "the stock market will crash."

It was a drumbeat from the Biden campaign that was also notable for its quantity. One campaign account even posted a series of videos of conservative outlets like Fox and Newsmax reporting the good news for investors.

Trump himself naturally could resist weighing in — and trying to take credit for himself.

He veered into the topic of markets during a recent speech to the National Rifle Association (NRA).

Trump claimed a Wall Street insider named "Scott" — an apparent reference to former Soros Fund Management CIO Scott Bessent — told him "the only reason that the stock market is doing well is because Trump is leading in all of the polls."

"He said it but I said it too," Trump told the crowd. "I believe it."

It of course remains to be seen which direction the market goes in the months ahead. Perhaps the only thing for sure is that both candidates are likely to weigh in.

Source：Yahoo finance

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Samantha Luan

Economic

By some measures, the greenback has lost some of its dominance. Global central banks' dollar holdings fell some 20% from 2002 to 2022, while U.S. sanctions on Russia have prompted China and others to reduce their reliance on the dollar in trade.

That has the Fed keeping a close eye on the risks of de-dollarization and how it could impact American consumers and businesses.

“There has been for some time been commentary predicting that the dollar is destined for demise–potentially an imminent demise,” Fed Governor Christopher Waller said Monday in opening remarks at a conference on the international role of the U.S. dollar.

For well over half a century, the dollar has been the world's de facto “reserve currency,” the default currency held in central bank reserves and the dominant currency in foreign exchange markets: The U.S. dollar appears in over 90% of forex transactions. The dollar's global dominance is an “exorbitant privilege” for the U.S., in the words of Valery Giscard d'Estaing, president of France in the 1960s.

But if the recent uptick in commentary arguing that the dollar's era of dominance could be ending soon proves correct, it would send shock waves throughout the global economy and increase borrowing costs within the U.S. Meanwhile, digital currencies are posing new threats to the dollar's privileged status, though the jury's still out as to whether the dollar is truly destined for decline.

While Waller acknowledged shifts in global finance, he reaffirmed the dollar's role in it.

“The role of the U.S. in the world economy is changing, and finance is always changing,” he said. “The dollar remains by far the most widely used currency by a number of metrics.”

In foreign exchange markets, the dollar's value is strong right now—the greenback has more buying power than it's had for almost 20 years. But that strength has strained foreign governments by increasing interest payments on dollar-denominated debt, and left them counting on the Fed for relief by cutting rates, prompting some countries to consider other options.

And after the U.S. imposed sanctions on Russia for its invasion of Ukraine, other governments have realized that upsetting the American government could mean their dollar holdings can be frozen.

Some have pivoted to gold as a safe, long-term store of value: Central banks' demand for gold is at record highs, led by China and Turkey. China has also pushed the renminbi for international payments and as a reserve currency, while others have proposed digital currencies (including China, which started piloting a digital version of its currency, the e-CNY, back in 2017) as legit alternatives to central banks' dollar holdings.

On Monday, Waller noted that geopolitical tensions, sanctions against Russia, China's efforts to boost the renminbi, and economic fragmentation can affect the dollar's international usage.

“If these sanctions and policies are long-lasting, the shifting cross-border payments landscape, including the rapid growth of digital currencies, could also pose challenges to the dominant role of the U.S. dollar,” he added.

For his part, Waller has dismissed concerns over the dollar's status in the past. In February, he gave a talk where he pointed out that demand for dollars increased during periods of global unrest as well as the ubiquity of the dollar in foreign exchange and international lending markets.

“I do not expect to see the U.S. dollar lose its status as the world's reserve currency anytime soon, nor even see a significant decline in its primacy in trade and finance,” Waller said at the time. “Recent developments that some have warned could threaten that status have, if anything, strengthened it, at least so far.”

Source: Fortune

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Cohen

Economic

Japan should not backpedal on its efforts to restore fiscal health as the likelihood of higher interest rates would mean increased payments for the debt-ridden nation, potentially limiting its room for future emergency spending, a fiscal policy advisory panel said Tuesday.

In a set of recommendations submitted to the government before it draws up a fiscal policy blueprint this summer, the panel underscored the need to reduce the budget deficit and the size of the national debt in relation to the economy.

Japan has set a goal of recording a surplus in the primary budget balance -- tax revenues minus spending, except for debt-servicing costs -- in fiscal 2025, though the target is widely viewed as unachievable.

The panel, mainly consisting of academics, is urging the government to include debt-related payments when it gauges how much its fiscal health, currently the worst among advanced economies, has improved.

The proposals came after the Bank of Japan raised interest rates in March for the first time in 17 years. Long-term Japanese government bond yields have been trending higher, with the benchmark yield on 10-year bonds nearing 1.0 percent.

"With its enormous outstanding debt balance, Japan should be more keenly aware than other nations about the risk that debt-servicing costs will increase due to higher interest rates and manage its finances with moderation," the advisory panel said.

"The economy is beginning to regain traction, prices and wages are rising and interest rates are about to enter an uptrend. Now is the time to normalize spending as soon as possible and build a sustainable fiscal structure," it said.

While Japan's debt is more than twice the size of its economy, the BOJ owns roughly half of the outstanding government bonds purchased over years of monetary easing.

Japan's accumulating debt is proof that it has been slow in shifting from emergency mode, when massive fiscal stimulus was provided over the years to respond to economic crises and disasters, adding to the woes of the rapidly aging nation, according to the panel.

"It's through restrained fiscal management during peacetime that the country can take fiscal measures without hesitation in times of contingency," the members said.

Source:KYODO NEWS

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Warren Takunda

Economic

The pound was within striking distance of its 2-month high versus the dollar on Tuesday but was set to break a seven-day winning streak against the euro ahead of key economic data.

Closely-watched consumer price inflation data is due on Wednesday and "flash" PMI data on British business activity will follow the next day.

Good risk appetite and a slightly more dovish repricing of expectations for European Central Bank monetary path have supported the pound in the last one and a half weeks, analysts said, mentioning its correlation with the U.S. stock index S&P.

Market participants see sterling as riskier than the safe-haven dollar and the single currency.

The pound dropped 0.05% at 85.44 euro per pound , after rising for seven sessions from around 86 pence on May 10.

"Since the last Monetary Policy Committee (MPC) meeting, it has been well understood that the June rate cut scenario depends on this week's CPI and the next one due June 19," said Paul Mackel, global head of forex research at HSBC.

"We maintain GBP-USD is expensive versus what interest differentials imply," he added, recalling that the Bank of England's (BoE) Chief Economist Huw Pill, who has been more guarded about the disinflation, will speak on May 24.

BoE Governor Andrew Bailey said on May 9 that future cuts might need to be more than those markets priced in, but the next day Pill said that betting too heavily on a rate cut at its June rate meeting would be a bad idea.

Policymaker Megan Greene said last week the BoE should wait for more conclusive evidence that inflation pressures are becoming less stubborn before it moves to cut rates.

Sterling rose 0.1% to $1.2715; it hit $1.2725 the day before, its highest level since March 21.

The pound rose around 2% this month as the U.S. dollar fell due to weak growth and inflation figures, while British data was stronger than expected.

In the long term, "our broad disposition toward the pound remains constructive, particularly versus the EUR", said Barclays analysts in their weekly research notes.

"This is because spillovers from a dovish BoE repricing tend to be limited, demand is resilient, and the prospect for closer ties with the EU should trigger a partial, yet sizeable, unwind of the pound's Brexit premium following the next UK general election," they added.