China's Bond Market Rattled as Central Bank Squares Off with Bond Bulls

Economic

Bond

Summary:

China's bond market, the world's second largest, is on edge following a turbulent week in which the central bank...

China's bond market, the world's second largest, is on edge following a turbulent week in which the central bank started intervening heavily to stem a plunge in yields even as the economy is struggling.

But die-hard investors say the bull market in government bonds still has legs, citing China's wobbly economy, deflationary pressures and low investor appetite for riskier assets.

"We remain actively bullish," said a bond fund manager, undeterred by unprecedented government moves to cool the sizzling treasury market and arrest a plunge in yields, which move inversely to prices.

"We don't see a rosy economic picture ... and we're under peer pressure to generate returns," said the Beijing-based manager who asked to be anonymous due to sensitivity of the topic.

Even those who have turned bearish appear half-hearted. Treasury futures investor Wang Hongfei said he chose to be "opportunistic" in the short term, trading quickly in skirmishes as the market tussle with regulators intensifies.

China's central bank has repeatedly warned of potentially destabilising bubble risksas investors chase government bonds and scurry away from volatile stocks and a sinking property market, while banks cut deposit rates. Falling yields also complicate the People's Bank of China's (PBOC) efforts to stabilise the weakening yuan.

But with the PBOC now turning threats into action to tame bond bulls, authorities have opened a new battle front - following wars of attrition long fought against speculators and unwelcome price moves in the country's stock and currency markets.

Unlike the West, "China's financial markets, including the bond market, are subject to top-down regulation," said Ryan Yonk, economist with the American Institute for Economic Research.

As the economy sputters, "Chinese officials will face increasing difficulty in maintaining such tightly controlled financial markets, and additional interventions are likely, and may signal the very instability Chinese officials are seeking to avoid."

First Shot

The first shot was fired last Monday, when China's long-dated yields hit record lows amid a global rout that drove money into safe havens such as treasuries.

State banks were seen selling large amounts of 10-year and 30-year treasuries after treasury futures jumped to record highs.

Debt dumping by state banks - confirmed by data and traders - continued throughout the week, mirroring how the central bank uses big banks as agents at times to influence the yuan currency market, traders said.

Late on Friday, the central bank said it will gradually increase the purchase and sale of treasury bonds in its open market operations.

PBOC Governor Pan Gongsheng was previously head of China's foreign currency regulator, so "it appears to be the same playbook," said a Shanghai-based fund manager.

In another warning shot to bond buyers, the PBOC ceased providing cash through open market operations on Wednesday for the first time since 2020, contributing to the biggest weekly cash withdrawal in four months in support of yields.

Dealing a further blow to market sentiment, China's interbank watchdog said it would investigate four rural commercial banks for suspected bond market manipulation, and would report several misbehaving financial institutions to the PBOC for penalty.

The PBOC did not reply to a Reuters request for comment.

'Sword of Damocles'

To be sure, the flurry of measures have made some investors cautious. Both China's 10-year and 30-year treasury futures posted their first weekly fall in a month.

"Taking all factors into account, it would be prudent to exercise additional caution regarding China duration risk," Kiyong Seong, lead Asia macro strategist at Societe Generale said, referring to the risk of holding long-dated bonds.

"While the scale of any selloff in China bonds may not be substantial in the medium and long term due to the fragile growth momentum in China, chasing duration returns in China does not seem appropriate in our view."

Tan Yiming, analyst at Minsheng Securities, wrote in a note: "The sword of Damocles is falling."

But in a so-called "asset famine" environment where high-yielding assets are in short supply, "the bond bull remains alive," Tan said.

The Shanghai-based fund manager said there's no reason to throw in the towel without seeing clear signs of economic improvement, and his strategy is to "buy on the dip".

"You cannot change market direction using technical tools, just as you cannot change the temperature by adjusting the thermometer," he said.

The PBOC moves could change the tempo of bond price rises, but not the uptrend, he said. "If you hold long enough, you will make money."

However, rising volatility shows the central bank is at least making some progress in giving investors pause for thought.

Chun Lai Wu, head of Asia Asset Allocation at UBS Global Wealth Management, cautioned that expected support to Chinese bonds from any monetary easing will likely be offset somewhat by stepped-up government bond issuance.

China's 30-year treasury yield is currently around 2.37%, compared with 3% a year ago.

"Over the long term, we could see the ... yield drift higher, maybe towards 2.5%, if indeed we see the economic recovery continue and inflation begin to return."

($1 = 7.1715 Chinese yuan renminbi)

Source: Reuters

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TD Securities

Economic

U.S. – Bumps in the Road

After last Friday’s disappointing payrolls report sent equities tumbling and bonds flying, markets have taken a bit of a breather this week. The U.S. 10-year treasury yield is back to 3.9%, within basis points of where it was last Thursday, while equities have retraced roughly half of their losses since Friday – although they are still well off their mid-July highs

The payrolls data set off alarm bells and traders piled into bets of impending rate cuts and a steep slowdown in economic activity. Fed funds futures are pricing 100 basis points of rate cuts from the Fed through the end of 2024. Importantly, with only three meetings to go, this suggests a 50-basis point cut could come as early as September.

We think this is a tad overdone. To be sure, rate relief is on the way, however our expectation is that the Fed will deliver three more cuts through December. The difference is slight but reflects the fact that we still see an economy that’s gradually gearing down, rather than one where the bottom is falling out.

For instance, take last week’s jobs report. Job growth slowed sharply to 114k jobs from 179k the month prior, with the services sector kicking its smallest addition of the post-pandemic recovery. On the face of it, the second consecutive month of decelerating job growth reflects waning momentum. However, job growth needed to cool to tame inflation and from this lens, the average of 170k jobs gained over the past three months, combined with a cooling in inflation, is a pace the Fed would be happy to accept.

Beyond the labor market, there are signs that economic activity is holding up. This week the ISM services index surprised to the upside, showing the sector regained some momentum to continue expanding. The details of the report were solid with new orders, overall activity and even employment all showing gains (Chart 1). The Weekly Bottom Line: Bumps in the Road_1

The Weekly Bottom Line: Bumps in the Road_1

Moreover, falling bond yields are helping ease financial conditions. Thirty-year mortgage rates are down below 6.5%, from 6.9% a month ago (Chart 2). Data from the National Association of Realtors showed June’s pending home sales up nearly 5% month-on-month (m/m), and with a further drawdown in financing costs in July, further recovery in actual sales could be in the offing. The Weekly Bottom Line: Bumps in the Road_2

The Weekly Bottom Line: Bumps in the Road_2

These indicators suggest an economy that continues to mosey along, slower than before, but not yet hitting a wall. And remember, the Fed remains data dependent, so for a sense of how the Fed will respond in September, two upcoming events will be in focus. First up, next week’s release of July’s Consumer Price Index (CPI). We are looking for a firming in core CPI (ex. food and energy) to 0.2% month-on-month. While this implies an annual figure of 3.2%, it would sink the three- and six-month percent changes in core CPI to roughly 1.6% and 2.9% annualized, respectively, comfortably extending the cooling in price gains.

The update on inflation then lays the groundwork for the next big event, the Fed’s Jackson Hole Economic Symposium on August 22-24th. Chairman Powell is slated to speak, so markets will be closely parsing his statements for any insights into the Fed’s read of recent events.

Canada – Keep Calm, Carry On

Canadian markets spent the holiday-shortened week digesting the rapid shift in market sentiment stemming from growth worries south of the border. Recent events in the U.S. and Japan have created volatile market conditions that have spilt over to Canadian markets. Yields whipsawed, with front-end yields rising 15 basis points, partially reversing the 30 bps rally the week prior. The Canadian dollar also caught a bid, up just over a tenth of a cent to 0.728/USD. Despite the external noise, we’d argue the economic outlook for Canada is stable and there isn’t a need to ring the alarm bells just yet.

With a soft U.S. payrolls print last week spurring knee-jerk reactions, Canada’s job market updates were being watched with an even closer eye. Like our southern counterparts, Canada disappointed against expectations, with virtually no job growth recorded in July. But unlike the past several months, labour force growth pulled back which helped keep the unemployment rate steady at 6.4%.Meanwhile, wages as measured by the Labour Force Survey are still growing at 5.0%, which will continue to be on the Bank of Canada’s (BoC) radar (Chart 1). The labour market has no doubt lost steam, but it is holding up relatively well and is evolving roughly in line with what we’d expect from past economic cycles. The Weekly Bottom Line: Bumps in the Road_3

The Weekly Bottom Line: Bumps in the Road_3

The Bank of Canada will use the labour data as a marker in their next policy decision. The Bank has firmly entered their rate easing cycle and so the question becomes how the path for policy rates looks over the rest of the year. Governor Macklem’s dovish tilt at last month’s meeting had markets re-jigging their rate cut expectations for the remaining three announcements this year, to now see Canada’s policy rate at 3.75% at year-end (Chart 2). This aligns with our thinking as it keeps interest rates on a slowly declining path and balances the objectives of supporting growth without reigniting inflation. The Weekly Bottom Line: Bumps in the Road_4

The Weekly Bottom Line: Bumps in the Road_4

The BoC’s Summary of Deliberations also released this week reiterated an important shift in the BoC’s thinking from last meeting. New in their messaging was the emphasis on the downside risks to inflation via excess supply and how it has taken on an increased weight in monetary policy discussions. This is an important shift in sentiment, as it’s indicative of a central bank concerned that the still high level of the policy rate may be exerting too much slowing in the economy.

Economic growth in Canada’s economy is by no means advancing at breakneck speed, but we don’t foresee a deterioration–or a recession–on the horizon. Domestically, the Canadian consumer bounced back in the first quarter of this year with contributions from spending expected to remain in coming quarters. Further, Canada’s trade picture is firming up as the recently operational Trans Mountain Pipeline expansion boosts energy exports, a theme we expect to persist of the coming months. At this stage, the BoC has enough confidence to gradually deliver rate relief to the economy with a soft-landing scenario still being the likely outcome.

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Samantha Luan

Economic

A week is not just a long time in politics.

Seven days ago a huge unwind in the yen carry trade and selloff in megacap U.S. tech triggered a wave of volatility that sent global markets reeling and investors running for the safety of U.S. Treasuries.

As the new trading week gets underway in Asia on Monday, that seems a long time ago - many assets have recovered much of these losses, volatility has subsided, and traders have heavily scaled back their rate cut expectations.

The question now is whether that momentum can be sustained. Some investors will seize upon lower equity volatility to push up risky assets again; others will be wary of potential aftershocks in any corner of the market, especially in mid-August when liquidity is much thinner than usual.

Monday's Asian calendar is light. Indian consumer price inflation is the main event, leaving markets at the mercy of global forces.

If that's the case, Monday should be relatively calm. Wall Street rose on Friday, meaning the Nasdaq and S&P 500 ended last week essentially flat. Treasury yields fell on Friday but registered their biggest weekly rise in months.

Stronger-than-expected U.S. economic data suggesting recession fears are overblown, and a couple of poorly-received U.S. debt auctions, pushed yields higher. No bad thing, perhaps, if you think the previous week's plunge was excessive.

Asian markets' rebound last week was pretty impressive. After the Nikkei registered its second biggest fall on record and its third largest ever rise in the space of 24 hours, the index ended the week down only 2.5%.

Other benchmark indices fared even better - the MSCI Asia ex-Japan and MSCI World index both ended flat, and the MSCI Emerging Market index rose 0.2%.

In currencies, U.S. futures market data on Friday showed that hedge funds slashed their net short yen position in the week to Aug. 6 by 62,000 contracts. That is the biggest yen-bullish weekly swing since the Fukushima disaster in February 2011, and third biggest since comparable data started in 1986.

If this is representative of the broader FX market, the short yen 'carry trade' has been mostly wiped out. Do traders begin shorting the yen and putting on carry trades again, or not?

Indian inflation is the main data point in Asia and comes after the Reserve Bank of India last week kept its key interest rate unchanged at 6.50%, dismissing the market turbulence and focusing on getting inflation down to its 4% medium term target.

The consensus in a Reuters poll is for annual consumer inflation in July to fall to 3.65% from 5.08% in June. That would be the first time in five years below the RBI's medium-term target.

Here are key developments that could provide more direction to Asian markets on Monday:

- India interest rate decision

- India industrial production (June)

- Germany wholesale inflation (July)

Source: Rueters

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Kevin Du

Economic

With the Middle East's emergence as a growing technology centre, it may be at a point where it is susceptible to a dreaded situation – a cyber attack.

And coupled with its leading role in the global energy sector, any episode that would rattle the region's tech infrastructure may have far-reaching consequences, taking root within its growing economies.

"Technology is universally integrated into many day-to-day processes, therefore, a cyber attack would be just as damaging to the Middle East as it would be to anywhere else in the world," Maher Yamout, a lead security researcher at Kaspersky, told The National.

"All economies rely heavily on computers and technology in general. The growing fusion of the digital and physical world is an international development that is not slowing down at any rate. As a result, similarities in the potential damage among major economies are a given."

A high price

The spotlight on the Middle East has grown in recent years as governments in the region ramp up their efforts to prepare their societies for the economy of the future, one underpinned by digital technology.

The push, led by the UAE and Saudi Arabia, has attracted attention and investments from companies such as Oracle, Google and Amazon, and highlights increasing investor confidence in the region.

In just about every industry, the Middle East is attempting to integrate the latest innovation to promote inclusiveness and reach the widest possible chunk of its population, especially now with services at the tip of one's fingers.

However, that also opens up opportunities for the digital underworld, which focuses on potentially lucrative demographics and economies.

"The region has shifted its approach towards knowledge-based sectors … this digital transformation – and the concurrent economic growth and prosperity – increases its attractiveness for hostile actors who are motivated by financial gain or political reasons, and also the number of vulnerabilities available to them," Haider Pasha, chief security officer at Palo Alto Networks, told The National.

Compared to other regions, cyber incidents in the Middle East have been relatively low, said Simon Bell, a cyber practice leader at New York-based consultancy Marsh McLennan.

Also, due to the far lower penetration of cyber insurance, the recovery for business is "likely to be more challenging and slower", he told The National.

But that does not mean the threat is insignificant. According to the latest IBM Cost of Data Breach report, the average cost of a cyber breach in the Middle East was slightly more than $8 million in 2023, a record for the region and the second highest globally behind only the US.

"The region has been experiencing a significant increase in phishing attacks and smishing attacks, which is a strong indication that such attacks are proving to be lucrative for cyber adversaries," Pepijn de Jong, a senior vice president and head of cyber advisory services at Marsh McLennan, told The National.

Phishing and smishing – two types of spoofing attacks – are growing in the Middle East, New York-based Marsh McLennan said.

Other popular weapons of choice for cyber criminals are malware, denial-of-service attacks and identity-based attacks, according to US cyber security company CrowdStrike.

In addition, the percentage of organisations globally that have reported costs of $1 million or more for their worst breach in the past three years rose to 36 per cent, from 27 per cent in 2023, according to PwC's 2024 Global Digital Trust Insights report.

The corresponding number for those in the Middle East this year is 29 per cent.

That means the damage from cyber attacks in the region could be far greater than the global average, said James Maude, field chief technology officer of US IT management company BeyondTrust.

"As the Middle East experiences a significant increase in digital transformation projects and technology investments, the risk of significant damage from a cyber attack will continue to grow," he told The National.

Malware detections in the UAE rose by about 12 per cent from January to May 2024, a broader trend affecting many countries in Europe, the Middle East and Africa, Swiss cyber security company Acronis said in a July report.

Bahrain had the highest detection rate, followed by Egypt. The two countries and South Korea the three biggest targets during the first quarter of the year, it said.

Moreover, while the Middle East is rapidly modernising and embracing digital technology, cyber security measures may not always keep pace, leaving critical infrastructure exposed.

"This makes the potential impact of a cyber attack in the Middle East far-reaching, affecting not just the local economies but also having serious global consequences," Sertan Selcuk, vice president at Florida-based cyber security company Opswat, told The National.

That consequence would be felt in the industry that has long been the mainstay of the Middle East – energy.

Energy crisis?

The effects of a cyber attack would not be limited to the Middle East, as the disruption it may cause would most certainly affect energy supply chains, with end consumers bearing the brunt of it.

With the region home to some of the world's largest oil and gas producers, any cyber attack can be "particularly damaging due to the region's crucial role in the global energy market", Mr Selcuk said.

"Any disruption here could cause significant ripple effects globally, leading to energy shortages and price hikes."

The Middle East accounted for about a third of the world's oil production in 2023, exporting about 15 million barrels per day, data from Statista shows.

"The energy sector is one of the most important and sensitive sectors that must protected from cyber attacks due to the devastating impact this sector might have on Middle Eastern economies," Mr de Jong said.

Cyber attacks around the world are a critical issue today. Taking into consideration the way digital transformation changes the way companies operate, suspect actors on the web also increase the volume and sophistication of their attacks.

The number of attacks against the energy industry and critical national infrastructure is "rising dramatically, in quantity, magnitude and impact", a February report from the World Governments Summit and consultancy EY said.

There have been no notable cyber incidents in Middle East energy but in the US and Canada, attacks have risen by about 71 per cent from 2021 to 2022, the report showed.

Complicating matters is geopolitical tension in parts of the Middle East: With its escalation, any high-profile or state-owned businesses will be at increased risk of cyber attacks from hacktivists, Mr Maude said.

Analysts have listed energy, finance, stock exchanges and health care as the industries that are most at risk.

"A breach of these entities could lead to substantial financial losses, erode trust … and destabilise the economy," Saran Paramasivam, a regional director at Indian software company Zoho, told The National.

What can be done?

Given that breaches affecting multiple environments incur the highest costs and longest resolution times, "substantial investments in security measures are imperative to mitigate both financial losses and operational disruption", Mr Paramasivam added.

Organisations and investors in the region are taking note: The Middle East's cyber security market is projected to surpass $24 billion by 2028, from an estimated $14.8 billion in 2023, growing at a compound annual rate of more than 10 per cent, according to research company Markets and Markets.

And in as much as the region could be susceptible to an attack, it can also be viewed as "ripe for reinvention" as the top three cyber investment priorities for the Middle East are modernisation of infrastructure, optimisation of current technology and an "improved risk posture", according to PwC.

Aside from the dollars, the Middle East is also actively advancing its cyber security landscape by protecting its critical infrastructure, developing regulations, addressing skill shortage and improving incident responses, Mr Pasha said.

"The region is also investing in advanced technologies and talent development, and working towards better data protection and regulatory frameworks," he said.

The security of critical infrastructure should be a priority: A 2022 Kaspersky report identified the Middle East as one of the top five global regions with the highest incidence of malware aimed at industrial control systems, making it an easy target for cyber criminals.

It does not matter if the technology used is old or new – stay outdated and fall prey to tried and tested techniques, or be updated and still be victimised by bad actors who are steps ahead, argues Mr Selcuk.

Systems that operate on outdated legacy platforms presents "significant challenges when updates, patch management and log collections require access through USBs, vendor laptops or other peripheral media", Mr Selcuk said.

Enterprises also need to ensure a top-to-bottom approach – from the server level and its authorised users, down to the personal devices of its end users – as cyber attackers can comb through a network to find any opening they will be able to exploit.

"Cloud environments are also susceptible to misconfigurations, leading to improper access controls or accidental data exposure. Insider threats, such as privileged user abuse or data theft, cannot be overlooked," Mr Paramasivam said.

"Finally, mobile devices, with their increasing role in both personal and professional life, introduce vulnerabilities through unsecured devices and malicious applications."

Source: The National News

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Alex

Economic

Stocks

With an assassination attempt and a late candidate swap, America's election ride has been wild. But what does it mean for stocks? No one really knows.

But the market couldn't care less about the drama.

What matters is that uncertainty will prevail, fuelling election years' normal second-half stock market surge, a US-based tailwind with global power. Let me show you why.

Headlines portray America's election as a wild rollercoaster. Twisty and occasionally upside-down. The candidates' personalities and colourful sound bites – usually unflattering – steal the spotlight.

But stocks look past this. They don't care about candidates' temperaments, gaffes or rhetoric. To markets, it is all noise, distracting from what really matters: Uncertainty will fall. We will get a winner, and markets will rally around them.

The Bull Stock Market Secret Behind America's Wild Election_1

This is a massive tailwind. Stocks hate question marks. They make investors and businesses nervous, discouraging risk taking. Early in most election years, question marks and fears abound. Myriad candidates typically clog the party primary races. They compete by playing to their bases – the extreme fringes of both parties – touting extremely scary views.

Hence elevated uncertainty usually stalls markets early in election years, when US returns average just 2.8 per cent in the first half since 1925.

But in the second half, uncertainty melts and stocks melt up.

Rowdy party primary races bring two nominees. Then we get vice presidential candidates. Party conventions render somewhat clear policy platforms. Rhetoric moderates as both sides court independent voters. State-by-state polls come into focus, showing investors each candidate's path to victory – and how wide it is.

Meanwhile, with Congress out campaigning, legislation grinds to a halt. Markets gain clarity and need not fret sudden policy disruptions. They love it!

The S&P 500 averages 9.2 per cent in US election years' second halves. Fun fact: This includes 15 years with positive first halves. Of these, the second half rose all but once in history (1948), with 8.9 per cent average returns.

This year started as an apparent exception. A rematch between President Joe Biden and former president Donald Trump looked destined, bringing unusually early low uncertainty. Absent scary primary noise, stocks shined.

Mr. Biden's late-June debate stumble changed everything, amping up switcheroo talk. Then came the abhorrent assassination attempt on Mr. Trump. Soon, Mr. Biden dropped out, endorsing Vice President Kamala Harris. Early rumblings emerged that some top Democrats didn't think she was viable. Would they coronate her? Or would the mid-August party convention be a multicandidate cage fight? All seemed to stoke uncertainty.

But it stabilised fast. Post-debate poll numbers initially swung a bit from Mr. Biden to third-party candidates, but they evened out. After the assassination attempt on Mr. Trump, stocks kept rising. Ms. Harris quickly attracted endorsements and top Democratic donors. As I write, we have only a handful of polls pitting her against Mr. Trump. But they have tightened from Mr. Trump's early-July margins over Mr. Biden.

This doesn't seal the deal for her. Honeymoon periods normally boost polling but usually don't stick. Then came the drama of who she would pick as her running mate. Regardless, by mid-August, we will have two decisive candidates, which means more clarity. The victory path will coalesce. Not with national polls. America votes state-by-state, via the Electoral College. Most states are already locked in. America's best election site, 270toWin.com, shows just five currently up for grabs: Nevada, Arizona, Wisconsin, Michigan and Pennsylvania. To these, I add Georgia, which waffles between toss-up and likely Mr. Trump.

This gives Mr. Trump a baseline of 235 electoral votes versus 226 for Ms. Harris. The winner needs 270. Now comes the harder, more crucial campaign battle: building late-stage ground games to mobilise marginal voters in these swing states. This takes money and know-how. The Democrats have more money, but Mr. Biden's debate flub revealed hidden weakness in states they assumed were safe: Minnesota, New Jersey, New Hampshire, Maine and even Virginia.

They have sufficient cash for TV and direct mail blitzes there. But can they build the ground game without distracting from the swing states?

Ms. Harris's success hinges on this. Her only real path to victory runs through Pennsylvania. If Mr. Trump wins this, he almost certainly wins Georgia, a much more Republican state. That gets him to 270. Will Ms. Harris turn out enough city and suburban voters to win? Or will Mr. Trump rally the more rural and industrial base?

Either way, we will have a winner, making stocks party hard late in the election year.

And after? Stocks' 2025 political impact hinges on the government's make-up, including both houses of Congress. If golden gridlock continues, squashing market-menacing bills, stocks should love it. If not, risks may lurk.

But 2025 is distant and too early to assess today. For now, simply enjoy late 2024's great stock market.

Source: The National News

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Cohen

Central Bank

Economic

Disappointing U.S. jobs data has shaken confidence in a soft landing for the world's largest economy, sending global equity markets tumbling and bets on interest rate cuts surging.

But investors abandoning a popular yen carry trade has played a big role in the selloff, complicating the message from asset prices on the economic outlook.

The likelihood of a recession is anyone's guess. Goldman Sachs has raised its odds of a U.S. recession to 25%. JPMorgan sees a 35% chance of one starting before year-end.

Here is what five closely-watched market indicators say about global recession risks:

1/ Data Puzzle

The U.S. unemployment rate jumped near a three-year high of 4.3% in July amid a significant slowdown in hiring.

It fanned recession fears by reaching a trigger point of the "Sahm rule", which has shown historically a recession is underway when the three-month rolling average unemployment rate rises half a percentage point above the low of the prior 12 months.

Still, many economists reckon the reaction to the data was overblown given the numbers may be skewed by immigration and Hurricane Beryl. Better-than-expected jobless claims data on Thursday also supported that view, sending stocks rallying.

"Payrolls are still growing. If you started to see payrolls turn negative, that would make me much more concerned that a genuine recession is starting," said Dario Perkins, managing director, global macro at consultancy TS Lombard.

The U.S. economy grew 2.8% in the second quarter on an annualised basis, double the first quarter rate and on par with the pre-pandemic average. Services activity also points to growth continuing.

Beyond the United States, however, business activity indicators point to faltering euro zone growth, while China's recovery remains fragile.

Global economic data is delivering negative surprises near the highest rate since mid-2022, Citi's surprise index shows. Recession Risks Roil Markets but Not Yet Alarming_1

Recession Risks Roil Markets but Not Yet Alarming_1

2/ Corporate Rout

MSCI's global stocks index is down more than 6% from July's record highs, while the U.S. S&P 500 has lost over 4% so far in August.

Yet analysts reckon stocks, which are still up around 7% globally this year, are far from signalling a recession.

Goldman Sachs estimates that every further 10% selloff in U.S. equities would reduce growth over the next year by just under half a percentage point.

Credit conditions could prove more important, analysts say.

They note that although the risk premium corporate bonds pay over government bonds has widened in Europe and the United States, it was correcting from historically tight levels and moves were not yet pronounced enough to suggested recession risks were high.

Recession expectations implied by the gap between U.S. investment grade bond and Treasury yields are about half as high as they were in 2022-2023, according to BofA. Recession Risks Roil Markets but Not Yet Alarming_2

Recession Risks Roil Markets but Not Yet Alarming_2

3/ Cut Away

Spurred on by the U.S. jobs data and a dovish-sounding Federal Reserve, traders now price in around 100 basis points of cuts in U.S. rates by year-end.

That is down from over 130 bps earlier this week, but double the roughly 50 bps anticipated on July 29. Markets also price in more than a 50% chance of a hefty 50 bps September cut.

Major banks have also added to the Fed cuts they expect this year.

Steve Ryder, portfolio manager at Aviva Investors, said the Fed was likely to cut rates three times this year, but given uncertainty around how economic data evolves, it was understandable that markets were pricing the probability that it would have to cut more.

Elsewhere, traders see a high chance of three more European Central Bank rate cuts this year, having seen less than a full chance of a second cut in mid-July. Recession Risks Roil Markets but Not Yet Alarming_3

Recession Risks Roil Markets but Not Yet Alarming_3

4/ Yield Curve

Rate cut bets have sent shorter-dated U.S. Treasury yields tumbling and the closely-watched part of the yield curve that tracks the gap between 10-year and 2-year Treasury yields turned positive for the first time since July 2022 on Monday.

While a yield curve inversion has historically been seen as a good predictor of a recession on the horizon, the curve tends to revert back to normal as the recession nears.

However, with the curve inverted for a record time this cycle with no recession materialising, a majority of strategists Reuters polled earlier this year no longer see it as a reliable recession indicator.

The curve has inverted back since, standing at minus 5 basis points on Thursday. Recession Risks Roil Markets but Not Yet Alarming_4

5/ Dr Copper

Known as "Dr Copper" for its track record as a boom-bust indicator, the metal's fall to 4-1/2 month lows this week puts it firmly on the recession watch list.

Trading at around $8,750 a metric ton, three-month London Metal Exchange copper prices have slumped roughly 20% from a record high scaled in May, reflecting pessimism about the global economic outlook.

Oil prices, another barometer of the health of global demand, are near multi-month lows. But their fall has been limited by worries that Middle East tensions could squeeze supplies from the largest oil producing region. Recession Risks Roil Markets but Not Yet Alarming_5

Recession Risks Roil Markets but Not Yet Alarming_5

Source: Reuters

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Thomas

Economic

China's secondhand goods trading sector is on the cusp of a new stage of growth as young, internet-savvy shoppers, who are also environmentally conscious, are inclined to use or share such goods and buy the relatively cheaper products online, experts said.

China's latest measures to boost large-scale equipment renewals and trade-in deals for consumer goods, they said, will further stimulate purchasing appetites of consumers, unleash domestic demand potential and consolidate the foundation for a rebound of the economy.

Ding Jian, president of Xianyu, Chinese tech heavyweight Alibaba Group's online trading platform for secondhand goods, said an increasing number of young Chinese consumers are paying more attention to green, sustainable consumption, and regard the purchase of secondhand goods as a thrifty, environmentally friendly way to shop.

Ding said Xianyu will cooperate with the government departments concerned to speed up the establishment of the standards concerning secondhand trading system, and further boost the efficient recycling and utilization of idle items and reduce carbon emissions.

Xianyu, he said, will further leverage digital technologies like artificial intelligence to continuously enrich and innovate the forms of, and mechanisms for, trading in secondhand items. It will also promote the circulation and reuse of idle resources, and bolster trade-in deals for consumer goods.

In late July, China said it will allocate about 300 billion yuan ($42 billion) in ultra-long-term special treasury bonds to support large-scale equipment upgrades and trade-in activities for consumer goods, aiming to further tap into the potential of domestic demand.

According to a notice jointly issued by the National Development and Reform Commission and the Ministry of Finance, about half of the planned bond funds will be used to support trade-in deals for consumer goods.

Ding said the recent trade-in program will encourage consumers to replace old consumer goods with new products that are more environmentally friendly, energy-saving and highly efficient, which will give a strong boost to the circulation of idle goods, adding China's secondhand goods market and the circular economy are expected to usher in new development opportunities.

Ding said Xianyu's daily active users have grown continuously over the past quarters, making him bullish on the prospects of the country's fast-developing secondhand trading sector. Launched in 2014, Xianyu has become one of the largest online trading platforms for used goods in China, with accumulated users reaching over 500 million. On average, more than 4 million such products are posted on the platform every day.

The value of China's used goods market transactions surpassed 1 trillion yuan in 2020, and will reach 3 trillion yuan in 2025, according to a report from the Institute of Energy, Environment and Economy of Tsinghua University.

Hong Yong, an associate research fellow at the Chinese Academy of International Trade and Economic Cooperation's e-commerce research institute, said the recent consumer goods trade-in program is conducive to weeding out consumer goods with high energy consumption and declining performance, further stimulating consumer spending appetites and injecting new momentum into economic growth.

Industry insiders said the trading of underutilized or unwanted goods — an important part of the circular economy — can effectively promote the efficient utilization of recyclable resources in China, help achieve the country's dual-carbon goals and foster green, sustainable development.

Mo Daiqing, a senior analyst at the Internet Economy Institute, a domestic consultancy, said, "The country's secondhand market, which is still nascent, has huge growth potential, and the penetration rate of online recycling and trading platforms is still relatively low."

Mo called for efforts to bolster the standardized and regulated development of the secondhand goods market, carry out third-party identification aimed at some used goods with high value, improve the discarded goods recycling network and enhance the processing and utilization of renewable resources.

The circulation and reuse of secondhand items can greatly reduce carbon emissions, Xianyu said, adding its users collectively helped reduce carbon emissions by 6.59 million metric tons between April 2023 and March 2024.

Li Xiang, head of Xianyu's ESG — environmental, social and governance — practices, said the company expects to serve more than 1 billion users and help drive carbon emission reductions of more than 55 million tons by 2030.