China's PBOC Readies Multibillion-Yuan Pool of Bonds to Sell by Tapping Major Banks

Economic

Central Bank

Summary:

PBOC signs agreements with major institutions to borrow bonds. Central bank says bond sales depend on market conditions.

After months of investor speculation about its intentions, the People’s Bank of China disclosed the clearest outline yet of its unprecedented plans in a statement to Bloomberg News on Friday.

It said it has hundreds of billions of yuan worth of medium- and long-term bonds at its disposal to borrow, after signing agreements with several major financial institutions. The central bank said it would borrow the bonds on an open-ended unsecured basis and sell them depending on market conditions.

The PBOC’s reply came after Bloomberg reported it had signed an agreement with Industrial & Commercial Bank of China Ltd. and was in talks with Postal Savings Bank of China Co. to borrow bonds, according to people familiar with the situation.

“Hundreds of billions are decent amounts when it comes to monetary operations,” said Frances Cheung, strategist at Oversea-Chinese Banking Corp. “The intention to sell mid-to-long end bonds is in line with our expectation, given the current bullishness in the bond market.”

China's PBOC Readies Multibillion-Yuan Pool of Bonds to Sell by Tapping Major Banks_1

China’s sovereign bonds have surged this year on the back of the country’s gloomy economic outlook and expectations for interest rate cuts. The lack of attractive alternatives and a switch out of savings to financial investments has fanned demand and an increase in government borrowing to boost fiscal stimulus failed to put off buyers.

However, the PBOC has been pushing back against the rally, warning investors of the potential for losses should the market reverse. The central bank sees excessively low yields as endangering financial stability and weighing on the yuan.

Benchmark yields rebounded from a record low this week after the PBOC said it would borrow bonds from primary dealers, a sign it may be contemplating selling the securities to cool the market.

“We think that hundreds of billions of amounts are likely to change the short-term momentum of the market,” said Yongbin Xu, co-chief investment officer of U-shine fund. “It is still difficult for PBOC’s action to change the long-term trend of bonds, the fundamentals plays a key role.”

The idea of the PBOC trading bonds as a potential tool came to the market’s attention via an old speech by President Xi Jinping, although such operations are also seen as a longer-term plan for better liquidity management in the financial system.

But a practical issue quickly became apparent that there may not be enough bonds for the PBOC to sell, or at least those with the maturities it wants to guide. Unlike peers such as the Federal Reserve or Reserve Bank of Australia which accumulated sizable amounts of debt before subsequently reducing their balance sheets, the PBOC has only bought a few batches of special sovereign bonds more than a decade ago.

Some speculated that the PBOC would look to borrow securities from primary dealers or big banks and sell them into the market, a move with little precedent in the global central bank playbook. The central bank held about 1.5 trillion yuan ($207 billion) of government debt on its balance sheet as of April. China's PBOC Readies Multibillion-Yuan Pool of Bonds to Sell by Tapping Major Banks_2

China's PBOC Readies Multibillion-Yuan Pool of Bonds to Sell by Tapping Major Banks_2

Analysts expect that yields may now settle into a range as the fundamentals driving the demand linger. China’s 10-year yield edged up one basis point to just over 2.25% on Friday, up from an all-time low of 2.18% on Monday, according to data compiled by Bloomberg.

Traders will closely watch the results of a 30-year government bond auction on Friday as a test of how the PBOC’s borrowing arrangement impacts investor demand.

“We still expect the PBOC would prefer ten-year yields to rise back up to close to 2.5% at least,” said Stephen Chiu, chief Asian foreign-exchange strategist at Bloomberg Intelligence. “So 2.3%-2.4% could be an achievable range, especially given that demand will be intact.

China watchers are also preparing for one of the country’s biggest annual policy meetings later this month, the so-called Third Plenum. Leaders at an economic meeting in December said they were contemplating a “new round of fiscal and tax reform,” sparking hopes that details may be unveiled there.

“The agreement opens the door for the PBoC to intervene in the market to stem off volatility,” said Gary Ng, senior economist at Natixis. “However, the current scale seems like it is more for a cyclical purpose as it will not be big enough to revert the market forces driven by economic rationale, such as the expectation of lower rates.”

Source:Bloomberg

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Cohen

Economic

Cryptocurrency

The future of Bitcoin (BTC) and the United Kingdom is under intense debate following the region’s general elections. The Labor Party is gearing up for the country’s leadership after an exit poll showed a landslide victory over Rishi Sunak’s Conservatives Party.

Bitcoin Under New UK Government

If the exit poll is confirmed, the Labor Party leader Keir Starmer will take over as the Prime Minister of the United Kingdom. This is a very big deal for the country and its financial market considering the Conservatives have led the UK for the past decade.

The crypto ecosystem is now in a gray area as it becomes quite hard to project what policies will come to guard the industry. The Conservatives, especially under Rishi Sunak have set a major standard for the Labor Party to trail. Over the past year, there has been a number of advances in the UK crypto ecosystem.

For example, Strike launched its Bitcoin services in the region recently as reported by Coingape. Additionally, the clamor surrounding Artificial Intelligence (AI) regulation is high. This has a unique bearing on the broader crypto ecosystem because several Web3-linked projects are now pivoting to AI.

Based on key trends observed this week, young UK voters were notably concerned about the future of crypto in the country. This concern is justifiable considering the fact the the electioneering campaign from all the parties was silent about the Bitcoin and the industry

With Labor Party likely to take over the affairs of the nations, it remains uncertain what to expect for the coin.

Will Web3 Thrive Under Keir Starmer?

The blockchain ecosystem has continued to expand beyond Bitcoin. Today, the industry is evolving at a very fast pace to now feature Real-World Assets (RWA) and tokenization.

Since the Labor Party fundamentally supports industrial growth, it might tilt toward supporting Web3. Many experts have projected that the tokenization industry will be worth more than $16 trillion in the coming decade. Already, many Web3 firms and financial giants like BlackRock are already solidifying their foothold in this regard.

With the right Labor policies, the industry may get more clarity, benefitting not just Bitcoin but other areas as well.

Source:Coingape

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Alex

Economic

Japanese household spending unexpectedly fell in May, government data showed on Friday, as higher prices continued to squeeze consumers' purchasing power, further threatening the fragile economy.

Consumer spending contracted 1.8% in May from a year earlier, far short of the median market forecast for a 0.1% uptick, as rising food prices weighed on spending for other items.

Consumption is among key factors the Bank of Japan (BOJ) is scrutinising to gauge the strength of Japan's economy and decide how soon to raise interest rates.

The weaker yen weighed on spending, including pushing down demand for overseas package tours, a government official told reporters at a briefing.

On a seasonally adjusted, month-on-month basis, spending decreased 0.3% versus an estimated 0.5% rise.

Sluggish private consumption is a source of concern for policymakers striving to achieve sustained economic growth underpinned by solid wages and durable inflation, which are prerequisites for normalising monetary policy.

BOJ Governor Kazuo Ueda has said he expects consumption to recover as big wage hikes offered by many Japanese companies, and government subsidies to curb electricity bills, prop up household income.

"I still think consumer spending is on a recovery trend in April-June, given rising wages and income tax cuts that kicked in from June," said Atsushi Takeda, chief economist at Itochu Economic Research Institute, adding that he expects the BOJ to raise interest rates in September.

The Japanese economy shrank more than initially reported in the January-March quarter, the government said earlier this week, in a rare, unscheduled revision to gross domestic product (GDP) data.

Economists, though, expect GDP to rebound this quarter thanks to higher wages and capital spending driving up domestic demand. A survey conducted by Japan's largest trade union group showed workers' monthly pay will rise 5.10% on average this fiscal year, the biggest hike in three decades.

Source:Reuters

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Cohen

Economic

Commodity

Australia’s east coast could see shortages of natural gas as early as in 2027 unless more supply is made available soon, the Australian Competition and Consumer Commission (ACCC) said in a report on Thursday, adding another warning about the domestic market of one of the world’s biggest LNG exporters.

“Long-term solutions to gas market shortfalls will require a range of policy and market responses,” ACCC said in its interim Gas Inquiry report, as carried by Bloomberg.

“Amongst these, there is an urgent need to develop new sources of gas production and supply,” the watchdog added.

Unless new supply is made available to the populous east coast of Australia, gas shortages could emerge in 2027, a year earlier than ACCC’s previous forecast from December 2023 that a shortfall could hit eastern Australia in 2028.

The revised date is due to “lower forecast supply due to delays in anticipated regulatory approvals for new projects and problems with legacy gas fields,” ACCC said.

To prevent shortages, Australia may have to redirect supplies earmarked for the spot market to consumers in the east coast, the watchdog said.

ACCC issued today the latest official warning of a possible shortage on Australia’s east coast.

The Australian energy regulator, the Australian Energy Market Operator (AEMO), said last month that Australia’s east coast could face imminent natural gas shortages due to supply outages and higher gas-fired power demand amid cold weather and unusually low wind generation.

In May, the industry group Australian Energy Producers said that Australia could face a natural gas shortage later this decade without action to boost domestic supply.

Australia’s energy producers and utilities are also calling on the government to support the existing natural gas-powered generation as a smooth market mechanism to move to growing shares of renewables in the electricity system. Australia has been closing coal-fired power generation and raising solar and wind power, but without enough baseload generation, it risks power shortfalls and blackouts, industry officials have warned.

Source:Oilprice

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Samantha Luan

Economic

Stocks

Santos CEO Kevin Gallagher has been making it abundantly clear for a while that he's up for selling parts or all of the $17 billion Australian oil and gas driller.

Last November, for example, he told investors he was "very frustrated" with the share price and that his door is open "seven days a week" for anyone with an offer. He reiterated the sentiment in May, three months after merger talks with local rival Woodside Energy collapsed. Now Saudi Aramco and the Abu Dhabi National Oil Company have each separately taken an initial look, Bloomberg reported on Thursday, citing unnamed people with knowledge of the matter. Chances are that they, too, will leave Gallagher hanging.

Santos has plenty to offer to its carbon-belching peers. The company operates several gas fields on and offshore that would appeal to players convinced that demand for that particular fossil fuel will endure through the transition to renewable energy. That could on paper be a handy diversification play for the two oil-heavy Middle Eastern state firms.

That it's now public that the pair have been sniffing around Santos may yet lure in some of the Western oil and gas majors like BP and Chevron that already operate Down Under. That, though, did not appear to happen earlier.

The trouble Gallagher is having is that an acquirer has to accept some pretty ho-hum returns. Assume the purchaser pays 20% more than Wednesday's closing stock price, it would value Santos's enterprise at some $24 billion. With operating income -after assuming 25% tax - expected to be around $1.7 billion both this year and next, per data compiled by LSEG, the return on investment would barely squeak above 7%.

A new owner would then have to cut around a quarter of Santos' operating expenses to boost the return above the target's 9% weighted average cost of capital. And that assumes the premium would be enough to mollify Gallagher's frustration; it’s previous effort to sell itself failed over valuation.

Of course, low returns don't prevent companies striking deals. Chevron, for instance, is looking at an 8.5% return on its acquisition of Hess. But it's a good reason for Santos to be left to its own devices.

Context News

Saudi Aramco and the Abu Dhabi National Oil Company are each separately considering making an offer to buy Australia's Santos, Bloomberg reported on July 4, citing unnamed people with knowledge of the matter.

In February Santos and rival Australian driller Woodside Energy ended discussions about a possible merger.

Santos shares were up more than 5% in morning trading on the Australian Securities Exchange.

Source: Yahoo

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Samantha Luan

Economic

Stocks

Global equities were set to hold onto record highs achieved Thursday as traders turned their attention to US jobs data due Friday for clues on Federal Reserve rate cuts.

Tokyo’s Topix index touched another record, before slipping. The moves followed gains for European shares, led by French equities. US stock futures were little changed in Asia after markets were closed Thursday for a holiday.

A gauge of global stocks was on track for its longest stretch of weekly gains since March. The moves have been driven by a series of soft US economic data which has revived hopes for a September rate cut. Emerging market equities also benefited as the MSCI Emerging Markets Index rose to the highest level in two years on Thursday.

“Markets expect US employment to show a slight slowdown or stability,” said Marco Oviedo, a senior investment strategist at XP Investimentos in Sao Paulo. “Any sign that the economy is cooling faster could be very positive for emerging currencies.”

An index of dollar strength steadied Friday after falling for a third day as developing-world currencies were broadly higher, led by the Brazilian real. The pound was little changed after a run of strengthening that began last week, as investors digested the prospect of a Labour Party victory in Thursday’s general election.

Global Stocks Hit Peak Level Before US Jobs Data_1

Exit polling data showed Keir Starmer’s Labour Party is projected to win with a huge majority, as Rishi Sunak’s governing Conservatives were on track for their worst-ever performance and would likely see some of the party’s biggest names voted out of Parliament.

France’s CAC 40 benchmark index advanced for a second day in the buildup to this weekend’s final round of voting in snap parliamentary elections. The gauge extended gains as polls suggested Marine Le Pen’s National Rally and its allies will fall well short of a majority.

In Asia, Australian and New Zealand yields were little changed early Friday. The yen was also steady after slightly strengthening in a rebound from the lowest level since 1986 reached on Wednesday.

Data releases in the region Friday include inflation for the Philippines, Thailand and Taiwan.

Soft Economic Data

Reports on Wednesday showed the American services sector contracted at the fastest pace in four years, while the labor market saw further signs of softening before Friday’s key jobs figures.

“With the ISM services yesterday falling to 48.8, the weakest since the pandemic and job claims deteriorating, ultimately the negative data is being seen as positive for markets,” said Justin Onuekwusi, chief investment officer at St James Place. “It feels like September is the date everyone is now looking at.”

West Texas Intermediate, the US oil price, edged higher early Friday. Bitcoin slipped to trade around $57,800.

Source:Bloomberg

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Devin

Economic

Political

The UK financial sector is warming to Labour's pro-business overtures and pledges to provide stability and support, but many in the City remain wary it could be targeted to prop up Britain's stretched public finances further down the line.

Under leader Keir Starmer, the Labour Party - expected to win Thursday's UK election - has assiduously courted the City of London, mindful that his plans for boosting economic growth will need a big dose of private capital.

In the last election in 2019, Starmer's predecessor Jeremy Corbyn set out a radical manifesto to increase public investment by raising taxes on companies and top earners, resulting in Labour's worst result since the 1930s.

"The most important change is that there has been a big shift in mindset by Labour towards the City in the past few years," William Wright, managing director of think-tank New Financial told Reuters.

"That is reflected in a strong sense of continuity in the reforms to capital markets and pensions underway," Wright said.

Labour, whose Rachel Reeves, a former economist at the Bank of England, is expected to become Britain's finance minister, has backed the Conservative government's post-Brexit 'Edinburgh Reforms' aimed at protecting the City's global competitiveness.

The party has also promised a review of the pensions and savings industry, which could help Britain's capital markets as well as boosting the financial resilience of the population.

But there is also speculation about changes to how capital gains and wealth are taxed, as well as Reeves' plans to change the way private equity is taxed, which would likely hit hard.

Michael Moore, chief executive of BVCA, a private equity industry body, said Labour was, however, showing willingness to back up its "pro-business mood music with engagement on substance".

Reeves had vowed to end a "loophole" that allows a portion of private equity earnings to be taxed as capital gains, rather than at the higher income tax rate, but last month signalled to the Financial Times that favourable tax treatment would continue in instances where fund managers put their own capital at risk.

Sanguine After Brexit and Truss

Many of Britain's top bankers and financiers are taking the prospect of a left-leaning Labour government in their stride after the hit from Brexit, and the impact on the UK government bond market in September 2022 from then-Prime Minister Liz Truss's plans for unfunded tax cuts.

"The industry has had positive and constructive conversations with Labour since 2019. If they win, very few new governments will have entered office better briefed on what our ecosystem needs to help act as a dynamo for growth and competitiveness," said Miles Celic, chief executive of TheCityUK, which represents the UK financial sector globally.

The Labour Party did not respond to a request for comment.

Fixing the damage to investor confidence and leakage of financial services activities to the EU caused by Brexit - arguably the most enduring legacy of the Conservative Party's 14 years in power - will be tough for Labour to fix.

France's central bank said last year transactions between French-based financial services firms and the rest of the world hit a record 10.4 billion euros in 2022 - double the volume seen at the time of the 2016 Brexit vote.

According to figures published by CityUK in January, the UK had a 16% share of cross-border bank lending in 2016 but this fell to 14% by end Q2 2023.

Meanwhile, Amsterdam has overtaken London to become Europe's top share trading venue since euro-denominated share trading by EU investors had to stop in Britain on Dec. 31, 2020.

Seeking Certainty and Stability

Starmer has repeatedly made clear that rejoining the single market, essential for the City to regain direct access to the EU, is a red line he won't cross.

Many market participants just want to see financial sector reforms already agreed properly implemented under Labour, to protect the industry's massive contribution to state coffers.

A study by PwC for the City of London Corporation and TheCityUK published in May estimated the total tax contribution of the financial and related professional services industry was 110.2 billion pounds ($140 billion) in 2023.

This is equivalent to 12.3% of total UK tax receipts, more than the UK government's education budget, or more than half the health budget.

Imminent changes to Britain's rules on stock market listings have been designed to bring in more big-ticket initial public offerings, which could potentially include China-founded fast-fashion retailer Shein, and other similar deals that bring handsome paydays for those involved.

The Financial Conduct Authority is set to publish its listings revamp after the election, which could spur a flurry of corporate activity from end-July.

Britain's economy pulled out of recession at a faster pace than previously thought in the first three months of this year, but the broader economic backdrop remains fragile.

UK public debt is high, nearly equivalent to GDP, with prospects of tepid growth, leaving analysts to conclude that taxes will inevitably rise to shore up health and other services, making the financial sector a potential target.

"It's pretty simple really, business wants certainty," said Naresh Aggarwal, associate policy & technical director at the Association of Corporate Treasurers.

M&G Investments said in a note to clients that a Labour election was unlikely to fundamentally alter the direction of the UK equity market where valuations are depressed compared with Wall Street.

But New Financial's Wright cautioned that Labour may be more radical in government than it has been in opposition, a view echoed by Samuel Gregg of the American Institute for Economic Research.

"The City should recognise Labour is a more left-leaning outfit these days than it was in Tony Blair's heyday," said Gregg, speaking of the New Labour stronghold of the early 2000s.

"That cannot help but make life more uncertain for the City under a Labour government with a huge majority."