Chinese Companies Rush To Hike Dividends, Buy Back Shares In Japan-style Reform

Economic

Summary:

Chinese listed companies are rushing to buy back shares and lift dividends as they respond to regulators' calls that echo reform efforts in Japan and South Korea, driving a welcome rally even if investors doubt that broader governance changes are afoot.

China-listed firms announced record cash dividends totalling 2.2 trillion yuan ($300 billion) for 2023 despite a fall in combined profit, official data shows. Over 100 listed companies returned money to investors for the first time.

Meanwhile, a growing number of firms are unveiling share buyback schemes to avoid being delisted or sanctioned with other penalties under tougher rules.

China's measures, designed to improve investor returns and announced in March, have triggered a solid rebound in stocks - the benchmark CSI300 index is up almost 17% from February's five-year lows.

They have also drawn comparisons with the Tokyo Stock Exchange's push for capital efficiency that drove the Nikkei to record highs.

But a Japan-style rally is unlikely as China's reforms have met with scepticism from fund managers who say it's more about rescuing the market than improving corporate governance.

Government-controlled companies, which account for roughly 30% of market capitalisation in China and Hong Kong, are under the tight grip of the ruling Chinese Communist Party, which could raise conflict of interest issues with non-state shareholders.

In Japan, firms have begun to unwind strategic shareholdings as part of ongoing reforms to be more market-oriented.

Returning money has struck a chord with investors who "have been calling for bumper dividends and more buybacks," said Yang Tingwu, fund manager at Tongheng Investment.

However, "Chinese companies have a long way to go in terms of corporate governance," he added. Under China's top securities regulator Wu Qing, listed companies are pressured to engage more with investors and improve returns.

This mimics Japan's corporate reform and South Korea's "Value Up" program, said John Pinkel, partner of New-York-based hedge fund Indus Capital, which recently added China exposure.

"The common denominator of these positions: they all have large cash positions, are buying back shares or increasing dividends, and we like their business models."

The China campaign has seen many firms arm-twisted to pay dividends.

Jason Hsu, chairman and chief investment officer of Rayliant Global Advisors, said that Japanese firms respond well to sticks and the same strategy works too in China, where regulators hope to protect retail investors.

Jilin Expressway Co and Fangda Special Steel Technlogy, for example, didn't intend to pay dividends, but changed plans to return money to investors following questioning by the Shanghai Stock Exchange.

In addition, companies including Chongqing DIMA Industry Co, SafBon Water Service and Infund Holding Co scrambled to unveil share buyback plans after warnings by stock exchanges that they could be delisted if their share prices traded at persistently low levels.

To be sure, concerns linger especially over state-owned companies (SOEs), who are tasked with social responsibilities often at odds with shareholder interests.

And while Japan's stock market revival was aided by foreign inflows, China still faces geopolitical headwinds and global fund managers remain nervous.

"When it comes to Chinese companies, as a minority Western investor, you are not top of the priority," said Sunil Krishnan, head of multi-asset funds at Aviva Investors, London.

"That is just a structural factor that Western investors have to recognise and accept." Still, as markets price in the progress investors have pocketed gains.

"The way that I look at Chinese governance is that yes, there is still a long way for the Chinese to improve and they are trying to improve it," said Chi Lo, senior markets strategist at BNP Paribas Asset Management.

Source：Reuters

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[Quick Facts]

1. Australia's inflation rises, interest rates likely staying higher for longer.

2. Fed's Beige Book shows an overall pessimistic outlook.

3. Germany's inflation rebound puts upward pressure on European prices.

4. OPEC+ will extend production cuts, eye on Venezuela's output change.

[News Details]

Australia's inflation rises, interest rates likely staying higher for longer

Australia's CPI rose 3.6% from a year earlier in April, higher than the previous month's 3.5% and the expected 3.4%; core CPI increased by 4.1% year-on-year, also higher than the previous reading of 4.0%.

Overnight index swap traders slightly increased their bets on an interest rate hike by the Reserve Bank of Australia (RBA) this year, with the likelihood of a September rate hike reaching 25%, up from 20% before the data release. In addition, traders don't expect a rate cut until mid-2025 at the earliest. This means the market expects that the RBA rate cut has been delayed once again.

Retail sales data released on Tuesday showed continued weakness in consumer spending, and the first-quarter GDP data scheduled for release next week is likely to show that the Australian economy has started 2024 on a weak note.

Fed's Beige Book shows an overall pessimistic outlook

The Federal Reserve released its latest Beige Book on May 29, local time, which showed that economic activity in the U.S. continued to expand from early April to mid-May, with most districts reporting a slight increase in economic activity. However, the overall outlook has become more pessimistic against a backdrop of rising uncertainty and increased downside risks.

The report showed that prices continued to rise at a modest pace. Contacts in most Districts noted consumers pushed back against additional price increases, which led to smaller profit margins for firms. Many Districts observed a continued increase in input costs, particularly insurance. Looking ahead, price growth is expected to continue at a modest pace in the near term.

A majority of Districts noted better labor availability, though some shortages remained in select industries or areas. A couple of Districts expect a continuation of modest job gains, while others noted a pullback in hiring expectations amid weaker business demand and reluctance due to the uncertain economic environment. Wage growth remained mostly moderate.

Overall, this report again dampened expectations for a rate cut.

Germany's inflation rebound puts upward pressure on European prices

German CPI rose 2.4% year-on-year in May, up from 2.2% in April and HICP rose 2.8% YoY, higher than the previous 2.4%. This inflation report is a good reminder of how difficult it will be for the European Central Bank (ECB) to return inflation to 2% sustainablly.

While the data won't affect the ECB's decision to cut rates in June, the German inflation data points to a real risk of price growth accelerating, at least true for a central bank setting the inflation target as 2.0%. This means that the policy path after the June rate cut will be affected. The upside risk to inflation and the gradual recovery of the euro area economy limit the ECB's action after the June meeting.

OPEC+ will extend production cuts, eye on Venezuela's output change

The OPEC+ meeting will be held on Sunday and the organization is expected to extend its current production cuts as concerns remain over economic conditions, interest rates, inflation, demand, and increasing geopolitical risks. While Venezuela has seen a slight increase in oil production, it is uncertain whether it will be one of the countries to cut production in the medium term. It has been excluded for a long time due to the long-term decline in its oil production.

However, with sanctions still in place against Iranian oil and different African oil producers and exporters experiencing problems with production, Venezuela may play a more important role in OPEC and the global oil markets, especially the American and European markets, in the future if its production continues to grow.

[Focus of the Day]

UTC+8 15:00 Switzerland GDP (Q1)

UTC+8 17:00 Eurozone Business Climate Index (May)

UTC+8 22:00 U.S. Pending Home Sales Index MoM (SA) (Apr)

UTC+8 00:00 Next Day: Bank of England Deputy Governor Breeden Speaks

UTC+8 00:05 Next Day: New York Fed President Williams Speaks at the Economic Club of New York

UTC+8 02:50 Next Day: Bank of England Governor Bailey Participates in Fireside Chat

UTC+8 04:30 Next Day: Dallas Fed President Logan Speaks

UTC+8 05:00 Next Day: New Zealand Fed President Orr Speaks on May Monetary Policy Statement

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Thomas

Forex

Economic

Central Bank

The currency reached a four-week low of 157.71 before trimming some of its losses to trade at 157.39 per dollar as of 10:15 a.m. in Tokyo on Thursday. That puts it near the closely watched mark of 157.52, where the yen strengthened dramatically at the start of May.

The sustained weakness reflects the wide gap in yields between Japan and other major economies which has pulled money out of the yen into assets with potentially higher returns. Even as Japanese bond yields reach fresh decade highs, pressure on the country's currency hasn't abated.

“The yen carry trade remains too attractive and fast-money investors continue to short yen,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. “Unless speculation emerges that the Federal Reserve will cut rates big or the Bank of Japan will raise rates a lot, strong momentum in dollar-yen is unlikely to change.”

Japan's 10-year government bond yield increased as much as 2.5 basis points to 1.1%, the highest since July 2011. Benchmark yields have been rising on mounting speculation the BOJ will deliver additional interest-rate increases this year after exiting the world's last sub-zero rate regime in March.

“Even if Japan's yields go slightly higher, it does not matter,” Omori said, with the market focus still on higher-yielding currencies.

The yen has depreciated not just against the dollar, but also versus European currencies. It's near the lowest since 2008 against the pound and is approaching a record low against the euro. Ten-year US and UK bonds yield over 300 basis points more than their Japanese counterparts.

Intervention Pushback

Japanese authorities haven't confirmed whether they bought yen in late April and early this month. They may have purchased about ¥3.5 trillion ($22 billion) of the currency, based on a comparison of commercial lenders' deposits at the Bank of Japan with brokers' forecasts.

Finance Minister Shunichi Suzuki has said repeatedly that he's closely watching developments in the currency market and will take appropriate measures if necessary. Still, the rate of change in the yen has been less rapid than a month ago, and Japan needs to be mindful of any pushback from its trading partners.

In a sign that it may be harder for Japan to step into the market now, US Treasury Secretary Janet Yellen reiterated that currency intervention should be a seldom-used tool and that officials ought to give fair warning about when they resort to it. Group of Seven nations have agreed not to tinker with exchange rates unless they are tamping down extreme volatility, she said earlier this month.

“It may be hard for them to step in when the pace of the yen's weakness is slow given recent remarks from Yellen,” said Marito Ueda, head of the market research department at SBI Liquidity Market Co. “Currencies with higher yields are likely to strengthen amid a surge in yields globally, continuing to weigh on the yen.”

BOJ Board Member Seiji Adachi, a noted dove on the board, acknowledged on Wednesday that it's possible yen weakness could spur price gains and prompt authorities to consider another rate hike earlier than expected. Adachi's remarks are largely in line with those of Governor Kazuo Ueda, who has recently shifted his tone regarding the weak yen by warning clearly of the potential for policy action in response to the currency's impact on prices.

Swap markets are pricing in a 100% chance of a rate hike by the BOJ's July meeting, compared with a 75% probability at the beginning of the month.

Source: Bloomberg

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Owen Li

Economic

Forex

The Bank of Japan in the Spotlight

The Bank of Japan and the USD/JPY will remain in the spotlight on Thursday (May 30). Views on inflation, the impact of a weaker Yen, and the timing of a BoJ rate hike would garner investor attention.

On Wednesday (May 29), BoJ Board Member Seiji Adachi warned of a policy response if the weaker Yen affects inflation. A weaker Yen raises import costs and the prices consumers pay for goods. Consumers could curb spending, impacting price stability and the Japanese economy.

In May, consumer confidence waned, with the Consumer Confidence Index unexpectedly falling from 38.3 to 36.2. The pullback in consumer confidence followed the significant wage hikes in the spring, suggesting continued weakness in household spending.

The BoJ focuses on household spending and the services sector as potential drivers of demand-driven inflation. The weaker Yen could also affect the economy, with private consumption contributing over 50% to the Japanese economy.

There are no stats from Japan to consider before Tokyo inflation, retail sales, industrial production, and unemployment numbers on May 31. Nevertheless, the USD/JPY move toward 158 could trigger intervention threats from the Japanese government.

US Economic Calendar: Fed Speakers, GDP Numbers, and Jobless Claims

Later in the Thursday session, the second estimate of GDP and jobless claims figures warrant investor attention.

According to the first estimate of GDP, the US economy expanded by 1.3% in Q1 2024 after growing by 3.4% in Q4 2023. A more marked expansion could reduce investor bets on a September Fed rate cut. The Fed could leave interest rates higher for longer to cool the economy and dampen demand-driven inflation.

However, labor market conditions may also influence the Fed rate path. Economists forecast US initial jobless claims to increase from 215k to 218k in the week ending May 24. An unexpected fall in claims could also impact investor expectations of a September rate cut.

Tight labor market conditions could support wage growth and increase disposable income. Higher disposable income may fuel consumer spending and demand-driven inflation.

Other stats include housing sector data. However, these will likely play second fiddle to the GDP and labor market numbers.

Beyond the numbers, Fed commentary needs consideration. Reactions to recent US economic data, views on inflation, and the Fed rate path could move the dial. Fed Vice Chair John Williams and FOMC member Lorie Logan are on the calendar to speak.

Short-term Forecast

Near-term trends for the USD/JPY may depend on the Japanese and US inflation figures. However, BoJ and Fed chatter could also influence near-term price trends in the USD/JPY pairing. Moreover, investors should consider the implications of a weaker Yen on BoJ policy goals.

USD/JPY Price Action

Daily Chart USD/JPY Forecast: Yen Weakness in Focus as Investors Eye BoJ's Next Moves_1

The USD/JPY sat well above the 50-day and 200-day EMAs, confirming the bullish price trends.

A USD/JPY breakout from the 157.5 handle could give the bulls a run at the 160 handle. Furthermore, a return to 160 could signal a move to the April 29 high of 160.209.

US GDP, initial jobless claims, and central bank comments need consideration before the Friday session.

Conversely, a USD/JPY fall through the 157 handle could signal a drop toward the 50-day EMA. A break below the 50-day EMA could give the bears a run at the 151.685 support level.

The 14-day RSI at 64.39 indicates a USD/JPY climb to the April 29 high of 160.209 before entering overbought territory.

Source: FX Empire

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Cohen

Economic

Stocks

The Dow Jones Industrial Average fell 411.32 points, or 1.06%, to 38,441.54. The S&P 500 dipped 0.74% to 5,266.95, marking its first negative session of the last three. The Nasdaq Composite slipped 0.58% to 16,920.58, as Nvidia’s advance somewhat mitigated losses for the technology-heavy index.

Nvidia climbed 0.8%, reversing an early loss of 2.6%. The megacap tech name has risen every trading session since issuing its blockbuster earnings report last Wednesday. Since then, the stock has surged roughly 21%.

All 11 sectors that comprise the broad S&P 500 retreated, underscoring the breadth of market weakness. More than 440 stocks in the index were lower on the day.

In all, 27 of the 30 stocks in the Dow fell. Insurance provider UnitedHealth led the blue-chip average lower with a slide of more than 3% following management commentary around its Medicaid business. Other stocks tied to the federal health insurance program dropped, including Molina Healthcare, Humana and Elevance Health.

Wednesday’s move lower comes as the 10-year Treasury note yield ticked higher for a second day, last trading above 4.6%. The benchmark yield popped to troublesome levels for stock investors following a Treasury Department auction on Tuesday that was met with weak demand. Higher yields can lower the multiples investors are willing to pay for stocks, drive up borrowing costs, hurt consumer spending and make T-bills and money market funds more attractive.

“Today is really all about interest rates,” said Adam Turnquist, chief technical strategist at LPL Financial, adding that the 10-year and 2-year yields have touched “uncomfortable levels.” “That all is creating some angst among investors.”

While there has been a choppy start to the shortened week, the major averages are on track to close the month with notable gains. The S&P 500 is up 4.6% in May, while the Dow has advanced about 1.7%. The Nasdaq has climbed more than 8% this month.

The advances arrive even as traders have lowered their expectations for Federal Reserve rate cuts. Indeed, fed funds futures trading data suggests a nearly 54% chance that rates will hold steady in September, according to the CME FedWatch Tool.

Investors are asking: "What is the summer going to deliver? And is the macro environment really changing?" said Shelby McFaddin, investment analyst at Motley Fool Asset Management. "The year is moving quickly. And some of the things that were expected to happen, the probability of them happening is decreasing."

Source：CNBC

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Economic

Central Bank

The stakes are high as Fed meeting approaches

After months of hotter-than-expected inflation prints, there was finally some good news in the latest CPI report. Both the headline and core measures of the consumer price index (CPI) edged lower in April, raising hopes that the Fed will be able to stay on course to cutting rates later in the year.

But with the Fed traditionally putting more weight on the alternate inflation metric of the personal consumption expenditures (PCE) for assessing price pressures, Friday's numbers could set the tone for Fed policymakers as well as for the markets before the blackout period begins at the weekend in the runup to the June 12 policy decision.

Hoping for a cooldown

The core PCE price metric that the Fed aims to keep near 2.0% stood unchanged at 2.8% in March. The forecasts indicate core PCE will hold at 2.8% for the third straight month in April, while the headline figure is also projected to stay steady at 2.7%. Month-on-month, both the core and headline rates are expected at 0.3%.

Will Core PCE Inflation Spur a Less Hawkish Fed?_1

However, some forecasters are putting the month-on-month pace for core PCE at 0.2% while the S&P Global business surveys for the month also suggest the risks are tilted to the downside. A softer-than-expected reading in one or more of the PCE price indices would likely add to bets that the Fed will cut rates sooner rather than later.

Aside from PCE inflation, personal income and spending figures will also be watched in the same report. Personal income is forecast to have risen by 0.3% m/m in April, down from 0.5% in the prior month. More importantly, consumer spending is expected to have slowed, growing by just 0.3% m/m versus 0.8% in March.

Will Core PCE Inflation Spur a Less Hawkish Fed?_2

What will it take for the Fed to change its tune?

Expectations of two rate reductions rose on the back of the CPI numbers before being pared back again after Fed officials maintained their hawkish posture despite the encouraging data. There is a risk of the same thing happening again if there is some cooling off in PCE prices – any initial euphoria could fade if the Fed does not adopt a less hawkish stance at its June policy meeting.

But the core PCE price index is not the only indicator on investors' radar ahead of the FOMC decision. The May payrolls data is out on June 7, while there will be another CPI report on Fed Day. In between the PCE data and the NFP report, the ISM PMIs will additionally be released. Hence, unless there is a big surprise, investors will likely opt not to overact to a slight improvement in the inflation picture and instead wait for the other upcoming events.

Dollar defies hawkish Fed

Yet, for the US dollar, growing doubts about two rate cuts have barely provided a boost as Fed Chair Powell seemingly ruling out a rate hike has put a lid on gains. The dollar's surprise underperformance comes even as other central banks such as the ECB are poised to cut rates in June.

The euro recently broke above its descending trendline, gaining support from a strengthening economic recovery in the Eurozone. The single currency may well test the $1.09 handle in the coming days if Friday's data does not change much about the US outlook.

Investors in wait-and-see mode

In case of stronger-than-expected numbers, the euro could take a dive towards the $1.0790 region, which lies near the 50% Fibonacci retracement of the October-December 2023 uptrend as well as the 200-day moving average.

Will Core PCE Inflation Spur a Less Hawkish Fed?_3

However, there's likely to be more dollar weakness if the inflation numbers miss the expectations, with the euro potentially aiming for the March peak of $1.0980.

Summing up, with an elevated risk of Fed rate cut bets for 2024 being trimmed to just one or even none, markets will be sensitive to any sharp deviations in the PCE readings from the forecasts. Otherwise, traders will prefer to form a more complete picture with the help of the June FOMC meeting and the other releases due until then before deciding on the next direction.

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Alex

Economic

Commodity

Oil prices were down on Thursday as the markets wait on the latest U.S. crude oil stockpiles data while resilient U.S. economic activity pointed to borrowing costs staying higher for longer in a potential blow to demand.

Brent futures lost 9 cents, or 0.1%, to trade at $83.52 a barrel, while U.S. West Texas Intermediate (WIT) crude was down 3 cents, or 0.04%, to $79.19 at 0046 GMT.

U.S. crude oil and gasoline inventories fell last week while distillates rose, according to market sources citing American Petroleum Institute figures on Wednesday.

The API figures showed crude stocks were down by 6.49 million barrels in the week ended May 24, the sources said, with gasoline inventories down by 452,000 barrels, and distillates up by 2.045 million barrels.

This comes against analysts projection of U.S. energy firms pulling 1.9 million barrels of crude out of storage while stocking 0.4 million barrels of distillates and 1 million barrels of gasoline.

The date by U.S. Energy Information Administration (EIA) is due later on Thursday.

"Any sign of strong demand in EIA's weekly inventory report should support crude oil prices," ANZ Research said in a note.

Rising global oil inventories through April due to soft fuel demand may strengthen the case for OPEC+ producers, which include the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, to keep supply cuts in place when they meet on June 2, OPEC+ delegates and analysts say.

Oil markets have been under pressure recently over expectation the Federal Reserve will keep interest rates higher for longer.

U.S. economic activity continued to expand from early April through mid-May but firms grew more pessimistic about the future while inflation increased at a modest pace, a Fed survey showed.

Higher borrowing costs tend to tie down funds and consumption, a negative for crude demand and prices. The Fed is now seen cutting rates in September at the earliest, compared to a June start to easing cycle expected by markets at the start of the year.