Why China's National Team Won't Save Spiralling Markets

Economic

Stocks

Summary:

For a second day running state-backed buying likely scraped Chinese stocks from multi-year lows...

For a second day running state-backed buying likely scraped Chinese stocks from multi-year lows. Investors doubt the support will last and warn it leaves markets unbalanced and unstable.

Formed in response to a market crash in 2015, the so called "national team" of Chinese state-backed investors poured $17 billion into index-tracking funds last month and were piling in on Friday and Monday as markets fell, analysts say.

On both days, the Shanghai Composite index slid suddenly to five-year lows before recovering simultaneously with surges in turnover at blue-chip stock tracking index funds.

But analysts and investors say propping up the market with cash can't be sustained and won't provide a lasting turnaround as long as the property sector remains weak and a weight on consumer and investor confidence. The task is also giant: mainland stocks are worth nearly $9 trillion.

"This effect may resemble the outcome observed during the 2015 boom-and-bust cycle," said Dennis Yang, Professor of Business Administration at the University of Virginia Darden School of Business.

"The short-term solution is unlikely to be sufficient for restoring long-term confidence among global investors without addressing the underlying issues in the Chinese economy."

In 2015 with a vastly more favourable economic backdrop the effect of "national team" buying was debatable and in any case, it took months for markets to find a bottom and more than five years for the blue-chip CSI300 to regain its peak.

This time analysts say similar buying has been evident for months - with S&P Global Market Intelligence tracking more than $17 billion into blue-chip tracking funds last month - but there is no resolution in sight to the core growth problem.

"China's economy is shifting away from infrastructure and property investment and towards higher value-added industries," said Ben Bennett, Asia-Pacific investment strategist at Legal & General Investment Management.

"Recent stimulus is trying to ease the transition by focusing on the symptoms such as decelerating credit growth and volatile equity markets. But the transition is still taking place, so such policies can only have a limited impact."

Questionable

The underperformance of China's markets is stark, as are signals that investor trust and patience are spent.

Numerous market-focused support measures such as restrictions on short-selling or reductions in trading duties have also failed to staunch the selloff, as have a number of government statements promising support but lacking details.

Most big investors say they are waiting for a spending package to help households. There has been no official confirmation of a Bloomberg News report of a mooted 2 trillion-yuan stockmarket bailout fund.

"Consumers face multiple crises of confidence in debt, property, and employment, emphasising the multifaceted challenges confronting China's economy," said Michael Ashley Schulman, partner & CIO of Running Point Capital Advisors.

"The effectiveness of the market rescue ... is questionable if it does not address weak aggregate demand or the deeper issues in the property market," he said. "Beijing's historical market interventions have shown short-lived impacts."

Foreign investors sold a net 18.2 billion yuan ($2.5 billion) in Chinese equities last month to notch a sixth straight month of outflows.

The has fallen six months in a row, losing 20%, while world shares added 5%. Small domestic investors are scrambling to buy funds tracking foreign shares.

To be sure, there are speculators circling who think that Chinese stocks are so cheap as to be bargain value. And the entry of state-backed investors could bend markets and open opportunities to follow the "national team" into index funds.

"The rescue is unbalanced, they mainly save the central (state-owned enterprises) and the blue-chip CSI 300 stocks," said Pang Xichun, research director at Nanjing RiskHunt Investment Management.

He recommends taking long positions in such state-owned companies and shorting small companies. While not exactly a bet on improvement, such a position - at least for now - may be profitable. The CSI 300 finished Monday up 0.7% and the small-cap index down 6.2%.

($1 = 7.1963 Chinese yuan renminbi)

Source: Reuters

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Alex

Bond

Treasuries extended Friday's losses, pushing the five-year yield to its highest level this year, as strong economic data reinforced the message of Federal Reserve officials including chair Jerome Powell that interest-rate cuts are unlikely to begin before May.

Yields climbed at least 10 basis points (bps), the five-year nearly 15bps to 4.13%, after the Institute for Supply Management (ISM) gauge of service-sector activity for January exceeded economist estimates. Friday was the US bond market's worst day in nearly a year, with two- and five-year yields rising more than than 15bps after strong January employment data dashed hopes for a speedy pivot toward easier monetary policy.

The chance of a quarter-point cut in March dwindled to almost 10%. Powell, in an interview with CBS's 60 Minutes which aired on Sunday, reiterated his Jan 31 comment that the Fed's next policy meeting in March is probably too soon to cut rates. Minneapolis Fed president Neel Kashkari made similar comments Monday, and nine other central bank officials are slated to speak this week.

Treasuries Losses Deepen as Strong Data Reinforces Fed's Message_1

The ISM report — which included an unexpected jump in a gauge of prices paid by companies in the service sector for materials — “just further reinforced the message from Powell that it's unlikely we'll see a March rate cut,” said Ian Lyngen, head of interest-rate strategy at BMO Capital Markets. Anticipation of this week's Treasury note and bond auctions over the next three days was putting additional upward pressure on yields, he said.

Monthly auctions of three- and 10-year notes and 30-year bonds totaling US$121 billion (RM572.36 billion) are scheduled, and in the corporate bond market, Morgan Stanley led a slate of 10 offerings Monday to begin a week expected to bring US$25 billion to US$30 billion.

Just four weeks ago, a March rate cut was considered a near certainty by investors, but Powell last week and again on Sunday said officials are looking for more economic data to confirm that inflation is headed down to their 2% target. Annual consumer price growth accelerated slightly to 3.4% in December.

Kashkari, in an essay published on the Minneapolis Fed's website on Monday, said the economy may be able to withstand higher interest rates than in the past, lessening the risk of waiting to cut interest rates.

Those comments were also a factor for the market on Monday, said Zachary Griffiths, senior fixed-income strategist at CreditSights.

Combined with the latest economic data, “this all suggests maybe all the optimism regarding disinflation may have gone too far”.

For months, traders have been piling into bets for early decreases, but with policymakers increasingly wary of declaring victory over inflation it's setting the market up for a sharp reversal. Goldman Sachs Group Inc, Bank of America Corp and Barclays plc are among Wall Street banks that last week pushed back their calls for the timing of the first Fed rate cut from March.

European bonds yields also climbed, with UK and most eurozone two-year yields higher by at least six basis points on the day, 10-year yields by at least 8bps.

Traders are betting on five quarter-point reductions from the European Central Bank this year, down from nearly seven expected a couple of months ago. The Bank of England is only expected to lower policy rates three times compared to as many as six late last year.

Source: Bloomberg

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ING

Economic

January inflation slides to 2.8%

Philippine headline inflation fell sharply lower to 2.8%YoY in January, down from 3.9%YoY in the previous month and well below the market consensus of 3.1%YoY. Core inflation also moderated, slipping to 3.8%YoY and settling within target for the first time since July 2022.

Slower inflation was recorded across 10 out of the 12 subsectors, with food inflation moderating to 3.5%YoY (5.4%YoY previously) and transport inflation actually reporting negative inflation (-0.3%YoY).

Despite slowing food inflation, however, rice inflation accelerated further to 22.6%YoY as local production remains challenged by the ongoing El Nino weather phenomenon. Rice inflation is important given the commodity's 9% weight in the CPI basket.

BSP likely to stick to hawkish tone...for now

Despite the slide in headline inflation, we are fully expecting the Bangko Sentral ng Pilipinas (BSP) to retain their hawkish tone and promise to keep their policy stance "sufficiently tight" for the time being. BSP Governor Remolona indicated that he was expecting inflation to slide in 1Q before accelerating sharply in 2Q, justifying his outlook for rates to stay higher for longer.

However, Remolona was recently quoted saying that a rate cut in 2H was possible, but that he would need to see inflation settle well within the target range for an extended period.

If we continue to see inflation moderate well into 2Q, we do expect BSP to begin to change their tune to signal a pivot, possibly by June.

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FastBull Featured

Daily News

[Quick Facts]

1. Japan's wage data is likely solid enough to keep BOJ on track.

2. U.S. ISM service sector growth accelerates in January.

3. The Eurozone service sector is unlikely to recover soon.

4. The likelihood of the ECB delaying a rate cut is growing.

[News Details]

Japan's wage data is likely solid enough to keep BOJ on track

Data showed that Japan's wage growth in December last year was less robust than expected, but it is likely solid enough to keep the Bank of Japan (BOJ) on track to end the negative interest rate regime in the coming months.

Japan's labor cash earnings rose 1% in December from the previous year, with the help of a 0.5% gain in winter bonuses. The increase accelerated compared to the previous month. In a brighter sign, data for full-time workers that avoid sampling problems and exclude bonuses and overtime pay showed growth of 2%, hitting that threshold or above for a fourth consecutive month. Wage growth will likely slow in January as the boost from winter bonuses fades.

U.S. ISM service sector growth accelerates in January

U.S. services sector growth accelerated in January as new orders rose and employment rebounded, but suppliers appeared to fall behind, resulting in a measure of input prices rising to an 11-month high. The Institute for Supply Management (ISM) said the non-manufacturing PMI rose to 53.4 last month from 50.5 in December. In addition to January's surge in job growth, the report shows that economic growth momentum from the fourth quarter spilled over into the new year. This further reduces the likelihood of a rate cut in March. Services spending started to spike as Americans returned to normal life after the pandemic, but it has lagged behind goods spending. This, however, has been strong enough to keep inflation high.

The Eurozone service sector is unlikely to recover soon

A shortage of labor is a pervasive reality across the entire eurozone, evident in the noteworthy wage increases in the top four euro area countries. Inflation of input prices within these economies underscores the impact of this phenomenon. Remarkably, companies demonstrated a marked unwillingness to reduce their workforce, a trend observed even in Germany and France, where the service sector remains in poor condition. Business expectations have improved a bit, hinting at better times ahead. However, given the seventh consecutive month of declining new business, an imminent recovery is unlikely.

The likelihood of the ECB delaying a rate cut is growing

Germany's services PMI for January was revised slightly upwards, lower than December's level. New business has contracted for the seventh consecutive month and its downward momentum has accelerated for the second consecutive month. Notably, (the business of) good companies were experiencing their most rapid decline since June 2020. This could hint at a wave of order cancellations.

In addition, France's services PMI also continued to underperform in January, with business activity falling for the eighth consecutive month. The overall new business and overseas business were declining, and employment was hovering near the tipping point of stagnation.

Both countries' final PMIs suggest that the 2% inflation target remains out of reach in the near term, posing a serious risk to the ECB's expected rate cuts in the coming months.

[Focus of the Day]

UTC+8 11:30 Reserve of Bank Australia's Interest Rate Decision (Feb)

UTC+8 12:30 RBA Governor Bullock Holds a News Conference.

UTC+8 18:00 Eurozone Retail Sales MoM (Dec)

UTC+8 01:00 Cleveland Fed President Mester Speaks

UTC+8 02:00 Bank of Canada Governor Macklem Speaks

UTC+8 02:00 Minneapolis Fed President Kashkari Speaks

UTC+8 03:00 Boston Fed President Collins Speaks

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Kevin Du

Central Bank

Economic

Stock Market in a ‘very Dangerous' Position as Jobs and Wages Run Hot, Fund Manager Says_1

The U.S. stock market is in a “very dangerous” spot as persistently strong jobs numbers and wage growth suggest the Federal Reserve's interest rate hikes have not had the desired effect, according to Cole Smead, CEO of Smead Capital Management.

Nonfarm payrolls grew by 353,000 in January, fresh data showed last week, vastly outstripping a Dow Jones estimate of 185,000, while average hourly earnings increased 0.6% on a monthly basis, double the consensus forecasts. Unemployment held steady at a historically low 3.7%.

The figures came after Fed Chair Jerome Powell said the central bank would likely not cut rates in March, as some market participants had anticipated.

Smead, who has thus far correctly predicted the resilience of the U.S. consumer in the face of tighter monetary policy, told CNBC's “Squawk Box Europe” on Monday that “the real risk this whole time has been how strong the economy has been” despite 500 basis points of interest rate hikes. One basis point equals 0.01%.

“We know the Fed has raised rates, we know that caused a banking run last spring and we know that's damaged the bond market. I think the real question can be ‘do we know that the lowering of CPI has actually been caused by those short-term policy tools they've used?'” Smead said.

“Wage gains continue to be very strong. The Fed has not affected wage growth, which continues to outpunch inflation as we speak, and I look at the wage growth as a really good picture of inflationary pressures going forward.”

Inflation has slowed significantly from the June 2022 pandemic-era peak of 9.1%, but the U.S. consumer price index increased by 0.3% month on month in December to bring the annual rate to 3.4%, also above consensus estimates and higher than the Fed's 2% target.

Smead contended that the fall in CPI should be chalked up to “good luck” due to the contributions of falling energy prices and other factors outside the central bank's control, rather than the Fed's aggressive cycle of monetary policy tightening.

Should strength in the jobs market, consumer sentiment and household balance sheets remain resilient, the Fed may have to keep interest rates higher for longer. This would eventually mean more and more listed companies having to refinance at much higher levels than previously and therefore the stock market may not benefit from strength in the economy.

Smead highlighted a period between 1964 and 1981 in which the economy was “generally strong” but the stock market did not proportionately benefit due to the persistence of inflationary pressures and tight monetary conditions, and suggested the markets could be entering a similar period.

The three major Wall Street averages on Friday closed out a 13th winning week out of the last 14 despite Powell's warning on rate cuts, as bumper earnings from U.S. tech titans such as Meta powered further optimism.

“The better question might be why is the stock market priced like it is with the economic strength and the Fed being pigeonholed into having to keep these rates high? That's a very dangerous thing for stocks,” Smead cautioned.

“And to follow on that, the economic benefit we're seeing in the economy has very little tie to the stock market, it doesn't benefit the stock market. What did the stock market do last year? It had valuations go up. Did it have a lot to do with the earnings growth tied to the economy? Not at all.”

Rate cut need becoming ‘less urgent'

However, some strategists have been keen to point out that the upside from recent data means the Fed's efforts to engineer a “soft landing” for the economy are coming to fruition, and that a recession is seemingly no longer in the cards, which could limit the downside for the broader market.

Richard Flynn, managing director at Charles Schwab U.K., noted Friday that up until recently, such a strong jobs report would have “set alarm bells ringing in the market,” but that doesn't seem to be happening anymore.

“And while lower interest rates would surely be welcomed, it is becoming increasingly clear that markets and the economy are coping well with the high rate environment, so investors are perhaps feeling that the need for monetary policy to ease is less urgent,” he said in a note.

″[Friday's] figures may be another factor delaying the Fed's first rate cut closer to summer, but if the economy maintains its comfortable trajectory, that might not be a bad thing.”

This was echoed by Daniel Casali, chief investment strategist at Evelyn Partners, who said the bottom line was that investors are becoming “a little more comfortable that central banks can balance growth and inflation.”

“This benign macro backdrop is relatively constructive for stocks,” he wrote in a note.

Source: CNBC

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Michelle

Central Bank

Economic

The Bank of Japan is laying the groundwork to end negative interest rates by April and overhaul other parts of its ultra-loose monetary framework, sources say, but is likely to go slow on any subsequent policy tightening amid lingering risks.

The clearest hint of a change to date came from a summary of debate at the BOJ's January meeting released last week, where some policymakers called for an immediate policy shift including one who said now was a "golden opportunity" to phase out stimulus.

At the meeting, the BOJ kept ultra-low rates intact but said the likelihood for sustainably achieving its 2% inflation target was heightening, signalling a growing conviction that conditions for phasing out its massive stimulus were falling into place.

"If we get further evidence that a positive wage-inflation cycle will heighten, we'll examine the feasibility of continuing with the various steps we are taking under our massive stimulus programme," Governor Kazuo Ueda told a post-meeting briefing.

"We think we can avoid any big discontinuity" upon ending negative rates, he said, suggesting the BOJ will go slow in any subsequent rate hikes.

While Ueda did not pre-commit to a specific timing of an exit, the hawkish comments led many investors to bet on an end to negative rates either in March or April.

"Piecing together its communication so far, it's fair to say the BOJ has its eyes set on April as the preferred timing of an exit," a source familiar with its thinking.

"Markets have correctly received the BOJ's message," another source said on heightening expectations of a near-term end to negative rates.

Upon ending negative rates, the BOJ will abandon all or most of its bond yield control, but pledge to keep buying enough bonds to prevent an abrupt spike in yields, the sources say.

The BOJ may also discontinue its risky asset purchases, but hold off selling its holdings any time soon, they say.

"When negative rates end, other parts of the framework will come under review," a third source said. All the sources spoke on condition of anonymity due to the sensitivity of the matter.

DATA RISKS

Since taking the helm in April 2023, Governor Kazuo Ueda has moved toward dismantling his predecessor's radical stimulus beginning with a tweak to its controversial yield curve control (YCC) policy that caps long-term rates around 0%.

Discussions of an exit began to intensify in December when, for the first time, some in the nine-member board said the BOJ could afford to keep monetary conditions accommodative even after ending negative rates, according to the meeting's minutes.

The hawkish communication tilt in January reflects a growing optimism within the BOJ over this year's wage outlook and a steady rise in service prices, the sources said.

The policy decisions in the next few months will rely heavily on data that support this optimism, including the BOJ's quarterly tankan survey and key annual wage talks in March between big employers and workers.

Companies this year are seen matching or beating last year's bumper pay increases, the biggest in three decades.

But the BOJ's exit strategy is not without risk with a recent batch of weak data highlighting the fragile state of Japan's recovery.

After shrinking an annualised 2.9% in July-September last year, the world's third-largest economy likely grew just 1.4% in October-December as consumption and capital expenditure barely grew, according to a Reuters poll.

Factory output rose a less-than-expected 1.8% in December and manufacturers project a 6.2% plunge in January due in part to production suspensions at a Toyota Motor (7203.T), opens new tab unit.

After peaking at 4.2% in January last year, core inflation has slowed to hit 2.3% in December. Many analysts expect inflation to slide below the BOJ's 2% target later this year.

While the slowdown in inflation is due mostly to the fading impact of higher raw material costs, the weakening price pressure could weigh on long-term inflation expectations and discourage firms from hiking wages next year, some analysts say.

Additionally, although big firms are expected to offer sizable wage increases this year, their smaller counterparts may struggle to match them as rising raw material costs squeeze margins.

"Japan's economy and prices actually aren't that strong," a fourth source said. "In the end, the decision on the timing is pretty much data-dependent."

Source: REUTERS

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Chandan Gupta

Traders' Opinions

Economic

Forex

Fudamental Analysis

Following the latest Federal Reserve policy decision, the initial decline in the dollar took a U-turn as Chairman Powell's comments ruled out a March rate cut. The greenback surged on his assurance, backed by concerns from US regional banks that dampened risk appetite and bolstered the US currency.

In its decision, the Fed maintained interest rates at 5.5%, aligning with expectations. The committee conveyed a cautious stance, indicating no rush to lower rates until there's confidence in sustained inflation progress towards 2%. Powell emphasized six months of positive inflation data but emphasized the need for confirmation before considering rate cuts, quashing hopes of a March move unless significant labor market deterioration occurs.

According to ING Bank, the EUR/USD pair is expected to hover near the 1.08 support in the current quarter, with a potential rise in Q2 if a Fed rate cut looms. ING highlighted the upcoming consumer price report on February 13 and record revisions on February 9 as pivotal points. Concerns arose over regional banks, exemplified by New York Community Bancorp's substantial Q4 loss due to provisions against potential loan losses.

On the economic front, Eurozone headline inflation for January dipped to 2.8%, slightly above the 2.7% expectation, while the base rate edged down to 3.3%, surpassing the anticipated 3.2%.

Bank expectations for the EUR/USD rate include ING Bank's anticipation of a breakout below 1.0790-1.0800 leading to support at 1.0715/25, while Westpac envisions a range between 1.0650 and 1.1000 in the coming weeks. These projections underscore the market's anticipation of potential shifts in the EUR/USD landscape, impacted by economic data, central bank decisions, and global market sentiments.

Technical Analysis

The EUR/USD currency pair seems to be in a bit of a bind, stuck in a downward channel that's raising eyebrows among traders. The bears are currently calling the shots, finding comfort below the psychological support level of 1.0800. This situation not only signals their control over the trend but also serves as a cautionary flag for an impending robust movement, especially as technical indicators approach oversold levels.

One of the key players in this currency drama is the mighty US dollar, which continues to flex its muscles. Thanks to the Federal Reserve's policy and the ongoing demand for the dollar as a safe haven, the bears find support for their journey southward. The next pitstops in their roadmap could be the support levels of 1.0740 and 1.0660, respectively.

Taking a peek at the daily chart, it's evident that any dreams of an upward rebound are facing a tough reality check. Returning to the 1.1000 psychological resistance area seems to be the prerequisite for any hopes of an ascent. It's like trying to climb a hill without first lacing up your hiking boots – not an easy feat.

Today's script for the EUR/USD pair involves external actors, mainly the Purchasing Managers' Index (PMI) reading for the services sector from both the Eurozone and the United States of America. This economic performance indicator has the potential to sway the currency tides. Additionally, the extent of investors' appetite for risk, or lack thereof, will play a role in determining the day's currency narrative.

The downward trend in the EUR/USD dance may not be the most thrilling storyline for those hoping for an upward swing. The bears have a firm grip, and breaking free from their hold would require a concerted effort. It's like trying to change the course of a river – a formidable task.

The US dollar, akin to a seasoned performer, continues to command attention. The Federal Reserve's policies have set the stage for the dollar's dominance, and its role as a safe haven in times of uncertainty only adds to its allure. The bears, riding on the coattails of the dollar's strength, are eyeing those support levels with determination.

As traders and investors navigate this currency landscape, the daily chart serves as a roadmap of sorts. It's a visual tale of the challenges and hurdles that lie ahead for the EUR/USD pair. The psychological resistance at 1.1000 looms large, casting a shadow over any hopes of an upward move. It's a reminder that in the world of currency trading, nothing comes easy, and every ascent requires careful planning.

In the grand theater of currency exchange, today's performance is not a solo act. The spotlight is also on the PMI readings, which have the potential to be the plot twist that either amplifies the current trend or introduces a new narrative. Investors, much like an audience, eagerly await the unfolding of events, aware that economic indicators and risk appetites can be the scriptwriters of currency movements.

In conclusion, the EUR/USD pair finds itself entangled in a downward dance, with bears holding the reins. The US dollar's strength and the psychological support at 1.0800 create a challenging backdrop. As the day unfolds, the stage is set for economic indicators and risk sentiments to take center stage, potentially influencing the currency's trajectory. Will the bears continue their downward march, or will external factors introduce a plot twist? Only time will tell in this ever-evolving currency saga EUR/USD Downtrend Strengthens while Analyzing the Current Market Trend_1