Aurelia Butler

(Reuters) – A look at the day ahead in Asian markets.Third time lucky for Asian stocks?Having followed Monday’s listless start to the quarter with a 0.5% decline on Tuesday, Asian stocks are poised to rebound on Wednesday thanks to a triple-boost from tech-fueled rise in U.S. and global stocks, falling Treasury yields and a weaker dollar.That’s as positive a global backdrop as investors in Asian equities can expect, although it may be altered by the slew of service sector purchasing managers index reports from around the continent including economic powerhouses China and Japan.Cross-asset volatility should provide a helping hand too – the VIX index slipped to a five-week low on Tuesday and currency market vol eased across the board. Even overnight and one week dollar/yen vol fell, suggesting investors are not overly concerned about the prospect of Japanese intervention.Tuesday’s market-friendly conditions were in large part laid by Federal Reserve Chair Jerome Powell’s comments at the ECB’s annual policy conference in Sintra, Portugal. While the Fed needs more data before cutting interest rates, the U.S. is back on a “disinflationary path,” Powell said.Bond yields retraced some of Monday’s steep rise, the dollar dipped, and stocks rose – a collective easing of financial conditions that is usually good for risk appetite and emerging market assets.The tech sector was a solid performer on Wall Street again, with Tesla (NASDAQ:TSLA) shares up 9% to a fresh six-month high and bringing the gains so far this week up to 15%. Having significantly lagged most Big U.S. Tech this year, they are on track for their best week in 18 months.Investors cheered the fact that the automaker reported a smaller-than-expected 5% drop in vehicle deliveries in the quarter, and analysts said that sales in China were higher than expected too.Strength across the broader tech complex and especially in mega caps pushed the NYSE FANG index to another record high on Tuesday. Can this feelgood factor spread to Asia? It hasn’t lately, and Asian tech has underperformed badly in recent weeks.The Hang Seng tech index fell again on Tuesday – its seventh decline in eight sessions – to its lowest since April 24. It has lost 15% since mid-May, in which time the S&P info tech index has risen 15%.Time for a bounce on Wednesday?On the economic front, the calendar on Wednesday will be dominated by service sector PMIs from China, Japan, Australia, Singapore and India.China’s is the ‘unofficial’ Caixin PMI index, which shows that services activity expanded in May at its fastest pace since July last year and has been consistently growing since January 2023. Here are key developments that could provide more direction to markets on Wednesday:- China, Japan, India, Australia services PMIs (June)- Euro zone services PMI (June)- South Korea FX reserves (June)     More

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SINTRA, Portugal (Reuters) – European Central Bank policymaker Gabriel Makhlouf said on Tuesday he was comfortable with just one more interest rate cut this year as he needed more time to gain confidence inflation was headed to the ECB’s 2% goal.Investors are pricing in at least one, but more likely two more ECB interest rate reductions by December after seeing inflation fall from 10% in late 2022 to just 2.5% last month.But Makhlouf, Ireland’s central bank governor, struck a more cautious tone in an interview with Reuters, even though he expected rates to fall eventually.”I am comfortable with expectations of another cut,” he said on the sidelines of the ECB’s Forum on Central Banking in Sintra, Portugal. “I think two cuts today, at the beginning of July, is probably going a little bit too far. I’m not saying I’d rule it out.” The ECB began undoing its steepest ever streak of interest rate hikes last month but President Christine Lagarde said the central bank for the euro zone is in no hurry to lower borrowing costs further as progress from here appeared to be slower.Data earlier on Tuesday showed inflation in the 20 countries that share the euro slow to 2.5% in June from 2.6% a month earlier.Makhlouf said he was “pleased” with the data “because it confirms the direction that we are moving in” but he stressed services inflation remained the “number one issue of focus” after a second straight 4.1% increase.The ECB has singled out wages, which are finally catching up with inflation after falling behind them in 2021-22, as the key driver of prices in the services sector and Makhlouf said he and colleagues should “allow time” to see more data.”I expect interest rates to be lower than they are today if we continue to be successful, as I expect us to be successful, in achieving our 2% target in a sustainable manner,” he said. “The pace at which that happens will depend and where we end up will depend.” More

(Reuters) – A Supreme Court case upending how government regulators do their work thrusts Federal Reserve bank overseers into extended uncertainty and potential risk, although the ruling should not complicate the central bank’s ability to provide support to markets in times of stress. The court, in an opinion released on Friday, overturned a precedent that gave deference to regulatory agencies as they interpreted the work of lawmakers. Experts reckon this shift opens Fed regulatory decisions to legal challenges with unpredictable outcomes, unsettling the relationship between the Fed and the institutions it oversees for years to come. Some academics fret the new landscape could also make the financial system less safe, although most agree the legal foundations that give the Fed space to provide emergency support remain on solid footing. For now, the key upshot is “the increase in uncertainty” as affected parties adjust to greater court involvement, said Kathryn Judge, a professor at Columbia University’s law school.Fed bank supervisors “may be less inclined to regulate aggressively out of fear that banks, being the more well-funded out of the potential litigants, are more likely to fight back in the event of aggressive regulation,” Judge said. “But there’s no reason to assume that courts are necessarily going to be any more inclined to side with banks,” and that lack of clarity means it will be hard to know how any rule challenges will ultimately shake out, she said. When it comes to its expansive regulatory work, “the Fed is used to enjoying an incredible amount of deference based in large part on its technical expertise.  Those days are behind it,” said Michael Held, of law firm WilmerHale, who was until 2022 the head lawyer at the Federal Reserve Bank of New York. Held said he expects future regulation will aim for rules that are “understandable and defensible” before judges, but even then, “I think we will also see an increased willingness in the industry to pursue legal challenges to regulations they do not like.”The Fed declined to comment on how the court’s decision will impact the institution’s bank oversight work. RISK MANAGEMENTSome academics believe gun-shy regulators could mean more risk for the financial system. Graham Steele, a senior fellow at the Roosevelt Institute and former top Treasury Department official in the Biden Administration, said “the ruling itself is a disaster, but it is a disaster that generally flows in the direction of making regulation harder.”Lessons learned from past financial crises show “that regulators need to get out ahead of emerging risks when they see an emerging practice or activity that has the potential to cause safety and soundness or financial stability risks,” Steele said. If there’s a lack of clarity for how rules can be written and regulators hold back “that will allow these risks to bubble up, and to me it’s a matter of when, not if, that kind of risk actually materializes.”Whatever rule-making challenges the Fed faces, its core mission as a lender of last resort appears intact, meaning its ability to provide emergency liquidity and other forms of banking sector support with Treasury’s approval should remain. The law giving the Fed its emergency lending powers “is pretty explicit” and “in that sense it seems much more clear” than banking regulation, said Steven Kelly, associate director of research at the Yale School of Management’s Program on Financial Stability, adding it’s also less likely that banks would sue to stop such efforts. That said, “each of the Fed’s emergency lending actions is distinctive” and there are ways a program could be set up, for example to benefit a specific industry like green energy, that could create grounds for a legal challenge, said Christina Parajon Skinner, a business and legal professor at the Wharton School of the University of Pennsylvania. More

NEW YORK (Reuters) – A measure of the borrowing costs on loans between banks and other participants in the U.S. repurchase agreement (repo) market hit its highest level since January on Monday, New York Federal Reserve data released on Tuesday showed.The Secured Overnight Financing Rate (SOFR), a measure of the cost of borrowing cash overnight collateralized by Treasury securities, hit 5.4%, the highest since Jan. 2, in a sign of dwindling liquidity.The jump from 5.33% at the end of last week follows heavy Treasury coupon debt supply, with the settlement of Treasury auctions straining banks’ balance sheets, analysts said.”SOFR should normalize in the coming days, as the supply gets digested,” said Teresa Ho, head of U.S. short duration strategy at JPMorgan.”However, it might take a little bit longer to normalize, not only because primary dealer inventories are already high, but also because it’s a holiday shortened week, providing less liquidity to the markets,” she said.A spike in the price for repurchase agreements, or repos, can be a sign that cash is getting scarce in a key funding market for Wall Street. Short-term funding costs spiked in September 2019, forcing the Federal Reserve to intervene by injecting liquidity into repo markets.”Everyone’s keeping a close eye on it because it is reminiscent of what happened in 2019,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities USA.The jump in funding rates roughly coincided with an increase in usage of the Federal Reserve Bank of New York’s reverse repo facility, through which money market funds lend to the Fed.The facility last week saw $664.6 billion in inflows, the highest level since $680 billion on Jan. 10.Such increases tend to happen around the end of the quarter as dealers offer less intermediation for regulatory reasons, prompting market participants to park their cash at the Fed.”Around quarter end is when you typically have a pullback in balance sheet availability because a lot of the banks are looking to de-risk heading into quarter end,” said Goldberg.”You’re starting to see more of an impact now that liquidity is not as ample as it used to be,” he said. More