Economy

LONDON (Reuters) – Global stocks rose on Friday for a second day on hopes that peaking U.S. inflation means less aggressive rate hikes from the Federal Reserve, leaving the dollar facing its biggest two-day drop in almost 14 years.Oil prices jumped after health authorities in top global crude importer China eased some of the country’s heavy COVID curbs.On Wall Street, stock futures were firmer, indicating that the S&P 500 and Nasdaq would add to their biggest daily percentage gains in over 2-1/2 years on Thursday after U.S. data showed prices rose less-than-expected in October.The MSCI all country stock index was up 1%, taking it back to its highest levels since mid-September as investors re-priced their interest rate expectations, though the benchmark is still down about 19% for the year. “It’s more of a sigh of relief after a cacophony of bad news over the past month or so. While the data may be improving in the U.S., it’s certainly not the case in Europe,” said Mike Hewson, chief markets analyst at CMC Markets.Fed policymakers on Thursday signalled a more gradual approach to hiking rates, but made clear that the direction was firmly up to tame 40-year high inflation.Market bets on the Fed raising rates by 50 basis points at its next meeting in December, instead of 75 basis points, increased.In Europe euro zone yields firmed and the EU’s executive European Commission said it sees a bigger euro zone slowdown in 2023, though only slightly affecting jobs or public finances.Britain’s economy shrank in the three months to September at the start of what is likely to be a lengthy recession.John O’Toole, global head of multi-asset investment solutions at asset manager Amundi, said the reaction in stock markets to the U.S. inflation data showed investors were “pretty desperate” for good news and could be getting ahead of themselves.”Even if we’re closer to the end than we are to the beginning of a tightening cycle, that doesn’t mean that rates are not going to stay at an elevated level for an extended period of time, and that’s something that financial markets just don’t have in their outlook,” O’Toole said.The weaker outlook for corporate earnings and jobs has yet to be fully priced into markets, he added.DOLLAR DIVEInvestors poured into risky assets after the U.S. data, with the dollar down 0.9%.The yield on benchmark U.S. 10-year paper slipped below 4% on Thursday. U.S. bond markets are closed on Friday for Veterans Day.”The data and market reaction are reminiscent of previous cycles of optimism regarding the ease with which the Fed might quell too-high inflation,” Citi bank said.Asian shares scaled a seven-week high, with MSCI’s broadest index of Asia-Pacific shares outside Japan up 5.6%, set for its biggest one-day percentage jump since March 2020.In China, health authorities on Friday eased the country’s heavy COVID-19 curbs, including shortening by two days the quarantine times for close contacts of cases and inbound travellers.The country’s blue-chip CSI 300 Index was up 2.8% and the Hang Seng Index surged 7.7%.Oil prices rose on Friday after the U.S. inflation data but were on track for weekly declines of more than 4% due to COVID-related worries in China. [O/R]U.S. crude rose 3.3% to $89.33 per barrel and Brent was at $96.44, up 3% on the day.Elsewhere, the crypto world remained gripped by the outlook for the crypto exchange FTX. Regulators froze some assets of FTX and industry peers raced to limit losses on Friday as solvency problems worsened.The firm was scrambling to raise about $9.4 billion from investors and rivals, Reuters reported. FTX’s native token FTT was down 7.4% at $3.45, having fallen 90% month-to-date. Bitcoin fell 1.38% to $17,309. More

LONDON (Reuters) -Investors bought more bonds than at any time in the last four months in the week to Wednesday as signs emerged that inflation may have peaked, BofA Global Research said on Friday.Investors bought $2.6 billion of bonds in the week to Wednesday, BofA said, citing EPFR data.These figures did not capture Thursday’s consumer price report, which showed inflation rose by far less than expected in October, prompting investors to reassess the likely path of U.S. monetary policy. “Inflation shock” is over, but ‘inflation stick’ of briskly rising services and wage inflation is here to stay; inflation will come down but to remain above range past 20 years,” BofA strategists, led by Michael Hartnett, said.The Federal Reserve has repeatedly signaled its determination to reduce inflation to its 2% target by raising rates aggressively.But in doing so, policymakers risk slowing down the economy, which could force them to slow the pace of rate hikes – a shift investors have referred as a “pivot”.Thursday’s inflation data triggered a huge push into risk assets such as equities, as the chances of a pivot grew.The benchmark U.S. S&P 500 added 5.5% in its best day for over two years on Thursday in light of the news.In contrast with the buoyant sentiment in the rest of the market, bitcoin has tumbled this week, as bearishness has been exacerbated by the demise of FTX.Regulators froze some of the distressed cryptocurrency exchange’s assets on Friday, as founder Sam Bankman-Fried scrambled to find a buyer to avoid complete collapse.Trading volumes in bitcoin futures and exchange-traded funds have exploded, with bitcoin falling 3% to $17,328 on Friday, with losses totalling 17% this month.The selloff in crypto this year has seen the value of the overall market fall from around $3 trillion to $900 billion, rivalling some of the biggest crashes of all time, according to the Bofa strategists.In the meantime, in the latest week, investors pulled $4.6 billion from equity funds and ploughed $2.4 billion into cash, but this trend could reverse, given the inflation outlook.Inflation shock, rates shock and recession shock defined the the 2022 bear narrative, Bofa said, adding that 2023 looks very different.”2023 bull narrative is ‘peak CPI, peak Fed, peak yields, peak US dollar’; we say ‘rent the pivot’ as ‘no recession, no rate cuts’,” the bank’s strategists said.BofA said U.S. 30-year Treasuries, small-cap industrials and resources, emerging market bonds, plus China/Japan and weak dollar plays were on its list.Emerging markets also looked to be staging something of a comeback. On Friday, the MSCI emerging-equity index shot up by almost 5% to its highest since late September.In terms of flows, emerging market equity funds recorded a third straight weekly inflow, up $400 million.Even so, BofA warns that a “multi-year derating of tech & FAANG” is just beginning and its “Bull & Bear” indicator remains at “max bearish”. That is where it was throughout most of the summer, its longest bearish streak since the global financial crash in 2008-09. More

The Chinese yuan finished the domestic trading session at its strongest level since late-September, as investors cheered the government’s decision to ease some of the country’s strict COVID-19 prevention controls.China’s sound economic fundamentals over the mid- to long-term should support a firm currency, while continued trade surplus also allows capital inflows, the Economic Daily, which is run by China’s State Council, said.”Unlike the United States and the European Union, which had previously implemented long-term quantitative easing policies, China’s inflation is relatively low and the yuan has room for appreciation,” the newspaper said.The currency is unpredictable as “two-way volatilities are normal and there won’t be one-sided market,” it added.The local currency has had sharp swings in recent months. It fell to the weakest levels since global financial crisis of 2008 in light of Federal Reserve policy tightening and a slowing domestic economy, before rebounding on hopes for the relaxation of Chinese pandemic restrictions.Despite Friday’s bounce, the yuan has still lost about 10.7% against the dollar so far this year and looks set for its biggest annual decline since 1994, when China unified market and official rates. More

ANKARA (Reuters) – Turkey’s central bank has put the finishing touches to a reserve-management system that has stabilised the lira currency ahead of elections in 2023, thanks to nearly 100 new regulations this year, industry sources and officials said. The policy, adopted in the wake of a historic currency crash a year ago, relies largely on foreign funds obtained from export revenues, foreign homebuyers and other sources to finely balance the market’s supply and demand, the officials added.Unlike past schemes to support the lira, the central bank no longer needs to constantly tap its own reserves, according to 10 bankers and economists and one Turkish official. The central bank declined to comment for this article, but senior officials and President Tayyip Erdogan have regularly praised the new regulations. Bankers’ calculations show the central bank has obtained about $100 billion this year under the new policy. For much of October and November, the lira has very closely tracked the dollar and held steady near 18.6.The sources, who requested anonymity, said the policy has given the central bank tight control over the forex rate “policy” and may help Ankara keep it stable through to presidential and parliamentary election set for June.Avoiding further economic or currency upheaval is crucial to Erdogan’s re-election hopes, with Turks already facing 85% inflation. Still, the vote could bring volatility as the opposition has vowed to reverse his policies. The lira plunged 44% last year, with particularly sharp falls in December, triggered by unorthodox rate cuts pushed by Erdogan that sent prices soaring. While the currency shed another 29% this year, it has dipped only 3% since mid-August. A near full exodus of foreign investors from money markets in recent years has strengthened authorities’ hand. One banker said the new policy has smoothed syndications and eurobond redemptions and achieved “huge benefits” for the forex market.Erdogan, in a speech in June, said: “We are planning to ensure price stability by increasing the current account surplus with an exchange rate that is at the level that suits us.”REGULATIONS, RESERVESCritics, including some bankers and economists who spoke to Reuters, say the policy has slowed lending while Ankara’s prioritising of monetary stimulus and cheap credit for exporters and smaller businesses has allowed inflation to soar.Many say it is unsustainable to artificially balance the foreign exchange market, especially if high energy-import costs rattle the already deeply negative trade balance this winter. “For now, Turkey can continue to muddle through with its liraisation policies. But it is unclear how long the balance of payments stability will persist,” Patrick Curran, senior economist at Tellimer Research, said.Yet the central bank told bank executives this week it will continue with its regulations and policies, despite their criticism, according to sources at the meetings.The nearly 100 regulations this year have given the central bank and state a dominant role in the FX, credit, loans and deposit markets, a transformation the government says has brought predictability for Turks. Among the changes are new depreciation-protected lira accounts encouraging companies and people to convert FX holdings, and a mandate for exporters to sell a large portion of their FX revenues to the central bank.As a result, the sources told Reuters, the bank can better strike a balance in foreign exchange, including importers’ needs and revenues from a strong tourism season.According to bankers’ calculations, the central bank sold back into the market the $100 billion it obtained in order to stabilise the forex rate. The bank met demands of all energy imports last winter and about $100 billion of import-related forex demand this year, the calculations show. Adding to the buffer, the central bank received about $23 billion from international counterparts, while separately Russia transferred at least $5 billion as part of a local nuclear investment. Erdogan says “friendly countries” are helping. The new policy closes a chapter in which the central bank used its reserves to directly support the lira, badly depleting its forex buffer.Data show it has a negative reserve balance of nearly $55 billion when taking into account these swaps. When swaps are excluded, reserves are $10-20 billion on a net basis and about $114 billion gross. More

LONDON (Reuters) -Britain’s economy shrank in the three months to September at the start of what is likely to be a lengthy recession, underscoring the challenge for finance minister Jeremy Hunt as he prepares to raise taxes and cut spending next week.Economic output shrank by 0.2% in the third quarter, less than the 0.5% contraction analysts had forecast in a Reuters poll, Friday’s official data showed. But it was the first fall in gross domestic product since the start of 2021, when Britain was still under tight coronavirus restrictions, as households and businesses struggle with a severe cost-of-living crisis.Britain’s economy is now further below its pre-pandemic size – it is the only Group of Seven economy yet to recover fully from the COVID slump – and is smaller than it was three years ago on a calendar-quarter basis.The Resolution Foundation think tank said that although the fall was smaller than investors had feared, it left Britain on course for its fastest return to recession since the mid-1970s.Its research director James Smith said the figures provided a sobering backdrop for Hunt’s Nov. 17 budget announcement, when he will try to convince investors that Britain can fix its public finances – and its credibility on economic policy – after Liz Truss’s brief spell as prime minister.”The Chancellor will need to strike a balance between putting the public finances on a sustainable footing, without making the cost-of-living crisis even worse, or hitting already stretched public services,” Smith said.Responding to the data, Hunt repeated his warnings that tough decisions on tax and spending would be needed.”I am under no illusion that there is a tough road ahead – one which will require extremely difficult decisions to restore confidence and economic stability,” Hunt said in a statement.”But to achieve long-term, sustainable growth, we need to grip inflation, balance the books and get debt falling,” he added. “There is no other way.” RECESSION REALITYThe Bank of England said last week that Britain’s economy was set to go into a recession that would last two years if interest rates were to rise as much as investors had been pricing. Even without further rate hikes, the economy would shrink in five of the six quarters until the end of 2023, it said.”Fears of a recession are turning into reality,” Suren Thiru, economics director for the Institute of Chartered Accountants in England and Wales, said. “This fall in output is the start of a punishing period as higher inflation, energy bills and interest rates clobber incomes, pushing us into a technical recession from the end of this year.”In September alone, when the funeral of Queen Elizabeth was marked with a one-off public holiday that shut many businesses, Britain’s economy shrank by 0.6%, the Office for National Statistics said. That was a bigger monthly fall than a median forecast for a 0.4% contraction in the Reuters poll and the largest since January 2021, when there was a COVID-19 lockdown.But gross domestic product data for August was revised to show a marginal 0.1% contraction compared with an original reading of a 0.3% shrinkage, and GDP in July was now seen as having grown by 0.3%, up from a previous estimate of 0.1%.The upward revisions to July and August’s GDP data mostly reflected new, quarterly figures on health and education output, alongside some stronger readings from the professional and scientific and wholesale and retail sectors, the ONS said. More

NEW DELHI (Reuters) – India’s annual industrial output rose 3.1% year-on-year in September, government data showed on Friday.Analysts polled by Reuters had expected a rise of 2% in September. More

MADRID (Reuters) -Spanish banks need to preserve capital and keep a lid on mortgage loan costs to cope with a potential deterioration of the economic outlook, the Bank of Spain warned on Friday.The central bank said that risks to financial stability had increased since its last report on the matter in April.The institution’s head of financial stability Angel Estrada also warned that mortgage relief measures being readied by the government and banks should be temporary and targeted only at vulnerable households.”The measures must identify the target group and the aid must not increase the cost of future (mortgage) clients,” Estrada told a news briefing.Though higher interest rates are also expected to boost banks’ financial margins in the short term, financial supervisors have recently cautioned against risks stemming from the war in Ukraine at a time when recession looms in Europe.”All this recommends a prudent provisioning and capital planning policy, allowing a short-term increase in profits to be used to increase the resilience of the sector,” it said in its semiannual financial stability report.The central bank expected high inflation in Spain to further pressure the economic outlook in coming quarters after it recently cut its growth forecast for 2023 to 1.4% from a previously expected rate of 2.8%.Though Spanish banks, including Santander (BME:SAN) and BBVA (BME:BBVA), posted better-than-expected third-quarter earnings but they were overshadowed by higher loan-loss provisions. The European Central Bank has also recommended prudence and its top supervisor Andrea Enria appeared to call time on a season of large share buybacks by banks as the economy weakens.Spanish lenders have been increasing their shareholder remuneration through higher pay-outs averaging 40%-60%, share buy-backs or a combination of both.”Pay-out ratios of Spanish institutions are not excessive and around the average or below that of the international banking systems, but the recommendation to be prudent is still on the table,” Estrada said.Echoing the ECB’s non-binding opinion on Spain’s banking tax proposal, the Bank of Spain said the levy would hurt banks’ profitability and capital generation in 2023-24. More

LONDON (Reuters) -Euro zone yields were higher on Friday after plunging the day before when U.S. inflation showed signs of cooling, while an inversion of the yield curve in bloc benchmark Germany highlighted recession fears.Bond yields had plummeted on Thursday after data showed the U.S. core consumer price index , which strips out food and energy components, rose 0.3% in October after rising 0.6% the month before. Analysts said lower-than-forecast inflation would likely see the Federal Reserve raise rates by a smaller 50 bps in December after four consecutive 75 bp hikes, although it was not likely to alter the view that rates will need to move into restrictive territory.”The data consolidates the view that the next Fed meeting will see a 50 basis point hike,” said Lyn Graham-Taylor, senior rates strategist at Rabobank, who is still calling for a peak in interest rates at 5%. “We still think that this shouldn’t be the start of a big risk rally as the easing of financial conditions works against the Fed’s policy tightening. Our gut feeling was that the move yesterday was overdone,” Graham-Taylor added. Germany’s 10-year yield was last up 6 basis points at 2.072% after dropping 17.5 bps on Thursday, its joint-largest one-day drop since Oct. 3. The 2-year yield, more sensitive to changes in near-term interest rate expectations, was up 10 bps to 2.073% after dropping 14.5 bps on Thursday.The yield curve between 2- and 10-year German yields inverted for the first time since Sept. 2008, according to Refinitiv data, indicating concerns about growth.An inversion of the 2/10 section of a yield curve can often herald the onset of recession. This spread is used widely by U.S. fixed income investors to gauge the outlook for the economy.Meanwhile, German consumer prices, harmonised to compare with other European countries, rose 11.6% year-on-year in October, confirming preliminary figures. European Central Bank policy maker Joachim Nagel called for the central bank to begin shrinking its balance sheet alongside rate hikes to help bring inflation down. Italy’s 10-year government bond yield was up 11 bps to 4.124% but that was only after the closely watched gap between German and Italian 10-year yields earlier touched its joint-tightest level since July at 197.4 bps. Analysts said the outlook for Italian bonds was less favourable as the ECB was expected to formalise plans to begin selling part of its bond holdings, so-called quantitative tightening (QT), next year.”We’re struggling to see how ECB QT doesn’t see Italian bonds suffer,” Rabobank’s Graham-Taylor said.”The fact we’re going into what we believe will be a fairly large recession, we struggle to see how Italian bonds don’t suffer during that process.”Eyes were also on geopolitical developments as China eased some of its heavy-handed COVID rules on Friday and Russia said it planned to withdrawal forces from Kherson in Ukraine earlier in the week. “Geopolitics is difficult to predict, but the news should be a positive for markets,” said Mohit Kumar, interest rate strategist at Jefferies. More