Marketmind: China supports, peak rate haze
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[June 27, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan
Flagging world markets got a lift on Tuesday as China moved to shore up
the falling yuan from the year's lows and nodded to more government
stimulus to underpin its spluttering economic recovery instead.
With falling Chinese interest rates diverging markedly from ongoing U.S.
Federal Reserve tightening, Beijing is struggling to support the economy
with monetary policy alone as that's undermining the currency. It made
its displeasure at further yuan weakness clear on Tuesday, lifting
official daily targets while state banks sold dollars.
Then, indicating Chinese growth had accelerated in the second quarter to
a 5% target, Premier Li Qiang told the World Economic Forum in Tianjin
that the government would take steps to boost demand, invigorate
markets, accelerate green transition and open high levels of its economy
to the outside world.
The combined moves boosted Shanghai and Hong Kong's main stock indices
by more than 1% each and rippled across world oil and commodity markets.
Despite the yuan rebound, however, the dollar rose against the euro and
yen. A former Bank of Japan official indicated any change to the BoJ's
super-easy policy stance may have to wait until October.
Even though investors seemed to bat away the bizarre weekend events in
Russia, the murky Western interest rate picture continues to hamper
European and U.S. stocks.
Central bankers meeting at an annual European Central Bank forum in
Portugal dissuaded markets from betting on a peak in the interest rate
cycle just yet.
"It is unlikely that in the near future the central bank will be able to
state with full confidence that the peak rates have been reached," ECB
chief Christine Lagarde said, adding inflation was in a new phase that
could linger for some time.
Lagarde echoed International Monetary Fund second-in-command Gita
Gopinath, who at the same event late Monday spotlighted "uncomfortable
truths" about inflation that meant central banks needed to work harder
to get price rises back to target - even at an obvious cost to growth.
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Traders work on the floor of the New
York Stock Exchange (NYSE) in New York City, U.S., November 15,
2022. REUTERS/Brendan McDermid/File Photo
While those comments are likely more directed at European
policymakers, where disinflation is lagging, markets also still
expect the Fed to push ahead with at least one more interest rate
rise next month.
Morgan Stanley economists on Tuesday said they now expect a July Fed
hike to a mid-point of 5.375%, where they would stay until at least
year-end, with further moves after July "data dependent".
The hawkish rate picture didn't deter demand for two-year Treasury
notes at Monday's auction, however, and 2-year yields slipped below
4.70% on Tuesday. Five-year paper is up for grabs later.
The main focus of the U.S. data slate is the release of the
Conference Board's June consumer confidence survey, with eyes on
whether it matches the University of Michigan's picture of ebbing
inflation expectations and rising sentiment this month.
Wall St futures were mildly positive ahead of the open. The VIX
volatility index hovered just above 14, well off Monday's highs.
Events to watch for later on Tuesday:
* U.S. June consumer confidence, U.S. May new home sales, April home
prices, May durable goods orders, Dallas Federal Reserve June
service sector survey, Richmond Fed June manufacturing
* European Central Bank conference in Sintra, Portugal
* U.S. Treasury auctions 5-year notes
* U.S. corporate earnings: Walgreens Boots Alliance
(By Mike Dolan, editing by Emelia Sithole-Matarise; mike.dolan@thomsonreuters.com.
Twitter: @reutersMikeD)
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