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Marketmind: Rates rebound cools, China commands rally

[February 06, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

World markets found their footing again on Tuesday as China's panicky markets staged a sharp rally on reports the government may intervene directly and on a leveling off in U.S. Treasury yields after their jobs-inspired bounceback this week.

The early action was all in China however, where benchmark stock indexes recorded their biggest one-day jump in almost two years amid a swirl of reports about regulatory action to staunch the selling, state-sponsored purchases and rising concerns at the top of the politburo.

The relentless slide in Chinese stocks, which had seen them underperform Wall St equivalents by more than 20% over the past three months alone, has snowballed amid foreign capital flight, tense geopolitics and deepening domestic deflation due to a property bust the government is struggling to stabilize.

The rout was spurred this week after Republican presidential candidate Donald Trump said he would impose tariffs on China again if he is elected in November and they could exceed 60%.

As the Biden administration sent five senior U.S. Treasury officials to Beijing this week for economic talks, meantime, Tuesday's local market bounce seemed to be inspired by a wave of anxiety in Beijing about the potential for a downward spiral.

President Xi Jinping will discuss the ailing market with financial regulators, according to Bloomberg. Regulators also announced further curbs on short selling and state investors said they were expanding their stockbuying plans.

Many put the 3%-plus jump in bluechips there on Tuesday down to state-backed investors dubbed the 'national team' rather than any sudden reversal of investor sentiment.

China's offshore yuan rallied back against an easier U.S. dollar - but the focus may now shift to Chinese consumer price updates on Thursday that are forecast to show outright annual headline deflation deepened last month.

Tensions back on Wall St this week have resided more in the bond market after a combination of January's blowout payrolls report and the Federal Reserve's caution on the path of rate cuts saw 2-year yields spike back up about 30 basis points since the jobs data to their highest in a month.

Fed chair Jerome Powell has since Wednesday's latest Fed meeting doused bets on a rate cut as soon as March and cautioned that policymaker projections of 75bp of easing this year are much less than what markets have been betting on.

Fed futures have all but wiped out chances of a March cut as a result and are only 80% confident of a first move in May - scaling back full-year easing to as low as 115bps from as much as 150bp at one point last month.

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Cars travel past a display showing Shanghai and Shenzhen stock indexes near the Shanghai Tower and other skyscrapers at the Lujiazui financial district in Shanghai, China February 5, 2024. REUTERS/Xihao Jiang/File Photo

Treasuries stabilized overnight, however, with the Fed's latest quarterly loan officer survey painting a mixed picture of ongoing tightening of credit though at a slower pace.

And another heavy week of debt auctions kicks off later on Tuesday with $54 billion of 3-year notes under the hammer.

Wall St futures were steady ahead of the bell, with eyes also on the split in fortunes between the resurgent digital megacaps and nervy regional bank stocks.

The dollar index backed off near three-month highs as restive Treasuries cooled off.

Elsewhere, Australia's dollar popped higher after the Reserve Bank of Australia left rates unchanged but cautioned that another increase could not be ruled out given inflation was still too high.

In Europe, London-listed BP climbed 5.3% after reporting forecast-beating fourth-quarter earnings of $3 billion and an acceleration in the pace of its share repurchases. UBS dropped 2.7% after the Swiss bank said it had completed the first phase of integrating fallen rival Credit Suisse following fourth-quarter results.

Key diary items that may provide direction to U.S. markets later on Tuesday:

* New York Fed's Global Supply Chain Pressure Index, NY Fed issues quarterly Household Debt and Credit Report

* Minneapolis Federal Reserve President Neel Kashkari, Philadelphia Fed boss Patrick Harker, Boston Fed chief Susan Collins, Cleveland President Loretta Mester. Bank of Canada Governor Tiff Macklem e a speech in Montreal

* U.S. Treasury sells $54 billion of 3-year notes

* U.S. corporate earnings: Ford, Amgen, Eli Lilly, Prudential Financial, Du Pont De Nemours, Gilead Sciences, Edwards Lifesciences, GE HEalthcare, Cognizant, Omnicom, Ampor, Chipotle, Atmos Energy, Cincinnati Financial, Essex Property, Assurant, IDEX, Fortinet, Gartner, Fiserv, VF, Jack Henry, Veralto, Jacobs Solutions, Cummins, AMETEK, Waters, Linde, Carrier Global, Xylem, Centene, Willis Towers Watson

(By Mike Dolan, editing by Christina Fincher, mike.dolan@thomsonreuters.com)

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