Business Maverick

Business Maverick

China shares lead muted day in Asia; USTs steady: markets wrap

China shares lead muted day in Asia; USTs steady: markets wrap
An electronic stock board outside a securities firm in Tokyo, Japan, on Monday, Nov. 21, 2022. (Photo: SeongJoon Cho/Bloomberg)

Chinese stocks led an otherwise lacklustre day for Asian equity markets as US share futures rose to retrace a downbeat day for Wall Street ahead of US jobs data due later on Friday.

Stocks in Japan and Australia held to tight ranges and traded in and out of negative territory. Mainland China and Hong Kong stocks rose, helped along by signs of official support for the private sector.

The PBOC will support banks to control liability costs and enhance financial support for the economy, the central bank said at a Friday briefing. The comments followed a statement from the central bank in which it said it would increase funding support for the private sector after meeting with executives from the property industry. 

US equity futures rose, retracing Wednesday’s minor losses for the S&P 500 and Nasdaq 100. The advance in futures was helped by gains of around 8% in after-hours trading for Amazon.com Inc. following robust results. This helped to offset a 2% drop in post-market trade for Apple Inc. which undershot revenue expectations. The moves come ahead of crucial US nonfarm payrolls data due later on Friday.

Another slide in longer-dated Treasuries put them on pace for their worst week of 2023. Yields on benchmark 10-year Treasuries were little changed in early Asian trading after rising around 10 basis points on Thursday to set a fresh nine-month high.

Two-year yields, which are more sensitive to interest rate decisions, were also mostly steady on Thursday, suggesting the pressure on longer-dated paper was linked to investors digesting news of $103-billion in upcoming US debt issuance — and concerns about the ability of the market to absorb supply.

Australian and New Zealand 10-year bond yields climbed more than five basis points, echoing the selling pressure in Treasuries. A Bloomberg gauge of the dollar was little changed after strengthening more than 1% this week. 

The Australian dollar held early gains after the country’s central bank revised forecasts for inflation to return to target levels by the end of 2025, later than previously expected, in a sign interest rates may have to remain higher for longer.

Bill Ackman, founder of Pershing Square Capital Management, said he’s short 30-year Treasuries “in size” — as both a hedge against the impact of higher long-term rates on stocks and also as a standalone bet. 

Bill Gross, the one-time king of the bond world, noted he’s “overall bearish” on 10-year yields, while Berkshire Hathaway Inc. chairman Warren Buffett told CNBC he had been buying Treasury bills and would likely continue. Tesla Inc.’s chief Elon Musk said that short-term T-bills are “a no-brainer”.

A report on Thursday underscored resilient US demand for workers, while separate numbers showed productivity jumped the most since 2020, blunting labour costs. Those figures preceded the government’s employment data — forecast to show the US added 200,000 jobs in July. While that would be the weakest print since the end of 2020, it’s still a strong advance historically.

“The good news is that almost everyone agrees that an imminent recession isn’t very likely,” said Ed Yardeni, founder of his namesake research firm. “That reduces the downside concerns about corporate earnings, but it increases the downside potential for the stock market’s valuation multiple if the bond yield continues to rise.”

Steeper yield curve

Meanwhile, rate options traders are paying through the nose for protection against further increases in long-maturity Treasury yields. A metric that compares demand for bearish put options to demand for bullish call options shows the widest divergence since September for options on CME Group Inc.’s US Treasury Bond Futures contract, which currently tracks a bond that matures in 2039. The gaps are less extreme for options on shorter-maturity Treasury futures.

The steepening of the yield curve extended a trend since the Bank of Japan surprised markets last week with a policy tweak. At 4.88%, two-year yields are 71 basis points higher than those on the 10-year note. That’s compared to a gap of 102 basis points two weeks ago.

Elsewhere, oil rose after Saudi Arabia prolonged its unilateral production cut by another month and hinted that deeper reductions may be on the way, putting futures on course for their sixth weekly advance and adding to inflationary pressure. DM

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