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PBOC Seen Raising Money Rates Twice in 2017 to Cut Leverage

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  • PBOC Seen Raising Money Rates Twice in 2017 to Cut Leverage

China’s central bank will keep a tight rein on money-market rates this year, raising the cost of short-term funds at least twice in moves that will pressure bonds.

That’s the consensus view in a survey of 29 fixed-income traders and analysts, with 20 saying that the People’s Bank of China will increase open-market operation rates by 10 basis points in the second quarter itself. Government bonds will decline for the third quarter in a row in the April-June period, according to the March 24-27 poll. That would be the longest run of losses in six years.

China’s policy makers are walking a fine line between driving money rates higher to reduce leverage in the financial system and preventing a cash crunch. They have already raised the cost of reverse-repurchase agreements twice this year, while benchmark interest rates have been on hold since 2015. A separate survey predicted that the PBOC will keep both benchmark borrowing costs and bank reserve-requirement ratios unchanged throughout the year.

“China is far from the end of efforts to squeeze out bubbles in the financial system,” said David Qu, a Shanghai-based markets economist at Australia & New Zealand Banking Group Ltd. “The PBOC will to some extent follow the Federal Reserve in tightening to keep the rate gap largely steady.”

The overnight repo rate on the Shanghai Stock Exchange jumped as much as 21.67 percentage points to 32 percent, the highest level since Dec. 27. The benchmark Shanghai Composite Index declined 1 percent.

The PBOC kicked off its latest tightening cycle in August after broad monetary loosening helped fuel an unprecedented, 11-quarter bond rally. The central bank resorted to injecting longer-term funds in open-market operations, and raising the cost of loans to commercial lenders. On March 16, while explaining the rationale for its latest open-market borrowing cost increase after a Fed hike, the PBOC said higher rates would help offset a drop in real interest rates and maintain a yield advantage over the U.S.

Taming Credit

PBOC Governor Zhou Xiaochuan told reporters during the National People’s Congress earlier this month that taming the credit binge will be a “medium-term process.” At the Boao forum held over the weekend, he said one of the priorities in China’s structural reforms in the short- and medium-term is lowering leverage.

“The funding market will become more volatile in the second quarter and there will be more frequent hiccups,” said Yan Yan, the Shanghai-based head of fixed income trading at China Guangfa Bank Co. “The pivotal level of funding costs will rise further.”

The survey’s results suggest that:

  • The seven-day repurchase rate, a gauge of interbank funding availability, will average 2.70 percent in the April-June period, compared with 2.61 percent so far this year. The rate closed at 2.81 percent on Thursday.
  • The 10-year sovereign bond yield will end the second quarter at 3.4 percent, according to the median estimate. That compares with a yield of 3.27 percent on Wednesday.
  • Nine respondents forecast that the sovereign yield curve will bear steepen, while eight expect rangebound trade and seven see a bear flattening.
  • The PBOC will boost the costs of funds offered in reverse-repurchase operations, according to all but two of the 29 respondents.
  • The credit premium of five-year AA grade corporate bonds over top-rated peers will widen by as much as 50 basis points, according to 18 respondents. The gap was last at 49 basis points, the narrowest since at least 2010.
  • The participants in the Bloomberg survey included China Guangfa Bank Co., Hengfeng Bank Co., Genial Flow Asset Management Co., Mao Dian Asset Management, JD Finance, Tebon Securities Co., SDIC Essence Futures Co. and Nanhua Futures Co. Twenty-one traders and analysts asked not to be identified as they are not allowed to comment on the matter publicly.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade long experience in the global financial market.

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Investment

Barclays Tell High Net Worth Investors to Shun Africa and Other Emerging Economies

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Barclays to High Net Worth Clients, Stay Off Africa and Other Emerging Economies

Barclays, one of the world’s largest investment banks, has started advising high net worth clients to stay off Africa and other emerging economies.

According to Barclays, despite the recent recovery noticed in emerging-market stocks, investors are better off avoiding the risks that still abound in emerging nations. Barclays Plc, however, advised high net worth clients to focus on U.S equities despite the S&P’s breakneck rally.

The investment bank said emerging economies do not have enough fiscal buffers to spend their way out of the COVID-19 pandemic and will likely continue to struggle in the near-time compared to the US with 12 percent of gross domestic product fiscal-support.

It said the huge US stimulus may halt rebound in emerging-markets stocks as more money is expected to flow into the world’s largest economy and its European counterparts.

“Compared to the U.S., emerging-market economies appear more vulnerable,” said Haider, the London-based managing director and head of global growth markets. “Their central banks have less room to maneuver, their governments may not be able to provide unlimited support and equity markets, given their sector mix, can be more challenged by an economic slowdown.”

Barclays added that even after 33 percent rebound in stocks of emerging markets since the panic selloff subsided in March, stocks are still down by 9 percent from year-to-date while the US S&P 500 stocks are up by 45 percent. Presently, their stocks trading at a 36 percent discount to US stocks, up from 25 percent three months ago.

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Economy

Crude Oil Rises to $43.1 Per Barrel on Production Cuts Extension

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  • Crude Oil Hits $43.1 Per Barrel Following OPEC’s Production Cuts Extension

Brent crude oil, against which Nigerian oil price is measured, rose by 1.25 percent on Monday during the Asian trading session following OPEC and allies’ agreement to extend crude oil cuts to the end of July.

OPEC and allies, known as OPEC plus, agreed to extend production cuts of 9.7 million barrels per day reached in April to July on Saturday.

In the virtual conference, delegates agreed that members, including Nigeria and Iraq presently struggling to attain a 100 percent compliance level must keep to the agreement or be forced to do so in subsequent months.

Nigeria, Iraq and others failed to keep to the cartel’s agreement in May after reports show that Nigeria only managed to attain a 19 percent compliance level during the month while Iraq struggled to attain just 38 percent in the same month.

Russia and Saudi Arabia, the two largest producers of the group, warned members to stick to the agreed quota if they want to rebalance the global oil market.

While the errant producers such as Iraq and Nigeria have vowed to reach 100% conformity and compensate for prior underperformance, we still think they will likely continue to have some commitment issues over the course of the summer,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.

The potential return of Libyan output could also cause considerable challenges for the OPEC leadership.

Earlier on Monday, Brent crude oil hits $43.1 per barrel, more than a month record-high, before pulling back slightly to $42.83 per barrel.

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Economy

Gold Dips by 2 Percent on Better Than Expected Job Report

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  • Gold Dips by 2 Percent on Better Than Expected Job Report

Gold prices declined by 2 percent on Friday following a better than expected US non-farm payroll report.

The report showed an increase of 2.5 million payroll numbers against a decline of 7.5 million predicted by many experts.

The surprise number boosted investors’ confidence in US recovery as many dumped their haven investment (gold) for the stock market.

“We had significantly stronger-than-expected U.S. payroll numbers – an increase of 2.5 million versus an expectation of a decline of 7.5 million – that 10-million swing has brought forward expectations of the economic recovery in the United States,” said Bart Melek, head of commodity strategies at TD Securities.

Spot gold immediately declined by 1.9 percent per ounce to $1,678.81 while the U.S. gold futures slid 2.6 percent to settle at $1,683.

Gold was also being pressured by stronger yields and a slightly firmer dollar, “meaning the opportunity cost to hold gold in the portfolio has gone up,” Melek added.

The surprise didn’t stop there, US Dow Jones was up 614 points despite the protest going on the US and US-China tension.

Also, NASDAQ rose by 29 points while the S&P index added 50 points increase.

Note: Investors generally increase their investments in gold and other haven assets during a crisis to avert risk exposure and do the opposite once they sense a better economy.

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