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Analysis-Investors say Asia a safe place as Fed hikes but premature to jump in

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© Reuters. FILE PHOTO: Traders are seen in front of a screen with trading figures in red at Thailand Stock Exchange building in Bangkok, Thailand March 13, 2020. REUTERS/Juarawee Kittisilpa

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By Rae Wee and Alun John

SINGAPORE/HONG KONG (Reuters) – Asia’s emerging economies are better placed than most other regions to weather a bout of turbo-charged U.S. policy tightening, analysts say, but with a health warning that investors shouldn’t rush in.

The Federal Reserve raised interest rates by 75 basis points on Wednesday, the largest hike in more than a quarter century, and flagged further steep increases for the rest of the year to curb surging inflation.

In contrast, only hours earlier China’s central bank kept rates unchanged in the world’s second-largest economy for a fifth straight month.

Expectations of aggressive U.S. tightening had already caused a violent selloff in global stock, bond and even cryptocurrency markets, though Asian currencies and stocks rallied on Thursday.

Foreign investors have pulled money out of emerging Asia, excluding China, for five straight months, worried about inflation and a reluctance in the region to raise rates in the face of slowing global growth.

Now Asia is under pressure to tighten.

Galvin Chia, an emerging markets strategist at NatWest Markets, cautions against reading too much into Thursday’s rally, warning the next few weeks could be volatile.

“There’s still a little bit of room for wiggle about what the Fed will do next,” he said. “I would say investors wouldn’t be jumping on with any sort of bigger, longer-term investment decisions at this point in time. It’s still going to be a little bit choppy.”

Kerry Craig, a global market strategist at J.P. Morgan Asset Management, said Asian economies have more support from current-account surpluses and stable currencies than in previous periods when Fed rate hikes sucked money out of emerging markets.

Local markets have sold off this year, though the moves have been far gentler than the violent capital outflows seen in U.S. tightening cycles in 2016 and 2004.

“But we’re still very cautious and neutral in terms of asset allocations, we’re not saying, ‘Run out and by these things now’,” Craig said.

“We’re just saying that they are becoming more appealing, with thinking about where to find growth in portfolios,” and investors can wait to see what happens to growth and inflation.

WATCHING CHINA

China remains a wild card.

The authorities in the communist economy have eased regulatory crackdowns and COVID-19 lockdowns this month, but questions remain about how fast the economy will recover.

Economists say the People’s Bank of China (PBOC) now has only limited room to ease, given the aggressive Fed and Beijing’s wariness of debt bubbles.

Divergent Sino-U.S. policies have wiped out China’s yield advantage, triggering a record monthly tumble in the yuan in April as capital left. The Chinese currency has since stabilised.

Investors pulled $4.9 billion out of emerging markets last month, extending a third month of outflows, according to the Institute of International Finance.

Foreigners reversed in the last week of May and bought Chinese equities, even as they reduced holdings of Chinese bonds for a fourth month.

“The word with China is stability and control,” Craig said. “They want to see there’s a lot more control and stability being factored in, in terms of currency, bond and equity markets while they focus on the economy.”

Underscoring this caution, China’s cabinet said on Wednesday it will act decisively in ramping up support for the economy, but such efforts should not lead to excessive money issuance and an “overdraft of the future”.

How other Asia central banks react to their domestic inflationary stresses is key. NatWest’s Chia points to a selloff in Indonesian bonds this month as evidence investors want to see the dovish central bank change its stance.

An aggressive Fed will put pressure on Asia to “raise rates, partially because of increased risk of capital outflows and weaker currencies,” said Rob Subbaraman, head of global macro research at Nomura.

“But also I think many of the Asian economies are now facing their own inflation pressures irrespective of the Fed.”

Subbaraman has changed his view on the Bank of Thailand staying on hold, now forecasting it will raise rates at the next two meetings. He also expects “aggressive” rate hikes in India in the second half.

Economy

Futures rise as easing China COVID curbs lift travel, leisure stocks

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© Reuters. A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., June 22, 2022. REUTERS/Brendan McDermid

By Shreyashi Sanyal

(Reuters) – Travel and leisure shares propped up U.S. stock index futures after China relaxed some COVID-19 quarantine requirements for international travelers, raising hopes of a revival in global growth.

Airlines, cruises, casinos and hotels were among the gainers in premarket trading after China’s slashing of the quarantine time for inbound travelers by half boosted hopes of a big jump in international travel and spending.

Shares of Walt Disney (NYSE:DIS) Inc rose 2.5% to top the list of gainers on the Dow Jones Industrial Average, after the company’s Shanghai Disney Resort said it would reopen the Disneyland theme park on June 30 after being shut for more than three months.

Spirit Airlines (NYSE:SAVE) and American Airlines (NASDAQ:AAL) Group Inc were the biggest gainers in the sector, rising 4% and 2% respectively.

Melco Resorts jumped 10% and led the rise in the casino sector, closely followed by Wynn Resorts (NASDAQ:WYNN), MGM Resorts (NYSE:MGM) International.

Wall Street’s main indexes started the week on soft footing after worries of surging inflation and an aggressive Federal Reserve dominated sentiment amid few market moving catalysts till the start of earnings season in two weeks.

Investors are now looking at data to determine whether the economy can withstand large interest rate hikes by the U.S. central bank to stamp out inflation.

A survey from the Conference Board is expected to show its consumer confidence index slipped to a reading of 100.4 in June, from 106.4 in May, at 10 a.m. ET.

The S&P 500 and the Nasdaq are set to post losses in June and are on course to log two straight quarterly declines for the first time since 2015.

At 6:49 a.m. ET, Dow e-minis were up 175 points, or 0.56%, S&P 500 e-minis were up 20 points, or 0.51%, and Nasdaq 100 e-minis were up 52.25 points, or 0.43%.

Nike Inc (NYSE:NKE) shed 2.8% as it forecast first-quarter revenue below estimates on expectations of more discounts and pandemic-related disruptions in China, its most profitable market.

Occidental Petroleum Corp (NYSE:OXY) climbed 3.1% after top investor Warren Buffett raised stake in the shale producer.

China ADRs also rose on Beijing easing its COVID curbs, with e-commerce firms Alibaba (NYSE:BABA).com, JD (NASDAQ:JD).com and Pinduoduo (NASDAQ:PDD) up between 1.2% and 1.4%

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Economy

Euro below $1.06 as Lagarde keeps July policy options open

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© Reuters. A shopper pays with a ten Euro bank note at a local market in Nice, France, June 7, 2022. REUTERS/Eric Gaillard

By Saikat Chatterjee

LONDON (Reuters) – The Aussie and the Canadian dollar climbed on Tuesday on firmer oil prices while the euro held below $1.06 as European Central Bank (ECB) President Christine Lagarde offered no fresh insight on the central bank’s policy outlook.

The ECB is widely expected to follow its global peers by raising interest rates in July to check soaring inflation though economists are divided on the magnitude of the rate hike to protect a struggling economic recovery due to high oil prices.

Oil prices are up 10% in barely a week on supply constraint concerns with Brent crude holding above $117, pushing the Canadian dollar and the Australian dollar up 0.3% and 0.4% respectively. [O/R]

“Oil is helping the Norwegian crown and the Canadian dollar to outperform and the euro is again running into resistance at the 1.06 level,” said Kenneth Broux, an FX strategist at Societe Generale (OTC:SCGLY) in London.

The euro held below $1.06 after the ECB’s Lagarde said the central bank would move gradually but with the option to act decisively on any deterioration in medium-term inflation, especially if there were signs of a de-anchoring of inflation expectations.

Money markets are pricing in about 238 basis points (bps) of cumulative rate hikes by mid-2023 compared to around 280 bps two weeks ago.

Broader currency market moves were contained in a big week for markets in economic data terms. German inflation figures are due on Wednesday, French data on Thursday and euro zone numbers on Friday.

At the other end of the dial, higher oil prices caused the partially convertible Indian rupee to open at a record low, and fall further to 78.67 per dollar.

The U.S. dollar index struck a two-decade high of 105.79 this month and was last steady at 103.93.

Elsewhere, the offshore Chinese yuan moved higher after China reduced COVID quarantine for international travellers.

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Economy

China’s economy recovering but foundation not solid, premier says

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© Reuters. FILE PHOTO: Chinese Premier Li Keqiang is seen on a screen as he attends a news conference via video link after the closing session of the National People’s Congress (NPC) in Beijing, China March 11, 2022. REUTERS/Ryan Woo

BEIJING (Reuters) -China’s economy has recovered to some extent, but its foundation is not solid, state media on Tuesday quoted Premier Li Keqiang as saying.

China will strive to drive the economy back onto a normal track and bring down the jobless rate as soon as possible, Li was quoted as saying.

“Currently, the implementation of the policy package to stabilise the economy is accelerating and taking effect. The economy has recovered on the whole, but the foundation is not yet solid,” Li was quoted as saying.

“The task of stabilising employment remains arduous.”

China’s economy showed signs of recovery in May after slumping the previous month as industrial production revived, but consumption remained weak and underlined the challenge for policymakers amid the persistent drag from strict COVID-19 curbs.

China’s nationwide survey-based jobless rate fell to 5.9% in May from 6.1% in April, still above the government’s 2022 target of below 5.5%.

In particular, the surveyed jobless rate in 31 major cities picked up to 6.9%, the highest on record. Some economists expect employment to worsen before it gets better, with a record number of graduates entering the workforce in summer.

Li vowed to achieve reasonable economic growth in the second quarter, although some private-sector economists expect the economy to shrink in the April-June quarter from a year earlier, compared with the first quarter’s 4.8% growth.

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