Euro zone yields rise as markets weigh impact of China protests

By Samuel Indyk

(Reuters) -Euro zone government bond yields were higher on Monday after rare protests in China over the country’s strict zero-COVID policies clouded the outlook for global growth and inflation.

Hundreds of demonstrators in Shanghai and other major cities shouted and jostled with police on Sunday evening as protests flared for a third day following a deadly apartment fire in the country’s far west.

“This could be negative for economic growth and add to inflationary pressures,” said Daniel Lenz, rates strategist at DZ Bank, citing the risk that supply chains could be negatively affected if China introduces stricter lockdowns to slow COVID-19 outbreaks.

“The market is more concerned about the impact on inflation than the impact on growth,” he added.

Germany’s 10-year government bond yield was up 2 basis points (bps) at 1.99%, after rising 12 bps on Friday.

Germany’s two-year yield, the most sensitive to changes in interest rate expectations, was little changed at 2.182%.

Meanwhile, investors were watching for comments from European Central Bank policymakers after board member Isabel Schnabel pushed back on Thursday against calls from many of her colleagues for smaller interest rate increases.

ECB president Christine Lagarde on Thursday kept her options open as to the size and number of future rate hikes, saying this would depend on a number of variables.

“How much further we need to go, and how fast we need to get there, will be based on our updated outlook, the persistence of the shocks, the reaction of wages and inflation expectations, and on our assessment of the transmission of our policy stance,” Lagarde told the European Parliament.

Markets are fully pricing in a 50-basis-point hike at the ECB’s December meeting and around a 60% chance of a larger 75 basis point rate rise, according to data from Refinitiv.

Germany’s yield curve steepened after hitting its deepest inversion since 1992 last week.

The gap between the 2-year and 10-year government bond yields rose to -19 bps. It hit -27.1 bps, the widest negative gap since October 1992 late on Thursday, Refinitiv data showed.

Analysts said an inversion suggested that investors expect the ECB to pause its rate hikes or even cut rates next year if inflation starts declining faster than expected or if the central bank focuses on avoiding a deep recession.

Italy’s 10-year yield rose 7 bps to 3.923% pushing the closely watched spread between Italian and German 10-year yields wider by 6 bps to 193 bps.

“In this environment, an equilibrium for the spread would be around 200 basis points,” DZ Bank’s Lenz said.

“At levels below this, markets see this as an area good for profit taking,” Lenz added.

The spread narrowed to around 180 basis points on Friday, its tightest since April.

(Reporting by Samuel Indyk and Stefano Rebaudo; editing by Conor Humphries and Bernadette Baum)

China’s anti-lockdown protests shake stocks and oil

By Sinéad Carew and Lawrence White

NEW YORK/ LONDON (Reuters) – U.S. stocks tracked a decline in equities worldwide and oil was sold off on Monday as rare protests in major Chinese cities against the country’s strict zero-COVID curbs fuelled concerns about global economic growth.

A surge in COVID cases and clashes between police and protesters across several major Chinese cities over the weekend also helped push U.S. Treasury yields lower and even safe-haven assets like the dollar and gold were in the red.

“There are concerns over China’s increasing COVID cases and how the government is going to react. We’ve gone from what we considered to be a reopening to likely greater restrictions,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.

“If you’ve got one of the largest economies coming off-line that’s going to weigh on global growth. It’s going to influence all companies one way or another.”

The Dow Jones Industrial Average fell 192.36 points, or 0.56%, to 34,154.67, the S&P 500 lost 30.51 points, or 0.76%, to 3,995.61 and the Nasdaq Composite dropped 90.21 points, or 0.8%, to 11,136.14.

The pan-European STOXX 600 index slipped 0.50% and MSCI’s gauge of stocks across the globe shed 0.71%.

Emerging market stocks dropped 0.94%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 1.1% lower, while Japan’s Nikkei lost 0.42%.

Oil prices, sensitive to the strictness of China’s lockdown as a barometer for demand, pared some losses but earlier U.S. crude had fallen to its lowest level since late December 2021. Brent crude after falling to its lowest level since early January, was last trading at $82.49, down 1.36% on the day. U.S. crude was down 0.93% to $75.57 per barrel.

In currencies, the safe-haven Swiss franc and Japanese yen gained, while the Aussie dollar and Chinese yuan underperformed. The U.S. dollar dipped, meanwhile, which analysts said was unusual given its typical safe-haven role.

“It does suggest perhaps that the swing against the dollarin the sense of the broader market mood or market positioning isperhaps running a little bit deeper this morning and that mightwell be significant,” Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said.

The dollar move had some market analysts blaming falling U.S. bond yields which made the greenback less attractive against Japan’s currency.

The dollar index fell 0.292%, with the euro up 0.13% to $1.0409. The Japanese yen strengthened 0.28% versus the greenback at 138.71 per dollar, while sterling was last trading at $1.2044, down 0.41% on the day.

The dollar was down 0.4% against the Swiss franc after earlier falling as much as 0.77%.

CHINA FEARS

In Treasuries Benchmark 10-year notes were down 2.8 basis points to 3.674%, from 3.702% late on Friday.

The 30-year bond was last down 2.7 basis points to yield 3.725%, from 3.752%, while the 2-year note was down 3.9 basis points to yield 4.4402%.

Fears about Chinese economic growth hit other commodities markets, with copper and other metals also falling.

The worries about China’s COVID policies overshadowed any support from the Chinese central bank’s 25 basis point cut to the reserve requirement ratio (RRR) announced on Friday, which would free about $70 billion to prop up a faltering economy.

China had announced a fifth consecutive day of record new local COVID cases with 40,052 infections on Monday, while in Shanghai demonstrators and police clashed on Sunday night as protests flared for a third day.

There were also protests in Wuhan, Chengdu and parts of the capital Beijing as COVID restrictions were put in place.

Gold prices gave up gains after touching a one-week high of $1763.70 per ounce. Spot gold dropped 0.5% to $1,748.07 an ounce. [GOL/]

(Reporting Sinéad Carew and Karen Brettell in New York, Lawrence White in London, Scott Murdoch in Sydney; Editing by Barbara Lewis, Chizu Nomiyama and Susan Fenton)

Brazil’s Lula to announce his economic team soon, aide says

BRASILIA (Reuters) – Brazil’s President-elect Luiz Inacio Lula da Silva is expected to announce his economic team in the coming days, a close aide said on Monday, as speculation grows on who will be the country’s next finance minister.

Congressman Reginaldo Lopes, the leader of the Workers Party in the Lower House, told reporters that Lula, who is in Brasilia this week to discuss cabinet appointments, would soon make an announcement needed to advance talks with Congress on approval of a bill allowing a spending cap waiver.

Former Sao Paulo Mayor Fernando Haddad has recently emerged as the front-runner to be finance minister, but he is viewed as a less market-friendly choice.

A second Lula aide, Congressman Jose Guimaraes, added during a news conference that Lula’s Workers Party was likely to support Arthur Lira’s re-election as Lower House speaker, with an official announcement expected on Tuesday.

Lira has been a key ally of right-wing President Jair Bolsonaro in Congress, but engaged in talks with Lula and Vice-President elect Geraldo Alckmin since the leftist leader defeated Bolsonaro in a runoff election in October.

Securing Congressional support is seen as key to Lula’s ability to govern, especially as he tries to get lawmakers to pass a budget spending cap waiver that would make room for higher welfare payments for poor families in 2023.

(Reporting by Ricardo Brito; Editing by Bill Berkrot)

Yen, Swiss franc gain on China concerns, dollar drops

By Karen Brettell

NEW YORK (Reuters) – The safe-haven Swiss franc and Japanese yen gained on Monday, while the Aussie dollar and Chinese yuan underperformed as protests against COVID restrictions in China knocked market sentiment.

The U.S. dollar dipped, meanwhile, which analysts said was unusual as it ran counter to its typical role as a safe haven.

Hundreds of demonstrators and police clashed in Shanghai on Sunday night as protests over China’s stringent COVID restrictions flared for a third day and spread to several cities in the wake of a deadly fire in the country’s far west.

“We’re really looking at the government response to what’s happening… the government response is so unpredictable, and of course that just means de-risking,” said Chris Weston, head of research at Pepperstone.

The greenback dipped 0.46% to 138.51 Japanese yen, and fell 0.41% against the Swiss franc to 0.9440. The Euro gained 0.29% to $1.0433.

Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said that the move in the dollar could reflect a shift in market sentiment towards the U.S. currency, but noted that its too soon to be certain.

“It does suggest perhaps that the swing against the dollar in the sense of the broader market mood or market positioning is perhaps running a little bit deeper this morning and that might well be significant,” Osborne said.

The dollar index has fallen to 105.85 from a 20-year high of 114.78 on Sept. 28 on expectations that its rally may have been overstretched and as the Federal Reserve looks to slow its pace of rate increases.

The risk sensitive Aussie dollar was the worst performing major currency, falling 0.93% to $0.6692. The currency was also dented by data showing that Australian retail sales suffered their first fall of 2022 in October as rising prices and higher interest rates finally seemed to have an impact on spending.

The offshore yuan weakened against the dollar to 7.2273.

Fed policy will remain a key focus for the market this week with Fed Chair Jerome Powell due to speak on Wednesday, and with key jobs data for November due on Friday.

The U.S. central bank is expected to hike rates by an additional 50 basis points when it meets on Dec. 13-14.

========================================================

Currency bid prices at 9:48AM (1448 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 105.8500 106.3400 -0.44% 10.649% +106.5200 +105.3100

Euro/Dollar $1.0433 $1.0403 +0.29% -8.23% +$1.0497 +$1.0342

Dollar/Yen 138.5100 139.1650 -0.46% +20.33% +139.4350 +137.5000

Euro/Yen 144.50 144.75 -0.17% +10.88% +145.0000 +143.0600

Dollar/Swiss 0.9440 0.9480 -0.41% +3.50% +0.9479 +0.9407

Sterling/Dollar $1.2053 $1.2089 -0.28% -10.86% +$1.2118 +$1.2027

Dollar/Canadian 1.3454 1.3400 +0.41% +6.41% +1.3473 +1.3395

Aussie/Dollar $0.6692 $0.6756 -0.93% -7.92% +$0.6728 +$0.6667

Euro/Swiss 0.9849 0.9833 +0.16% -5.03% +0.9890 +0.9793

Euro/Sterling 0.8654 0.8598 +0.65% +3.02% +0.8675 +0.8587

NZ $0.6208 $0.6247 -0.59% -9.27% +$0.6244 +$0.6193

Dollar/Dollar

Dollar/Norway 9.9245 9.8765 +0.60% +12.79% +9.9800 +9.8835

Euro/Norway 10.3517 10.2549 +0.94% +3.38% +10.3856 +10.2623

Dollar/Sweden 10.4313 10.4112 +0.61% +15.67% +10.5028 +10.3700

Euro/Sweden 10.8834 10.8171 +0.61% +6.35% +10.8988 +10.8406

(Additional reporting by Harry Robertson in London and Rae Wee in Singapore, Editing by Nick Zieminski)

Bank of England gets solid demand at 750 million pound bond sale

LONDON (Reuters) – The Bank of England said it received bids totalling 2.39 times the 750 million pounds ($903.75 million) of gilts with a maturity of 7-20 years which it sold at auction on Monday.

This represents stronger demand than at the BoE’s last gilt auction on Nov. 24, when it received bids worth 1.92 times the volume of bonds on offer.

British government bond prices were little changed after Monday’s auction result, which was the sixth of eight auctions the BoE is holding in November and December.

($1 = 0.8299 pounds)

(Reporting by David Milliken, Editing by Kylie MacLellan)

Factbox-Big banks see global economy slowing more in 2023, with likely U.S. recession

(Reuters) -The world’s largest investment banks expect global economic growth to slow further in 2023 following a year roiled by the Ukraine conflict and soaring inflation, which triggered one of the fastest monetary policy tightening cycles in recent times.

The U.S. Federal Reserve has increased interest rates by 375 basis points this year since rolling out its first hike in March. This has sparked worries about a recession, even as the central bank is expected to temper its pace of hikes.

Real GDP (annual Y/Y) forecasts for 2023:

Bank Global U.S. China

Morgan Stanley 2.20% 0.50% 5%

Goldman Sachs 1.80% 1% 4.50%

Barclays 1.70% -0.1% 3.80%

J.P.Morgan 1.6% 1% 4%

BNP Paribas 2.3% -0.10% 4.50%

UBS 2.1% 0.1% 4.5%

BofA 2.3% -0.4% 5.5%

Credit 1.6% 0.8% 4.5%

Suisse

Deutsche Bank ~2% 0.8%

4.5%

U.S. inflation forecast for 2023 and Fed terminal rate forecast:

Bank U.S. Inflation Fed Terminal Rate

(annual Y/Y for

2023)

Morgan Stanley Headline CPI: 4.625% (by Jan ’23)

3.3%Core PCE: 3.8%

Goldman Sachs Headline CPI: 3.2% 5 – 5.25%

Core CPI: 3.2% (by May ’23)

Core PCE: 2.9%

Barclays Headline CPI: 3.70% 5% – 5.25% (by March

’23)

J.P.Morgan Headline CPI: 5% (by Jan ’23)

4.1%Core CPI: 4.2%

BNP Paribas Headline CPI: 4.40% 5% – 5.25% (by Q1 ’23)

UBS Headline CPI: 3.6% 5%

BofA Headline CPI: 4.4% 5% – 5.25%(by March

’23)

Credit Suisse 4.75% – 5% (by March

Headline CPI: 3.8% ’23)

Deutsche Bank Headline CPI: 4.3% 5.125% (By March ’23)

Morgan Stanley sees the Fed delivering its first rate cut by December 2023, taking the benchmark rate to 4.375% by the end of that year. Barclays sees the rate between 4.25% and 4.50% by the end of next year, while Deutsche Bank sees it at 4.625% after a rate cut.

UBS expects U.S. inflation to be “close enough” to the Fed’s 2% target by the end of 2023 for the central bank to consider rate cuts. BofA sees the rate between 2.75% and 3.00% by the end of 2024.

Forecasts for currency pairs, yields on U.S. 10-year Treasuries, S&P 500 target by the end of 2023:

Bank EUR/U USD/C USD/J S&P 500 Target U.S.

SD NY PY 10-year

yield

Morgan Stanley 1.08 6.8 140 3,900 3.50%

Goldman Sachs 1.05 6.9 140 4,000 4.34%

Barclays 1.05 7.3 131 3.75%

J.P.Morgan 1.0 7.2 133 3.4%

BNP Paribas 1.06 6.9 128 3,400 3.50%

UBS 1.04 6.9 135 3,700 (by June 3%

2023)

BofA 1.1 7 137 4,000 3.25%

1.02 7.3 135 4.10%

Credit Suisse

Deutsche Bank 1.1 6.8 125 4,500 3.65%

Most banks see the euro falling below parity to the dollar during the year, before clawing back by year-end.

As of 1317 GMT on Nov. 28, 2022:

EUR/USD: 1.045

USD/CNY: 7.197

USD/JPY: 138.50

U.S. 10-year Treasury yield: 3.67%

S&P 500 level (as of close on Nov. 25): 4,026.12

(Complied by Susan Mathew in Bengaluru; Edited by Sriraj Kalluvila, Anil D’Silva and Shounak Dasgupta)

Sterling edges up again dollar but outlook murky

By Lucy Raitano

LONDON – Sterling edged up against a weaker dollar on Monday, hovering near a three-month high, even as Britain’s murky economic outlook weighed on traders’ minds.

At 1030 GMT, the pound was up 0.12% at $1.2103 – not far off a three-month high of $1.2153 touched on Nov. 24. But sterling fell 0.6% versus the euro at 86.58 pence.

A survey released on Monday showed Britain’s property market activity stalling in October and house price growth slowing to its lowest quarterly level since February 2020, as the fallout from former prime minister Liz Truss’s “mini-budget” and a cost-of-living crisis continued to be felt.

A UK CBI retail survey is due to be published on Monday, and will show how the UK consumer is dealing with soaring inflation and a pay squeeze.

Analysts said sterling’s direction this week was likely to be driven by its peers given the political backdrop is more settled and the data calendar is quiet.

Fears of a lengthy UK recession were seen weighing on sentiment.

Last week’s flash purchasing manager index (PMI) data showed British economic activity staying near 21-month lows, though the figures were slightly better than economists had expected.

Market players pondering the Bank of England’s (BoE) next move will be listening carefully to several BoE members due to speak this week, including BoE governor Andrew Bailey on Tuesday and chief economist Huw Pill on Wednesday.

The Monetary Policy Committee, the BoE’s rate-setting body, is expected to increase rates by 50 basis points on Dec. 15, taking the base rate to 3.50%, a Reuters poll of economists found.

The central bank has been hiking rates since late 2021 to try to bring down soaring inflation without damaging the economy too much in the process.

“The BoE’s forecasts imply that the bulk of UK inflation will dissipate and that minimal further tightening is required,” said Mizuho senior economist Colin Asher, writing in a note that the BoE’s forecasts suggest the upcoming recession will do much of the necessary work in battling inflation.

(Reporting by Lucy Raitano; editing by Dhara Ranasinghe and Barbara Lewis)

Marketmind: China, COVID and Crude

A look at the day ahead in U.S. and global markets from Mike Dolan.

Rare anti-government unrest across China’s cities over the weekend has unnerved world markets, weakening crude oil prices and adding fresh political risks to a fragile year-end.

As demonstrations over strict COVID-19 curbs flared across the country over the weekend and infections climbed, protesters made a show of civil disobedience unprecedented since leader Xi Jinping assumed power a decade ago.

Wary that both the unrest and the COVID crunch compound the economic hit to China and the world, the initial market reaction on Monday was to sell Chinese stocks, the yuan and oil – with crude oil prices falling to close to $80 per barrel, their lowest since January. Other Asia bourses weakened in tandem.

A U.S. regulatory clampdown on Chinese tech giants, citing national security concerns, also weighed on shares of tech firms.

And developments on the street meant little solace was taken from Friday’s central bank decision to cut banks’ required reserve ratios, even though this and the prospect of further easing added pressure to the Chinese currency.

European stocks and U.S. futures fell too on Monday. Broad dollar gains reversed quickly, however, as 10-year U.S. Treasury yields skidded to their lowest in almost two months.

The recession signal from the U.S. yield curve between 3 months and 10 years inverted further to almost 70 basis points – its most negative in almost 22 years.

Financial markets have for weeks looked positively at even the vaguest hint of China’s curbs easing – with many asset managers still assuming the restrictions will eventually lift by the end of the first quarter of 2023.

This now may seem harder to parse.

Whether the widening unrest creates a new level of unpredictable political risk in China or merely accelerates some government exit from the draconian ‘zero COVID’ strategy – or even a U-turn on buying foreign vaccines – remains unclear.

As U.S. markets return after the Thanksgiving weekend, attention will return to Federal Reserve tightening, the labour market and inflation picture. Fed Chair Jerome Powell speaks on Wednesday, with the November U.S. jobs report out on Friday.

A bear market rally in equities may continue into next year before relapsing as a recession in the world economy takes hold, Deutsche Bank said in its 2023 economic outlook published on Monday. The German banking giant said it expected U.S. output to drop 2% over the whole year, euro zone output to decline 1% and world economic growth to slow to a recessionary 2%.

It also sees the euro/dollar exchange rate rising steadily to $1.10 by the end of 2023, 10-year Treasury yields staying constant at 3.65%, Brent crude falling to $80 per barrel and credit spreads widening.

Developments that may provide direction to U.S. markets later on Monday:

* Dallas Fed Nov manfacturing index; New York Federal Reserve President John Williams speaks

* European Central Bank President Christine Lagarde at European Parliament. ECB board member Elizabeth McCaul speaks in London

* UK Prime Minister Rishi Sunak speaks at Lord Mayor’s Banquet

Graphic: Protests across China over COVID curbs https://graphics.reuters.com/HEALTH-CORONAVIRUS/CHINA/znvnbeqdwvl/chart.png

Graphic: Crude crash https://graphics.reuters.com/GLOBAL-OIL/myvmonqjqvr/chart.png

Graphic: China COVID-19 spike https://graphics.reuters.com/GLOBAL-MARKETS/mypmonqkqpr/chart.png

(By Mike Dolan, editing by Barbara Lewis mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)

China’s stocks, yuan tumble as COVID protests rattle nerves

SHANGHAI (Reuters) – Chinese stocks on Monday saw the worst day in a month, as recent monetary-easing measures failed to offset investor worries about protests against strict COVID-19 curbs in the world’s second-largest economy, while the yuan weakened versus the dollar.

A U.S. crackdown on Chinese tech giants citing national security concerns also weighed on shares of technology firms.

Nevertheless, the social unrest and rising coronavirus cases had fuelled expectations of an earlier end to China’s zero-COVID policy, putting a floor under stocks and boosting tourism and consumer shares.

China’s blue-chip CSI 300 Index closed down 1.1%, after slumping as much as 2.7% earlier in the day, logging the biggest daily decline since Oct. 28. Hong Kong’s Hang Seng Index lost 1.6%.

Amid the worries, stock investors took little cheer from a central bank decision on Friday to cut banks’ required reserve ratio (RRR) in a bid to aid the struggling economy. The widely expected RRR cut did however add downward pressure on the Chinese currency.

The onshore yuan weakened as much as 1.1% to 7.2435 per dollar at one point, the softest level since Nov. 10, and ended its domestic session trading at 7.1999.

“The market does not like uncertainties that are difficult to price and the China protests clearly fall into this category. It means investors will become more risk-averse,” said Gary Ng, economist at Natixis.

The wave of civil disobedience is unprecedented in mainland China since President Xi Jinping assumed power a decade ago and comes amid mounting frustration over his signature zero-COVID policy as well as record high daily infections.

While state media has not reported the protests, photos and videos of the protests circulated on social media.

Meanwhile, daily new COVID cases in China reached a record high, with more than 40,000 new infections reported for Sunday, prompting widespread lockdowns and other curbs on movement and business across the country.

In fresh evidence of the hit to China’s economy from COVID, data on Sunday showed Chinese industrial firms’ overall profits declined further in the January-October period.

Most sectors in mainland markets dropped, with shares in financials, real estate and energy down between 1.5% and 2%.

Shares in Chinese surveillance equipment maker Dahua Technology Co, video surveillance firm Hangzhou Hikvision Digital Technology Co Ltd and telecoms firm Hytera Communications Corp Ltd dropped, following a sales ban by the Biden Administration.

RISING REOPENING BETS

Bucking the trend, consumer and tourism-related companies rose, as some investors bet recent COVID flare-ups and social unrest might push China to end its zero-COVID policy earlier.

“The demonstrations … mean the current COVID policy mix is no longer politically sustainable. As cases surge, the beginning of some sort of de facto reopening now appears at hand,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics in a note.

A tourism sub-index jumped 4.2%, while stocks in Spring Airlines surged 4.7%, and UTour Group jumped more than 7%.

Casino stocks jumped 7.6% as Macau government said its six incumbent casino operators would be given new licences to operate in the world’s biggest gambling hub from January. Wynn Macau soared more than 15% to lead the rally.

Goldman Sachs chief China economist Hui Shan forecast a 30% probability of China reopening before the second quarter next year, including some chance of a forced and disorderly exit.

“The central government may soon need to choose between more lockdowns and more COVID outbreaks,” she wrote in a late Sunday note.

Gavekal’s Beddor expects China would make concessions to address the underlying concerns, which would mean the center clarifies its instructions to local governments to discourage the use of the harshest COVID-19 containment measures.

Hong Kong-listed tech giants and real estate developers led the decline in the city’s market, with the Hang Seng Tech Index down nearly 2% and the Hang Seng Mainland Properties Index slumping 4.8%.

(Reporting by Shanghai Newsroom; Editing by Himani Sarkar, Sam Holmes and Sherry Jacob-Phillips)

Deutsche Bank: Equity bear market rally will stretch into 2023, dollar weaker

LONDON (Reuters) – A bear market rally in equity markets will continue into next year before slumping as a recession in the world economy takes hold, Deutsche Bank said in its world economic outlook published on Monday.

The German bank said it expected the S&P 500 to rally to 4,500 in the first half of next year and then fall back.

The broadest measure of U.S. stocks closed at around 4,026 in Friday and has rallied roughly 15% from a low hit in October.

In its 2023 outlook, Deutsche said a recession was likely to take hold from mid-year and would also be felt in credit markets where U.S. high yield spreads should widen to 860 basis points by end-2023, and euro-denominated high yield spreads should reach 930 bps.

An end to the U.S. tightening cycle and a recession was viewed as more positive for Treasuries, with the 10-year yield expected to ending 2023 around current levels at 3.65%.

German Bunds were seen underperforming, however, with 10-year yields moving to 2.60% from around 1.96% now

“Finally in FX, we see a reversal in the dollar’s upswing, with euro/dollar strongly moving back above 1.10, likely reaching 1.15 by late 2023,” Deutsche Bank analysts said.

On oil, they added that supply disruptions could temporarily lift Brent crude prices to $100 in the first quarter of next year, before declining to $80 by year-end.

(Reporting by Dhara Ranasinghe, editing by Karin Strohecker)

Take Five: Everything to play for

LONDON (Reuters) – The final month of the year is almost here but there’s no time yet to slow down, with latest U.S. jobs numbers and euro zone inflation data coming up.

And don’t forget the turbulence in crypto land, growing concern about China’s economic outlook given a COVID-19 resurgence and an extraordinary weekend of protests, plus speculation in the soccer world (that goes beyond predicting the World Cup winner).

Here’s a look at the week ahead in markets from Saqib Iqbal Ahmed in New York, Vidya Ranganathan in Singapore, and Alun John, Marc Jones and Dhara Ranasinghe in London.

1/ ANOTHER JOBS SURPRISE?

Markets are hopeful the Federal Reserve will soon slow the pace of its aggressive rate hikes. Friday’s November jobs data could put that expectation to the test.

The U.S. economy likely created 200,000 new jobs, a Reuters poll of economists forecasts found, in what would be the smallest gain since December 2020. Estimates ranged from 150,000 to 240,000.

A higher-than-expected 261,000 new jobs were created in October, even as the pace of job growth slowed and the unemployment rate rose to 3.7%, suggesting some loosening in labor market conditions.

Still, five of the last six jobs reports have topped consensus estimates and another strong number could spell trouble for U.S. stocks, cooling the S&P 500’s 12% rally since mid October. The dollar, weakened by expectations that rates could soon peak, may head higher.

U.S. non-farm payrolls https://graphics.reuters.com/MARKETS-GLOBAL/THEMES/byvrljerxve/chart1.png

2/ FEVERISH ANTICIPATION

A record number of COVID-19 infections and new lockdowns across China have dampened hopes of a reopening of the world’s No.2 economy in the first quarter of 2023.

Protests rippling across the country over the restrictive curbs in scenes unprecedented since President Xi Jinping assumed power a decade ago have added to the woes.

There are, however, other reasons to be hopeful. Regulators have announced a plan to prop up an ailing property sector, and four people with direct knowledge told Reuters China’s central bank will offer cheap loans to financial firms to buy bonds issued by property developers.

The authorities also look set to impose a fine of more than $1 billion on Jack Ma’s Ant Group, setting the stage for ending the fintech company’s two-year long regulatory overhaul.

It’s going to be a cold winter, nonetheless.

Manufacturing indicators, mainly PMIs due on Wednesday, might attest to the weakness already seen across the economy. Beijing has hinted at cutting bank reserve requirements to help support the economy. Economists reckon China will do what it takes to get growth above 5% next year.

China’s COVID-19 spike https://graphics.reuters.com/GLOBAL-MARKETS/zjvqjkonzpx/chart.png

3/ NO PEAK HERE

U.S. inflation may be close to peaking, but euro area price pressures remain strong, Wednesday’s preliminary November estimate of inflation in the bloc is likely to show.

Inflation in the euro zone was 10.6% in October, more than five times the European Central Bank’s 2% target. An underlying measure stripping out volatile food and energy prices remains well above target.

ECB Vice-President Luis de Guindos warns that the persistency of inflation pressures should not be underestimated. The ECB has hiked rates by 75 basis points at each of its last two meetings, lifting rates by 200 bps to 1.5% in just three months.

Markets price in an 80% chance of another 75 bps hike in December. Indeed, the Fed may be getting ready to slow the pace of its rate hikes, but the ECB is not there yet.

No signs of thaw https://graphics.reuters.com/GLOBAL-MARKETS/THEMES/lgpdkwamevo/chart.png

4/ DOMINO DANCING

Cryptocurrencies will likely remain under pressure, as the industry nervously waits to see whether any of the dominoes tottering after the collapse of crypto exchange FTX fall over.

Top of mind is crypto broker Genesis, which said on Monday it had “no immediate plans to file for bankruptcy”, after media reports it was struggling to raise cash for its lending unit.

Bitcoin fell to $15,479 that day – a two-year low – though if anything it has held up better than feared, having largely traded sideways since FTX collapsed.

Crypto markets are in disarray, however, and CME December bitcoin futures are trading around $16,000, while the token itself is around $16,400. That’s a massive discount by recent standards.

Bitcoin in doldrums https://graphics.reuters.com/GLOBAL-MARKETS/THEMES/xmvjkoermpr/chart.png

5/ BALL PARK FIGURES

Maybe World Cup fever is getting everyone excited, but suddenly England’s two most storied soccer clubs, Manchester United and Liverpool, are up for grabs to the highest bidder.

AC Milan as well as Roman Abramovich’s forced sale of Chelsea have already fetched top dollar this year, so some eye-watering valuations – nearly 7 billion pounds ($8.48 billion) in United’ s case – are being banded around for this prized pair.

Both clubs have U.S. owners looking to head down the tunnel, but where potential buyers come in from, particularly at these prices when recessions and trophy droughts loom, is uncertain. Nevertheless, a crowd of billionaires, wealth funds and private equity bankers is cheering from the sidelines.

Ball park figures https://graphics.reuters.com/GLOBAL-MARKETS/egvbykqaepq/chart.png

(Compiled by Dhara Ranasinghe; Graphics by Vincent Flasseur, Sumanta Sen, Pasit Kongkunakornkul, Vineet Sachdev and Kripa Jayaram; Editing by Barbara Lewis and Toby Chopra)

China Protests Send Riskier Assets Tumbling amid Economic Uncertainty

China COVID-19 news updates have grabbed the headlines in recent weeks. Government responses to the surge in new cases had varied from easing containment measures to reintroducing stringent lockdown measures.

Earlier this month, news hit the wires of factory workers escaping as factories introduced on-sight lockdown measures, allowing production facilities. Workers were less enamored by the willingness of the government to permit production to continue under strict controls, opting instead to flee.

However, over the weekend, factory worker resistance escalated to countrywide protests.

What Happened in China Over the Weekend?

On Sunday, Reuters reported demonstrators clashing with police in Shanghai. According to the report, police arrested a ‘busload of protesters.’

There have also been reports of gatherings across universities, and protests in other cities, including Wuhan and Lanzhou. Protesters are challenging Xi Jinping’s zero-COVID policy.

A fire in an apartment block in the region of Xinjiang was the likely catalyst for the uprisings. Reportedly, ten people died in the fire, leading to protests in the provincial capital Urumqi before spreading.

Protesters are calling for Xi Jinping to step down in unprecedented scenes.

The FIFA World Cup has also caused unrest. Scenes of maskless supporters in stadiums forced the government to reportedly censor crowd scenes from the world cup to ease tensions.

The latest surge in new COVID-19 cases and protests across the country have raised uncertainty. How the government responds to the protests will likely be pivotal. Measures to end protests and introduce more stringent lockdown measures could lead to more widespread protests.

However, the government could ease lockdown measures that should ease market tensions.

With the war in Ukraine showing no signs of ending, the introduction of strict lockdown measures in China would not bode well for the global economy. Supply chain disruptions had eased midway through the final quarter.

For central banks, extended lockdown measures could remove hopes of easing inflationary pressure and force more hawkish policy moves. Such an eventuality could drive greater risk aversion, with economies teetering on the brink of recession.

How Protests Could Affect the Global Financial Markets?

Bearish sentiment swept across the financial markets through the Asia session. This morning, the Hang Seng Index and the CSI 300 were down 1.98% and 1.58%, respectively.

The futures markets point to bearish European and US sessions. This morning, the NASDAQ mini and the DAX 30 were down 94.5 and 84 points, respectively.

Crude pile prices showed greater sensitivity to the news of unrest, with WTI and Brent down 2.91% and 2.82%, respectively.

The market risk aversion drove demand for the dollar, with the Dollar Spot Index (DXY) up 0.38% to 106.362.

Things were no better for the crypto market. The crypto market slid by $18.1 billion in the final hour of the Sunday session and by a further $14.2 billion (-1.80%) this morning.

Chart, waterfall chart Description automatically generated

Movement over the remainder of the day will hinge on the Chinese government’s response measures. News of plans to ease lockdown measures to placate protesters would be positive for riskier assets.

 

Marketmind: China crisis brewing

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever.

Purchasing managers index (PMI) data will be the key economic driver for Asian markets this week, but the tone will be set by the increasingly tense political situation in China.

Thousands of people are taking to the streets in several cities across the country in an unprecedented protest against the government’s stringent COVID restrictions after a deadly apartment fire in Urumqi in the country’s far west.

The wave of civil disobedience and clashes between protestors and police come amid mounting frustration over President Xi Jinping’s signature zero-COVID policy. China has reported record new COVID cases for four straight days.

“Down with the Chinese Communist Party, down with Xi Jinping,” a crowd in Shanghai shouted in the early hours of Sunday, according to witnesses and videos posted on social media.

It’s safe to say that this does not happen very often, and the world is watching intently to see how Beijing handles the brewing crisis.

From an immediate market perspective, the COVID surge and nationwide unrest snuff out any hope China is about to re-open its economy. It doesn’t seem that the restrictions will be lifted any time soon, and growth will continue to suffer.

In that vein, PMI figures on Wednesday are expected to show that Chinese factory and service sector activity shrank again in November, another sign that Beijing will maintain its loose monetary policy stance.

If so, the yuan is likely to come under renewed pressure, especially after the central bank on Friday said it would cut the amount of cash banks must hold as reserves, injecting about $70 billion of liquidity into the struggling economy.

China manufacturing PMI vs Reuters poll https://fingfx.thomsonreuters.com/gfx/mkt/myvmonqnwvr/CHINAPMI.jpg

China stocks vs manufacturing PMI https://fingfx.thomsonreuters.com/gfx/mkt/gkvlwgqgepb/CHINAPMI2.jpg

Three key developments that could provide more direction to markets on Monday:

– Australia retail sales (October)

– Fed’s Williams speaks

– ECB’s Lagarde speaks

(Reporting by Jamie McGeever in Orlando, Fla.; Editing by Mark Porter)

Crypto lender Genesis subject of probe by regulators – Barron’s

(Reuters) – State securities regulators are investigating Genesis Global Capital as part of a wide-ranging inquiry into the interconnectedness of crypto firms, Barron’s reported on Friday citing a comment from the Alabama Securities Commission Director.

While it does not directly serve individual investors, Genesis backs products offered by crypto companies such as Circle Internet Financial, the principal operator of one of the largest stablecoins, USD Coin, and by Gemini. Those products pay yield to customers who deposit certain cryptocurrencies on the platforms.

The inquiry will look into Genesis’s connection to such retail investors, and whether it or other industry participants might have violated securities laws, the report added.

Genesis and Alabama Securities Commission did not immediately respond to Reuters’ requests for comment on the report.

In the aftermath of the collapse of crypto exchange FTX, Genesis suspended customer redemptions in a spillover effect citing “abnormal withdrawal requests” that exceeded its liquidity.

Earlier this week, the New York Times reported Genesis hired investment bank Moelis & Company to serve as the firm’s restructuring advisor as it explored options including a potential bankruptcy.

Several crypto firms have been plagued by contagion concern from the fallout of the FTX collapse, with many counting their exposure in millions to the beleaguered exchange.

(Reporting by Manya Saini in Bengaluru; Editing by Krishna Chandra Eluri)

Brazil to allow credit fintechs to initiate payment transactions

BRASILIA (Reuters) -Brazil’s National Monetary Council on Friday decided to allow credit fintechs to initiate payment transactions, the central bank said, a move that will in practice clear them to provide payment services to consumers and business establishments.

To operate as payment initiators, fintechs currently need to open another company specifically for this purpose. With the change, they will be able to offer this service within their routine operation, said the central bank.

Payment initiators, according to the central bank, “initiate a transaction ordered by the final user but never manage the payment account, nor hold the funds of the transactions.”

The central bank stressed that the change should promote innovations in the financial system and increase competition between companies authorized to provide this service.

(Reporting by Isabel Versiani; Editing by Steven Grattan and Cynthia Osterman)

Dollar edges up in range-bound holiday markets

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – The dollar edged higher across the board on Friday in a quiet session following the U.S. Thanksgiving holiday but remained near multi-month lows as the prospect of the Federal Reserve moderating the pace of its policy tightening weighed on the U.S. currency.

“Today has all the indicators of another session dominated by USD consolidation in lieu of any major cross-asset drivers,” said Simon Harvey, senior FX analyst at Monex Europe.

“Liquidity is quite limited, nothing major being released in other markets,” Harvey said.

The euro slipped 0.1% against the dollar to $1.04015 but remained not far from the four-month high of $1.0481 touched in the mid-November. For the week, the common currency was up 0.7% against the greenback.

The dollar has rallied against every major currency this year, boosted by the Federal Reserve’s supersized interest rate hikes as it battles inflation. But recent cooler-than-expected U.S. consumer price data has spurred investor bets that the dollar’s rally may be done.

Minutes from the Federal Reserve’s November meeting, released on Wednesday, showed that most policymakers at the central bank agreed it would soon be appropriate to slow the pace of interest rate hikes.

On Nov. 30, Federal Reserve Chair Jerome Powell will speak at the Hutchins Center on Fiscal and Monetary Policy on the outlook for the economy and the changing labor market.

“Powell’s first comments since the Nov 2nd meeting will be crucial. If he doesn’t push back on the recent loosening in financial conditions, the dollar’s near-term support may slip,” Harvey said.

The dollar was 0.4% higher against the Japanese yen at 139.14 yen after data showed core consumer prices in Japan’s capital, a leading indicator of nationwide trends, rising at their fastest annual pace in 40 years in November, signalling broadening inflationary pressure.

Sterling was 0.21% lower at $1.2084, as investors remained concerned about the economic outlook for the United Kingdom.

China’s central bank said on Friday it would cut the amount of cash that banks must hold as reserves for the second time this year, releasing about 500 billion yuan ($69.8 billion) in long-term liquidity to bolster the slowing economy.

The offshore Chinese yuan fell about 0.3% to 7.2071 to the dollar, headed for a second weekly loss, as COVID-19 worries continued to weigh.

Cryptocurrencies, which have come under intense selling following the high-profile collapse of crypto exchange FTX, remained choppy, with bitcoin down 0.6% at $16,485.

(Reporting by Saqib Iqbal Ahmed; Editing by Deepa Babington and Lisa Shumaker)

Nasdaq falls and dollar rises on investor caution

By Sinéad Carew and Alun John

NEW YORK/LONDON (Reuters) – The Nasdaq closed Friday’s shorter session lower with pressure from Apple Inc, while the dollar gained as investors shied away from risk as they worried about consumer spending and monitored China’s reaction to a resurgence of COVID cases.

Frustration simmered among residents and business groups in China as the government set stricter COVID-19 control curbs just weeks after hopes for easing restrictions had been raised.

And market heavyweight Apple’s shares were weighed down by concerns about its manufacturer Foxconn. Foxconn’s flagship iPhone plant in China was expected to show a November shipment slowdown as thousands of employees left in the latest bout of unrest, Reuters reported, citing an unnamed a source with direct knowledge of the matter.

“The biggest news item is what’s going on in China, the protests against the zero-covid-tolerance policies,” said Brian Jacobsen, senior investment strategist at AllSpring.

“Investors are in a holding pattern waiting for some catalyst even though we’re not quite sure what that catalyst will be,” said Jacobsen noting that an easing of China’s restrictions would promote a risk-on mood while tightening or keeping restrictions would have the opposite effect.

In the United States, trading was also likely impacted by lower volume as many traders take vacation for the market half-day due to Thursday’s Thanksgiving holiday.

The mood was cautious as the all-important gift-buying season kicked off. With inflation soaring, investors are watching out for signs of weakness in consumer spending.

And while shoppers often turn out in record numbers for Black Friday discounts, so far on Friday, Reuters reported that crowds were thin outside stores on what is historically the busiest shopping day.

The Dow Jones Industrial Average rose 152.97 points, or 0.45%, to 34,347.03, the S&P 500 lost 1.14 points, or 0.03%, to 4,026.12 and the Nasdaq Composite dropped 58.96 points, or 0.52%, to 11,226.36.

MSCI’s gauge of stocks across the globe shed 0.15% on the day but added about 1.5% for the week.

Europe’s retailers, while fearing the shopping season could be the worst in at least a decade, were also offering Black Friday deals in hopes of boosting spending against the backdrop of high inflation and the distraction of the soccer World Cup.

Europe’s STOXX 600 ended down 0.02% on Friday but boasted a 1.7% weekly percentage gain, marking six weekly advances in a row for the first time since late 2021.

The U.S. dollar crept higher across the board in what looked like a quiet session but it remained near multi-month lows as the prospect of the Federal Reserve moderating the pace of its policy tightening weighed on the U.S. currency.

“Today has all the indicators of another session dominated by USD consolidation in lieu of any major cross-asset drivers,” said Simon Harvey, senior FX analyst at Monex Europe adding that “liquidity is quite limited.”

The dollar index rose 0.21%, while the euro was down 0.07% to $1.0401.

The Japanese yen weakened 0.33% versus the greenback at 139.08 per dollar, while Sterling was last trading at $1.2082, down 0.23% on the day.

U.S. Treasury yields gave up earlier gains after already falling on Wednesday after the Fed’s November meeting minutes indicated agreement that rate hiking could be slowed.

Benchmark 10-year notes were down 1.5 basis points to 3.694%, from 3.709% late on Wednesday.

The 30-year bond was last up 1.3 basis points to yield 3.7554%, from 3.742%. The 2-year note was last down 1.4 basis points to yield 4.469%, from 4.483%.

Oil prices fell on Friday in thin market liquidity, closing a week marked by worries about Chinese demand and haggling over a Western price cap on Russian oil.

U.S. crude futures settled down 2.13% at $76.28 per barrel while Brent settled at $83.63, down $1.71, or 2% on the day.

Gold prices retreated after the precious metal posted gains in the previous three sessions on expectations the U.S. Federal Reserve would scale back its rate-hiking stance.

Spot gold dropped 0.1% to $1,753.61 an ounce. U.S. gold futures gained 0.40% to $1,751.90 an ounce. [GOL/]

(Reporting by Sinéad Carew, Saqib Iqbal Ahmed and Carolina Mandl in New York, Ankika Biswas and Shubham Batra in Bengaluru, Alun John in London, and Kevin Buckland in Tokyo; Editing by Christina Fincher, Kirsten Donovan, Deepa Babington, Philippa Fletcher)

Brazil’s Lula to prioritize tax reform early in govt, aide says

SAO PAULO (Reuters) -Brazil President-elect Luiz Inacio Lula da Silva will give “full priority” to kicking off tax reform early in his administration, close aide and former Sao Paulo mayor Fernando Haddad said on Friday.

Haddad, who has recently emerged as the front-runner to become finance minister, said at an event hosted by banking lobby Febraban that Lula had decided that tax reform should be the top priority at the beginning of his new government.

Haddad, who was representing Lula at the event, added that Lula’s plan is to first approve a reform bill already in Congress aimed at taxing consumer spending and later submit a new proposal to change taxes on income and assets.

Lula, a leftist, will take over the presidency from President Jair Bolsonaro on Jan. 1.

Haddad also said that Lula would look into quickly resuming trade agreements that have been “sitting on the shelf,” including Mercosur’s deal with the European Union.

On public expenses, he said that some social welfare programs should be improved with a “management shock” and others completely reformulated to meet their objectives.

(Reporting by Andre Romani; Editing by Steven Grattan and Deepa Babington)

Pakistan central bank lifts key rate in surprise move on inflation

By Gibran Naiyyar Peshimam

ISLAMABAD (Reuters) – Pakistan’s central bank unexpectedly raised its key policy rate by 100 basis points to 16% on Friday to ensure high inflation does not get entrenched.

The move brings the State Bank of Pakistan’s (SBP) 2022 hikes to 625 basis points. It kept the rate unchanged at its last two meetings in October and September.

GRAPHIC: Pakistan central bank’s key policy rate – https://graphics.reuters.com/PAKISTAN-CENBANK/zjpqjkozgvx/chart.png

“This decision reflects the MPC’s view that inflationary pressures have proven to be stronger and more persistent than expected,” the central bank said in a statement after a meeting of its monetary policy committee.

SBP Governor Jameel Ahmad said at an analyst briefing afterwards that the tightening so far was enough to achieve its current objectives.

While the bank said inflation was likely to be more persistent than previously anticipated, it still estimated a drop toward the upper range of a 5-7% medium-term target by the end of fiscal 2024.

“Maintaining fiscal discipline is needed to complement monetary tightening, which would together help prevent an entrenchment of inflation and lower external vulnerabilities,” the bank added.

A majority of respondents in a Topline Securities survey earlier this month forecast no change to the policy rate, and a cut by fiscal year-end in June 2023.

Pakistan’s consumer price index (CPI) rose 26.6% year-on-year in October despite devastating floods and attempts to maintain fiscal discipline that have slowed the economy.

GRAPHIC: Pakistan retail inflation surges amid high energy costs – https://graphics.reuters.com/PAKISTAN-CENBANK/xmvjkoemypr/chart.png

Analysts at the post-policy briefing told Reuters that SBP Deputy Governor Murtaza Syed said the bank responded as inflation had moved beyond a transient shock in food and energy prices to show up in core inflation.

Syed also said the bank did not want high inflation expectations to become entrenched, and aimed to get ahead of broader pressures on the economy, they added.

“Looks like SBP is more concerned with rising inflation. Moreover IMF talks for next tranche is under way and is delayed, that may have also compelled the committee to take this step to fight inflation,” Topline Securities’ Chief Executive Mohammed Sohail said.

Pakistan’s timely finalisation of a recovery plan from the floods is essential to support discussions and continued financial support from multilateral and bilateral partners, the International Monetary Fund (IMF) said on Wednesday.

“Too much emphasis on current inflation,” Fahad Rauf, head of research at Ismail Iqbal Securities, told Reuters. “On a forward looking basis, inflation is going to head downwards.”

He estimated a drop in November CPI to 24% from 26.6% in October. Economic activity indicators signal a sharp slowdown and another rate hike will do more harm than good by increasing the government’s debt burden, hurting the private sector and causing higher unemployment, he added.

The SBP affirmed a Gross Domestic Product estimate of about 2% for fiscal 2023 and a current account deficit forecast of about 3% of GDP. However, it now expects higher food prices and core inflation to push average inflation to 21-23% instead the previous estimate of 18-20%.

(Writing by Swati Bhat; Additional reporting by Asif Shahzad and Sudipto Ganguly, Editing by William Maclean, Alexander Smith and Richard Chang)

Analysis-Egypt not out of the woods after IMF rescue deal

By Patrick Werr and Marc Jones

CAIRO/LONDON (Reuters) – Egypt’s finances remain in a precarious state despite two major currency devaluations this year and a brand new $3 billion International Monetary Fund rescue package, economists say.

With debt interest payments set to soak up over 40% of the government’s revenues next year and a lack of foreign currency still hurting the economy, investors remain cautious despite a post-IMF bounce in sentiment.

Bankers in north Africa’s largest economy point out that the Egyptian pound’s black market rate of 26-26.5 per dollar is still 8% below the 24.53 official rate despite a 36% overall devaluation this year.

Foreign exchange traders, meanwhile, seem convinced it will be 28 to the dollar this time next year and Japanese bank Nomura has just put Egypt top of its list of countries at high risk of a currency crisis..

“The Egyptian pound will likely remain under pressure until more U.S. dollar inflows from GCC (Gulf nations) and committed foreign direct investment materialises,” said Carla Slim at Standard Chartered Bank.

Last month’s IMF deal has provided some respite.

Egypt’s soon-to-pay-out government bonds have rallied some 15% and the premiums demanded by investors to hold them rather than U.S. Treasuries have shrunk by almost a third. Bonds that won’t have to be paid for another 15-20 years have also gained sharply, although at 65-70 cents in the dollar and a third below their face value, analysts stress they still indicate danger. “Egypt has got a high debt load and arguably it is more vulnerable even than Pakistan in terms of debt payments as a share of revenues,” said Renaissance Capital’s chief economist Charlie Robertson.

“But the difference is, it has been proactive and been quick to go to the IMF,” Robertson added, noting Egypt also has strong support from rich Gulf countries.

GRAPHIC: Egypt’s debt problems – https://fingfx.thomsonreuters.com/gfx/mkt/zgvobmzgmpd/Pasted%20image%201669369447834.png

Sales of Egyptian short-term treasury bills to foreigners – a key source of government finance until the Ukraine crisis – have also remained relatively stagnant at around 4-6 billion Egyptian pounds ($163-244 million), two bankers in Egypt who requested anonymity for this story estimated.

This is partly because of the government’s reluctance to raise the interest rate — or yield — on the bills above the rate of inflation, particularly when another sharp currency devaluation is being priced in.

BOTTLENECKS

Egypt’s swollen current account deficit and $33.9 billion of international debt payments due for the three years to mid-2025 leave Egypt vulnerable, ratings agency Fitch said this month when it slapped a downgrade warning on the country’s credit rating.

Only default-stricken Sri Lanka and soon-to-default Ghana spend more than the 41% of government revenues Egypt is forecast to spend on interest payments on its debt next year.

GRAPHIC: Struggling to pay the bills – https://graphics.reuters.com/EMERGING-DEBT/dwpkdrlwlvm/chart.png

With very limited amounts of dollars and other foreign exchange available in Egypt, importers continue to face problems financing goods from abroad, creating bottlenecks for factories and retailers, bankers say.

Farouk Soussa, an economist at Goldman Sachs, said a backlog of corporate demand for foreign exchange and tight liquidity in the system would continue to push the pound weaker if it were allowed to trade freely.

“Fundamental valuation models suggest the pound is undervalued by as much as 10% at the moment,” Soussa said, while James Swanston of Capital Economics said the pound probably had to weaken to at least 25 to the dollar to account for the inflation differential with Egypt’s main trading partners.

Egypt’s IMF negotiations dragged on for seven months and drove its second big devaluation of the year. The central bank continues to allow the pound to weaken incrementally by 0.01 or 0.02 pounds each trading day.

Many Egyptians on the street view the strength of the currency as a barometer of how well the economy is managed, and as a result the government has long been reluctant to allow it to weaken rapidly, analysts say.

Authorities also fear a fully free-floating currency could overshoot, prompt businesses to hike their prices and ramp up inflation already at a four-year high.

“Prices have been increased after the flotation, and the government has done nothing to control them,” said Reham Mohamed, a 38-year-old freelance translator who lives with her mother in Cairo and is struggling to find work. “They are increasing every day.”

(Additional reporting by Karin Strohecker and Mahmoud Salama; editing by Aidan Lewis and Christina Fincher)