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Analysis-With Fed taper expected, investors brace for rate hikes on horizon

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November 2, 2021

By Karen Pierog and Saqib Iqbal Ahmed

(Reuters) – As the U.S. Federal Reserve gears up to taper its huge asset purchases, investors reeling from gyrations in the bond market are scanning the road ahead for signs of how effectively the central bank can tighten policy to deal with stubbornly high inflation.

At their meeting this week, Fed policymakers are expected to give the green light to reducing the central bank’s bond purchases which have seen it hoover up $120 billion a month in government-backed bonds in a bid to steady the economy after the hit from the pandemic.

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(GRAPHIC: In with a boom, out with a … – https://graphics.reuters.com/USA-FED/byvrjrggbve/chart.png)

The move, which is anticipated to commence in mid-November or mid-December, has been widely telegraphed. Still, the Treasury market has churned over the past week as investors positioned for tighter policy. Investors have sharply increased expectations that inflation would force the Fed to raise rates sooner and faster than projected. Short-term rates have risen and the yield curve flattened.

“Once you get by the taper the next big event is if-and-when the Fed does look to actually tighten going forward, and that puts more importance on effectively every major economic data point that comes out,” said Chuck Tomes, associate portfolio manager at Manulife Asset Management in Boston. “There could be more volatility events around all of those major economic data points.”

The gyrations in the bond market likely have already caused some leveraged hedge funds to suffer losses, Bank of America warned in a report. The moves could also reflect investors unwinding positions to prevent deeper losses, Deutsche Bank said.

Wall Street banks, meanwhile, are intensifying preparations for tapering to ensure they are able to handle spikes in market volatility.

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There could still be surprises. Not tapering at this point could substantially steepen the U.S. Treasury yield curve, while a faster-than-expected tapering program would lead to a substantial flattening, according to Steve Bartolini, portfolio manager for U.S. core bond strategy at T. Rowe Price.

The Fed’s communication this time around stands in contrast to 2013 when bond yields rose dramatically during the so-called “taper tantrum” after then-Fed chief Ben Bernanke unexpectedly told lawmakers the central bank could slow its pace of asset purchases that had been propping up markets. Benchmark 10-year U.S. Treasury yields rose from around 2% in May 2013 to around 3% in December.

While the move is not as extreme so far, the U.S. bond market is on track for its first annual loss since 2013.

(GRAPHIC: Rough sledding in the bond market – https://graphics.reuters.com/USA-FED/INVESTORS/akvezadxmpr/chart.png)

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Investors are keenly focused on rising inflation and look to the Fed meeting to see if Chair Jerome Powell’s stance that higher prices will moderate on their own over time may be wavering.

“It’s the labor, the inflation, it’s the consumer that we are mostly concerned about,” said Tom Martin, senior portfolio manager at Globalt Investments in Atlanta, who thinks that long-term bond yields may fall once the taper announcement is made as rising short-term borrowing costs act as a headwind to growth.

“We are concerned that the central bank could make a policy error and raise rates sooner than they should,” said Martin, who said he’s been “positioned for interest rates to not rise for quite some time and we stand by that positioning.”

Stephen Tally, chief operating officer at Leo Wealth, said the risk was “inflation is not as transitory as we’ve been led to believe” and that “pushes the Fed farther and faster than they want to go.”

Inflation expectations spiked last week with 5- and 10-year breakeven inflation rates hitting their highest levels in more than a decade.

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“Where it’s going to be more dicey is how (Powell) dances with the word transitory and puts a definition around that maybe in terms of a time frame,” said Lon Erickson, a portfolio manager at Thornburg Investment Management.

Sit Investment Associates Senior Portfolio Manager Bryce Doty said he has been tweaking portfolios recently with an eye on rising inflation.

“I think you still need to be heavily invested in TIPS and anything that offers some inflation protection,” Doty said.

Powell, whose uncertain renomination as Fed chair has also played into market moves, puts rate hikes in a separate box from tapering, with higher interest rates dependent on a return to full employment and inflation reaching the Fed’s 2% goal, while moderately exceeding that level for some time.

Investors have been closely watching monthly jobs reports, with October’s due Friday.

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“After a pretty weak September number are they relying on that October number before they start to really get deep into discussions around rate hikes?,” said Jason England, global bonds portfolio manager at Janus Henderson Investors.

(Reporting by Karen Pierog and Saqib Iqbal Ahmed; Editing by Megan Davies and Andrea Ricci)

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Buying the Omicron dip

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November 29, 2021

A look at the day ahead from Danilo Masoni.

Sell first, get answers later. With stocks near lifetime peaks, the Black Friday reaction to the new fast-spreading virus strain Omicron was hardly surprising.

But a weekend later, investors look heavily engaged in buying the dip, as markets take a more balanced view of risks attached to what the WHO called a “variant of concern”.

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After their ninth biggest drop ever on Friday, gains in crude prices topped 5% earlier in Asia and stock futures point to a solid bounce across Europe and America.

A South African doctor said patients with Omicron have “very mild” symptoms and investment houses don’t look to have budged that much. Credit Suisse, for example, made no portfolio changes, staying slight overweight on equities.

Perhaps more telling is that retail traders poured north of $2 billion into U.S. stocks on Friday, setting the second biggest daily inflow on record, per Vanda Research data.

Of course there are uncertainties and that will likely make for volatile days heading into the Christmas shopping season.

Understanding the level of severity of the variant “will take days to several weeks”, said WHO. And vaccine maker BioNTech needs up to two weeks to figure out whether the shot it makes with Pfizer needs to be reworked.

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So while Omicron has spread from Australia to the Netherlands and governments ban travel and mull lockdowns, markets may also gamble on central bankers turning more patient in their path towards rates normalisation.

Lots of speakers from the Federal Reserve and the European Central Bank are lined up for today. On Sunday, speaking about risks to the recovery, ECB’s Lagarde said: “We now know our enemy and what measures to take.”

Key developments that should provide more direction to markets on Monday:

* ECB speakers: Governor Lagarde, ECB board members AndreaEnria, Isabel Schnabel, Pentti Hakkarainen; ECB Vice PresidentLuis de Guindos * Euro zone consumer sentiment/inflation expectations * German preliminary CPI/HICP * Fed speakers: Chairman Jerome Powell, New York PresidentJohn Williams, Governor Bowman * Emerging markets: Kenya central bank meets; Turkey tradebalance and bank NPL ratios (This story refiles to fix chart)

(Reporting by Danilo Masoni; Editing by Saikat Chatterjee)

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UK regulator set to block Meta’s Giphy deal – FT

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November 29, 2021

(Reuters) -The UK competition regulator is expected to block Meta Platforms’ acquisition of online GIF platform Giphy in the coming days, the Financial Times reported https://www.ft.com/content/662c8e3f-4909-4bec-9131-c0237bb4897d on Monday.

The Competition and Markets Authority is set to reverse the deal in what would be the first time the watchdog has reversed a Big Tech acquisition, the report said, citing individuals close to the matter.

Meta Platforms and the regulator did not respond to requests for comment from Reuters sent outside working hours.

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The regulator had in October fined the U.S. social media giant Facebook, now Meta, 50.5 million pound ($67.35 million) for breaching an order that was imposed during an investigation into its purchase of the GIF platform, Giphy.

Facebook bought Giphy, a website for making and sharing animated images, or GIFs, in May last year to integrate it with its photo-sharing app, Instagram. The deal was then pegged at $400 million by Axios.

($1 = 0.7499 pounds)

(Reporting by Sneha Bhowmik in Bengaluru; Editing by Uttaresh.V)

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Evergrande shares fall after chairman cuts stake; Fantasia suspends trading

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November 29, 2021

HONG KONG (Reuters) – Shares in China Evergrande Group fell as much as 4.8% on Monday morning, after its chairman trimmed his stake in the cash-strapped property developer to raise about $344 million.

The group’s electric vehicle unit, China Evergrande New Energy Vehicle Group Ltd, also dropped more than 5% after it said the company was still exploring ways to pump capital into the unit with different investors.

Evergrande has been scrambling to raise capital as it grapples with more than $300 billion in liabilities and Chinese authorities have told its chairman, Hui Ka Yan, to use some of his personal wealth to help pay bondholders, sources have said.

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Evergrande failed to pay coupons totalling $82.5 million due on Nov. 6 and investors are on tenterhooks to see if it can meet its obligations before a 30-day grace period ends on Dec 6.

The developer disclosed late on Friday that Hui had sold 1.2 billion shares in the company at an average price of HK$2.23 each, lowering his stake in the Shenzhen-based real estate developer to 67.9% from 77%.

Once China’s top-selling developer, Evergrand’e troubles have hit the broader Chinese property sector with a string of debt defaults and credit rating downgrades of its peers in the last couple of months.

Fantasia Holdings suspended trading in company shares on Monday pending release of information. On Thursday, the developer said a winding-up petition was filed against a unit related to an outstanding loan.

(Reporting by Sumeet Chatterjee; Editing by Stephen Coates)

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