2025-10-03 05:03

Fed rate cuts should lower hedging costs for foreign investors Foreigners hold over $30 trillion in US assets, $8 trillion by Europeans High hedging costs deter some investors, but more dollar weakness expected NEW YORK, Oct 3 (Reuters) - The long-awaited resumption of the Federal Reserve's rate-cutting cycle is likely to cheapen hedging of dollar exposure for foreign investors and increase their motivation to guard more of their U.S. assets against further currency weakness. In September, the U.S. central bank lowered interest rates by an expected 25 basis points to 4.00-4.25% on labor market concerns and indicated more cuts would follow later this year. Sign up here. That cut narrows the interest-rate differential between the U.S. and other developed countries, which helps to lower the hedging costs for foreign pensions, sovereign funds and other institutional investors, managers and analysts said. The ICE U.S. Dollar Index (.DXY) , opens new tab is down about 10% this year, partially driven by foreign investors increasing hedging activity on worries about the impact of U.S. trade and tariff policies on their U.S. assets, market participants said. "There are some people that are watching it, that have been waiting for the resumption of the cutting cycle by the Fed," said Van Luu, global head of solutions strategy for fixed income and foreign exchange for Russell Investments in London. "Now they are inclined to raise the hedge ratio, and they're waiting for the right moment or they're waiting for some kind of catalyst." Hedging is a way to limit losses on an existing portfolio by using financial instruments such as derivatives to create an offsetting position. Since it often involves selling dollars via forwards or swaps, any rise in hedging activity can spell additional weakness for the beleaguered greenback. NEW-FOUND NEED TO HEDGE High hedging costs and a bullish view on the buck were two major factors suppressing FX hedging ratios in recent years, according to a June report from the Bank for International Settlements. Years of dollar strength meant foreign investors could leave U.S. assets unhedged since it boosted their overall returns and was a source of diversification. Now that's set to change. With the greenback down significantly this year and with more potential weakness on the horizon, hedging could help blunt the hurt from unfavorable FX moves. Markets are pricing in about two more quarter-point rate cuts this year, which could incentivize investors who want to ramp up their hedges but have found the cost to do so a deterrent. GUARDING MORE BUSINESS AGAINST CURRENCY SWINGS Foreigners currently have more than $30 trillion invested , opens new tab in U.S. stocks and bonds, according to Morgan Stanley, $8 trillion of which is held by European investors. Rising concerns over Fed leadership, its independence, and U.S. policy uncertainty have helped keep pressure on the dollar, even as U.S. stocks have rallied. The S&P 500 is up about 14% for the year, near a record high. "The strong gains in U.S. (stock) market and the very sharp U.S. dollar falls are unusual but they’re not unheard of – we think an increase in hedging is part of the reason for this divergence," said Steve Dooley, head of market insights at Convera in Melbourne. A July research note from Deutsche Bank showed that equity investors in Germany and Austria have increased their hedge ratios to 60-70% from 20-30% at the start of the year. A new report from the Danish central bank showed that insurance companies and pension funds are shielding almost three quarters , opens new tab of their dollar investments from currency swings. The Deutsche note stated that some high-profile pension funds plan to top up those ratios after the summer. "I think foreign investors are still inclined to hedge away their dollar exposure," Thierry Wizman, global FX and rates strategist at Macquarie in New York, said. "So they will come out again at some point in the next few weeks ... you're going to see another round of dollar hedging by foreign institutions," he said. Research from MillTech also shows that 86% of European corporates are currently hedging their forecastable currency risk, up from 67% in 2023, with their mean hedge ratio rising to 49% from 43%. Joseph Hoffman, chief executive officer at Mesirow Currency Management, said the shift among international investors is not mainly about short-term interest-rate advantages, but is driven "more by a bearish structural view on the dollar rooted in the Fed’s policy, heightened political uncertainty, and persistent fiscal deficits." WHAT'S MY COST? Still, a lower cost of hedging will likely draw those investors who may have held off boosting hedges due to price considerations. For instance, the 4% annual hedging cost for investors in Japan and Switzerland, based on current interest rates, remains a big hurdle. It costs other euro-based investors around 2% annually. "I think there's like a psychological level that if the hedge cost goes to 1% or below, which is on the horizon for EUR investors over the next 12 months, people wouldn't worry about it as such," said Russell's Luu. (This story has been corrected to say 'almost three quarters,' instead of 'more than three quarters,' in paragraph 16) https://www.reuters.com/business/foreign-investors-can-exploit-cheaper-dollar-hedges-fed-easing-resumes-2025-10-03/

2025-10-03 04:33

A look at the day ahead in European and global markets from Ankur Banerjee: The U.S. shutdown and political , opens new tab gridlock in Washington show no signs of ending any time soon. That hasn't stopped stocks and gold striking fresh record highs, as investors mainly focus on the Federal Reserve sticking the rate-cut path. Sign up here. While the risk of a drawn out shutdown could muddle the policy path, for now, markets are shrugging that off and taking a risk-on approach. Traders don't have to bide their time for the U.S. jobs report on Friday due to the shutdown, although manufacturing data from across Europe may sway the markets and underscore the impact of tariffs. But we have been saying that for a while and data so far has shown limited impact. Data earlier this week showed U.S. manufacturing activity edged up in September, though new orders and employment were subdued as factories grappled with the fallout from President Donald Trump's sweeping tariffs. So perhaps, more of the same is in store for Europe. That may not deter the stock markets where the pan-European STOXX 600 (.STOXX) , opens new tab closed at a record high on Thursday, taking its yearly gains to 12%. Futures indicate another strong open. The surge in global stocks is led by the ever-present AI mania and the rising wagers of the Fed cutting rates again this year. With no government data, traders have turned to alternative private reports that show a sluggish labour market. That has reinforced the view that the Fed will lower rates again, as traders almost fully price in a cut later this month. Gold prices, as a result, have been on a tear, with the yellow metal heading for a seventh straight week in the black, bringing yearly gains to an eye-watering 47%. Investor attention will also be on any further deals that may be unveiled after Trump announced a deal with Pfizer CEO Albert Bourla earlier this week to cut drug prices in exchange for relief from planned tariffs on imported pharmaceuticals. The Trump administration is pursuing deals across up to 30 industries, involving dozens of companies deemed critical to national or economic security, sources told Reuters. Key developments that could influence markets on Friday: Economic events: September PMIs for France, Germany, UK and euro zone. https://www.reuters.com/world/china/global-markets-view-europe-2025-10-03/

2025-10-03 02:56

MUMBAI, Oct 3 (Reuters) - The Indian rupee is anticipated to face a difficult session on Friday, with most traders predicting that the central bank will likely intervene to prevent the currency from hitting a new all-time low. The 1-month non-deliverable forward indicated the rupee will open flat-to-slightly weaker versus the U.S. dollar compared to Wednesday's close of 88.69. India financial markets were shut on Thursday. Sign up here. The rupee has been pressured in recent weeks by relentless dollar demand from importers, with sentiment remaining firmly skewed against the currency amid equity outflows and U.S.-India trade frictions. The Reserve Bank of India has been stepping in to ensure the rupee’s decline remains orderly. Central bank Governor Sanjay Malhotra reiterated earlier this week that the RBI is not defending any particular level of the currency and is instead focused on containing volatility and keeping moves measured. The RBI support is "keeping things calm" for now, a currency trader at a bank said. However, overall sentiment remains weak and the market wants to test the downside, he added. Currency traders are closely watching the 88.80 level, the lifetime low for the rupee hit on Monday. With broad dollar demand keeping the pressure on, this level is seen a key marker for potential intervention or a pause in the currency’s slide. ASIAN CUES Asian cues did not lend any particular direction to the rupee on Friday, with peers mixed and the dollar index marginally higher. A U.S. government shutdown has paused the release of key economic data, including Friday’s closely watched September jobs report, depriving markets of an important gauge for the Federal Reserve’s rate outlook. With the official jobs report on hold, Wednesday’s private payrolls data drew heightened attention. The weak reading has increased expectations of a Federal Reserve rate cut this month. We could see "a longer tail effect" from the private jobs data, given the uncertainty around the payrolls release, ING Bank said in a note. KEY INDICATORS: ** One-month non-deliverable rupee forward at 88.86; onshore one-month forward premium at 14 paise ** Dollar index up at 97.86 ** Brent crude futures up 0.3% at $64.3 per barrel ** Ten-year U.S. note yield at 4.1% ** As per NSDL data, foreign investors sold a net $453.4 million worth of Indian shares on September 30 ** NSDL data shows foreign investors sold a net $12.1 million worth of Indian bonds on September 30 https://www.reuters.com/world/india/rupees-negative-drift-demands-central-bank-firepower-2025-10-03/

2025-10-03 00:27

Subdued market reaction seen from Koizumi victory Win by dovish Takaichi could steepen yield curve, weaken yen Dark horse Hayashi supports BOJ rate hikes, opposes large stimulus TOKYO, Oct 3 (Reuters) - Japanese markets are bracing for a crucial ruling party vote this weekend that will determine the next prime minister and set the tone for budget and central bank policies. The race to head the Liberal Democratic Party has centred on household relief versus fiscal discipline. Overhanging those deliberations is the question of whether Japanese shares can chart new highs and calm will return to its volatile bond market. Sign up here. Since Shigeru Ishiba, a fiscal hawk, announced his resignation last month, investors have bet that any successor will be more liberal with spending. Among the front-runners, party veteran Sanae Takaichi could trigger even more bond market uncertainty, while farm minister Shinjiro Koizumi and top government spokesperson Yoshimasa Hayashi are less likely to rock the boat. As Saturday's vote approached, a retracement in the Nikkei share gauge along with a decline in long-term bond yields signalled bets that Takaichi will either come up short or rein in her most expansionist instincts if she prevails. "So far we expect either Koizumi or Hayashi may win the election, and they are not trying to interfere with Bank of Japan policy," said Takashi Fujiwara, chief fund manager at Resona Asset Management's fixed income investment division. "Even if Takaichi wins, she has toned down her appeal for maintaining loose monetary policy." RATTLED BOND MARKET The Japanese government bond (JGB) market has been on edge since late May due to waning demand among traditional buyers, decreased support from the central bank, and concerns about swelling debt. The sector was dealt another blow in July, when Ishiba's coalition lost seats in the upper house to outsider parties campaigning on tax cuts and increased spending. Speculation mounted that he would resign, and Takaichi, who finished second behind Ishiba in a run-off vote last year, would swoop in as Japan's first female prime minister. The so-called Takaichi trade was long on stocks and bearish on JGBs, particularly longer tenors, on expectations she would push for tax cuts, fiscal stimulus, and easy monetary policy. The 30-year JGB yield surged to a record high 3.285% on September 8, the first trading day after Ishiba announced he was stepping down. The Nikkei marched to successive all-time highs, setting an intraday record of 45,852.75 on September 19. On the last trading day before the vote, the Nikkei was up 1.5% in the afternoon session and long-term JGBs rallied, sending yields lower. As the campaign heated up, Takaichi said she would not immediately pursue sales tax cuts and was mostly silent on central bank policy, causing some unwinding of her namesake trade. Even so, a victory by Takaichi would likely prompt the biggest reaction via a steepening of the JGB yield curve and yen depreciation, said Carl Ang, a fixed income research analyst at MFS Investment Management. "Given her image as a foreign policy hardliner, bond and currency markets may start factoring in more substantial JGB-financed spending increases to defence, for example," he added. Koizumi, the son of former premier Junichiro Koizumi, said his government would compile a package of measures to cushion the blow to households from rising prices. Hayashi, the dark horse, ruled out the need for large-scale stimulus and said he backed the BOJ's plan to raise rates. Traders have largely priced in Koizumi's victory, so it would lead to a subdued reaction on Monday, said Kazuaki Shimada, chief strategist at IwaiCosmo Securities. "If Takaichi wins, it becomes a positive surprise, and the stock market could surge," Shimada said. Shares of Daiwa Motor Transportation (9082.T) , opens new tab are seen as a barometer of support for Koizumi, who backs deregulation of the ride-share sector, Shimada added. On the other hand, nuclear energy supplier Sukegawa Electric (7711.T) , opens new tab would stand to gain from Takaichi's push to increase investment in that sector. Daiwa Motor jumped nearly 12% in Tokyo trading on Friday, while Sukegawa slid 1.1%, down for a fifth session. Yields on shorter-term JGBs, those most sensitive to central bank policy, jumped to 17-year highs at the end of September as bets increased the BOJ would hike rates as soon as this month. That movement, which has flattened Japan's yield curve, reflects growing bets that Koizumi will win and give the BOJ free rein on policy, said Shoki Omori, chief desk strategist at Mizuho Securities. But a looming worry is whether Koizumi would concede to tax cuts pushed by outsider parties as he looks to form a wider coalition. "That would be more scary, but we don't know about that part just yet," Omori added. https://www.reuters.com/markets/asia/japans-markets-gird-leadership-vote-with-stocks-bonds-edge-2025-10-03/

2025-10-03 00:21

OPEC+ could further boost output in November, sources say Analysts predict oil market surplus in fourth quarter and beyond Chevron refinery fire unlikely to affect broader market HOUSTON, Oct 3 (Reuters) - Oil prices settled higher on Friday but posted a weekly loss of 8.1% after news of potential increases to OPEC+ supply. Brent crude futures closed up 42 cents, or 0.7%, at $64.53 a barrel by, while U.S. West Texas Intermediate crude was up 40 cents, or 0.7%, at $60.88. Sign up here. For the week, Brent fell 8.1%, the largest weekly loss in over three months. WTI tumbled 7.4% in the week. "The expected increase in OPEC+ production and the Iraq/Kurdish pipeline beginning to flow after being shut in the past two years is keeping sellers present in crude," said Dennis Kissler, senior vice president of trading at BOK Financial. "Hamas is also starting negotiations with the Trump administration on a peace plan. Add in the bearish EIA storage data from earlier this week and it's hard to be bullish crude in the near term," Kissler said. Eight OPEC+ countries are likely to further raise oil output on Sunday with the group’s leader Saudi Arabia pushing for a large increase to regain market share and Russia suggesting a more modest rise, four people with knowledge of the OPEC+ talks said. Potentially higher OPEC+ supply and slowing global crude refinery runs owing to maintenance and a seasonal dip in demand in the months ahead are set to weigh on market sentiment, analysts said. "Demand indicators have fallen a touch through the Atlantic Basin as summer demand comes to an end. The over-supplied implied balance from a fundamentals perspective starting in October is gaining ground," said Rystad Energy analyst Janiv Shah. JPMorgan analysts, meanwhile, said they believed September marked a turning point, with the oil market heading towards a sizeable surplus in the fourth quarter and into next year. Meanwhile, through a pipeline from the semi-autonomous Kurdistan region in northern Iraq to Turkey on Saturday for the first time in 2-1/2 years, Iraq's oil ministry said earlier this week. Meanwhile, U.S. President Donald Trump gave Hamas until Sunday night to agree to his proposal to end Israel's war in Gaza. U.S. crude oil, gasoline and distillate inventories rose last week as refining activity and demand softened, according to the Energy Information Administration on Wednesday, further weighing on prices. On the supply side, producers cut oil rigs by 2 to 422, oilfield service provider Baker Hughes said. Elsewhere on Friday, a fire broke out at Chevron's (CVX.N) , opens new tab El Segundo refinery overnight, though a county official said the flames had been confined to one area. The refinery is one of the largest on the U.S. West Coast, with capacity of 290,000 bpd. It was not immediately clear if there was any impact on production, but the impact on oil prices could be limited, analysts said. https://www.reuters.com/business/energy/oil-track-steepest-weekly-plunge-3-12-months-2025-10-03/

2025-10-03 00:01

FUJAIRAH, Oct 2 (Reuters) - The unwinding of OPEC+ production cuts, China storage flows and geopolitical tensions have been the primary drivers of crude oil prices this year, and are likely to remain so for the foreseeable future. Knowing what is influencing the market is one thing. Predicting with any accuracy how these factors will develop is another entirely. Sign up here. The problem for the crude industry is that all three of these factors are inherently unpredictable and subject to fairly rapid changes, which makes forecasting the current market even more of a mug's game than it usually is. This contradiction was evident during workshops and discussions at the Energy Markets Forum held this week in the oil storage and shipment hub of Fujairah in the United Arab Emirates. While conferences usually feature both bullish and bearish proponents, the level of uncertainty over the outlook for the next two or three quarters was marked. The three factors currently shaping crude markets also tend to work in opposite directions when it comes to prices. The unwinding this year of 2.2 million barrels per day of voluntary output curbs by eight members of OPEC+, with a further 137,000 bpd due in October, is theoretically bearish for prices, as it is far from certain that global demand is rising fast enough to absorb the extra oil. But the situation is complicated by the actual rise in exports from the group not matching the allowed increases in production. Analysts and industry sources estimate that the eight OPEC+ exporters have delivered about three-quarters of the extra oil output it targeted since the group started easing production curbs in April. This means that some 500,000 bpd, which is about 0.5% of global demand, that was expected to hit the market has not arrived. In effect, the lifting of OPEC+ production quotas has turned out to be bullish for prices, rather than bearish. This may mean that even if the eight OPEC+ members agree at a meeting this weekend to further increase production quotas, the market reaction may be muted as participants wait to see how much extra oil actually becomes available. CHINA STORAGE The volume of crude being stored this year by China is largely seen as a bullish factor at least in the short term as it soaks up any excess crude and has worked to keep the price of benchmark Brent futures anchored in a narrow range around $65 to $70 a barrel in recent months. China doesn't disclose the volume of crude flowing into commercial and strategic storages, but an estimate of the surplus can be made by subtracting the volume of oil processed by refineries from the total available from imports and domestic output. On this basis, it is likely that China was building stockpiles by at least 500,000 bpd so far this year. But given the lack of transparency in the process, it is difficult to predict whether China will continue to build inventories, or whether they will pull back. In some ways the best predictor is price, as China does have a track record of buying extra crude when prices are low, but drawing on inventories when prices rise. This dynamic may have played out in September, with LSEG Oil Research estimating China's crude imports dropped to around 10.83 million bpd from 11.65 million bpd in August, the lowest since February. The decline in September imports comes after oil prices spiked higher in June amid the conflict between Israel and Iran, which is also the time that September-arriving cargoes would have been arranged. The brief conflict between Israel and Iran also serves as a reminder that geopolitics have played a bigger role this year, and remain an unpredictable factor. In addition to tensions in the Middle East, there are also Ukraine's attacks on Russian oil refineries, and the economic uncertainty created by the trade wars launched by U.S. President Donald Trump. The impact of these events is also uncertain. For example, damaging Russia's refineries is likely to cut its exports of refined fuels, but may increase shipments of crude oil, a combination that would likely lead to rising refining margins. Uncertainty can lead to price volatility, but it may also result in market players being cautious and unwilling to push too hard in either direction as they await hard data on which factor is likely to gain the upper hand. Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis of everything from swap rates to soybeans. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn , opens new tab and X , opens new tab. The views expressed here are those of the author, a columnist for Reuters. https://www.reuters.com/markets/commodities/opec-china-geopolitics-are-triple-whammy-uncertainty-crude-2025-10-02/