China keeps lending rates unchanged; Asian stock markets slip

Key points:

• As expected, China's one-year loan prime rate stayed at 3.0% and the five-year rate at 3.5%, marking a 17th consecutive month without change.
• The USD/CNY reference rate set by the PBOC was the yuan's strongest since 2 February 2023.
• From 21 October to 2 November, the PBOC will carry out daily overnight reverse repo operations — one day after Governor Pan suggested a shift toward an overnight policy rate.
• Equities in Asia slipped, with the Hang Seng down about 1%, the Shanghai Composite off roughly 0.5% and the Nikkei lower by about 0.6%.
• With no new Middle East headlines, oil edged up — WTI near $99 and Brent around $110 — while gold fell toward $4,125 before bouncing to about $4,140.
• With few other catalysts, bank research took centre stage as Goldman Sachs, BlackRock, Morgan Stanley and Citi discussed higher bond yields and what they mean for portfolios.

Asian benchmarks traded lower on Tuesday amid a thin news flow, with China keeping its benchmark lending rates unchanged and steering the yuan to its strongest official daily fixing in more than three and a half years.

The one-year loan prime rate was held at 3.0% and the five-year at 3.5%, extending the pause into a 17th month. That outcome had been broadly anticipated, since third-quarter growth that beat forecasts lessened the urgency of stimulus. The LPR's importance as a policy tool has faded, with the seven-day reverse repo rate now the central bank's key signal, yet it still serves as the benchmark for most loans and mortgages.

Money markets supplied the more significant policy development. The People's Bank of China announced daily overnight reverse repo operations from 21 October to 2 November, with a 1 trillion yuan daily cap. The announcement came a day after Governor Pan Gongsheng said the central bank would examine adopting the overnight rate as its main policy rate. The rate on these operations has yet to be announced, and traders will watch it closely for clues about a lower policy anchor.

The PBOC's daily yuan reference rate was set at the currency's strongest level since 2 February 2023, a sign of official comfort with a firmer yuan. MUFG said this week that better Chinese activity figures create a more favourable backdrop for the currency, although it warned that weak household demand and a severe property downturn could curb further appreciation.

Regional equity markets were subdued. Hong Kong's Hang Seng lost about 1%, the Shanghai Composite slipped close to 0.5% and Japan's Nikkei fell about 0.6%, extending the weakness left by last week's tech-driven decline on Wall Street.

Crude ticked up in the absence of fresh Middle East developments, putting WTI near $99 a barrel and Brent close to $110. Goldman Sachs noted last week that Brent is carrying a risk premium of nearly $25 a barrel over fair value because of the Iran war, while figures show the US Strategic Petroleum Reserve at its lowest level since 1982. Gold slipped to about $4,125 an ounce before rebounding to roughly $4,140. Goldman estimates central banks purchased 79 tonnes in August and views official demand as a structural pillar.

With the calendar quiet, bank research helped fill the gap left by the light news calendar, and the recurring message was that higher yields are forcing harder choices. At Goldman Sachs, the view is that intensifying competition for capital from government borrowing and AI investment has made elevated yields the international norm. BlackRock argued the French bond sell-off demonstrates why selectivity matters, and upgraded US Treasuries. Morgan Stanley Investment Management said yields are climbing for sound reasons tied to strong growth. Mark Woodruff, Citi Australia's chief executive, was more wary of bonds, telling reporters in Sydney that more supply, stubborn inflation and higher neutral rates are making Treasuries a weaker hedge against equities.

On the technology front, UBS argued that last week's slide in specialist AI cloud providers does not interrupt the broader AI investment cycle, while Morgan Stanley singled out Amazon as a top pick because of faster cloud growth.

Geopolitics stayed on the agenda after the Washington Post reported that US officials say Washington has not approved sending Patriot interceptor missiles to Ukraine, amid a dispute over Ukrainian attacks on Russian energy infrastructure.

Coming up, UK inflation data and Moody's review of France's credit rating are on the docket, followed next week by rate decisions from the Bank of Canada — where Scotiabank expects a hike — and the Bank of Japan, where Daiwa predicts no change but a move toward anchoring inflation at 2%.