By Stanley White and John McCrank

TOKYO/NEW YORK (Reuters) - Asian shares and U.S. stock futures fell on Friday as record-breaking new coronavirus cases in several U.S. states stoked concerns that new lockdowns could derail an economic recovery, while investors looked forward to earnings season.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.76%. Australian stocks dropped 0.42%, while Japanese stocks declined by 0.4%.

Shares in China fell 0.72%, the first decline in more than a week, as investors booked profits on a surge in equities to a five-year high.

E-mini futures for the S&P 500 erased early gains to trade down 0.01%.

The Antipodean currencies fell and the yen rose as traders shunned risk and sought safe havens.

More than 60,500 new COVID-19 infections were reported across the United States on Thursday, the largest single-day tally of cases by any country since the virus emerged late last year in China.

That heightened concerns that renewed lockdowns could hurt the economic recovery.

The number of Americans filing for jobless benefits dropped to a near four-month low last week, data showed.

But investors remained cautious as the report also said a record 32.9 million people were collecting unemployment checks in the third week of June, supporting expectations the labor market would take years to recover from the COVID-19 pandemic.

"Weakness in financial stocks, with the bank sub-index down 2.5%, comes ahead of next week's Q2 reporting season that sees JP Morgan, Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) all report next Tuesday and following news that Wells Fargo is planning to cut 'thousands' of jobs starting later this year," said Ray Attrill, head of FX strategy at National Australia Bank (OTC:NABZY).

On Thursday, the Dow Jones Industrial Average fell 1.39% and the S&P 500 dropped 0.56%, but the tech-heavy Nasdaq rose 0.53% to its fifth record closing high in six days.

Mainland China shares fell on Friday for the first time since June 29. Shares had surged to the highest since 2015 on Thursday, fueled by retail investor enthusiasm and policy support, even as regulators cracked down on margin financing and as state media warned of market risks.

The rise in China's mainland equities has some similarities to the bubble there five years ago, but it is not yet close in scale, and prices could continue to inflate for some time, said Capital Economics economist Oliver Jones.

"That said, another boom-bust cycle in China's equities could have even greater knock-on effects for markets elsewhere than before, with foreign holdings far higher now than five years ago," he said.

Fueled by illegal margin lending, the 2015-16 market bubble saw the benchmark Shanghai index fall more than 40% from its peak in just a few weeks.

In the currency market, the yen edged up against the dollar and the euro as investors bought the traditional safe haven.

The Australian and New Zealand dollars, which are often traded as a liquid proxy for risk because of their close ties to China's economy, both fell against the greenback.

The Aussie also fell as local officials use lockdowns and border restrictions to contain a sudden increase in coronavirus cases.

U.S. crude fell 0.23% to $39.53 a barrel, while Brent crude edged 0.02% lower to $42.34 per barrel due to concerns about a long-term decline in global energy demand.

SYDNEY (Reuters) - Virgin Australia Holdings Ltd (AX:VAH) bondholders plan to propose an alternative deal to creditors to the purchase by Bain Capital agreed by the company's administrator, a lawyer for the bondholders said on Friday.

Singapore's Broad Peak Investment Advisers and Hong Kong's Tor Investment Management plan to put forward an alternative deed of company arrangement (DOCA) to a vote at a creditor's meeting next month, said Ian Jackman, a lawyer representing them.

"The administrators will no doubt put forward a DOCA that represents the Bain transaction at the second meeting of creditors," he said at a court hearing.

"We for our part will have an alternative DOCA….with a view to improving the return of creditors as well as ensuring the future viability of the company."

By Anthony Esposito

MEXICO CITY (Reuters) - Ford Motor Co on Thursday said new staffing restrictions imposed on plants producing car parts in the Mexican state of Chihuahua were "not sustainable," the latest sign U.S. automakers are still reeling from coronavirus lockdowns in Mexico.

Mexico is a key part of a wider international supply chain crucial to U.S. carmakers, many of which operate factories across the border in Mexico due to lower labor costs.

Chihuahua, where the state government has limited employee attendance to 50% in plants, is home to a Ford (N:F) engine plant and many auto parts producers.

U.S. ambassador to Mexico Christopher Landau on Thursday said the Dearborn, Michigan-based automaker may have to shut some U.S. car plants as early as next week if they fail to receive Mexico-produced engines.

Kumar Galhotra, president of Ford's Americas and International Markets Group, said the company had "several suppliers" operating under restrictions imposed by Chihuahua state.

"With our U.S. plants running at 100%, that is not sustainable," Galhotra said in an emailed statement.

"While we do not expect any impact to production next week, we are continuing to work with government officials on ways to safely and constructively resume remaining production," he said.

Mexico's federal government has given automakers, mining firms and builders, with activities deemed essential, the green light to restart work, though some states have implemented their own restrictions as the coronavirus pandemic rages on.

Landau said a senior Ford executive told him on Wednesday night about the company's concern over parts produced in Chihuahua state.

"They're saying that they're going to start shutting down factories in the United States as of next week if they don't get that rolling," Landau said, in a talk organized by the Atlantic Council.

Alejandra de la Vega, Chihuahua's minister of innovation and economic development, said she was in "constant contact" with Ford and spoke with a company executive Thursday morning, but did not specify what was discussed.

De la Vega said Chihuahua had created a traffic light system to allow different sectors to gradually reopen from lockdowns, but added it was a "balancing act" to protect both public health and the economy.

In May, when Mexico signaled it would delay the reopening of its factories, Mexican officials said their U.S. counterparts pushed for a speedy return, arguing that U.S. plants on American soil could not operate without them.

(This story corrects to fix typographical error in headline)

LONDON (Reuters) - Britain's retail industry on Friday urged UK and European negotiators to reach a post-Brexit trade deal, warning that without tariff-free trade, consumers face higher prices from next year.

The sector has already announced thousands of job losses due the coronavirus pandemic as wary shoppers stay away from the high street, and the next stage of the Brexit process poses a further challenge.

Britain left the EU in January and is currently in a standstill transition period with the bloc to give the two sides time to fix a new relationship in everything from trade to security.

Last week's round of talks was cut short, with both sides saying that, while they wanted an agreement, they had yet to overcome the gulf in positions that could see Britain leaving the transition period without a trade deal.

Four-fifths of UK food imports come from the EU and EU imports also play a major role in supply chains for fashion, homeware, and other retail sectors.

In May, the UK government published its new tariff schedule, which would apply from Jan. 1 2021 if a deal was not agreed.

Under the schedule, 85% of foods imported from the EU will face tariffs of more than 5%, including 48% on beef mince and 16% on cucumbers. The average tariff on food imported from the EU would be over 20%.

Given the highly competitive nature of retail, the industry could not absorb all these increased costs, meaning the public would face higher prices, the British Retail Consortium (BRC) said.

“Many UK shoppers experienced disruption in the run up to (coronavirus) lockdown; without a deal, the public may face an even bigger challenge at the end of the transition period," said Andrew Opie, the BRC's director of food and sustainability.

"With the clock ticking down to 31st December, the government must put consumers first and agree a deal that avoids tariffs and minimises the impact of non-tariff barriers."

UK retailers, already struggling with high rents, business taxes, tight margins and online competition, were particularly hammered by the lockdown and data shows shoppers are reluctant to enter stores even as restrictions ease.

By Svea Herbst-Bayliss

BOSTON (Reuters) - Cannae Holdings (NYSE:CNNE) and Senator Investment Group, which are trying to buy property data and analytics company CoreLogic Inc, have hired a proxy solicitor, a source familiar with the matter said on Thursday.

A proxy solicitor polls large shareholders on how they plan to vote on hotly contested corporate matters like mergers or proxy fights. Hiring one signals that Cannae and Senator are taking next steps to prepare for a potential fight with CoreLogic.

The source said the two firms tapped D.F. King two days after CoreLogic rejected their unsolicited $7 billion takeover bid.

Last month Cannae and Senator, which jointly hold an economic interest of roughly 15% in CoreLogic, proposed to buy the company, valued at $5.3 billion, for $65 a share. The stock has since risen past the offer price and closed at $67.54 on Thursday.

This week, Cannae and Senator said they stillhope to engage with the company but also said they could call a special meeting as soon as July 28 to replace the current board. CoreLogic said it "is open to all viable paths to increasing shareholder value" and that it is "willing to meet with Senator and Cannae."

Bank of America (NYSE:BAC) has said that it was sure it could arrange financing for the deal.

D.F. King has worked with Xerox (NYSE:XRX) in a hostile bid for HP (NYSE:HPQ), which was canceled because of the Covid-19 pandemic, Mantle Ridge in its investment in Aramark where the investment firm gained control of the board, and the Rice Brothers in their successful proxy contest at natural gas producer EQT Corp (NYSE:EQT).

Representatives for D.F. King, Cannae and Senator did not respond to requests for comment.

CoreLogic hired Innisfree as its solicitor, the company said earlier this week.

By Noel Randewich and Chuck Mikolajczak

(Reuters) - Wall Street's most controversial stock may be about to go mainstream.

Tesla (NASDAQ:TSLA) Inc appears on the verge of joining the S&P 500, a major accomplishment for Chief Executive Officer Elon Musk that would unleash a flood of new demand for the electric car maker's shares, which have already surged 500% over the past year.

Higher-than-expected second-quarter vehicle deliveries, announced last week, have analysts increasingly confident the company will show a profit in its quarterly report on July 22. That would mark Tesla's first cumulative four-quarter profit, a key hurdle to be added to the S&P 500.

With a market capitalization of about $250 billion, Tesla would be among the most valuable companies ever added to the S&P 500, larger than 95% of the index's existing components. It would have a major impact on investment funds that track the index.

For a graphic on Tesla potentially in the S&P 500: https://fingfx.thomsonreuters.com/gfx/mkt/bdwvkanyyvm/VokA0-tesla-in-the-s-amp-p-500.png

While analysts and investors have recently become more confident of Tesla's addition, an S&P Dow Jones spokeswoman declined to comment about specific changes to the index.

Howard Silverblatt, a senior index analyst at S&P Dow Jones, had to look back to the dot-com era to recall a comparable situation. In 1999, Yahoo surged 64% in five trading days between the announcement that it would be added to the index on Nov. 30 and its inclusion after the close of trading on Dec. 7. Yahoo's market capitalization at the time was about $56 billion.

For a graphic on Yahoo's 1999 S&P 500 debut: https://tmsnrt.rs/3iOlA8o

"The lesson learned from Yahoo was that when you have an up and coming issue that may possibly go into the index, you should already own a little of it," said Silverblatt. "If you had to get into that stock, you were paying a heck of a premium compared to owning it a week earlier."

Funds that attempt to identically track the S&P 500 have at least $4.4 trillion of assets, according to S&P Dow Jones, and those funds would need to buy Tesla shares quickly to avoid errors tracking the index's performance.

Ivan Cajic, head of index & ETF research at Virtu Financial (NASDAQ:VIRT) estimates index managers would need to own roughly 25 million shares of Tesla stock, currently worth $34 billion.

"You have all the index funds that have no choice but to include it," said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York. "That is one reason why it has been so strong here, in anticipation of that."

Additionally, actively managed investment funds that benchmark their performance to the S&P 500 will be forced to decide whether to buy Tesla shares. Such funds manage trillions of dollars in additional assets.

"Even if you don't like Tesla and you think it's overvalued, the fact that it is going into the index would mean trillions of dollars would have some kind of position," said Jim Bianco, head of Bianco Research in Chicago. "As part of their benchmark, portfolio managers would not be able to ignore it."

Up 43% in just the past eight sessions, Tesla is among the most loved - and hated - stocks on Wall Street. It is the U.S. stock market's purest play bet on the rise of renewable energy and the decline of fossil fuels, and Tesla's Model 3 sedan has made major inroads among consumers.

For a graphic on As Tesla rallies, short bets hit record levels: https://fingfx.thomsonreuters.com/gfx/mkt/xlbpgoddbpq/Yfifp-as-tesla-rallies-short-sellers-risk-more.png

However, short sellers are betting $19 billion that Tesla's shares will fall, the largest short level on record for a U.S. company, in dollars, according to S3 Partners.

Bears point to looming competition from Porsche, General Motors (NYSE:GM) and other longer-established rivals. They are also skeptical of Tesla's corporate governance under Musk, who in 2018 agreed to pay $20 million and step down as chairman to settle fraud charges.

Traders betting Tesla could be added to the S&P 500 have almost certainly contributed to the recent rally. However, Bianco warned that the stock could reverse if Tesla is not added to the S&P 500.

By Lawrence Hurley and Jan Wolfe

WASHINGTON (Reuters) - The U.S. Supreme Court on Thursday firmly rejected President Donald Trump's arguments for sweeping presidential immunity and ruled that a New York prosecutor can obtain his financial records but prevented - at least for now - Democratic-led House of Representatives committees from getting similar documents.

The twin 7-2 rulings authored by conservative Chief Justice John Roberts mark another milestone in Trump's tumultuous presidency and in the short term prevent details of his finances from becoming public because lower courts must resolve lingering issues.

The businessman-turned politician, seeking re-election on Nov. 3, has fought tenaciously to keep his tax returns and other elements of his finances secret - and the rulings spare him of any major revelation at a sensitive time. But looking further ahead, Trump faces possible future criminal prosecution in his native New York, perhaps after he leaves office.

The Supreme Court emphasized that there are limits to the powers of the presidency and stoutly reaffirmed the principle that not even the president is above the law - a message delivered 3-1/2 years into a presidency in which Trump has repeatedly skirted the norms of American political conduct.

Trump's two Supreme Court appointees, conservatives Neil Gorsuch and Brett Kavanaugh, joined Roberts and the four liberal justices in both rulings, spurning Trump's arguments that the Constitution gave him absolute immunity from any criminal proceedings as a sitting president.

Manhattan District Attorney Cyrus Vance, a Democrat, and the three House committees all issued subpoenas to third parties for the records, not to the Republican president himself. Trump sued to block enforcement of the subpoenas.

The court in the New York case ruled that the subpoena to Trump's long-term accounting firm, Mazars LLP, for tax returns and other financial records to be turned over to a grand jury as part of Vance's criminal investigation can be enforced.

The justices rebuffed Trump's broad arguments on expansive presidential powers in a showdown with Congress as he tried to block subpoenas by lawmakers to Mazars and two banks - Deutsche Bank (DE:DBKGn) and Capital One - for his financial records. In doing so, the court also faulted the broad arguments made by the House and sent the litigation back to lower courts, delaying the final outcome.

Trump portrayed himself as a victim, calling the subpoenas a "pure witch hunt" and a "hoax" in comments to reporters. On Twitter, he wrote, "This is all a political prosecution ... and now I have to keep fighting in a politically corrupt New York. Not fair to this Presidency or Administration!"

Trump's argument that he was immune from any criminal process "runs up against the 200 years of precedent establishing that Presidents, and their official communications, are subject to judicial process," Roberts wrote.

"We affirm that principle today and hold that the president is neither absolutely immune from state criminal subpoenas seeking his private papers nor entitled to a heightened standard of need," Roberts added.

Roberts rejected the suggestion that the decision would subject future presidents to harassment by local prosecutors, noting that the court in 1997 rejected a similar argument made by President Bill Clinton when he faced a civil lawsuit brought by a woman who accused him of making unwanted sexual advances - litigation the court refused to delay.

The court in 1974, Roberts noted, also ruled that President Richard Nixon must turn over audio tapes in the Watergate scandal that eventually drove him to resign.

'HE IS HIDING'

Unlike other recent presidents, Trump has refused to release his tax returns and other documents that could provide details on his wealth and the activities of his family real-estate company, the Trump Organization.

House Speaker Nancy Pelosi said Democrats will continue to investigate Trump and seek to enforce the subpoenas.

"Congress's constitutional responsibility to uncover the truth continues, specifically related to the President's Russia connection that he is hiding," Pelosi said, referring to the possibility that Trump's financial records could show such an entanglement.

Roberts said lawmakers will need to further explain the need for the records at the lower court, which would then assess the burden placed on the president.

Jay Sekulow, Trump's personal lawyer, said he would "raise additional constitutional and legal issues in the lower courts."

Vance's investigation into Trump and the Trump Organization was spurred by disclosures of hush payments to two women who said they had past sexual relationships with the president, pornographic film actress Stormy Daniels and former Playboy model Karen McDougal - relationships he has denied.

Trump argued that Congress lacked a valid purpose for seeking his records and that such disclosure would compromise his and his family's privacy and distract him from his duties. In the Vance investigation, Trump's lawyers argued before a lower court that law enforcement officials would not have the power to investigate him even if he shot someone on New York's Fifth Avenue.

The House Oversight Committee issued its subpoenas after Michael Cohen, his former lawyer, told Congress Trump had inflated and deflated certain assets on financial statements between 2011 and 2013 in part to reduce his real estate taxes.

The House Financial Services Committee is examining possible money laundering in U.S. property deals involving Trump. The House Intelligence Committee is investigating whether Trump's dealings left him vulnerable to the influence of foreign individuals or governments.

By Caroline Valetkevitch

(Reuters) - The S&P 500 and Dow dropped on Thursday as investors worried about another round of business shutdowns to contain a surge in coronavirus cases and began to shift their focus to earnings, while the Nasdaq hit another record closing high.

The United States saw more than 60,000 new COVID-19 infections on Wednesday, setting a single-day global record while Florida and Texas reported a record one-day increase in deaths.

Investors also began to turn their focus to the second-quarter earnings season, which shifts into higher gear next week. S&P 500 companies are expected to post a more than 40% decline in year-over-year earnings, which would be the biggest quarterly profit drop since the 2008 financial crisis, based on IBES data from Refinitiv.

Walgreens Boots Alliance Inc (O:WBA) shares dropped after it reported a quarterly loss compared with a profit a year earlier, hurt by non-cash impairment charges of $2 billion as COVID-19 disrupted business at its Boots UK division. Its stock closed 7.8% lower.

"We're heading into earnings season, and you're seeing some troubling trends," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

"I expect a lot of confusing numbers and guidance. COVID is certainly not behind us in any way, shape or form, so maybe the V gets elongated some," he said.

The Nasdaq registered its fifth record closing high in six days, helped by gains in Amazon.com (O:AMZN), Microsoft Corp (O:MSFT), Nvidia (O:NVDA), Apple Inc (O:AAPL). Also, Tesla (O:TSLA) extended recent gains, ending up 2.1%.

The Dow Jones Industrial Average (DJI) fell 361.19 points, or 1.39%, to 25,706.09, the S&P 500 (SPX) lost 17.89 points, or 0.56%, to 3,152.05 and the Nasdaq Composite (IXIC) added 55.25 points, or 0.53%, to 10,547.75.

The benchmark S&P 500 is still up more than 40% from its March 23 closing low.

Helping stocks early in the day was data showing the number of Americans filing for jobless benefits dropped to a near four-month low last week. A record 32.9 million people though were collecting unemployment checks in the third week of June.

A batch of upbeat economic data including the record pace of job additions in June has underscored that the stimulus-fueled domestic economy was on the path to recovery.

In a bullish signal for near-term momentum, the benchmark S&P 500's chart formed a "golden cross" pattern, in which its 50-day moving average vaulted above the 200-day moving average.

Declining issues outnumbered advancing ones on the NYSE by a 2.56-to-1 ratio; on Nasdaq, a 2.19-to-1 ratio favored decliners.

The S&P 500 posted 33 new 52-week highs and one new low; the Nasdaq Composite recorded 117 new highs and 33 new lows.

Volume on U.S. exchanges was 10.73 billion shares, compared with the 12.23 billion average for the full session over the last 20 trading days.

U.S. stocks were mixed after the close on Thursday, as gains in the Technology, Consumer Services and Healthcare sectors led shares higher while losses in the Oil & Gas, Telecoms and Financials sectors led shares lower.

At the close in NYSE, the Dow Jones Industrial Average lost 1.39%, while the S&P 500 index lost 0.56%, and the NASDAQ Composite index climbed 0.63%.

The best performers of the session on the Dow Jones Industrial Average were Walmart Inc (NYSE:WMT), which rose 2.66% or 3.31 points to trade at 127.75 at the close. Meanwhile, Cisco Systems Inc (NASDAQ:CSCO) added 1.94% or 0.89 points to end at 46.70 and Microsoft Corporation (NASDAQ:MSFT) was up 0.70% or 1.49 points to 214.32 in late trade.

The worst performers of the session were Walgreens Boots Alliance Inc (NASDAQ:WBA), which fell 7.76% or 3.28 points to trade at 39.01 at the close. Raytheon Technologies Corp (NYSE:RTX) declined 4.75% or 2.90 points to end at 58.11 and Chevron Corp (NYSE:CVX) was down 4.18% or 3.61 points to 82.74.

The top performers on the S&P 500 were F5 Networks Inc (NASDAQ:FFIV) which rose 7.94% to 144.81, Advanced Micro Devices Inc (NASDAQ:AMD) which was up 7.16% to settle at 57.26 and Pentair PLC (NYSE:PNR) which gained 4.59% to close at 38.30.

The worst performers were Mohawk Industries Inc (NYSE:MHK) which was down 19.99% to 73.12 in late trade, Hess Corporation (NYSE:HES) which lost 9.41% to settle at 44.68 and TechnipFMC PLC (NYSE:FTI) which was down 8.34% to 6.81 at the close.

The top performers on the NASDAQ Composite were Golden Bull Ltd (NASDAQ:DNJR) which rose 62.00% to 2.4300, Nuzee Inc (NASDAQ:NUZE) which was up 40.97% to settle at 16.00 and Big 5 Sporting Goods Corporation (NASDAQ:BGFV) which gained 39.58% to close at 2.68.

The worst performers were Bed Bath & Beyond Inc (NASDAQ:BBBY) which was down 24.50% to 7.86 in late trade, China Finance Online Co Limited (NASDAQ:JRJC) which lost 21.86% to settle at 7.97 and Vericity Inc (NASDAQ:VERY) which was down 17.88% to 8.13 at the close.

Falling stocks outnumbered advancing ones on the New York Stock Exchange by 2178 to 618 and 65 ended unchanged; on the Nasdaq Stock Exchange, 1903 fell and 766 advanced, while 38 ended unchanged.

Shares in Microsoft Corporation (NASDAQ:MSFT) rose to all time highs; gaining 0.70% or 1.49 to 214.32.

The CBOE Volatility Index, which measures the implied volatility of S&P 500 options, was up 4.20% to 29.26.

Gold Futures for August delivery was down 0.70% or 12.70 to $1807.90 a troy ounce. Elsewhere in commodities trading, Crude oil for delivery in August fell 3.28% or 1.34 to hit $39.56 a barrel, while the September Brent oil contract fell 0.05% or 0.02 to trade at $42.36 a barrel.

EUR/USD was up 0.04% to 1.1286, while USD/JPY rose 0.05% to 107.24.

The US Dollar Index Futures was up 0.40% at 96.752.

(Bloomberg) -- A brutal selloff that’s made China’s government bonds one of the world’s worst performers is showing no signs of ending any time soon.

That’s because the chances of significant monetary easing from the country’s central bank are becoming even more remote, as the roaring stock market increases government concerns over the risk of an equity bubble. Beijing will want to avoid the kind of debt-fueled stock binge that ended chaotically five years ago, which was partly encouraged by cheap and plentiful money in the financial system.

China’s 10-year government bond yield rose the most since late 2016 on July 6, helping make the notes the world’s third-worst performer the past week. The rout comes at a time when the debt is already under pressure from a surge in issuance and Beijing’s cautious approach to liquidity. Sovereign notes are now the cheapest relative to equities in two years.

“The stock rally and bond tumble exceeded my expectations -- they were too fast, too sudden, and the past week feels like half a year,” said Ji Tianhe, a strategist at BNP Paribas (OTC:BNPQY) SA in Beijing. He forecasts that the 10-year yield will continue climbing and match last year’s high of around 3.4% in coming months. “The central bank will refrain from major easing due to the advance in equities,” he said.

With further issuance on the horizon, the declining trend looks set to continue. The notes should be avoided for now, say analysts from BNP Paribas and ANZ Bank China Co. The yield on China’s 10-year government bonds has jumped more than 20 basis points the past week, the worst five-day performance since December 2016.

Here’s a look at the factors challenging the bond market:

Stock Rally

The tumble in debt mirrors a rally in equities. Stock trading turnover has soared, margin debt has grown at the fastest pace since 2015 and online trading platforms have struggled to keep up. Bullish articles in state-run media spurred the mood.

The advance makes it even harder for the People’s Bank of China to ease -- lower funding costs also make it cheaper for investors to load up on debt and buy stocks. Loose monetary policy was one driver behind the 2015 bubble, the bursting of which wiped out $5 trillion of equity value.

“The rally in equities has disrupted China’s monetary policy. Now Beijing can’t send out a strong easing signal as that will create a stock bubble,” said Xing Zhaopeng, a markets economist at ANZ. “We won’t likely see any major easing measures over the next month, and that will be bad news for bonds.”

PBOC Caution

The central bank has repeatedly disappointed the market by not loosening its monetary policy aggressively. It has refrained from cutting the amount of cash lenders need to set aside as reserves, despite Beijing signaling last month that such an easing measure could be used. The PBOC in the past two days maintained a neutral position after draining cash from the financial system for eight straight sessions, exacerbating concerns over a liquidity shortage.

Still, analysts see an inflection point when the spike in government yields begin to hurt the economy, which may trigger action from the central bank. Collateral damage from the slumping sovereign-bond market is already roiling the credit market, where companies are shelving plans to sell debt as borrowing costs surge. They canceled about $11 billion worth of deals in June alone, according to data compiled by Bloomberg.

“The 10-year yield will fluctuate above 3% for a while,” said Chen Qi, chief strategist at private fund management company Shanghai Silver Leaf Investment Co. She added that while the PBOC will maintain an easing bias, the era of very loose monetary policy has passed.

Spike in Issuance

By the end of July, the central government intends to sell 1 trillion yuan ($143 billion) of so-called special notes, with the proceeds put toward fighting the virus outbreak. Banks will have the incentive to preserve cash to buy these higher-yielding securities, meaning China’s sovereign notes will suffer from the issuance increase. More debt is expected to hit the market in August and September, as regional authorities unleash their own launches delayed by the special bonds, meaning pressure on sovereign notes should persist throughout the third quarter.

©2020 Bloomberg L.P.