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U.S. sends carriers to South China Sea during Chinese drills

(Reuters) – Two U.S. aircraft carriers were conducting exercises in the disputed South China Sea on Saturday, the U.S. navy said, as China also carried out military drills that have been criticised by the Pentagon and neighbouring states.

China and the United States have accused each other of stoking tension in the strategic waterway at a time of strained relations over everything from the new coronavirus to trade to Hong Kong.

The USS Nimitz and USS Ronald Reagan were carrying out operations and exercises in the South China Sea “to support a free and open Indo-Pacific,” the navy said in a statement.

It did not say exactly where the exercises were being conducted in the South China Sea, which extends for some 1,500 km (900 miles) and 90% of which is claimed by China despite the protests of its neighbours.

“The purpose is to show an unambiguous signal to our partners and allies that we are committed to regional security and stability,” Rear Admiral George M. Wikoff was quoted as saying by the Wall Street Journal, which first reported the exercises.

Wikoff, commander of the strike group led by the Ronald Reagan, said the exercises were not a response to those being conducted by China, which the Pentagon criticised this week as “counter-productive to efforts at easing tensions and maintaining stability”.

China dismissed the U.S. criticism of its drills on Friday and suggested the United States was to blame for increasing tensions.

U.S. carriers have long carried out exercises in the Western Pacific, including in the South China Sea, according to the U.S. navy. At one point recently, the United States had three carriers in the region.

China announced last week it had scheduled five days of drills starting July 1 near the Paracel Islands, which are claimed by both Vietnam and China.

Vietnam and the Philippines have also criticised the planned Chinese drills, warning they could create tension in the region and impact Beijing’s relationship with its neighbours.

The United States accuses China of trying to intimidate Asian neighbours who might want to exploit its extensive oil and gas reserves. Brunei, Malaysia, the Philippines, Taiwan and Vietnam also lay claim to parts of the South China Sea, through which about $3 trillion of trade passes each year.

The U.S. statement said the naval exercises gave commanders the flexibility and capabilities “that only the U.S. Navy can command”.

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Politics

U.S. Congress urges Trump administration to get tougher on China's Xinjiang crackdown

WASHINGTON (Reuters) – More than 75 U.S. senators and House members on Thursday urged the Trump administration to take a tougher stance on China over its crackdown in that country’s Xinjiang province and make a formal determination whether its treatment of Muslim Uighurs and other groups constitutes an atrocity, including genocide.

“It is time for action,” members of the Senate and House of Representatives, led by Republican Senator Marco Rubio, wrote Secretary of State Mike Pompeo and Treasury Secretary Steven Mnuchin, asking them to sanction the Chinese officials responsible for the mistreatment of Uighurs.

“These human rights abuses demand a response from the United States as well as the international community because evidence strongly indicates that the Chinese government is intentionally working to destroy and essentially wipe out Uyghur families, culture, and religious adherence and encouraging violence against women,” said the letter, seen by Reuters.

The group also asked the administration to work with allies and partners to hold a Security Council meeting at the United Nations to appoint a special rapporteur to look into the situation in Xinjiang province.

The United States and China have been at loggerheads for months over the handling of the coronavirus pandemic and Beijing’s imposition of a new security law in Hong Kong. It is also ramping up pressure on China’s treatment of Muslim Uighurs in Xinjiang.

The United Nations estimates that more than a million Muslims have been detained in camps there. China has denied mistreatment and says the camps provide vocational training and help fight extremism.

Last month, President Donald Trump signed a bill, which Congress passed with only one “no” vote, calling for sanctions over the repression of Uighurs. The legislation for the first time calls for sanctions on a member of China’s powerful Politburo, Xinjiang’s Communist Party secretary, Chen Quanguo, as responsible for “gross human rights violations.”

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Business

Wall Street closes higher after biggest payrolls jump on record

NEW YORK (Reuters) – Wall Street closed higher and the Nasdaq reached an all-time closing high on Thursday as investors headed into their long holiday weekend buoyed by a record surge in payrolls, which provided assurance that the U.S. economic recovery was well under way.

All three major U.S. stock averages advanced, with the benchmark S&P 500 posting its fourth straight daily gain.

Massive stimulus and hopes for a speedy economic rebound have returned the S&P 500 and the Dow to 7.6% and 12.6% below their record highs reached in February.

The indexes registered strong gains for the week.

The U.S. economy added 4.8 million jobs USNFAR=ECI in June according to the Labor Department, 1.8 million more than analysts expected, setting a second consecutive record.

Massive rehiring sent the unemployment rate USUNR=ECI down to 11.1%. [nL1N2E82LC]

“There was a lot to like in economic data for the week,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago. “And there’s still talk that there will be more stimulus from Washington after they get back from the Fourth of July break.”

Still, even with May and June’s consecutive record payroll gains, the labor market has still recovered only a fraction of the 22 million jobs lost in the March-April plunge.

The recovery of the U.S. economy, now in its sixth month of recession, could stall as new cases of COVID-19 hit record levels and several states hit hardest by the resurgence halted or reversed plans to reopen their economies. [nL1N2E81ES]

On Thursday, Florida reported a record-shattering 10,000 new cases of the disease, worse than any European country reported at the peak of their outbreaks. [nL8N2E94GS]

“With the spikes (in new COVID-19 cases) we’ve seen the larger states – Texas, California and Florida – those states have taken steps to turn back their re-opening plans,” Nolte added. “And that will slow the overall growth and consumer spending in those regions.”

In the coming weeks, market participants will train their focus on second-quarter reporting season. In aggregate, analysts now expect S&P earnings to have dropped by 43.1% as companies grappled with plunging demand and disrupted supply chains.

The Dow Jones Industrial Average .DJI rose 92.39 points, or 0.36%, to 25,827.36, the S&P 500 .SPX gained 14.15 points, or 0.45%, to 3,130.01 and the Nasdaq Composite .IXIC added 53.00 points, or 0.52%, to 10,207.63.

The CBOE Volatility index , a barometer of investor anxiety, logged its largest weekly point drop since the week ending May 8.

Of the 11 major sectors in the S&P 500, all but real estate .SPLRCR and communications services .SPLRCL closed higher, with materials .SPLRCM enjoying the largest percentage gain.

Microsoft Corp (MSFT.O) provided the biggest boost to the S&P 500, and in June retained its top spot as the most globally invested stock, according to data from trading platform eToro.

Tesla Inc (TSLA.O) jumped 8.0% after the electric car maker’s second-quarter vehicle deliveries beat Wall Street estimates. [nL4N2E92OP]

Advancing issues outnumbered declining ones on the NYSE by a 1.90-to-1 ratio; on the Nasdaq, a 1.28-to-1 ratio favored advancers.

The S&P 500 posted 36 new 52-week highs and no new lows; the Nasdaq Composite recorded 123 new highs and 10 new lows.

Volume on U.S. exchanges was 10.03 billion shares, compared with the 13.24 billion average over the last 20 trading days.

(This story corrects index that has recovered since February to the Dow instead of the Nasdaq, paragraph three)

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Politics

U.S. Senator to block military promotions until assurances on former White House aide

WASHINGTON (Reuters) – Democratic U.S. Senator Tammy Duckworth said on Thursday that she would put a hold on the confirmation of over 1,000 military promotions until Defense Secretary Mark Esper provided assurances on the promotion of a former White House aide who testified in President Donald Trump’s impeachment trial.

Lieutenant Colonel Alexander Vindman, who provided some of the most damaging testimony during an investigation by the U.S. House of Representatives into Trump’s dealings with Ukraine, is up for a promotion to colonel. However, there is concern his promotion could be affected due to political reasons.

“Our military is supposed to be the ultimate meritocracy. It is simply unprecedented and wrong for any commander in chief to meddle in routine military matters at all,” said Duckworth, a former Army National Guard helicopter pilot who lost both legs when she was shot down in Iraq in 2004.

She is also reportedly under consideration by Democratic presidential candidate Joe Biden to be his running mate.

Duckworth intended to place a hold on 1,123 senior military service members’ promotions until Esper “confirms in writing that he did not, or will not, block the expected and deserved promotion of Lieutenant Colonel Alexander Vindman to colonel,” a statement said.

Duckworth’s action would make it far more difficult and time-consuming to approve such promotions, especially given how little time the Senate has before the November elections.

Vindman and his twin brother were escorted from the White House in February.

“We sent him on his way to a much different location, and the military can handle him any way they want,” Trump said at the time.

Esper said in November that Vindman should not fear retaliation over his testimony.

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Business

Investors rethink yield curve control horizon as Fed raises doubts

NEW YORK (Reuters) – Investors are dialing back expectations that the U.S. Federal Reserve may soon move to implement yield curve control, with some of them welcoming skepticism from the central bank in considering such a move.

Federal Reserve minutes released on Wednesday showed serious questions were raised about the strategy. Some bond market players had become increasingly convinced that one of the Fed’s next moves would be to cap yields at a specific point on the curve, by buying 2- or 3-year maturities for example.

“The simple reason the Fed will be skeptical is that you are asking a central bank to embark on a very risky change in policy, and it’s not clear that where it has been attempted, it actually works,” said Andrew Sheets, chief cross-asset strategist at Morgan Stanley.

The Fed’s discussion has centered on whether to import the sort of long-term interest rate targeting currently used by the Bank of Japan (BOJ) and the Reserve Bank of Australia (RBA).

Various Fed members have talked about yield curve control the past couple of months. In May, Fed Vice Chair Richard Clarida and New York Federal Reserve Bank President John Williams said yield curve control could be a tool to complement forward guidance.

Yields on two-year, three-year, five-year and seven-year issues have fallen since the March stock market sell-off and since Fed officials started talking about yield curve control.

For a graphic on Yield control by stealth:

here

“I think there was a subset of market participants that saw (yield curve control) by September as a foregone conclusion,” said John Roberts at NatWest Markets, who added that the front-end of the U.S. Treasury curve “cheapened a bit following the release of the minutes, so it’s possible some were unwinding YCC trades”.

Analysts at Goldman Sachs said in a research note Wednesday that they no longer expect yield curve control to be introduced at the Fed’s September meeting, although they still expect the committee to recognize the policy as an option for the future in its framework review.

Fed officials did appear to favor crafting some promises about the future – in effect making a pledge not to raise rates until some goal is met.

“What they made very clear is (yield curve control) is not their first tool of choice, it is ahead of negative interest rates but behind explicit outcome-based forward guidance,” said Jason Ware, chief investment officer at Albion Financial Group.

Controlling bond yields by purchasing certain maturities of U.S. Treasuries would keep yields where the Fed desires and help keep credit and business lending rates low.

The expectation for yield curve control has come as the U.S. Treasury has greatly increased borrowing. It announced in May plans to borrow nearly $3 trillion in the second quarter, more than five times larger than the previous record, while the July-September quarter would see borrowing of $677 billion.

For a graphic on Monthly U.S. Treasury issuance by tenor:

here

Marvin Loh, senior global macro strategist at State Street Global Markets in Boston, said he would take yield curve control “off my plate for 2020 unless we really see yields rise,” adding that if yields in the 3-7-year part of the curve were to get “out of control, particularly given how much issuance the U.S. Treasury has been doing, then the market would wind up more concerned.”

Still, the focus on yield curve control has “basically meant that the Fed has already accidentally implemented it,” said Jon Hill, U.S. rates strategist at BMO Capital Markets, citing five-years yields hitting all-time lows on Tuesday.

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Business

State Department warns top U.S. firms over supply chain risks linked to China's Xinjiang

WASHINGTON (Reuters) – The U.S. State Department warned top American companies including Walmart Inc(WMT.N), Apple Inc (AAPL.O)and Amazon.com Inc(AMZN.O) over risks faced from maintaining supply chains associated with human rights abuses in China’s western Xinjiang province, according to a letter seen by Reuters on Friday.

“It is critical that U.S. companies and individuals be aware of the large-scale human rights abuses perpetrated by the PRC government in Xinjiang,” Keith Krach, Undersecretary of State for economic growth, energy and the environment wrote on July 1.

“Businesses should evaluate their exposure to the risks that result from partnering with, investing in, and otherwise providing support to companies that operate in or are linked to Xinjiang,” he said in the letter also sent to trade groups.

The United States is seeking to ratchet up pressure on China at a time of heightened tensions over that country’s treatment of Muslim Uighurs in Xinjiang and Beijing’s new national security law for Hong Kong.

It also follows a Wednesday advisory by the U.S. government that said companies doing business in Xinjiang or with entities using Xinjiang labor could be exposed to “reputational, economic, and legal risks”.

In a call with reporters, Krach said the complex nature of supply chains was making companies vulnerable to potential risks and urged them to be more vigilant. “It’s incumbent on the board of directors for each company to conduct a detailed analysis of their supply chains to reveal who their company is buying from and who it is selling to,” he said.

He did not give specific number on how many U.S. companies might have been entangled in such supply chains.

The United Nations estimates that more than a million Muslims have been detained in camps there. China has denied mistreatment and says the camps provide vocational training and help fight extremism.

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World News

U.S. Vice President Pence: China's Hong Kong law is a 'betrayal' – CNBC interview

WASHINGTON (Reuters) – U.S. Vice President Mike Pence told CNBC on Thursday that China’s new law on Hong Kong is a betrayal of an international agreement.

“The national security law that China passed and now is imposing on Hong Kong is a – it’s a betrayal of the international agreement that they signed, and ultimately it’s unacceptable to freedom-loving people around the world,” he said.

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World News

U.S. factory orders rebound in May

WASHINGTON, July 2 (Reuters) – New orders for U.S.-made goods rebounded in May, suggesting a turnaround in manufacturing, though business spending will likely contract again in the second quarter amid cheaper crude oil as the COVID-19 pandemic depressed global growth.

The Commerce Department said on Thursday factory orders increased 8.0% after falling 13.5% in April. Economists polled by Reuters had forecast factory orders increasing 8.9% in May.

Factory orders dropped 10.3% year-on-year in May. Manufacturing, which accounts for 11% of U.S. economic activity, appears to be regaining its footing, but a resurgence in coronavirus cases amid the reopening of businesses threatens the budding recovery.

The Institute for Supply Management reported on Wednesday that its measure of national factory activity jumped to a 14-month high in June.

Unfilled orders at factories nudged up 0.1% in May after falling 1.5% in April. Inventories at factories rose 0.2%, while shipments of manufactured goods increased 3.1%.

Transportation equipment orders soared 82.0% in May after tumbling 48.9% in the prior month. Orders for motor vehicles and parts gained 28.3%. Machinery orders rose 0.5%. Orders for electrical equipment, appliances and components increased 1.0%.

The government also reported that orders for non-defense capital goods excluding aircraft, which are seen as a measure of business spending plans on equipment, rose 1.6% in May instead of increasing 2.3% as reported last month.

Shipments of core capital goods, which are used to calculate business equipment spending in the GDP report, increased 1.5% in May, instead of rising 1.8% as previously reported. Economists expect business spending to contract in the second quarter, the fifth straight quarterly decline.

The Atlanta Federal Reserve is forecasting gross domestic product plunging at a record 36.8% annualized rate in the April-June quarter. The economy contracted at a 5.0% rate in the first quarter, the sharpest decline since the 2007-09 recession. (Reporting By Lucia Mutikani Editing by Chizu Nomiyama)

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Business

Amid strong June job growth, signs U.S. recovery may be stumbling

(Reuters) – The U.S. economic recovery, after two months of faster-than-expected job gains, may be stumbling as a surge of new coronavirus infections prompts states to delay and in some cases reverse plans to let stores reopen and activities resume.

The latest batch of high-frequency data assembled by Federal Reserve officials, economists, cellphone tracking companies, and employee time management firms suggests activity stalled in recent days, casting a cloud over Thursday’s strong U.S. employment report.

The Labor Department reported a gain of 4.8 million jobs in June, marking the second straight month of record employment growth.

But a Federal Reserve Bank of New York weekly economic index dipped slightly last week as consumers grew less confident about the economy.

Meanwhile, estimates of foot traffic to retail stores, compiled by Reuters from cellphone data supplied by Safegraph and indexed to March 1, fell for the first time since early April, at the bottom of the economic crisis triggered by the novel coronavirus pandemic. Similar data from Unacast also dipped, with what had been a tentative return to restaurants, gyms and beauty salons stalled amid rising coronavirus infections.

Hours worked at a sample of more than 44,000 small businesses, whose employee hours are managed by Homebase, fell in 25 states in the week ending June 28. That included a more than 7% decline in Arizona and a more than 5% drop in Texas, where new outbreaks forced governors to renege on aggressive efforts to reopen the economy.

“More than ever, we’re concerned about the worsening health situation and its impact on the burgeoning recovery. Rebounding mobility and poor use of protective equipment will make for a dangerous summer cocktail,” Oxford Economics analyst Gregory Daco wrote. The firm’s recovery index rose slightly for the week ended June 19 as Americans spent and drove more, and continued returning to restaurants and hotels.

That rising mobility helped spur the June job gains and pushed the unemployment rate down to 11.1% from 13.3% in May. But with mixed adherence to social distancing, mask use and other personal behaviors that can slow the spread of the coronavirus, it also caused the indexes’ health measures to erode.

COVID-19 caseloads have reached new records nationally and particularly in a cluster of southern and southwestern states which were hesitant at first to set strict rules for managing the health crisis.

Goldman Sachs analysts estimated that states including over half the U.S. population had now paused or partially reversed their reopening plans, with limits reimposed most often on bars, restaurants and the size of gatherings – likely undermining what remained of the slight improvement in the company’s tracking indices for industrial and consumer activity.

“The spread of the virus is worsening in almost every state,” company analysts wrote, noting that only the small New England states of Vermont and New Hampshire currently meet all four of the recommended criteria for restarting commerce.

For more details on the data referred to in this story:

Unacast here Homebase here Safegraph www.safegraph.com/dashboard, Kronos here NYFed here Goldman here Oxford https://www.oxfordeconomics.com, DOL here

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Business

Record job growth powers Wall Street, Nasdaq hits all-time high

(Reuters) – Wall Street opened higher on Thursday, with the Nasdaq hitting an all-time high as data showed the U.S. economy added jobs at a record pace in June, the latest signal of a rebound in business activity following the easing of coronavirus-led lockdowns.

Nonfarm payrolls rose by 4.8 million jobs in June, the Labor Department’s closely watched monthly employment data showed, the most since the government began keeping records in 1939, although a recent surge in COVID-19 cases has threatened the fledgling recovery.

All 11 major S&P sectors were trading higher and gains were led by financials, basic materials and energy stocks.

“The strong rebound would normally be an unambiguously positive sign that a recovery is under way (but) it is being accompanied by a sharp rise in new infections, which was what caused the collapse in the first place,” said Mike Bell, global market strategist at JP Morgan Asset Management in London.

“It is therefore too soon to say for certain that this recovery in employment sounds the all-clear for investors.”

Several states are scaling back or pausing reopenings to tackle the spike in infections and analysts have warned of another selloff in financial markets if the damage to Corporate America mounts.

Third-quarter earnings for S&P 500 companies are now expected to tumble 25%, compared with a forecast of a 2.7% drop on April 1, according to Refinitiv data. In the second quarter, earnings are forecast to have plunged 43%.

“People are less concerned about earnings than they are about the guidance and what companies say about the next six months and 2021,” said Thomas Hayes, managing member at Great Hill Capital Llc in New York.

At 10:10 a.m. ET, the Dow Jones Industrial Average was up 431.49 points, or 1.68%, at 26,166.46, the S&P 500 was up 46.08 points, or 1.48%, at 3,161.94, and the Nasdaq Composite was up 147.27 points, or 1.45%, at 10,301.90.

Tesla Inc jumped 8.5% and was set for a fourth straight session of gains after beating Wall Street estimates for second-quarter vehicle deliveries.

Travel-related stocks were also among the biggest gainers, with cruise line operators Carnival Corp, Royal Caribbean Cruises Ltd and Norwegian Cruise Line Holdings Ltd rising more than 2%.

Coty Inc added 5.3% after it named former top executive of L’Oreal, Sue Nabi, as its chief executive officer.

Advancing issues outnumbered decliners more than 8-to-1 on the NYSE and 3-to-1 on the Nasdaq.

The S&P index recorded 30 new 52-week highs and no new low, while the Nasdaq recorded 84 new highs and six new lows.

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