By Dan Burns

(Reuters) - The U.S. Federal Reserve's holdings of bonds and other assets shrank for a fourth straight week, sliding below $7 trillion, and use of one key emergency liquidity measure dropped to zero in the latest sign that financial stresses that erupted early in the coronavirus pandemic have eased.

The Fed's total balance sheet size declined by about $88 billion to $6.97 trillion as of July 8 versus $7.06 trillion a week earlier, data released on Thursday by the central bank showed.

It was the largest weekly drop in more than 11 years, and the main driver was the balance of outstanding repurchase agreements - or repos - which fell to zero from $61.2 billion a week earlier. It was the first time in 10 months that banks have not tapped the Fed for this key source of short-term funding.

"In a sense, it is the end of an era," Jefferies (NYSE:JEF) economists Thomas Simons and Aneta Markowska wrote in a research note emailed Thursday afternoon.

The Fed began intervening in the repo market in mid-September after a shortfall of bank reserves led to a record surge in short-term borrowing costs. It ramped up that support to unprecedented levels in March after concerns over the rapidly spreading coronavirus disrupted financial markets.

Take-up of the Fed's repo operations waned over the past few months as markets stabilized and the Fed provided more liquidity through massive purchases of Treasury securities and mortgage-backed securities.

The central bank also tweaked the repo operations in June to make them slightly more expensive, positioning them as more of a backstop. That appears to be pushing banks to find private counterparties for their repo needs.

As evidence, there were no bids for a fourth straight day at Thursday's overnight repo offering from the Fed. Officials have pledged to keep monitoring financial conditions and offer more support if needed.

"They want to be seen as supplying more than enough to the system and they're going to err on the side of doing that," said Kathy Bostjancic, chief U.S. financial economist for Oxford Economics.

By Daphne Psaledakis, Alexandra Alper and Matt Spetalnick

WASHINGTON (Reuters) - The United States on Thursday imposed sanctions on the highest ranking Chinese official yet targeted over alleged human rights abuses against the Uighur Muslim minority, a move likely to further ratchet up tensions between Washington and Beijing.

Washington blacklisted Xinjiang region's Communist Party Secretary Chen Quanguo, a member of China's powerful Politburo, and three other officials. The highly anticipated action followed months of Washington's hostility toward Beijing over China's handling of the novel coronavirus outbreak and its tightening grip on Hong Kong.

A senior administration official who briefed reporters after the announcements described Chen as the highest ranking Chinese official ever sanctioned by the United States.

The blacklisting is "no joke," he said. "Not only in terms of symbolic and reputational affect, but it does have real meaning on a person's ability to move around the world and conduct business."

The Chinese embassy in Washington did not respond to a request for comment. But China has denied mistreatment of Uighur Muslims and says the camps provide vocational training and are needed to fight extremism.

The sanctions were imposed under the Global Magnitsky Act, which allows the U.S. government to target human rights violators worldwide by freezing any U.S. assets, banning U.S. travel and prohibiting Americans from doing business with them.

Sanctions were also imposed on Zhu Hailun, a former deputy party secretary and current deputy secretary of regional legislative body the Xinjiang's People's Congress; Wang Mingshan, the director and Communist Party secretary of the Xinjiang Public Security Bureau; and former party secretary of the bureau Huo Liujun.

U.S. Secretary of State Mike Pompeo said Washington was also barring Chen, Zhu, Wang and their immediate families, as well as other unnamed Chinese Communist Party officials, from traveling to the United States.

U.S. Republican Senator Marco Rubio, who sponsored legislation signed by U.S. President Donald Trump in June that calls for sanctions over the repression of Uighurs, told Reuters the move was "long overdue" and that more steps were needed.

"For far too long, Chinese officials have not been held accountable for committing atrocities that likely constitute crimes against humanity," Rubio said.

Despite Trump's hardline public remarks about Beijing, former national security adviser John Bolton alleged in his recent book that Trump said Chinese President Xi Jinping should go ahead with building detention camps in Xinjiang and sought Xi's help to win reelection in November.

Trump said in an interview last month he had held off on tougher sanctions on China over Uighur human rights due to concerns such measures would have interfered in trade negotiations with Beijing.

Treasury Secretary Steven Mnuchin had also raised objections to the Treasury sanctions, especially against a Politburo member, out of concerns they could further damage U.S.-China relations, according to a person familiar with the matter.

"The United States is committed to using the full breadth of its financial powers to hold human rights abusers accountable in Xinjiang and across the world," Mnuchin said in a statement.

Peter Harrell, a former U.S. official and sanctions expert at the Center for a New American Security, said Thursday's move may signal a continued shift by the Trump administration of "paying more attention to human rights abuses in China ... after several years of relative neglect."

Chen made his mark swiftly after taking the top post in Xinjiang in 2016, when mass "anti-terror" rallies were held in the region's largest cities involving tens of thousands of paramilitary troops and police. He is widely considered the senior official responsible for the security crackdown in Xinjiang.

The United Nations estimates that more than a million Muslims have been detained in camps in the Xinjiang region.

CARACAS (Reuters) - Venezuela's congress on Thursday said it hired two U.S. firms to manage $80 million seized from President Nicolas Maduro's government after Washington disavowed it and recognized opposition leader Juan Guaido as the country's legitimate president.

Opposition leaders are hoping to use some of the funds to provide stipends for doctors and nurses working on the front lines of the coronavirus epidemic.

Delaware based companies BRV Disbursement Co. LLC and BRV Administrator Co. LLC will manage the resources in exchange for $1.25 million, congress said in a statement.

Reuters was unable to obtain comment from the firms, which do not appear to have websites.

Guaido does not control Venezuela's state institutions or armed forces, but his allies control offshore assets including refiner Citgo and some funds that had been held by Maduro's government in U.S. accounts.

Despite a sweeping set of sanctions enacted in early 2019, Guaido's allies have struggled to obtain access to funds frozen in the United States due in part to the stringent requirements of U.S. authorities.

Maduro's government has accused Guaido and others of stealing the nation's resources with the help of the Trump administration.

(Bloomberg) -- South Korea’s government is preparing new regulations to curb excessive house price gains that have fueled public discontent over inequality and property speculation.

Affordable housing has been one of President Moon Jae-in’s key policy objectives since taking office in May 2017 with a vow to improve the living standards of a wider range of people. Yet a mismatch of supply and demand in popular neighborhoods and widespread investment purchases have seen prices soar in Seoul.

South Korea Urges Officials to Sell Homes as Prices Fuel Anger

Record-low interest rates aimed at supporting the virus-hit economy have also contributed upward pressure on prices. Politicians with multiple homes have further complicated the issue by giving the impression they are benefiting from the circumstances.

The Moon administration has already unleashed a series of measures that have cooled price increases in many parts of the country. The challenge is to come up with further steps that can address the remaining pockets of soaring prices without buckling the wider property market or limiting potential stimulus for a sputtering economy.

South Korea’s overheating property market has been largely confined to Seoul and its surrounding areas, with prices broadly stable in other large cities and declining in some smaller regions over the past three years.

The average apartment price in Seoul surged more than 50% to 925 million won ($774,000) from May 2017 to June 2020. That compares with a gain of 2% in Busan and 15% in Daegu, where prices are only a third of those in the capital.

The government has expressed concern about excess liquidity flowing into the property market. Broad money supply -- known as M2 -- rose by 9.1% in April from a year earlier, the fastest pace since 2015, as the government expanded loans to struggling companies and handed out cash to families to relieve pandemic pain. The money supply has previously displayed a correlation with Seoul house price growth.

The BOK has cut interest rates by 75 basis points since the pandemic struck, delivering a corresponding decline in lending rates. While that’s a sign of effective monetary policy transmission, it’s a concern when property prices are still rising rapidly.

“There’s not much the central bank can do at this stage,” said Kim Jin-myoung, an economist at Hanwha Investment & Securities Co. in Seoul. “You can’t raise rates for the sole purpose of reining in property prices when the economy is still in a slump from the coronavirus.”

BOK Governor Lee Ju-yeol has repeatedly pledged to keep monetary policy accommodative until the economy recovers from the virus downturn. Minutes of the latest May interest rate decision showed some board members expressed concerns about housing market instability, while proceeding with a rate cut to help the economy.

Construction investment led South Korea’s economic expansion under the former administration, as interest-rates were cut and property regulations eased to buoy a then-stagnant property market. The trend has reversed in recent years, with tighter rules and a correction from the previous housing oversupply.

President Moon vowed late last year that the government wouldn’t use the property market as a means to boost growth. Yet the pandemic has deteriorated the outlook for the economy, which is now expected by analysts to contract this year for the first time since the late 1990s Asian financial crisis.

“The property curbs are negative for the construction investment outlook,” said An Young-jin, an economist at SK Securities. “But the government is willing to endure that as they place greater urgency on reining in the property market.”

©2020 Bloomberg L.P.

(Reuters) - U.S. equity funds in the week ended on Wednesday drew $609 million, the first inflow in four weeks, according to Lipper.

U.S. taxable bond funds attracted $12.6 billion, the 13th straight weekly inflow, while money market funds saw $4.7 billion come in, the first inflow in eight weeks, Lipper data showed on Thursday.

By David Lawder and Andrea Shalal

WASHINGTON (Reuters) - U.S. Trade Representative Robert Lighthizer on Thursday said the world needed either a multilateral system to govern global trade or a series of bilateral agreements, but the two were in conflict with each other.

Speaking in a webcast event hosted by the London-based Chatham House think-tank, Lighthizer said that Europe's proliferation of some 77 bilateral free trade agreements (FTAs) was "one of the biggest challenges to the multilateral trading system."

He said that to revive the multilateral trading system enshrined in the World Trade Organization, there needed to be a "reset" on global tariff rates, an end to making new trade rules through WTO litigation and new ways to effectively deal with China's state-directed economic model and non-tariff barriers such as product and food safety standards.

"The FTAs, in my opinion, we should just get rid of them. We should have a multilateral system or a bunch of bilateral systems," Lighthizer said. "And to be honest, I can go either way. But we can't have people who...profess to multilateralism and then go around basically being the biggest proponents of a bilateral system."

The United States last week launched a new trade deal with Mexico and Canada and is in the process of negotiating bilateral trade deals with the United Kingdom and Kenya after activating a "Phase 1" trade agreement with China in February.

Lighthizer and U.S. President Donald Trump have long argued that bilateral trade deals were better for the United States than multilateral ones, such as the Trans-Pacific Partnership. Trump pulled the United States out of TPP on his third day in office in 2017.

Lighthizer also said that Britain's former trade secretary Liam Fox is "one of the favorites" to become the next director general of the World Trade Organization, but said there were other good candidates as well and the Trump administration is still considering which of the seven to support.

"If you say what are we looking for? Number one, we have someone who understands that we have a fundamental need for reform," Lighthizer said, adding that the WTO was at "a turning point" that could significantly shift its current form. The next WTO chief will also need to understand that China is "state capitalism," he said.

By David Ljunggren

OTTAWA (Reuters) - Canada is not considering immediate sanctions against China over its treatment of Hong Kong and does not want to escalate a dispute between the two nations, a Canadian government source said on Thursday.

Last week, Liberal Prime Minister Justin Trudeau suspended an extradition treaty with Hong Kong, banned the export of sensitive military items and said Canada could boost immigration from the former British colony after Beijing imposed new national security legislation.

Some members of the main opposition Conservative party want Trudeau to impose sanctions on Chinese officials but such a move is off the table for now, said the source.

"There are a lot of options we have at our disposal," said the source, who requested anonymity given the sensitivity of the situation.

Asked about sanctions, the source replied: "Right now it's not necessarily something that is being considered in the immediate term but lots of things can happen."

Canada-China relations froze in late 2018, when Canadian police detained Huawei Technologies Co's chief financial officer, Meng Wanzhou, on a U.S. arrest warrant.

"We're not seeking to escalate any current dispute with China," said the source when asked about the Canadian measures on Hong Kong. "It's not a question of trying to do something deliberately provocative, it's to take a step in response to a step that the Chinese took."

For the time being Canada is more focused on measures to boost immigration from Hong Kong.

Australia said on Thursday that Hong Kong students, graduates and workers in the country on temporary visas will have the opportunity to stay and work for an extra five years and then apply for permanent residency.

Canadian Immigration Minister Marco Mendocino, asked on Thursday what Canada would do, said Ottawa was exploring options but did not give details.

LONDON (Reuters) - Stress in financial markets could yet make a comeback, Britain's finance industry warned the Bank of England last month, with Brexit and global political risks auguring for a difficult end to the year.

Minutes published on Thursday from a June 2 meeting of the BoE's UK Money Markets Committee (MMC), which includes major banks, showed unease about a possible repeat of market chaos that struck in March when the COVID-19 pandemic escalated.

"While it was clear that liquidity had now returned... some members were more pessimistic about the potential recovery and noted the potential for stress to return," the minutes said.

In March, a frenzied "dash for cash" prompted investors who were normally willing to buy safe assets such as British government bonds to swap them for money held with central banks.

BoE Governor Andrew Bailey has said there was a risk that Britain's government would have struggled to raise money without the central bank's intervention to calm the market.

Minutes from the BoE's June MMC meeting also hinted at nerves about the end of the government's job-protecting furlough scheme, which is due to shut at the end of October.

"It was noted that this, in conjunction with Brexit and geopolitical risks, could make year-end challenging," the minutes said.

The world's sixth-biggest economy shrank by 25% in March and April and could be heading for its biggest fall in 300 years in 2020, with the unemployment rate on course to more than double to about 10%, according to official projections.

Under a new bonus plan announced by finance minister Rishi Sunak on Wednesday, employers will be paid 1,000 pounds ($1,256) after the furlough scheme expires for every worker who returns to their job, provided they are kept on through to the end of January.

The BoE also published minutes from an extraordinary MMC meeting on March 18, around the height of the market tensions, which showed worry about the pressure heaped on banks.

"The banking sector was facing significant balance sheet constraints, in part as a consequence of corporates drawing down on, or expected to draw down on, revolving credit facilities (RCFs)," the minutes said.

Some MMC members also asked the BoE if had planned to expand its emergency funding scheme for large companies - the Covid Commercial Financing Facility - to include the financial sector.

By Howard Schneider

(Reuters) - U.S. states that have driven a record surge in coronavirus cases may now be slipping backward https://graphics.reuters.com/USA-ECONOMY/REOPEN/yxmpjlxewpr in their economic recovery, as cellphone data shows retail visits in a clutch of high case-growth locations falling below the rest of the country.

In Arizona, Texas, Florida, Georgia and South Carolina, which had edged ahead of other states during their drive in May to reopen commerce, retail foot traffic has slipped below levels elsewhere, information from data firm Unacast showed.

The data, which covers the period through July 3, is not representative of retail sales. But it does highlight the dilemma many economists and health experts have raised from the earliest days of the outbreak of novel coronavirus: Inattention to health protocols like wearing of masks and social distancing combined with a rush to reopen businesses could lead to worse outcomes for both public health and the economy.

"A mismanaged health crisis across many states means short-term gains will transform into medium-term sluggishness as social distancing relaxation is reversed and virus fear lingers," Gregory Daco, chief U.S. economist at Oxford Economics, wrote in an analysis on Thursday. "It's now evident that the economy is entering Q3 (third quarter) with much less momentum than previously anticipated."

Oxford's recovery https://graphics.reuters.com/USA-ECONOMY/OXFORDINDEX/xklvyzdwypg index fell for the second time in three weeks on the basis of a surge in COVID-19 cases that is straining hospital capacity in places like Texas as the hot spots of the outbreak rotate from states in the Northeast to those in the South and Southwest that resisted the strictest health measures early on. Several have since begun tightening rules or imposing restrictions they initially rejected.

The result is an economic reopening that appears to be, at best, in limbo, according to an array of high frequency data and broader analyses prepared by economists and the U.S. Federal Reserve.

Goldman Sachs (NYSE:GS) indexes https://graphics.reuters.com/USA-ECONOMY/GSTRACKERS/gjnpwwxnjpw of U.S. industrial and consumer activity both edged higher during the week ended July 4, while a New York Fed index https://graphics.reuters.com/USA-ECONOMY/WEI/bdwvkaebwvm of growth in gross domestic product edged down.

The drop in the New York Fed's index may be notable because it was driven lower by the components related to retail sales and consumer confidence, NatWest Markets analyst John Roberts wrote on Tuesday.

"It doesn’t seem like a great sign that retail sales and confidence fell in a week ending with a big U.S. holiday ... It does seem likely, however, that the spike in cases and increased lockdown measures in some hot-zone states would have negatively impacted confidence and sales, as was the case last week," he said.

Graphic: Retail foot traffic, % change vs. 2019 - https://graphics.reuters.com/USA-ECONOMY/REOPEN/qzjpqegogpx/chart.png

MAGNITUDE AND DURATION

Nationally, cellphone tracking data from both Unacast https://graphics.reuters.com/USA-ECONOMY/UNACAST/jznpnzkwkpl and Safegraph https://graphics.reuters.com/USA-ECONOMY/SAFEGRAPH/bdwvkaexwvm showed retail visits were stalled or falling. Time management firm Homebase https://graphics.reuters.com/USA-ECONOMY/HOMEBASE/ygdpzwdzmvw showed employment among its small business clients hit a plateau, while clients of Kronos https://graphics.reuters.com/USA-ECONOMY/KRONOS/xlbpgobqypq, which manages employee time across a larger swath of industries, showed a drop in shifts.

In each of those cases the outcome was likely influenced by business or shift closures over the July 4 holiday weekend.

Still, another 1.31 million people filed for unemployment https://graphics.reuters.com/USA-ECONOMY/REOPEN/jznvnzkdnvl insurance in the week ended July 4, and 32.9 million people were receiving unemployment checks under all programs in the third week of June.

Fed officials looking across that data and their own models have begun sounding a more pessimistic note. In appearances this week they cited renewed nervousness among business executives, a loss of "energy" among firms and consumers, and concern that a recovery that seemed to start fast in May and June may be facing a sort of crossroads as the United States tries to resolve the tension between the health and economic risks it is facing.

"We are uncertain about two things and that’s always hard. We are uncertain about the magnitude and we are uncertain about duration," of the twin crises, San Francisco Fed President Mary Daly said on Tuesday. "Being in a risk posture that says things can get worse, or can stay this bad for a while, is important I think for all of us."

NEW YORK, July 9 (Reuters) - The Federal Reserve bought $21.685 billion of agency mortgage-backed securities in the week

from Jul. 2 to Jul. 8, compared with $22.705 billion purchased the previous week, the New York Federal Reserve Bank said on Thursday.

In a move to help the housing market begun in October 2011, the U.S. central bank has been using funds from principal payments

on the agency debt and agency mortgage-backed securities, or MBS, it holds to reinvest in agency MBS.

The New York Fed said on its website the Fed sold $3.6 billion in mortgage securities guaranteed by Fannie Mae (OB:FNMA),

Freddie Mac (OB:FMCC) or the Government National Mortgage Association, or Ginnie Mae,

in the latest week. It sold none the prior week.

By Caroline Valetkevitch and David Randall

NEW YORK (Reuters) - U.S. companies are preparing to open their books on a quarter that is set to show the biggest earnings fall since the financial crisis, leaving investors looking for light at the end of the tunnel.

The season unofficially begins on Tuesday with results from some of the biggest U.S. banks. Analysts expect S&P 500 companies overall to report a 44.1% drop in year-over-year earnings for the second quarter, when the coronavirus likely took its biggest toll on companies. Earnings fell 12.8% in the first quarter, according to IBES data from Refinitiv.

The first coronavirus cases in the United States were identified in January and within weeks much of the economy was shut down to slow the spread, throwing millions of Americans into unemployment. Companies across a range of industries have been dealing with the aftermath ever since.

The second quarter is expected to be the low point for earnings this year. It would be the second-biggest quarterly earnings drop in IBES data going back to 1968, trailing only 2008's fourth-quarter fall of 67%, when banks and other major lenders were hit at the height of the subprime mortgage crisis.

For a graphic on Four biggest U.S. quarterly earnings declines:

https://fingfx.thomsonreuters.com/gfx/editorcharts/qzjvqembrvx/eikon.png

"It's widely assumed at this point that earnings for Q2 are going to be pretty much a disaster," said Willie Delwiche, investment strategist at Baird in Milwaukee.

As a result, many on Wall Street are looking past this quarter's earnings results. The S&P 500 is now trading at 22 times forward earnings, well above the 19 times earnings it reached when it hit a record high in February. Overall, the index is up more than 40% from its March 23 closing low on the back of stimulus measures from the Federal Reserve and U.S. government.

Earnings are expected to turn around in 2021, but investors will be looking for signs that the profit trend is improving.

That is especially important as many companies have been pulling guidance, giving analysts and investors little information on the outlook for earnings.

Second-quarter outlooks from S&P 500 companies totaled just 62 as of Wednesday, far below the 171 average number of quarterly pre-announcements going back to 1997, based on Refinitiv data.

Moreover, in recent months, some investors had begun to speculate on whether companies globally may report earnings before interest, taxes, depreciation, amortization - and coronavirus, or "EBITDAC," which would add to the uncertainty surrounding the profit picture.

Worries have been mounting as states reopen and new coronavirus cases increase in parts of the United States, forcing some states to reverse course and shut businesses down again.

Still, another stimulus bill could boost earnings. Negotiations over a new relief bill had been expected to pick up in July.

Nicholas Colas, co-founder of DataTrek Research, said earnings expectations could be too low if Congress passes further economic stimulus this month.

Though not as bad as the second quarter, third- and fourth-quarter earnings still look pretty dire. Analysts see a 24.7% year-over-year decline in earnings for the third quarter and a 13.1% fall in the fourth, while first-quarter 2021 earnings are expected to jump 12.1%, based on Refinitiv's data.

For a graphic on U.S. quarterly profit performance since 1968:

https://fingfx.thomsonreuters.com/gfx/editorcharts/azgvorldjpd/eikon.png

All 11 S&P 500 sectors are slated to see a decline in earnings for the second quarter, with energy, consumer discretionary and industrials among the hardest hit, but utilities and technology showing the smallest declines.

Sandy Villere, a portfolio manager at New Orleans-based Villere Funds, said he is increasingly focused on companies that have the ability to give earnings and revenue projections for the second half of this year or into 2021.

"The ones that truly can't give guidance are ones that we would steer away from," Villere said.

There is a chance investors will find reasons to reward some companies this earnings season, said Sam Stovall, chief investment strategist at CFRA Research in New York, pointing to FedEx (NYSE:FDX), whose shares jumped last week after better-than-expected quarterly profit and revenue.

David Ellison, a portfolio manager at Hennessy Funds, said investors will likely continue to look past poor results as long as parts of the economy remain shuttered.    

"A tsunami hit and there's going to be a couple of quarters for them to figure it out," he said.