By Duncan Miriri

NAIROBI (Reuters) - Nervous investors are avoiding long-dated Kenyan Treasury bills and bonds, central bank data showed, putting more strain on the government's plans to pivot to domestic borrowing after scrapping controversial tax hikes.

The latest debt sale, on Aug. 1, saw the benchmark 1-year Treasury bill get less than a tenth of demand for the amount on offer. That weak demand is making it even more expensive – and complicated – to fund the debt-burdened government's budget.

"It is going to be a problem and it feels like they are just kicking the can down the road," said Kenneth Minjire, senior associate for debt and equity at AIB-AXYS, a Nairobi-based brokerage.

President William Ruto abandoned tax hikes worth more than 346 billion shillings ($2.67 billion) after protests that killed more than 50 people.

The U-turn forced the finance ministry to hike local borrowing targets by 42% to 404.6 billion shillings ($3.12 billion), even as securities, apart from 91-day Treasury bills, were already underperforming at auction.

PRECIPITOUS FALL

Demand for Kenyan debt instruments at the central bank's weekly auction fell precipitously as domestic disruptions and violence engulfed major urban centres, data from the central bank showed.

Investors offered to buy just a third of what the central bank offered in Treasury bills during the week of June 24, when the turmoil erupted, while the subscription rates for that week's bond auction were just 2.4%.

Before the protests, the subscription rates for Treasury bills was 94.7%, while bonds were oversubscribed.

Central Bank governor Kamau Thugge downplayed concerns over local financing, noting it was early in the financial year, and that even the revised borrowing target was lower than the previous financial year.

"I really don't see that we will not be able to meet the domestic financing requirements," he told a news conference on Wednesday.

The finance ministry did not respond to requests for comment.

'OVER-BORROWING'

Finance minister John Mbadi said the local debt portfolio was already too high. Total domestic debt stands at $750 billion, three times the stock of external debt, he told a parliamentary vetting panel on Saturday.

"We are over-borrowing domestically," he said, without commenting on whether he would cut the domestic borrowing target.

Mbadi, who was sworn into office on Thursday, could struggle to cut it. The Kenya Bankers Association, a lobby group, warned that the funding bill withdrawal and credit ratings downgrades that followed "risk constraining external funding options even more."

The country's Eurobonds have also slid, meaning if Kenya wanted to issue again, it would be more expensive.

DELAY IN IMF FUNDING?

Potential delays in IMF funding also loom; Kenya had secured a staff level agreement for the seventh review of its $3.6 billion bailout before the protests, but the board had not signed off.

Officials submitted a revised economic repair plan without the tax hikes, which it hopes will secure its next $600 million tranche.

But Ruto's efforts to fill the gap left by tax reversal are mixed; his pledge to cut 346 billion shillings worth of spending was halved by the time the law passed, leaving more risk to the country's balance sheets.

"The path to achieving fiscal targets has become increasingly challenging," said Fitch, the global credit ratings agency, while downgrading Kenya's credit last Friday.

Further compounding the pressure, there are near-weekly attempts to rally and keep Ruto from increasing any other taxes, such as on fuel.

"We must stay glued to the issues," said Martha Karua, an opposition party leader.

($1 = 129.5000 Kenyan shillings)

BEIJING (Reuters) -China's consumer prices rose at a slightly faster-than-expected rate in July partly due to weather disruptions to food supplies, while producer deflation persisted, keeping the country's underlying consumption trends soft in a test for policymakers.

China's frail consumer sector been a major focus for Beijing as weak domestic demand hobbles the world's second-biggest economy while manufacturing activity shrinks.

The consumer price index (CPI) edged up to a five-month high of 0.5% year-on-year in July, versus a 0.2% rise in June, the National Bureau of Statistics (NBS) reported on Friday, beating a 0.3% increase in a Reuters poll of economists.

On a month-on-month basis, the CPI rose 0.5% against a 0.2% fall in June and a forecast 0.3% increase.

High temperatures and rainfall in some areas last month pushed up food prices, partly contributing to the monthly return to growth, said NBS statistician Dong Lijuan.

Food prices swung from a drop of 2.1% on-year in June to an unchanged outcome in July, while the growth in non-food prices slowed from 0.8% in June to 0.7% last month.

"There's a sharp contrast between food and ex-food CPI... none of the other goods and services saw inflationary moves, suggesting no sign of a pickup in domestic demand," said Xu Tianchen, senior economist at the Economist Intelligence Unit.

Core inflation, excluding volatile food and fuel prices, gained 0.4% on-year in July, down from 0.6% in June.

Weak domestic demand has become a major pain point for the economy, while hopes for an export-led recovery have also been crimped by rising trade tensions with the West, tariffs on Chinese goods and fears of a U.S. recession.

Consumers have largely shunned incentives to revive consumption, as a prolonged housing downturn, job insecurity and a wall of local government debt inhibit them from purchases of especially big-ticket items.

Car sales, the biggest component of China's retail sales, fell for the fourth month running in July despite a national auto trade-in program and eased auto loan rules.

China's capital city Beijing posted a 6.3% slide in retail sales in June while the financial hub of Shanghai saw the gauge of consumption fall 9.4%, underperforming a national rise of 2%, per official data.

The producer price index (PPI) was down 0.8% in July from a year earlier, unchanged from the previous month, and above an expected 0.9% fall.

Chinese leaders pledged at the end of July that the stimulus measures needed to reach this year's economic growth target will be targeted at consumers, days after announcing the allocation of 300 billion yuan ($41.96 billion) in ultra-long treasury bonds to finance equipment upgrades and consumer goods trade-ins.

($1 = 7.1502 yuan)

By Leika Kihara, Pasit Kongkunakornkul, Vineet Sachdev and Kripa Jayaram

(Reuters) - The Japanese yen has been under pressure in the past few years as markets focused on the wide U.S.-Japan interest rate differentials.

The yen lost more than 20% against the dollar since the outset of 2022, prompting several rounds of intervention by Tokyo to prop up the currency in September and October that year. It kept falling despite further intervention in April and May 2024, touching a 38-year low of 161.96 to the dollar on July 3. Japan is suspected to have stepped in again in mid-July to put a floor under the yen.

The yen's downtrend has reversed in recent days, following the Bank of Japan's July 31 decision to raise interest rates and ahead of an expected loosening of U.S. monetary policy.

The BOJ's hawkish move, along with investors' concerns about U.S. growth, jolted global stock and bond markets. It triggered an unwinding of the carry trade, whereby investors borrow cheaply in yen to invest in higher-yielding assets. The yen rebounded sharply against the dollar, but remains relatively weak by the standards of the past few decades.

The yen's fluctuations matter because the currency has long provided a cheap source of funding for global investors, even as other central banks raised borrowing costs. 

BOJ'S SHIFTING INTERVENTION GOAL

Japanese authorities had historically intervened to prevent the yen from strengthening too much, as a strong yen hurts the export-reliant economy. This trend changed in 2022, when Tokyo stepped in and bought yen to defend its value, after the currency plunged on expectations that the BOJ would keep interest rates ultra-low even as other central banks tightened monetary policy to combat soaring inflation.

In both cases, authorities buy or sell yen, usually against the dollar. The Ministry of Finance decides when to step in and the Bank of Japan acts as its agent. 

The decision is highly political because Japan's reliance on exports makes the public more sensitive to yen moves than in other countries. With many manufacturers now shifting production overseas, the benefit of a weak yen has diminished. Instead, a weak yen has become a pain for households and retailers by inflating the cost of importing fuel and raw material.

Tokyo intervened on April 29 and May 1 this year, according to Ministry of Finance data, to combat the yen's declines. After the moves failed to reverse the yen's downtrend, Japanese authorities are suspected by market participants to have intervened again on several occasions in July. 

Japanese authorities typically do not confirm whether they intervened in the currency market, and say only that they would take appropriate action as needed against excessively volatile foreign exchange moves.

WHY DID THE YEN WEAKEN IN RECENT YEARS?

Various factors caused the yen's decline. 

First, the U.S. Federal Reserve's aggressive interest rate rises and the BOJ's slow pace in normalizing monetary policy kept the gap between U.S. and Japanese interest rates large, thereby keeping the yen less attractive compared with the dollar. 

Second, Japan is now importing more fuel and raw material than in the past, which means companies are converting yen into foreign currencies to make payments. 

Third, many big Japanese manufacturers that shifted production overseas have reinvested profits abroad, rather than repatriating them. That reduced demand for yen.

WHY ISN'T THE BOJ RAISING RATES MORE RAPIDLY?

The BOJ ended negative interest rates in March and raised its short-term policy rate again to 0.25% from 0-0.1% in July. Governor Kazuo Ueda has signaled the chance of raising rates again if Japan makes further progress toward meeting the central bank's 2% inflation target, as it projects.

Analysts expect the BOJ to eventually raise interest rates to levels deemed neutral to the economy, around 1% to 1.5% in the next few years. But such a gradual tightening would leave Japanese borrowing costs very low compared with other countries.

Japanese policymakers are cautious about raising rates too aggressively for fear of hurting already-weak consumption and threatening a fragile economic recovery. They are also wary of the risk of triggering a sharp rise in long-term interest rates that would increase the cost of funding Japan's huge public debt.

WHAT ARE THE DRAWBACKS OF A WEAK YEN?

A weak yen pushes up the cost of importing fuel, food and raw material. That in turn hurts retailers and households through higher living costs. 

Inflation data shows that the rate of core inflation, which excludes volatile fresh-food prices but includes fuel costs, has been higher than the central bank target for the past 27 months. 

WHAT ARE THE BENEFITS OF A WEAK YEN?

A weak yen, however, is not necessarily all bad for Japan's economy. 

The yen's decline benefited Japanese export firms by inflating the yen-based profits they earned overseas. The increased profits may lead to higher wages and help underpin consumption.

A cheaper yen also boosts tourism. The number of overseas visitors to Japan has surged over the past couple of years, giving hotels, department stores and others relief after enduring COVID-19 restrictions.

($1 = 146.3100 yen)

By Martin Coulter

LONDON (Reuters) - An ongoing European Commission investigation into social media platform X could take its handling of harmful content related to the recent UK riots into account, a spokesperson said.

Last month, European Union officials issued charges against X, owned by tech billionaire Elon Musk, under the Digital Services Act (DSA), which requires very large online platforms to do more to tackle illegal content and risks to public security.

While Britain has not been a member of the EU since 2020, harmful content in breach of DSA rules shared in Britain may have been seen by users in Europe, constituting a potential breach of the law.

Disinformation and calls to violence spread on social media in Britain in recent days, after far-right and anti-Muslim groups seized on the fatal stabbing of three young girls.

"What happens outside of the EU is not covered by the DSA, but what happens in the UK is visible here. If there are examples of hate speech or incitements to violence, they could be taken into account as part of our proceedings against X," a Commission spokesperson told Reuters.

X did not immediately respond to a request for comment.

By Swati Bhat and Sudipto Ganguly

MUMBAI (Reuters) - The Reserve Bank of India (RBI) kept its key interest rate unchanged on Thursday, as widely expected, retaining its focus on bringing inflation down even as global market volatility left other major central banks poised to ease policy.

The Monetary Policy Committee (MPC), which consists of three RBI and three external members, kept the repo rate unchanged at 6.50% for a ninth straight policy meeting.

Four out of six MPC members voted in favour of the rate decision.

The MPC last changed rates in February 2023, when the policy rate was raised to 6.50%.

The monetary policy stance was retained at 'withdrawal of accommodation' to aid the MPC's focus on bringing inflation towards the target, with four of the six members voting in its favour.

All 59 economists in the Reuters poll conducted in late July predicted the central bank would stand pat on rates.

It is important for monetary policy to stay the course in bringing inflation down towards its 4% medium term target, RBI Governor Shaktikanta Das said, adding that India's food inflation remains "stubbornly" high.

"Growth remains resilient, inflation has been trending downward and we have made progress in achieving price stability, but we have more distance to cover," Das said.

Ensuring price stability is important for sustainable growth, Das said.

"With growth remaining robust, the MPC still has room to hold on to policy stance to get confirmation on the disinflationary trend," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

By Nell Mackenzie

LONDON (Reuters) -A wager that stock markets would stay calm has cost retail traders, hedge funds and pension funds billions after a selloff in global stocks, highlighting the risks of piling into a popular bet.

The CBOE VIX index, which tracks the stock market's expectation of volatility based on S&P 500 index options, posted its largest-ever intraday jump and closed at its highest since October 2020 on Monday as U.S. recession fears and a sharp position unwind have wiped off $6 trillion from global stocks in three weeks.

Investors in 10 of the biggest short-volatility exchange traded funds saw $4.1 billion of returns erased from highs reached earlier in the year, according to calculations by Reuters and data from LSEG and Morningstar.

These were bets against volatility that made money as long as the VIX, the most-watched gauge of investor anxiety, remained low.

Wagers on volatility options became so popular that banks, in an effort to hedge the new business they were receiving, might have contributed to market calm before the trades suddenly turned negative on Aug. 5, investors and analysts said.

Billions flew in from retail investors but the trades also garnered the attention of hedge funds and pension funds.

While the total number of bets is difficult to pin down, JPMorgan estimated in March that assets managed in publicly traded short volatility ETFs roughly totaled $100 billion.

"All you have to do is just look at the intra-day rate of change in the VIX on Aug. 5 to see the billions in losses from those with short vol strategies," said Larry McDonald, author of How to Listen When Markets Speak.

But McDonald, who has written about how bets against volatility went wrong in 2018, said publicly available data on ETF performance did not fully reflect losses incurred by pension funds and hedge funds, which trade privately through banks.

On Wednesday, the VIX had recovered to around 23 points, well off Monday's high above 65, but holding above levels seen just a week ago.

VOLATILITY'S RISE

One driver behind the trading strategy's popularity in recent years has been the rise of zero-day expiry options - short-dated equity options that allow traders to take a 24-hour bet and collect any premiums generated.

Starting in 2022, investors including hedge funds and retail traders, have been able to trade these contracts daily instead of weekly, allowing more opportunities to short volatility while the VIX was low. These contracts were first included in ETFs in 2023.

Many of these short-term options bets are based around covered calls, a trade that sells call options while investing in securities such as U.S. large-cap stocks. As stocks rose, these trades earned a premium as long as market volatility remained low and the bet looked likely to succeed. The S&P 500 rose over 15% from January to July 1 while the VIX fell 7%.

Some hedge funds were also taking short volatility bets through more complicated trades, two investor sources told Reuters.

A popular hedge-fund trade played on the difference between the low volatility on the S&P 500 index compared to individual stocks that approached all-time highs in May, according to Barclays research from that time.

Hedge-fund research firm PivotalPath follows 25 funds that trade volatility, representing about $21.5 billion in assets under management of the roughly $4-trillion industry.

Hedge funds tended to bet on a VIX rise, but some were short, its data showed. These lost 10% on Aug. 5 while the total group, including hedge funds that were short and long volatility, had a return of between 5.5% and 6.5% on that day, PivotalPath said.

'DAMPENED VOLATILITY'

Banks are another key player standing in the middle of these trades for their larger clients.

The Bank of International Settlements in its March quarterly review suggested that banks' hedging practices kept Wall Street's fear gauge low.

Post-2008 regulations limit banks' ability to warehouse risk, including volatility trades. When clients want to trade price swings, banks hedge these positions, the BIS said. This means they buy the S&P when it falls and sell when it rises. This way, big dealers have "dampened" volatility, said the BIS.

In addition to hedging, three sources pointed to occasions where banks hedged volatility positions by selling products that allowed the bank to even out its trades, or remain neutral.

Marketing documents seen by Reuters show that Barclays, Goldman Sachs and Bank of America this year were offering complex trade structures, which included both short- and long-volatility positions.

Some, according to the documents, do not have a constant hedge built into the trade to buttress against losses and are protected "periodically," the papers say. This might have exposed investors to higher potential losses as the VIX spiked on Aug. 5.

LONDON (Reuters) - Britain's housing market looks set for a sales bounce in the coming months after the Bank of England cut interest rates and the new government turned its focus to the sector, a survey showed on Thursday.

The Royal Institution of Chartered Surveyors said its measure of expected sales over the next three months was the strongest since January 2020, immediately before the coronavirus pandemic struck Britain.

"The new government's focus on boosting housing development alongside the recent quarter-point base rate cut does appear to have shifted the mood music in the sales market," RICS Chief Economist Simon Rubinsohn said.

"Inevitably, significant challenges lie ahead in delivering on the ambitions around planning reform and it is far from clear that the Bank of England will follow the August move with further easing over the coming months, but, even so, the policy mix is becoming more supportive for the sector," he added.

The overall picture for the housing market brightened slightly last month as mortgage rates fell ahead of the Aug. 1 BoE cut to borrowing costs from their 16-year high.

A measure of new buyer enquiries turned positive for the first time in four months and agreed sales also improved.

But RICS' measure of house price prices in July slipped back to -19 from June's -17. Economists polled by Reuters had expected an improvement to -10.

Other house price data previously released by mortgage lenders Nationwide and Halifax pointed to a pickup in price growth last month.

The picture was bleaker in the rental sector where demand from tenants increased while a measure of supply shrank, suggesting further rental price rises ahead.

Rubinsohn said the findings reflected what he called "an increasingly hostile environment for investment in the sector".

The previous government's delayed plans to tighten no-fault eviction rules have been picked up by the new administration, worrying some landlords, while changes to tax and energy efficiency rules have added to their costs in recent years.

By Martin Coulter

LONDON (Reuters) - Elon Musk has been accused of exacerbating tensions after a week of far-right rioting in Britain, sparking calls for the government to speed up the rollout of laws policing harmful online content.

Misinformation and calls to violence have spread on social media over the past week after far-right and anti-Muslim groups seized on the fatal stabbing of three young girls in the English town of Southport.

As rioters clashed with police in some towns and cities, Musk joined the debate on his X platform, posting that civil war was "inevitable" in Britain. Prime Minister Keir Starmer's spokesperson said there was "no justification" for such comments.

Separately, Starmer warned social media companies that violent disorder whipped up online was a crime "on your premises", while adding there was a "balance to be struck" in handling the firms.

The official responses reflect the difficult situation the government is in.

An Online Safety Bill was passed into law in October but has yet to be implemented. It gives media regulator Ofcom the power to fine social media companies up to 10% of global turnover if they are found in breach of the law, for example by failing to police content inciting violence or terrorism.

But Ofcom is still drawing up guidelines outlining how it will implement the law, with enforcement not expected until early next year. In the wake of recent violence, some are calling for the rules to be rolled out sooner.

Adam Leon Smith, a fellow at industry body BCS, the Chartered Institute for IT, wants Ofcom to start enforcing the Online Safety Act as soon as possible, he told Reuters.

"There must be a tipping point where a foreign billionaire platform owner has to take some responsibility for running a toxic bot network that has become one of the main sources of fake news and misinformation in the UK," he said.

Laws properly governing online safety are long overdue, said Kirsty Blackman, an MP for the Scottish National Party.

"I would back moves for the timetable to be accelerated,” she said. "Requirements should be brought in as soon as possible, particularly for the biggest and highest-risk platforms."

An Ofcom spokesperson said: "We're moving quickly to implement the Online Safety Act so we can enforce it as soon as possible. To do this, we are required to consult on codes of practice and guidance, after which the new safety duties on platforms will become enforceable."

Musk did not immediately respond to requests for comment.

ENFORCEMENT

While those inciting violence online can be prosecuted individually, the government has no way to force social media companies to police their platforms until the Online Safety Bill comes into effect.

On Tuesday, Britain's technology minister Peter Kyle said he had met with TikTok, Meta (NASDAQ:META), Google (NASDAQ:GOOGL) and X to emphasize their responsibility to prevent the spread of harmful content online. The companies did not immediately respond to requests for comment.

Despite this, a number of posts on X actively encouraging violence and racism – seen by Reuters – remain live and have been viewed tens of thousands of times.

At the time of writing, Musk's X posts on the issue have been read by tens of millions of users, according to the site's own metrics.

One post containing misleading information about a Kurdish teenager convicted of rape in Britain has been seen 53 million times. Another, in which he suggested Muslim communities were receiving undue police protection, had been viewed 54 million times.

While such comments themselves might not break the rules around illegal content, allowing direct calls for violence may.

"We would encourage Ofcom to speed up its work on the guidelines, so that X and other social media platforms face financial penalties if they do not remove harmful content," said Iman Atta, director of advocacy group Tell MAMA, which monitors anti-Muslim activity in Britain.

"There is a need to force platforms to take more drastic action against extremism and hate speech," she said.

By Karen Brettell

(Reuters) -U.S. Treasury yields rose on Wednesday after the Treasury Department saw soft demand for a $42 billion sale of 10-year notes and as companies rushed to sell debt as risk appetite improved.

Supply is the main focus this week as traders wait on fresh economic data for further clues on the strength of the U.S. economy.

Yields tumbled to more than one-year lows after Friday’s employment report for July showed an unexpected increase in the unemployment rate, while jobs gains also came in below economists’ forecasts, raising fears of an imminent recession.

Tumbling stock markets partly blamed by traders unwinding popular dollar/yen carry trades, in which they sold the Japanese currency and bought U.S. assets, added to demand for safe haven U.S. debt.

This demand has since ebbed as stocks move higher, but Treasury yields remain well below where they have recently traded, which was seen as denting interest in Wednesday's debt auction.

The 10-year notes sold at a high yield of 3.96%, 3 basis points above where they traded before the sale. Demand was 2.32 times the amount of debt on offer, the weakest since December 2022.

"Investors just weren't willing to pay up for sub-4% 10s," said Vail Hartman, U.S. rates strategist at BMO Capital Markets in New York. "This suggests this move may still have a little bit further to run before dip buyers reemerge in a more meaningful way."

Heavy corporate debt issuance also pushed yields higher.

“You have a lot of issuers who paused on Monday and even maybe held back yesterday just to make sure the coast was clear in terms of how risk assets are going to be received and now are coming to market today,” said Michael Lorizio, senior fixed income trader at Manulife Investment Management in Boston.

By Liz Lee and Ellen Zhang

BEIJING (Reuters) - China's exports climbed 7.0% in July from year earlier, a slower pace of growth than in June and missing expectations, but imports rose 7.2%, customs data showed on Wednesday.

That compares with forecasts for 9.7% growth in exports and a 3.5% increase in imports from a Reuters poll of economists.

It also compares with June figures that showed an 8.6% expansion in exports and a 2.3% contraction in imports.

The world's second-largest economy has struggled to gain momentum despite government efforts to stimulate domestic demand following the pandemic. A protracted property slump and fears about job security have dragged heavily on consumer confidence.

By Liz Lee and Ellen Zhang

BEIJING (Reuters) - China's exports climbed 7.0% in July from year earlier, a slower pace of growth than in June and missing expectations, but imports rose 7.2%, customs data showed on Wednesday.

That compares with forecasts for 9.7% growth in exports and a 3.5% increase in imports from a Reuters poll of economists.

It also compares with June figures that showed an 8.6% expansion in exports and a 2.3% contraction in imports.

The world's second-largest economy has struggled to gain momentum despite government efforts to stimulate domestic demand following the pandemic. A protracted property slump and fears about job security have dragged heavily on consumer confidence.