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ICBC Financial Market Daily Review - February 5, 2018

I. Yesterday’s News
International News

1. The U.S. dollar rose and yields on the benchmark 10-year U.S. Treasury note shot up to a four-year high on Friday, after U.S. data showing strong U.S. jobs numbers and the strongest annual wage growth in more than 8-1/2 years rattled investors who fear the Federal Reserve might hasten to increase interest rates to stem inflation. Stock markets plunged with the Dow Jones Industrial Average swooning almost 666 points, for its biggest daily percentage loss in 20 months. But investors were not convinced the dollar’s advances would last past the day, and expect that the bull market is not over yet.

2. U.S. job growth surged in January and wages increased further, recording their largest annual gain in more than 8-1/2 years, bolstering expectations that inflation will push higher this year as the labor market hits full employment. Nonfarm payrolls jumped by 200,000 jobs last month after rising 160,000 in December, the Labor Department said on Friday. The unemployment rate was unchanged at a 17-year low of 4.1 percent. Average hourly earnings rose 0.3 percent in January, boosting the year-on-year increase in average hourly earnings to 2.9 percent, the largest rise since June 2009, from 2.7 percent in December. The robust employment report underscored the strong momentum in the economy, raising the possibility that the Federal Reserve could be a bit more aggressive in raising interest rates this year.

3. The European Central Bank is normalising policy and whether it ends asset buys in September or winds them down gradually is not an existential question, French central bank chief Francois Villeroy de Galhau said on Friday. "One shouldn’t focus excessively on the sole instrument of monthly net asset purchases: whether we end them in September or taper them somewhat more gradually is not a deep existential question," Villeroy said.

4. Europe is not ready for another economic downturn and the next crisis could test the limits of the European Central Bank, potentially pushing interest rates much deeper into negative territory, ECB board member Benoit Coeure said.

5. British Prime Minister Theresa May said on Friday that a Brexit transition period will be agreed with the European Union in seven weeks as she tries to ease concerns that a deal may take longer to reach.

6. British Prime Minister Theresa May reached deals worth more than 9.3 billion pounds ($13.26 billion) during her visit in China, which will create over 2,500 jobs across the United Kingdom, the British government said.

Domestic News

7. China’s overall leverage ratio is lower than developed countries with its debt level controllable, an expert from Chinese Academy of Social Sciences (CASS) said in People’s Daily. But the figures in some key sectors rose too fast, highlighting structural problems, in which deleverage is needed accordingly, the report added.

8. Swiss bank UBS has upgraded its China GDP growth outlook in a research note to 6.6 percent for 2018 and to 6.4 percent for 2019 respectively, citing stronger momentum in China's exports and service sector. The Chinese currency, the renminbi or the yuan, will not be used as a tool to respond to U.S, trade measures, and the yuan’s prices is revised down to 6.2 per dollar from 6.4 per dollar at the end of 2018, the report added.

9. The number of sale and purchase agreements for all building units received for registration last month decreased by 1.3 percent over December 2017, as developers slowed their pace in launching new residential units, according to Hong Kong Land Registry statistics. The overall transactions, however, rose 60 percent from the previous year.

II. Market Overview
1. Global Market

The U.S. dollar rose on Friday against a number of currencies including the Japanese yen and the euro after strong national jobs data, but the greenback later pared gains and investors were not convinced advances would last past the day. The dollar index, tracking the unit against a basket of major currencies, was up 0.58 percent at 89.185 at 1955 GMT. On the day, the greenback scored its best daily performance since Oct. 26. Against the yen, the dollar reached its highest since Jan. 23, and was last up 0.79 percent at 110.25. After the jobs data, the euro fell against the dollar. While it pared losses during the day, it did not make up its decline and last fell 0.46 percent to $1.2451. Sterling was at $1.4128, down 0.95 percent on the day.

2. Home Market
China's yuan rose against the U.S. Dollar in expanded volume on Friday afternoon, crossing over 6.28 during one point and hitting the highest since the currency reform on August 11, 2015 along with the official midpoint rates. Yuan is expected to keep appreciation in the near term as it is allowed by the regulator.

Precious Metals

Gold prices declined on Friday as the U.S. dollar ticked up against the euro after U.S. jobs data showed a robust rise in jobs and wages and 10-year U.S. Treasury yields peaked. Spot gold dropped 1 percent at $1,335.26 an ounce by 1834 GMT, while U.S. gold futures for April delivery settled down $10.60, or 0.8 percent, at $1,337.30. Gold is set to end this week 1.1 percent lower, after rising in six out of the last seven weeks.

1.Crude Oil

Oil prices fell on Friday as the dollar surged following strong U.S. jobs numbers, though compliance with output cuts by OPEC and rising global demand kept much of the early year oil rally in place. U.S. West Texas Intermediate (WTI) crude settled down 35 cents to $65.45 a barrel, after earlier losing more than 1 percent. Brent lost $1.07, or 1.5 percent, to $68.58 a barrel. The deep decline in Brent narrowed the gap between it and WTI to its narrowest since August.

2.Base Metals

Lead prices hit 6-1/2 year highs on Friday on worries about shortages after key Chinese mines shut for the winter. Benchmark lead on the London Metal Exchange hit a peak of $2,685 per tonne, the strongest since July 29, 2011, before closing 0.6 percent firmer at $2,680. Three-month LME copper shed 1 percent to finish at $7,045 a tonne.

U.S. Treasuries
1. U.S. Bonds

A strong payrolls report on Friday raised concerns the Federal Reserve might hasten to increase interest rates to stem inflation, compounding a bond market rout that pushed the yield on the U.S. 10-year Treasury to a four-year high. The yield on the Benchmark 10-year Treasury reached a four-year peak at 2.852 percent. Earlier, it was 2.841 percent, up 6.8 basis points on the day. The yield spread between two-year and 10-year Treasuries widened to 69 basis points, the most since mid-November after hitting a decade low nearly a month ago.

2. Chinese bonds

China’s treasury bond futures pulled back after a two-day rally, while cash bonds were resilient after U.S. Treasury bond yields rose sharply overnight. Market liquidity remained eased, but is unlikely to sustain after the China’s New Year. Further strength still need some drivers amid heavy regulation.

Stock Market
1. U.S. Equities

Worries about the impact of a tightening job market on the prospects for inflation and a surge in bond yields sent investors fleeing equities on Friday, with the Dow Jones Industrials Average swooning almost 666 points, for its biggest daily percentage loss in 20 months. The Dow Jones Industrial Average fell 665.75 points, or 2.54 percent, to 25,520.96, the S&P 500 lost 59.85 points, or 2.12 percent, to 2,762.13 and the Nasdaq Composite dropped 144.92 points, or 1.96 percent, to 7,240.95.

2. Hong Kong Equities

Hong Kong's Hang Seng Index ended Friday marginally down, but posted its biggest weekly loss in two months, as rising bond yields triggered volatility in global equities. At close of trade, the Hang Seng index was down 40.31 points or 0.12 percent at 32,601.78. The Hang Seng China Enterprises index rose 0.78 percent to 13,538.66. For the week, the Hang Seng lost 1.7 percent, its biggest weekly fall in two months. The sub-index of the Hang Seng tracking energy shares rose 4.46 percent while the IT sector dipped 0.91 percent, the financial sector was 0.18 percent lower and the property sector dipped 0.51 percent.

3. China Equities

Chinese stocks reversed the losing course to close higher on Friday, snapping a four-day losing streak, lifted by energy shares and steadied telecom, media and computer sectors. Trading appetite declined ahead of the incoming China’s New Year. Major indexes are expected to remain rangebound at lows, and regain steam after the holidays.