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ICBC Financial Market Daily Review - January 18, 2018
 

I. Yesterday’s News
International News

1. President Donald Trump said on Wednesday the United States was considering a big “fine” as part of a probe into China’s alleged theft of intellectual property, the clearest indication yet that his administration will take retaliatory trade action against China. In an interview with Reuters, Trump and his economic adviser Gary Cohn said China had forced U.S. companies to transfer their intellectual property to China as a cost of doing business there. “We’re talking about big damages. We’re talking about numbers that you haven’t even thought about,” Trump said. Trump said he would be announcing some kind of action against China over trade and said he would discuss the issue during his State of the Union address to the U.S. Congress on Jan. 30.

2. A 20-nation meeting on North Korea agreed on Tuesday to consider imposing unilateral sanctions on Pyongyang that go beyond those required by U.N. Security Council resolutions, the United States and Canada said in a joint statement. The meeting also agreed to support dialogue between the two Koreas“ in hopes that it leads to sustained easing of tensions”, the statement added. Japanese Foreign Minister Taro Kono said that the world should not be naive about North Korea's "charm offensive" in engaging in talks with the South. Tillerson said North Korea must not be allowed "to drive a wedge" through allied resolve or solidarity.

3. The euro's recent strength against the U.S. dollar is 'not helpful', European Central Bank policymaker Ewald Nowotny said on Wednesday when asked about the currency's recent gains. Nowotny added that the ECB had no exchange rate target so it would monitor the developments. The euro fell on Wednesday, pulling back from a three-year high above $1.23 after his comments. The speed of the euro's rise in early 2018 - up more than 3 percent in the last two weeks - has prompted comments from ECB officials, highlighting growing concerns, according to analysts. Even after the ECB's decision to cut its bond purchases in half, starting from January, ECB vice president Constancio said he did not rule out that monetary policy would still continue to be "very accommodating for a long time". “I am concerned about sudden movements which don’t reflect changes in fundamentals,” Constancio said when asked about the recent strength of the single currency.

4. The Bank of Canada raised interest rates on Wednesday, as expected, as job growth and firmer inflation outweighed the cloud of NAFTA uncertainty, but the head of the central bank admitted the decision was not a no-brainer. As it raised rates for the third time in seven months, taking borrowing costs to their highest level since 2009, the bank accomplished the so-called dovish hike that many analysts had predicted. While more rate hikes are probably warranted, some continued monetary policy accommodation will likely be needed, the bank said, signaling it will not rush to return rates to more normal levels. The future of NAFTA was the most significant downside risk cited by the bank in an otherwise bullish report on the outlook for Canada's economic growth. The Canadian dollar weakened modestly after the hike as investors realized that markets may have gone too far in pricing in more or faster rate hikes than the bank is contemplating.

5. Bitcoin extended its sharp tumble of the past 24 hours, skidding more than seven percent on Wednesday in a rapid downturn in fortunes as investors were spooked by fears regulators might clamp down on an asset whose value has skyrocketed in the past year. It led the fall in cryptocurrencies, although others such as Ethereum and Ripple, have also slid sharply this week after reports South Korea and China could ban trading, sparking worries of a wider regulatory crackdown.

Domestic News

6. Wen asked about how to prevent financial risks, Guo Shuqing, the head of the China Banking Regulatory Commission, said, “To this end, [we] need to vigorously reduce corporate debt ratios, contain leverage ratios in the household sector, strictly standardise cross-sector financial products and continue to dismantle shadow banking. [We will] continue to suppress the tendency for real estate bubbles to form, and actively cooperate with local government to combat hidden debt.”

7. The average debt-to-asset ratio of China's central SOEs stood at 66.3 percent at the end of 2017, 0.4 percentage point lower than the beginning of the year, according to data from the State-owned Assets Supervision and Administration Commission (SASAC). Of the 98 central SOEs monitored, 60 saw the figure fall by more than 1 percent. By 2020, SASAC aims to cut the ratio by another 2 percentage points.

8. The Chinese government will no longer be the monopolist of residential lands, the Minister of Land and Resources said. The move will increase land supply and rental housing development, helping in curbing housing prices and bringing real estate’s commodity attribute back from financial attribute, People’s Daily said.

II. Market Overview
FX
1. Global Market

The index that tracks the dollar against a basket of currencies was up 0.26 percent at 90.629. The Canadian dollar rose 0.17 percent to C$1.2411. The euro was down 0.29 percent at $1.2223, pulling back from a three-year high above $1.23 as some European Central Bank officials voiced worries about the currency's strength. The outlook for the dollar, however, remains dour on the view that other central banks besides the Federal Reserve are moving away from the ultra low-rate stance and unconventional tools. The Canadian dollar weakened after the Bank of Canada struck a cautious tone along with an expected rate hike on Wednesday. Digital currencies suffered another day of heavy losses on worries about a widening regulatory crackdown.

2. Home Market

China's yuan pared some gains against the U.S. dollar after opening higher slightly on Wednesday morning, while the central bank's midpoint rates renewed a 25-month high. The dollar index steadied, cooling down yuan’s bullish sentiment and boosting appetite for forex. In the near term, the dollar is expected to remain subdued, while yuan is expected to extend gains, traders said.

Precious Metals

Gold prices hovered near four-month highs on Wednesday as the U.S. dollar slipped against a basket of currencies. Longer-term, gold will be supported by risk that global share prices could fall from record highs and strong growth around the world could stoke inflation. Spot gold was last down at $1,327.65 an ounce from $1,338.54. U.S. gold futures for February delivery settled up $2.10, or 0.2 percent, at $1,339.20 per ounce.

Commodities
1.Crude Oil

Oil prices ended higher on Wednesday ahead of the release of U.S. government data that was expected to show a ninth straight weekly drawdown in crude inventories. Brent futures settled 23 cents higher at $69.38 a barrel while U.S. West Texas Intermediate (WTI) crude gained 24 cents to $63.97 per barrel.

2.Base Metals

Copper resumed its decline on Wednesday as some speculators took profits from a December rally and others went short after prices broke below technical levels. Benchmark copper on the London Metal Exchange closed 0.6 percent down at $7,034 a tonne. Three-month LME aluminium rose 0.1 percent to end at $2,192 a tonne. LME nickel dropped 1.1 percent to finish at $12,415 a tonne, while galvanising metal zinc also declined 1.1 percent to $3,367.50. Lead fell 0.3 percent to close at $2,547 while tin added 0.1 percent to $20,495.

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

The U.S. yield curve flattened to a decade-low spread between 5-year and 30-year yields and two-year Treasury yields hit a nine-year high on Wednesday on expectations the Federal Reserve will continue to tighten monetary policy this year. At 43.7 basis points, the spread between 5-year and 30-year yields hit its lowest level since August 2007. At 1908 GMT, 10-year Treasury yields were 2.561 percent, above Tuesday's close at 2.544 percent. Two-year yields were 2.039 percent, after hitting 2.047 percent earlier in the day, its highest since September 2008.

2. Chinese bonds

Treasury bond futures in China’s interbank bond market swung in a tight range, while cash bonds inched up in a see-saw trading on Wednesday morning. Cash bonds continued tight rangebound amid lackluster outlook and concerns over tighter regulation. Only the auction of five-year T-bonds showed solid demand.

Stock Market
1. U.S. Equities

U.S. stocks jumped on Wednesday and the Dow closed above 26,000 for the first time as investors' expectations for higher earnings lifted stocks across sectors. The Dow also hit an all-time high in intraday trading. The S&P 500 posted a record closing high. The Dow Jones Industrial Average rose 322.79 points, or 1.25 percent, to 26,115.65, the S&P 500 gained 26.14 points, or 0.94 percent, to 2,802.56 and the Nasdaq Composite added 74.59 points, or 1.03 percent, to 7,298.28.

2. Hong Kong Equities

Hong Kong's Hang Seng Index rose to a fresh closing peak on Wednesday, aided by continued strength in index heavyweight Hong Kong Exchanges and Clearing (HKEx). HKEx jumped more than 2 percent to 2-1/2-year highs. At close of trade, the Hang Seng index was up 78.66 points or 0.25 percent at 31,983.41. The Hang Seng China Enterprises index rose 0.64 percent to 12,868.78.

3. China Equities

Chinese stocks rose in expanded turnover, renewing an over two-month high on Wednesday, led by banks and brokers. Medium and small caps also rebounded across the board, lifting key indexes to a two-year peak. The benchmark Shanghai Composite Index closed up 8.08 points or 0.24 percent at 3,444.67. The trading volume of Shanghai A-shares surged almost 20 percent to 316.3 billion yuan from 266.4 billion yuan. The Hushen 300 index ended at 4,248.12, down 0.24 percent.


(2018-01-18)
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