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ICBC Financial Market Daily Review - September 20, 2018
 

I. Yesterday’s News
International News

1. The United States is ready to engage in talks with North Korea "immediately," U.S. Secretary of State Mike Pompeo said on Wednesday, with the aim of completing North Korea's denuclearization by January 2021. Pompeo's announcement demonstrated the Trump administration's apparent eagerness to seize on commitments made by North Korean leader Kim Jong Un at a summit with South Korea, even as critics said they did little to put Pyongyang on the course for irreversible denuclearization. Pompeo said he had invited North Korean Foreign Minister Ri Yong Ho to meet in New York next week where they are both due to attend the U.N. gathering of world leaders. The United States has also invited North Korean representatives to meet with the U.S. special representative for North Korea, Stephen Biegun, in Vienna at the "earliest opportunity", Pompeo said.

2. Prime Minister Theresa May appealed directly to fellow European leaders on Wednesday to drop "unacceptable" Brexit demands that she said could rip Britain apart, and urged the bloc to respond in kind to her "serious and workable" plan. EU officials again said Britain had to move its own position over what has become known as the Irish backstop - how to avoid erecting border posts between the British province and EU member Ireland - as well as on future economic cooperation after Brexit day in March. A government source suggested Britain would come up with other proposals to try to reach agreement on Northern Ireland "in due course", but May has so far been reluctant to move from her Chequers plan, hashed out at her country home in July.

3. The German government is taking steps to counter a surge in Chinese bids for stakes in German technology companies, including the creation of a billion-euro fund that could rescue such firms in financial trouble, a government source told Reuters. Senior officials are also working on changes to foreign trade regulations to ensure that key technologies remain in German hands. These would include government reviews of foreign acquisitions of stakes in companies below the current 25-percent threshold, and expanding which types of purchases must be examined. Further details were not immediately available about how the instrument would be funded.

4. U.S. homebuilding increased more than expected in August, a positive sign for the housing market which has underperformed the broader economy amid rising interest rates for home loans. Housing starts rose 9.2 percent to a seasonally adjusted annual rate of 1.282 million units in August, the Commerce Department said on Wednesday. Building permits, however, fell 5.7 percent to a rate of 1.229 million units. The U.S. housing market has underperformed a robust economy, with economists blaming the slowdown on low inventories and rising mortgage rates.

5. Brazil's central bank on Wednesday held interest rates at an all-time low of 6.50 percent but said it could gradually raise them if the outlook worsens, highlighting how the upcoming presidential vote is increasingly weighing on monetary policy. Concern about the elections has already helped depress the Brazilian real to near record lows and could soon trigger the first interest rate rise in three years depending on the result. "Stimulus will begin to be removed gradually if the outlook for inflation at the relevant horizon for the conduct of monetary policy and/or its balance of risks worsen," the bank said in its policy statement.

Domestic News

6. The direct economic impact on China of the trade war with the United States appears limited, though it could rapidly prompt China's exporters to switch away from the US market, the former Central Bank governor in Beijing said on Wednesday. Zhou Xiaochuan expected China's economy to roughly match last year's growth rate of 6.5 percent in 2018. Zhou played down the direct economic damage to China from the trade clash, which he said had been estimated at 0.2-0.8 percent of GDP, but said the impact of the conflict could be deeper in terms of business confidence.

7. The National Development and Reform Commission recently signed a cooperation agreement with the National Development Bank to support the growth of the digital economy, with plans to invest 100 billion yuan (US$14.6 billion) over the next five years to support the sector and promote the construction of big data, Internet of Things, cloud computing and new smart cities. The NDRC said its financial agreement with the CDB aims at heeding calls from the state cabinet for more financial support to China's "digital economy". The investments will go to key projects on big data, IoT, cloud computing, smart cities and the digital Silk Road, according to the agreement.

8. China's Premier Li Keqiang said that China has ample policy tools to cope with difficulties and challenges amid significant changes in external environment, but the difficulties in maintaining steady growth were increasing. China is confident to maintains steady economic growth as the fundamentals remain healthy, he added.

9. China will implement an innovation-driven development strategy to create a fair-play market environment and innovation-friendly atmosphere, solve the key problems in the development of SMEs to ensure fair treatment for all enterprises in the economy, and strengthen protection of intellectual property to facilitate corporate development, vice premier Liu He said.

II. Market Overview
FX
1. Global Market

The U.S. dollar edged lower against the euro and fell to the lowest in nearly three weeks against the risk-sensitive Aussie on Wednesday, as worries over a trade row between China and the United States eased. The euro was 0.14 percent higher against the greenback. The Australian dollar was 0.69 percent higher , the highest since Aug. 30. The dollar was 0.15 percent lower against the yen. The Canadian dollar strengthened to its highest in nearly three weeks against its U.S. counterpart, before paring most gains. Sterling was nearly flat against the dollar, having erased most early gains after The Times reported that May had rejected an improved offer from the EU on to solve the Irish border issue.

2. Home Market

China's yuan currency rallied almost 150 bps against the dollar on Wednesday, while the guidance midpoints rates slipped to an almost four-week low. Global FX market was little changed overnight, with the dollar index inching higher, as market continued to priced in the impact of rising trade friction between the world’s two largest economies. Yuan is unlikely to sharply rise or fall against the background. China’s counter-measures shall be focused.

Precious Metals

Gold rose on Wednesday as the dollar weakened, indicating investors are starting to worry about the impact of the U.S.-China trade war on the U.S. economy, luring some buyers back into precious metals investments. Spot gold climbed 0.5 percent to $1,203.58 per ounce. U.S. futures for December delivery settled up $5.40, or 0.5 percent, at $1,208.30 per ounce.

Commodities
1.Crude Oil

U.S. oil futures surged nearly 2 percent on Wednesday as they were bolstered by a fifth weekly crude inventory drawdown and strong domestic gasoline demand amid ongoing global supply concerns over U.S. sanctions on Iran that come into force in November. U.S. crude futures settled up $1.27, or 1.8 percent, at $71.12 a barrel. Brent futures also rose but the gains were more muted, as the global benchmark ended 37 cents, or 0.5 percent, higher at $79.40 a barrel.

2.Base Metals

Copper jumped to its highest in three weeks on Wednesday, boosted by a weaker dollar after a new round of U.S.-China trade tariffs proved not as costly as expected. Benchmark copper on the London Metal Exchange (LME) surged to its highest since Aug. 29 at $6,145 a tonne, ending 0.6 percent higher at $6,121. Zinc, meanwhile, closed 3 percent higher at $2,434 per tonne, its biggest advance in over a month. Lead tumbled 2.4 percent to $2,025 per tonne, the first decline in six trading sessions.

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

The U.S. 10-year Treasury note yield hit fresh four-month highs on Wednesday, nearing its 2011 peak as the market shrugged off trade fears and mounting inflation and strong economic data raised expectations of a hawkish Federal Reserve meeting next week. The day's highs - the 10-year at 3.092 percent and the 30-year at 3.248 percent - were hit early in the North American session after a report that U.S. homebuilding increased more than expected in August. The three-day rally in longer-dated maturities steepened the yield curve, with the spread between 2-year and 10-year yields hitting a high of 27.6 basis points. The spread between the 5- and 30-year yields hit a high of 27.9 basis points.

2. Chinese bonds

Yields of China’s cash bonds pared gains as safe-haven sentiment receded after both U.S. and China will levy tariffs on imported goods, and stocks firmed in anticipation of rising infrastructure investment. Investors shall be wary of the risk of less-than-expected policy stimulus as shown by Premier’s remarks.

Stock Market
1. U.S. Equities

The S&P 500 and the Dow Jones industrial average rose on Wednesday, with the Dow hitting its highest closing level since late January as rising Treasury yields boosted the financial sector and trade worries subsided. The Dow Jones Industrial Average rose 158.8 points, or 0.61 percent, to 26,405.76, the S&P 500 gained 3.64 points, or 0.13 percent, to 2,907.95 and the Nasdaq Composite dropped 6.07 points, or 0.08 percent, to 7,950.04.

2. Hong Kong Equities

Hong Kong shares rose to a two-week high on Wednesday, joining a broad rally in Asian markets, as investors saw limited impact from an escalating Sino-U.S. trade war, and bet on more stimulus from Beijing to bolster growth. The Hang Seng index rose 1.2 percent to 27,407.37 points, while the China Enterprises Index gained 1.8 percent to 10,741.69 points.

3. China Equities

China stocks rebounded strongly for the second straight day in expanded turnover on Wednesday, lifted by heavyweights and middle and mall caps. The rally is expected to extend in the near term. But investors shall keep an eye on possible divergence as rising fund rates may tighten liquidity. The Shanghai Composite index gained 30.90 points or 1.14 percent to 2,730.85. The trading volume rose to 140 billion yuan from previous session’s 112.9 billion yuan.


(2018-09-20)
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