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ICBC Financial Market Daily Review - October 18, 2018
 

I. Yesterday’s News
International News

1. Federal Reserve policymakers are largely united on the need to raise borrowing costs further, minutes from their most recent policy meeting show, despite U.S. President Donald Trump's view that interest rate hikes have already gone too far. The broadly united front could bolster expectations the central bank will raise rates a fourth time this year in December, but the minutes also show the committee remains split on how much further to raise rates next year. Trump said the central bank is his "biggest threat," and last week calling the Fed "crazy," "loco," "ridiculous," and "too cute." Though the minutes did not refer to any of Trump's criticism, its message of further rate increases suggests that policymakers are not fazed by it. The dollar rose, U.S. Treasury yields gained, and U.S. stocks regained most ground after the minutes.

2. The U.S. government on Wednesday refrained from naming China or any other trading partner as a currency manipulator, as it leans on import tariffs to try to cut a trade deficit with China. In its semi-annual currency report, the U.S. Treasury Department said a recent depreciation of China's yuan currency will likely exacerbate the U.S. trade deficit, but U.S. officials found Beijing appeared to be doing little to directly intervene in the currency's value. The Treasury also said it has was keeping China, India, Japan, Germany, South Korea and Switzerland on a monitoring list for extra scrutiny.

3. U.S. Commerce Secretary Wilbur Ross said in an interview with CNBC on Wednesday that trade negotiations with China appear to have taken a brief pause, and he damped expectations that an agreement would come out of an upcoming G20 meeting. "In any negotiation there are ups and downs, there are hiatuses, and there are much more active periods. So it appears as though we may be in something of a hiatus now," he said. Severe damage could be done to the multilateral trading system unless political steps are taken to solve a "serious" crisis in global trade, Roberto Azevedo, director-general of the World Trade Organisation, said on Wednesday.

4. U.S. homebuilding dropped more than expected in September as construction activity in the South fell by the most in nearly three years, likely held down by Hurricane Florence. Other details of the report published by the Commerce Department on Wednesday were also soft. Building permits declined to their lowest level in almost 1-1/2 years and homebuilding completions were the fewest since November 2017. Housing starts fell 5.3 percent to a seasonally adjusted annual rate of 1.201 million units last month. The housing market, which has been a weak spot in a robust economy, has been hobbled by an acute shortage of properties for sale, higher home prices and rising mortgage rates. Residential investment contracted in the first half of the year and the latest data supports economists' expectations that housing remained a drag on economic growth in the third quarter.

5. UK Prime Minister Theresa May spent her talking time at the EU leadership summit in Brussels trying to pep talk European Union leadership that a Brexit deal can still be made, even as the EU begins to gear up for serious preparations for a hard Brexit scenario. May was given a 15-minute slot to speak to the bloc’s other 27 leaders before they sat down to dinner without her and discussed preparations for a possible no-deal Brexit under which Britain leaves the European Union without a treaty to cushion the disruption to businesses across the continent. “We have shown we can do difficult deals together constructively. I remain confident of a good outcome,” she told the leaders, according to a British official.

Domestic News

6. China's total social financing (TSF), a broad measure of credit and liquidity in the economy, rose to 2.21 trillion yuan in September, up 276.8 billion yuan from August but down 39.7 billion yuan from the same period last year, data from the central bank showed. The September figure for total social financing included 738.9 billion yuan worth of special purpose bonds. China’s new bank loans in September totalled 1.38 trillion yuan, higher than economists’ forecast of 1.35 trillion in a Reuters poll. Broad M2 money supply grew 8.3 percent in September from a year earlier, in lines with Reuters’ estimates.

7. The Chinese government press sought to combat reports of rising domestic pessimism about the country’s trade war with the United States on Wednesday, telling readers the conflict would have little impact on the nation’s current or future prospects. According to Wednesday’s People’s Daily editorial, the ongoing trade war’s impact on the economy will remain within “a controllable range”, and can be gradually relieved in the long run.

8. Chinese exporters are mostly confident they can weather a trade war with the United States, but worry about collateral damage it might cause throughout the global economy, according to a Reuters poll of participants at China's largest trade fair. Representatives from 91 firms involved in sectors ranging from industrial machinery to home appliances, motorcycles and new energy vehicles were surveyed during the Canton Import and Export Fair on Oct 15-16. Just over 60 percent said they were worried about the trade war.

9.China’s renown economist Qiu Xiaohua said that China’s economic growth is expected to slow down to below 6 percent in the first half of next year amid more severe environment, but would lift the whole-year figure to around 6 percent as measures to stimulate domestic demand start to take effect in the July-December period next year. The trade war with the United States will not be short-lived, he added.

10. Off-balance-sheet borrowings by Chinese local governments could be as high as 40 trillion yuan ($6.0 trillion), S&P Global Ratings said in a report. To curb the debt iceberg, the amount of local government hidden debt and their solvency shall be made clear.

II. Market Overview
FX
1. Global Market

The U.S. dollar index rose to its highest levels in a week on Wednesday after minutes from the Federal Reserve’s September meeting affirmed expectations that the U.S. central bank is likely to continue raising interest rates. Every Fed policymaker backed raising interest rates last month and also generally agreed borrowing costs were set to rise further. The dollar index hit session highs after the minutes were released, although the bulk of Wednesday’s rally came before the news. The dollar index gained 0.49 percent to 95.510 after earlier reaching 95.562, the highest since Oct. 10. Sterling weakened after the European Union's chief Brexit negotiator, Michel Barnier, said on Wednesday much more time was needed to secure an exit deal for Britain.

2. Home Market

China’s yuan fell under water after opening higher against the dollar in the morning, while the midpoint rates posted a two-day winning streak. The dollar index steadied overnight, triggering bargain-hunting and weighing on yuan. Support can be found at around 6.93 per dollar in the near term, with focus on the minutes from the Federal Reserve’s September meeting due at night.

Precious Metals

Gold prices edged lower on Wednesday as the U.S. dollar strengthened after minutes from the Federal Reserve's September meeting cemented expectations for more interest rate hikes by the U.S. central bank. Spot gold was down at $1,222.28 per ounce. U.S. gold futures settled down $3.6, or 0.29 percent, at $1,227.4 an ounce.

Commodities
1.Crude Oil

Oil prices fell on Wednesday, with U.S. futures settling below $70 a barrel for the first time in a month, after U.S. crude stockpiles rose 6.5 million barrels, almost triple what analysts had forecast, while exports dropped. Oil had been rising this week on worries about Iranian sanctions and tensions between the United States and Saudi Arabia after the death of Saudi journalist Jamal Khashoggi. U.S. crude oil slumped $2.17, or 3 percent, to settle at $69.75 a barrel. Brent crude also dipped below $80 a barrel but ended at $80.05, $1.36 or 1.7 percent lower. The global benchmark is trading nearly $7 below a four-year high of $86.74 reached on Oct. 3.

2.Base Metals

Copper prices held steady on Wednesday as better than forecast Chinese lending data signalling solid economic growth in the world's biggest metals consumer was offset by signs that a supply squeeze in China was receding. Aluminium meanwhile fell after a second day of large inflows of metal into London Metal Exchange warehouses. Benchmark copper on the London Metal Exchange (LME) closed down 0.1 percent at $6,219 a tonne. LME aluminium ended down 0.6 percent at $2,022 a tonne.

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

U.S. Treasury yields rose on Wednesday as the Federal Reserve's minutes on its meeting last month showed all policy makers agreed to raise key interest rates for a third time in 2018 with many open to further rate hikes. Shorter-dated yields ticked up a bit more than longer-dated yields after the release of the Fed Sept. 25-26 minutes, briefly flattening the yield curve. The move faded as most traders still expect the Fed to stick to gradual rate increases in an effort to keep the U.S. economy from overheating. The benchmark 10-year Treasury yield was 3.184 percent, up near 3 basis points from late Tuesday. The 30-year yield was 3.354 percent, up 2 basis points.

2. Chinese bonds

Cash bonds in China’s interbank market steadied ahead of the release of financial report and more economic data. Liquidity remained ample despite the central bank stopped market operations for the 13th consecutive day in the open market. But cash bonds were little changed. Institutional investors were waiting for more clues.

Stock Market
1. U.S. Equities

Wall Street's major indexes edged lower after a choppy session on Wednesday after the Federal Reserve showed broad agreement on the need to raise borrowing costs further, cementing investor concerns. The Dow Jones Industrial Average fell 91.74 points, or 0.36 percent, to 25,706.68, the S&P 500 lost 0.71 points, or 0.03 percent, to 2,809.21 and the Nasdaq Composite dropped 2.79 points, or 0.04 percent, to 7,642.70.

2. Hong Kong Equities

The Hong Kong stock market was closed on Wednesday for public holiday.

3. China Equities

China stocks rose 0.60 percent or 15.28 points to 2,561.61 on Wednesday, bouncing off a four-year low hit during the session. Sharp volatility was seen in a seesaw trading after Wall Street surged overnight. The oversold software, chip and media sectors led the rally, while natural gas and oil names were subdued. More individual stocks collapsed during the session, possibly due to squaring of collateral bets or exits of leverage capital. The Shanghai Composite Index is expected to remain weak range-bound with sector rotation picking up.


(2018-10-18)
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