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ICBC Financial Market Daily Review-August 11, 2017

I. Yesterday's News
International News
1. President Donald Trump warned North Korea again on Thursday not to strike Guam or U.S. allies, saying his earlier threat to unleash "fire and fury" on Pyongyang if it launched an attack may not have been tough enough. After North Korea disclosed plans to fire missiles over Japan to land near the U.S. Pacific territory of Guam, Trump said the move would prompt "an event the likes of which nobody's seen before." But he sidesteps question on launching pre-emptive attack, and pressed China to do more.

2. U.S. producer prices unexpectedly fell in July, recording their biggest drop in nearly a year and pointing to a further moderation in inflation that could delay a Federal Reserve interest rate hike. The Labor Department said its producer price index for final demand slipped 0.1 percent last month, weighed by decreasing costs for services. That was the largest decline since August 2016 and reversed June's 0.1 percent gain. U.S. Treasury yields rose after the data, boosted by safe-haven demand on escalating tensions between U.S. and North Korea. Rates futures priced in a 42 percent chance of a rate hike in December, from a nearly 60 percent a month ago.

3. New York Federal Reserve President William Dudley said in a speech that he expects sluggish U.S. inflation to rise over the next several months, reinforcing the Fed's gradual policy-tightening plan. Yet Dudley said the declining dollar would push up import prices, and eventually push (month-over-month) inflation up. That won't "drop out" of annual readings for six to 10 months, he added.

4. OPEC forecast higher demand for its crude oil in 2018 due to rising global consumption and slower supply growth from rivals, although another jump in the group's output suggested the market will remain in surplus despite efforts to rein in production. In a monthly report on Thursday, the Organization of the Petroleum Exporting Countries said the world would need 32.42 million barrels per day (bpd) of its crude next year, up 220,000 bpd from the previous forecast. But the 14-country producer group also said its oil output in July came in above the demand forecast, led by gains in Libya and Nigeria.

5.British industrial output unexpectedly picked up in June after oil producers delayed normal seasonal maintenance, but falling car production and a slide in construction bode poorly for future months. Industrial output jumped by 0.5 percent on the month. In June alone, Britain's deficit in goods trade with the rest of the world widened to 12.7 billion, while goods export volumes dropped in their biggest fall in a year. Looking at the second quarter, exports were 5.0 percent higher than last year. The Office for National Statistics said nothing in Thursday's data pointed to a material change in its earlier estimate.

Domestic News
6. China's yuan's recent rally underscored government's statement that “there is no more market basis for persistent yuan depreciation”, suggesting a return to two-way volatility at the key mark of 6.6. Yuan rose for the fourth consecutive day, hitting a 11-month high, and reversing the the phase of heavy depreciating pressure since yuan's exchange rate reform two years ago. But neither one-way appreciation nor depreciation mark the birth of a mature market. It would be normal for two-way yuan volatility to heighten in future.
Traders said, a weak dollar, plus corporate dollar sales or profit-taking or stop-loss by individuals contributed to yuan's recent rally. A sustained one-way rally might trigger reverse repo by the central bank when setting midpoints, making 6.60 hard to cross over.

7. China's top aluminum foil producers are preparing a legal defense challenging a preliminary U.S. ruling on Wednesday that would impose hefty penalties on imports from the world's top producers, two sources familiar with the matter said. Loften Aluminum, China's top foil exporter to the United States, is joining 11 other firms to fight the ruling, the first such case since the inauguration of U.S. President Donald Trump, an official at the company said on condition of anonymity. The China Nonferrous Metals Industry Association (CNIA) is leading the charge on the case, which will be filed with the U.S. International Trade Commission, a CNIA official said.

8. China's outbound investment is overall healthy, but there till exist some blind M&As and asset transfers by some enterprises, said Yin Zhongqing, deputy director of the Financial and Economic Affairs Committee of the National People's Congress, the top legislature.

II. Market Overview
1. Global Market
The dollar hit an eight-week low against the Japanese yen on Thursday, as the escalating tensions between the United States and North Korea drove investors to seek safety in assets viewed as less risky. The dollar was down 0.77 percent against the yen at 109.21 yen. The Japanese currency rallied broadly against most major currencies. The dollar index, which tracks the greenback against six rival currencies, was down 0.17 percent to 93.391. The euro was 0.14 percent higher against the dollar. The kiwi was 0.79 percent lower against the greenback. Sterling touched a three-week low against the dollar as a mixed bag of output and trade data did little to alter investors' downbeat view of an economy struggling to meet Bank of England targets.

2. Home Market
China's yuan pared some gains after touching an almost one-year high against the U.S. dollar in the morning session on Thursday after the central bank lifted its guidance to the strongest level in 10-1/2 months. Yuan's prices soared sharply to 6.65 before paring gains on bargain hunting and profit-taking. But in the near term, any gains or losses shall be limited.

Precious Metals
The price of gold rose on Thursday for the third straight day, reaching a two-month high as another exchange of threats by the United States and North Korea prompted investors to buy bullion as a safe-haven asset.  The spot gold price had gained at $1,286.00 an ounce after reaching its highest level since June 8 at $1,287.73. U.S. gold futures for December delivery settled up 0.8 percent at $1,290.10.

1.Crude Oil
Oil prices fell more than 1.5 percent on Thursday, as a bruising day on Wall Street bolstered fears of slowing demand amid lingering concerns over a global oversupply of crude. U.S. West Texas Intermediate crude settled down 97 cents or 1.96 percent to $48.59 a barrel. Brent crude futures were down 80 cents or 1.52 percent to $51.90 a barrel.

2.Base Metals
Lead prices steadied on Thursday near the six-month highs hit earlier this week, supported by expectations of tighter supplies due to mine closures that have created shortages of concentrate for smelters. Benchmark lead on the London Metal Exchange slipped 0.7 percent to $2,366 a tonne at the close on profit-taking. Aluminium ended up 0.3 percent at $2,037 from an earlier $2,046.5, a level last seen in Nov. 2014. Nickel added 3.3 percent to $10,985. Copper slipped 0.9 percent to 6,423 a tonne.

U.S. Treasuries
1. U.S. Bonds
U.S. Treasury long-dated yields dropped to six-week lows on Thursday, pressured by continued tensions between the United States and North Korea as well as weak economic data that reduced expectations of an interest rate hike in December. A generally solid U.S. 30-year bond auction also firmed demand for long-dated debt. In late trading, U.S. 10-year yields slipped to 2.208 percent, a six-week low, from 2.242 percent late on Wednesday. U.S. 30-year bond yields fell to 2.783 percent, from Wednesday's 2.818 percent. During the session, yields fell as low as 2.781 percent, a six-week low.

2. Chinese bonds
Yields of China's interbank cash bonds edged down in the morning session of Thursday, with T-bond futures turning higher. Rising tensions between the United States and North Korea drove up U.S. Treasury yields, but pulled down global stocks, and would boost China's cash bonds. But yields would remain tight rangebound on mixed economic data.

Stock Market
1. U.S. Equities
The S&P 500 index had its biggest one-day drop in almost three months on Thursday as investors fled riskier assets, with technology stocks leading the charge, in response to an increasingly aggressive exchange of threats between the United States and North Korea. The Dow Jones Industrial Average closed down 204.69 points, or 0.93 percent, at 21,844.01, the S&P 500 lost 35.81 points, or 1.45 percent, to end the session at 2,438.21 and the Nasdaq Composite fell 135.46 points, or 2.13 percent, to 6,216.87. The S&P is now on track for its biggest weekly drop since the week before the Nov. 8 U.S. presidential election. The CBOE Volatility Index, a barometer of expected near-term stock market volatility, closed at its highest since the election.

2. Hong Kong Equities
Hong Kong shares fell more than 1 percent on Thursday, mirroring losses in regional markets amid continued tensions over North Korea, and as investors booked profits after recent gains. The Hang Seng index ended down 1.1 percent at 27,444.00 points, while the China Enterprises Index lost 1.7 percent to 10,782.20.

3. China Equities
China's Shanghai Composite Index extended losses in a zigzag trading on Thursday, led by cyclical sector. It fell to the 60-day moving average of 3,236 during one point before paring some losses. Individual stocks dropped across the board. Market is expected to remain rangebound with heavy resistance at 3,300.