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ICBC Financial Market Daily Review - July 12, 2018

I. Yesterday’s News
International News

1. A "reckoning" over China's unfair trade policies is urgent and is too big for the World Trade Organization to handle, U.S. ambassador Dennis Shea told a WTO meeting on Wednesday. However, Shea said the Geneva-based WTO was not the place to settle the row. "It is clear, moreover, that the WTO currently does not offer all of the tools necessary to remedy this situation. The best solution is for China finally to take the initiative to fully and effectively embrace open, market-oriented policies," he said. Senate Finance Committee Chairman Orrin Hatch said the announcement "appears reckless and is not a targeted approach." U.S. House of Representatives Speaker Paul Ryan said, "I've long said I don't think tariffs are the right way to go," in response to a question about China. " The Wall Street Journal, citing unnamed Chinese officials, said Beijing was considering steps including holding up licenses for U.S. companies, delaying approvals of mergers involving U.S. firms and stepping up border inspections of American goods.

2. The United States said that it signed an agreement with ZTE Corp that paves the way for the Chinese tech company to resume operations after a nearly three-month ban on doing business with American suppliers. The ban on China's No. 2 telecommunications equipment maker will be removed once the company deposits $400 million in an escrow account, the U.S. Commerce Department said in a statement announcing that an escrow agreement had been signed.

3. U.S. producer prices increased more than expected in June amid gains in the cost of services and motor vehicles, leading to the biggest annual increase in 6-1/2 years. The report published by the Labor Department also showed a pickup in underlying producer inflation last month. Economists expect tariffs on lumber, steel and aluminum imports to drive up prices, likely keeping the Federal Reserve on track to increase interest rates two more times this year. The producer price index for final demand climbed 0.3 percent last month after rising 0.5 percent in May. That pushed the annual increase in the PPI to 3.4 percent, the largest rise since November 2011, from 3.1 percent in May.

4. European Central Bank policymakers are split over when the ECB might raise interest rates next year, with some saying an increase is possible as early as July 2019 and others ruling out a move until autumn, according to several sources. The ECB said last month it expected to keep rates at their current, record-low levels "through the summer" of 2019. Investors took the phrase to mean rates would not go up until October or even December of next year. But policymakers speaking to Reuters on condition of anonymity gave different interpretations.

5. The Bank of Canada raised interest rates to 1.50 percent on Wednesday, as expected, and said further gradual rate hikes will be warranted, but warned mounting trade tensions will have a larger impact on investment and exports than previously thought. Pointing to a stronger-than-expected U.S. economy, the bank boosted its estimate of Canadian second-quarter growth to 2.8 percent from 2.5 percent forecast in April, but said growth will slow to 1.5 percent in the third quarter.

Domestic News

6. China's commerce ministry said on Wednesday the United States' decision to impose new tariffs on $200 billion of Chinese goods is "totally unacceptable," and vowed to make necessary countermeasures. China stands on the right side of history in defending multilateralism, its foreign ministry said.

7. China's assistant commerce minister Li Chenggang said that the latest proposed tariffs from the United States on an extra $200 billion worth of Chinese imports hurts globalization, and puts enterprises under great pressure, saying the only correct choice for China-U.S. relations was cooperation. Li also mentioned that China's non-financial outbound direct investment (ODI) in the U.S. dropped 21.1 percent year on year in the first five months of this year, while the overall ODI increased 38.5 percent in the same period.

8. China and Germany on Monday agreed that an open market, free trade and fair market access are the basis and driver of bilateral trade relations, Chinese Premier Li Keqiang and German Chancellor Angela Merkel said in a joint statement after the fifth round of intergovernmental consultations. Both countries were committed to solving trade disputes under WTO framework, and unequivocally oppose protectionism.

9. Shanghai expects to implement over 90 percent of the newly-released 100 measures aimed at promoting opening up by the end of 2018, while local issues not related to the central government will be launched immediately from the date of the release, Zhou Bo, Shanghai’s executive vice mayor, said at a press conference. “In principle, most of the measures are planned to be implemented in the third quarter,” Zhou said.

10. Auto sales in China rose 4.8 percent in June from a year earlier to 2.27 million vehicles, the China Association of Automobile Manufacturers (CAAM) said on Wednesday, as demand remained on the upswing.

II. Market Overview
1. Global Market

The U.S. dollar strengthened as investors ignored mounting trade tensions and turned to the Labor Department's expectation-beating inflation report, which increased prospects that the Federal Reserve will raise interest rates another two times this year. The dollar broke through the psychologically significant barrier of 112 yen for the first time since Jan. 10, rising as much as 1.3 percent to 112.17 yen. The dollar index, which measures the greenback against a basket of six rivals, was up 0.7 percent to a high of 94.77. The biggest losers were the offshore Chinese yuan, which skidded toward an 11-month low, and the Australian dollar , which fell as much as 1.2 percent.

2. Home Market

The spot yuan fell to an almost 9-1/2-month low against the greenback, testing the support of the key mark of 6.68 per dollar. It recouped some losses late in the session, while the midpoint rate continued to rise. The offshore yuan fell below 6.69 per dollar during the session, dragging onshore yuan down, but forex settlement at highs and dollar inflow by big banks steadied the currency in the afternoon, traders said.

Precious Metals

Gold prices slipped on Wednesday as U.S. threat of tariffs on an additional $200 billion of Chinese goods pushed safe-haven flows to the U.S. Dollar. Spot gold closed at $1,241.76 per ounce, earlier sinking to an eight-day low of $1,240.89. U.S. gold futures for August delivery settled down $11, or 0.9 percent, at $1,244.40 per ounce.

1.Crude Oil

Global benchmark Brent crude oil had its biggest one-day drop in two years on Wednesday as escalating U.S.-China trade tensions threatened to hurt oil demand, and news that Libya would reopen its ports raised expectations of growing supply. Brent crude fell $5.46, or 6.9 percent, to settle at $73.40 a barrel. The decline was the largest one-day move on a percentage basis since Feb. 9, 2016. U.S. crude fell $3.73, or 5 percent, to $70.38 a barrel.

2.Base Metals

Industrial metals tumbled on Wednesday, with copper, zinc and lead sinking to the lowest in about a year as speculators unleashed selling on the back of a further escalation in the U.S.-Chinese trade conflict. Prices bounced off their lows, however, as some consumers scrambled to lock in prices they regarded as good value after heavy recent losses. Three-month copper on the London Metal Exchange dropped as much as 4 percent to $6,081 a tonne, its lowest since July last year, before recovering by the close of open outcry trading to $6,145, down 2.9 percent. LME zinc fell as much as 4.8 percent to $2,503, the lowest since June 2017, before paring losses to end at $2,563, off 2.6 percent.

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

U.S. yields slipped on Wednesday as growing trade tension between China and the United States contributed to high demand for an auction of 10-year notes. The spread between 5-year and 30-year Treasuries dipped below 19 basis points for the first time since 2007. The spread between 2-year and 10-year notes also touched a fresh low at 26.29 basis points. U.S. benchmark 10-year yields were 2.8 basis points lower at 2.845 percent, and 30-year bondswere quoted at 2.946 percent.

2. Chinese bonds

Cash bonds yields in China’s interbank debt market fell sharply growing trade tension between China and the United States, while Treasury bond futures closed higher. Global shares plummeted as the United States’ decision to impose new tariffs on Chinese imports refueled safe-haven sentiment, trader said. Cash bond futures pulled back after a strong start, but regained the ground late in the session, while cash bond yields dropped to level at the start of the session.

Stock Market
1. U.S. Equities

U.S. stocks fell on Wednesday, breaking a four-session streak of gains after Washington's threat to impose tariffs on an additional $200 billion worth of Chinese goods fanned trade war fears, while a sharp drop in oil prices hit energy shares. The Dow Jones Industrial Average fell 219.21 points, or 0.88 percent, to 24,700.45, the S&P 500 lost 19.82 points, or 0.71 percent, to 2,774.02 and the Nasdaq Composite dropped 42.59 points, or 0.55 percent, to 7,716.61.

2. Hong Kong Equities

Hong Kong's benchmark stock index fell 1.3 percent on Wednesday as the United States threatened more import duties on Chinese goods, sharply escalating the trade conflict between the world's two biggest economies. The Hang Seng shed 370.56 points or 1.29 percent to 28,311.69, while the China Enterprises Index slumped 1.54 percent, to 10,658.26 points.

3. China Equities

China's stocks slumped 1.8 percent in a choppy trade on Wednesday after three days of gains and U.S. President Donald Trump's administration threatened 10 percent tariffs on $200 billion worth of Chinese imports. Market morale subdued once again, pulling down turnover. The market will be determined by the progress in U.S.-China trade friction.