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ICBC Financial Market Daily Review - June 14, 2018

I. Yesterday’s News
International News

1. The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the U.S. central bank's shift from policies used to battle the 2007-2009 financial crisis and recession. In raising its benchmark overnight lending rate a quarter of a percentage point to a range of 1.75 percent to 2 percent, the Fed dropped its pledge to keep rates low enough to stimulate the economy "for some time" and signaled it would tolerate inflation above its 2 percent target at least through 2020. Policymakers' fresh economic projections indicated a slightly faster pace of rate increases in the coming months, with two additional hikes expected by the end of this year, compared to one previously.

2. The Fed now sees gross domestic product growing 2.8 percent this year, slightly higher than previously forecast, and dipping to 2.4 percent next year. The unemployment rate is seen falling to 3.6 percent in 2018, compared to the 3.8 percent forecast in March. Inflation would run above the central bank’s 2 percent target, hitting 2.1 percent this year and remaining there through 2020 according to fresh projections from policymakers.

3. U.S. President Donald Trump will meet with his top trade advisers on Thursday to decide whether to activate threatened tariffs on billions of dollars in Chinese goods, a senior Trump administration official said. Trump is due to unveil revisions to his initial tariff list targeting $50 billion of Chinese goods on Friday. People familiar with the revisions said that the list will be slightly smaller than the original, with some goods deleted and others added, particularly in the technology sector. It remains unclear when Trump would activate the tariffs if he decides to do so. Several industry lobbyists told Reuters that they expect the move to come as early as Friday, with publication of a Federal Register notice, or it could be put off until next week.

4. U.S. producer prices increased more than expected in May, leading to the biggest annual gain in nearly 6-1/2 years, the latest sign of a gradual building up of inflation pressures. The Labor Department said on Wednesday its producer price index for final demand rose 0.5 percent last month, boosted by a surge in gasoline prices and continued gains in the cost of services. In the 12 months through May, the PPI increased 3.1 percent, the largest advance since January 2012. A key gauge of underlying producer price pressures nudged up 0.1 percent last month. In the 12 months through May, the core PPI rose 2.6 percent. The renewed upward trend in producer prices strengthens expectations that inflation will pick up this year and likely breach the U.S. central bank’s 2 percent target.

5. President Trump declared on Wednesday there was “no longer a Nuclear Threat from North Korea”. Secretary of State Pompeo noted “there’s a lot of work left to do”amid widespread doubt from American people that North Korea is on the way to nuclear disarmament. In Trump and Kim's joint statement, President Trump committed to provide security guarantees to the DPRK, and Chairman Kim Jong Un reaffirmed his firm and unwavering commitment to complete denuclearization of the Korean Peninsula. Democrats blast Trump for concessions he granted in U.S.-North Korea summit.

6. British inflation held at a one-year low in May despite a jump in fuel prices, leaving the chances of a Bank of England interest rate hike over the coming months finely balanced. Consumer price inflation remained at 2.4 percent in May, its joint lowest annual rate since March 2017, the Office for National Statistics said on Wednesday. Economists had forecast 2.5 percent inflation in a Reuters poll. Fuel prices rose in May by 3.8 percent, the biggest monthly amount since January 2011. Manufacturers' raw-materials costs were 9.2 percent higher than in May 2017, boosted by the biggest monthly jump - 2.8 percent - since October 2016.

7. Australia's central bank governor Philip Lowe said on Wednesday the current slowdown in the housing market isn't a cause for concern but flagged the need for policy to remain at record lows for the foreseeable future with wage growth and inflation still weak. Home prices across Australia's major cities have fallen for successive months since late last year as tighter lending standards at banks cooled demand in Sydney and Melbourne - the two biggest markets. Housing credit growth has hit its slowest pace in six years, building approvals have come off a peak and home prices posted their first annual drop since 2013 last month.

Domestic News

8. The central government is adopting an adjustment fund system for the basic pension covering employees of enterprises to address the different situations among provincial regions and ensure punctual and full pension payments to retirees. The State Council, China's Cabinet, said on Wednesday that the system, which will be put in place on July 1, will be based on the current pension system and will not add to financial burdens on businesses and their employees.

9. The Ministry of Science and Technology and All-China Federation of Industry said a jointed guidance that China will support innovation in private sector and cultivate a group of leading private enterprises equipped with the state-of-the-art core technology, strong innovation ability and sharp cutting edge.

10. China said on Wednesday that U.S. President Donald Trump's announcement that the United States would halt military exercises on the Korean peninsula shows China's "dual suspension" proposal is practical and tenable.

II. Market Overview
1. Global Market

The dollar ended steady to modestly higher on Wednesday, hitting a three-week high against the yen, as Federal Reserve officials saw the likelihood of two more interest rate increases for a total of four in 2018 based on a solid economic outlook. The greenback's bounce tied to the Fed's perceived hawkish stance faded as traders booked profits in advance of the European Central Bank's meeting on Thursday, where policy-makers may discuss the timing of winding down its 2.55-trillion-euro bond-purchase program. In late trading, the dollar was flat against the yen at 110.50 yen after touching a three-week peak at 110.84 shortly after the release of the Fed's latest policy statement. The greenback finished 0.44 percent lower versus the euro at $1.1795. The dollar was steady against sterling at $1.3381 and ended modestly stronger against the Swiss franc and Canadian dollar. The Turkish lira was down over 1 percent at 4.6485 per dollar.

2. Home Market

China's yuan eased against the dollar, following the central bank's weaker midpoint. Market participants were cautious in shrinking turnover despite of improving risk appetite, awaiting the outcome of the incoming policy meeting of the Federal Reserve and the European Central Bank. Forex-buying demand around 6.4 per dollar keeps yuan in check.

Precious Metals

Gold prices turned lower on Wednesday after the U.S. Federal Reserve announced it was raising interest rates. Spot gold rose 0.29 percent at $1,299.31 per ounce, after earlier hitting $1,292.15, its lowest since June 5. U.S. gold futures for August delivery settled up $1.90, or 0.2 percent, at $1,301.30 per ounce. Investors expect policy announcements from the European Central Bank (ECB) on Thursday and Japan's central bank on Friday, which could affect gold prices.

Crude Oil

Oil prices turned positive on Wednesday after a bigger-than-expected decline in U.S. crude inventories along with surprise drawdowns in gasoline and distillates indicated strong demand in the world's top oil consumer. Earlier in the session, Brent and U.S. crude futures had retreated on concerns about rising production in the United States and expectations that OPEC and other producers could relax voluntary output cuts when they meet on June 22-23 in Vienna. Brent crude settled up 86 cents, or 1.1 percent, at $76.74 a barrel and U.S. crude closed 28 cents, 0.4 percent, higher at $66.64 a barrel.

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

U.S. Treasury yields rose on Wednesday after the Federal Reserve raised interest rates as expected, and signaled two more hikes this year, citing higher inflation. U.S. two-year yields, the maturity most sensitive to rate hike expectations, rose to three-week highs of 2.594 percent. They were last at 2.581 percent. U.S. 10-year yields rose to 2.988 percent, a one-week high, after the Fed rate hike. The yield curve flattened further after the Fed decision. The yield spread between U.S. 30-year bonds and U.S. 5-year notes narrowed to a low of 24.4 basis points, the flattest level since January 2012. U.S. 30-year yields were up at 3.106 percent.

2. Chinese bonds

Cash bond yields in China’s interbank market pulled back in the afternoon session boosted by solid demand for tier-1 interest rates bonds. Treasury bond futures also expanded gains. Weak financial data released yesterday send bond futures higher. Market morale recovered steadily as demand improved.

Stock Market
1. U.S. Equities

U.S. stocks ended a choppy session lower on Wednesday after the U.S. Federal Reserve raised interest rates as expected and projected a slightly faster pace of rate hikes this year. Stocks were volatile after the statement but ended near the lows of the session, and selling was broad-based, with most S&P sector indexes ending lower. The Dow Jones Industrial Average fell 119.53 points, or 0.47 percent, to 25,201.2, the S&P 500 lost 11.22 points, or 0.40 percent, to 2,775.63 and the Nasdaq Composite dropped 8.10 points, or 0.11 percent, to 7,695.70.

2.Hong Kong Equities

Hong Kong stocks ended lower on Wednesday as a slump in shares of telecommunications giant ZTE Corp unnerved market participants, while investors braced for a Federal Reserve policy decision later in the day. The Hang Seng index closed down 377.91 points or 1.22 percent at 30,725.15, while the China Enterprises Index ended down 1.4 percent at 12,035.63 points. The Hong Kong-listed shares of ZTE slumped 41.6 percent for the day, their steepest single-session drop since its debut in 2004, following a two-month trading suspension. Its Shenzhen shares dropped by their 10 percent limit to 28.18 yuan.

3. China Equities

China stocks ended lower on Wednesday, as investors were looking forward to the Federal Reserve policy decision later in the day. Major indexes are expected to extend losses to find bottom amid bearish sentiment and continued capital outflow. The Shanghai Composite Index closed down 30 points or 0.97 percent at 3,049.80 points. The turnover of Shanghai A shares rose to 155.8 billion yuan from 154.3 billion yuan.