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ICBC Financial Market Daily Review - May 24, 2018
 

I. Yesterday’s News
International News

1. A slew of flash Purchasing Managers' Index (PMI) reports came out worse than expected worldwide, disappointing investors.

PMI IHS Markit's Euro Zone Composite Flash Purchasing Managers' Index (PMI) sank in May to an 18-month low of 54.1, below all forecasts in a Reuters poll. Euro zone economic growth slowed much more sharply than expected this month, a business survey showed, which along with weaker inflation suggests a stiffer policy challenge for the European Central Bank ahead.

Growth in Germany's private sector slowed in May to its lowest in more than 1-1/2 years, as the expansion of new business slowed to the slowest rate in almost three years. Markit's flash composite Purchasing Managers' Index (PMI) fell to 53.1 from 54.6 in the prior month, the weakest since September 2016. The flash reading for manufacturing fell to 56.8 in May, the lowest since February 2017. The Markit's flash PMI for services sector fell to 52.1 from 53.0 in April, hitting the lowest since September 2016.

French business activity slowed more than expected in May, shifting down to its slowest pace in nearly a year and a half as a string of public holidays weighed on the service sector. Its composite Purchasing Managers' Index (PMI) fell to 54.5 points from 56.9 in April, hitting its lowest level since January 2017.

Japanese manufacturing activity expanded at the slowest pace in nine months in May as new orders cooled, signalling a softening in domestic demand that could hamper an economic rebound. Growth in Japan's manufacturing sector slowed in May to its weakest level since August 2017 amid a spike in input prices and as new orders dragged, according to an industry gauge. The Nikkei-Markit flash manufacturing purchasing manager's index edged lower to 52.5 in May, the trough since August 2017.

2. British inflation fell unexpectedly in April, according to figures that could add to doubts about when the Bank of England will raise interest rates again. Official data published on Wednesday showed annual consumer price inflation cooled to 2.4 percent, its weakest increase since March 2017, and down from 2.5 percent this March. Prices of goods leaving British factories increased at a faster rate than expected last month. And while consumer price inflation cooled again, the timing of the Easter holidays and their impact on air fare prices was a big contributor.

3. Japan, Russia and Turkey have warned the United States about potential retaliation for its tariffs on steel and aluminium, the World Trade Organization said on Tuesday, bringing the total U.S. tariff bill to around $3.5 billion annually. The three countries detailed their compensation claims in notifications to the world trade body, following similar moves by the European Union, India and China. Each showed how much the disputed U.S. tariffs would add to the cost of steel and aluminium exports to the United States, based on 2017 trade.

4. Most Federal Reserve policymakers thought it likely another interest rate increase would be warranted "soon" if the U.S. economic outlook remains intact, minutes of the central bank's last policy meeting showed. The readout of the meeting, released on Wednesday, also included a call by some policymakers to revise the Fed's monetary policy statement soon to reflect that rates would be close or above long-run estimates before too long. According to the minutes, policymakers once again debated the inflation path. Several noted that recent wage data provided "little evidence" of overheating in the labor market, while some others saw a risk that "supply constraints would intensify upward wage and price pressures, or that financial imbalances could emerge." U.S. stocks edged higher following the release of the minutes while the U.S. dollar slightly pared gains against a basket of currencies. U.S. Treasury yields held at lower levels.

5. The U.S. House of Representatives passed on Tuesday bipartisan legislation that would ease bank rules introduced in the wake of the 2007-2009 financial crisis, giving President Donald Trump a major legislative victory. The vote eases some of the 2010 Dodd-Frank rules that have hurt smaller banks and community lenders and keeps the Republican president's promise to try to spur more economic growth by cutting regulation. The bill, which was approved by the Senate in March, marks the first attempt to revise rules.

Domestic News

6. U.S. President Donald Trump on Wednesday signaled a new direction in U.S.-China trade talks and said any deal would need "a different structure," fueling uncertainty over current negotiations and sending U.S. stocks lower. In an early morning post on Twitter, Trump said the current track appeared "too hard to get done" and cited difficulties such as verification, but he gave no other details about what he or his administration was looking for amid ongoing negotiations. Representatives for the White House did not respond to a request for more information about the president's statement. Representatives for China's Foreign Ministry did not immediately respond to a request for comment on Trump's statement.

7. China’s April export growth was revised down to 12.7 percent from 12.9 percent in dollar terms, while imports were unchanged at 21.5 percent, the customs administration said. Overall, China's April trade balance was a positive $28.382 billion, slightly lower than previous estimate of $28.78 billion.

8. China will extend an exemption on land value-added tax (VAT) for restructured firms in a bid to support corporate structure reform, the Ministry of Finance and State Administration of Taxation said Tuesday. The exemption is aimed at supporting the restructuring of companies and improving the market environment, the statement said.

9. China's state planner ordered utilities this week to stop stockpiling thermal coal and told miners to slash prices, two sources familiar with the matter said, the government's first direct intervention to cool coal prices since mid-2016.

II. Market Overview
FX
1. Global Market

The dollar held near a more than five-month high against a basket of currencies on Wednesday, after minutes of the Federal Reserve's May policy meeting showed most policymakers thought it likely another interest rate increase would be warranted "soon" if the U.S. economic outlook remains intact. The dollar index, which measures the greenback against a basket of six other currencies, hit a high of 94.188 before the release of the minutes, but pared some gains to trade up 0.42 percent at 94.006. The euro was down 0.69 percent against the greenback at $1.1697, its weakest since mid November. The lira plunged to a record low against the dollar before reversing course to trade more than 2 percent higher after the Turkish central bank raised interest rates by 300 basis points in an emergency move. Against the Japanese yen, the dollar slipped 0.72 percent, on pace for its worst day since late March.

2. Home Market

China's yuan eased against the U.S. dollar on Wednesday, while the midpoint rate was set lower. Data from eurozone, Germany and Britain was disappointing across the board, dragging sterling and euro down. The dollar index climbed higher, triggering a wave of dollar purchasing that sending yuan lower. More guidance is needed from the policy meeting minutes of the Federal Reserve.

Precious Metals

Gold prices rose on Wednesday as the U.S. dollar backed off its highs against a basket of currencies while investors interpreted minutes from the U.S. Federal Reserve's latest policy meeting as dovish. Spot gold was last at $1,293 per ounce, after touching its highest since May 15 at $1,297.84. U.S. gold futures for June delivery settled down $2.40, or 0.2 percent, at $1,289.60 per ounce.

Commodities
Crude Oil

Oil benchmarks fell on Wednesday after an unexpected build in U.S. crude and gasoline inventories despite strong demand, and as traders weighed a possible increase in OPEC crude output to cover any shortfalls in supply from Iran and Venezuela. Brent crude futures slipped 23 cents to settle at $79.80 a barrel, while U.S. crude lost 36 cents to $71.84 a barrel.

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

U.S. Treasury yields held at lower levels on Wednesday after minutes of the Federal Reserve's May meeting showed that most Fed policymakers thought it likely another interest rate increase would be warranted "soon" if the U.S. economic outlook remains intact. Benchmark 10-year note yields held around the 3.02 percent level where they had traded before the minutes, down from 3.054 percent on Tuesday and from an almost seven-year high of 3.128 percent on Friday. Treasury prices had gained earlier on Wednesday as concerns about the tumbling Turkish lira boosted demand for low-risk debt.

2. Chinese bonds

China’s cash bonds in the inter-bank market were little changed on Wednesday, while the benchmark 10-year Treasury bonds pulled back after opening higher. Market was consolidating amid loose liquidity, after morale recovered in the previous session. But market outlook was still uncertain in lackluster trading.

Stock Market
1. U.S. Equities

U.S. stocks ended with small gains on Wednesday after minutes from the Federal Reserve's latest meeting suggested higher inflation may not result in faster interest rate hikes. Stocks turned higher after the news. The Dow Jones Industrial Average rose 52.4 points, or 0.21 percent, to 24,886.81, the S&P 500 gained 8.85 points, or 0.32 percent, to 2,733.29 and the Nasdaq Composite added 47.50 points, or 0.64 percent, to 7,425.96.

2. Hong Kong Equities

Hong Kong stocks posted their biggest intraday fall in seven weeks on Wednesday, pulled down by energy shares which slumped after Beijing intervened to cool the red-hot coal market. The Hang Seng index ended down 568.71 points or 1.82 percent at 30,665.64, while the China Enterprises Index closed 2.1 percent lower at 12,090.79 points.

3. China Equities

China stocks fell the most in a month on Wednesday, snapping a three-day winning streak. Main sectors fell across the board, led by previous winner coal and energy firms. The Shanghai Composite Index declined 45.39 points or 1.41 percent to 3,168.96 points, their sharpest single-day drop since late April 20’s 1.47 percent drop, while the blue-chip CSI300 index fell 1.32 percent to 3,854.58.


(2018-05-24)
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