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ICBC Financial Market Daily Review - November 2, 2018

I. Yesterday’s News
International News

1. U.S. President Donald Trump and Chinese President Xi Jinping both expressed optimism on Thursday about resolving their bitter trade disputes ahead of a high-stakes meeting planned for the two leaders at the end of November in Argentina. Trump said on Twitter that trade discussions with China were "moving along nicely," and that he planned to meet with Xi on the sidelines of the G20 leaders summit, after the two had a "very good" phone discussion. Xi said both of them share good wishes for the healthy, stable development of China-U.S. ties as well as expanding bilateral economic and trade cooperation, and they should strive to translate this kind of wish into reality. The two sides have resolved economic and trade problems in the past through coordination and cooperation, Xi said, adding that the economic teams of both countries should enhance contacts and push for reaching a solution on resolving China-U.S. economic and trade issues acceptable to both sides.

2. The United Kingdom and the European Union have made progress on a deal to give London's dominant financial centre basic access to EU markets after Brexit, two British officials said, but no agreement has yet been clinched. The deal being discussed would be based on the EU's existing system of financial market access known as 'equivalence' - a watered-down relationship that officials in Brussels have said all along is the best arrangement that Britain can expect.

3. The Bank of England said on Thursday that interest rates might need to rise a bit faster than investors expect, but it warned that all bets would be off if Britain leaves the European Union without a deal in less than five months. The BoE's nine rate-setters all voted to hold rates at 0.75 percent, as expected in a Reuters poll of economists, after raising them in August for only the second time in a decade. Governor Mark Carney said the BoE did not expect a disruptive no-deal Brexit, but if it happened, the central bank would be in uncharted territory and it was not possible to predict if rates would need to rise or fall in response.

4. New applications for U.S. unemployment aid fell last week and the number of Americans receiving benefits was the lowest in more than 45 years as labor market conditions tightened further. Initial claims for state unemployment benefits dropped 2,000 to a seasonally adjusted 214,000 for the week ended Oct. 27, the Labor Department said. Thursday's claims report also showed the number of people receiving benefits after an initial week of aid declined 7,000 to 1.63 million for the week ended Oct. 20, the lowest level since July 1973. The four-week moving average of the so-called continuing claims decreased 6,250 to 1.64 million, the lowest level since August 1973.

5. U.S. auto sales rose slightly in October, hit by rising interest rates and higher vehicle prices, and No.2 carmaker Ford Motor Co. warned of slipping consumer confidence, indicating sales volumes would continue to moderate in 2018. Ford on Thursday reported a 5 percent decline in sales for its pickup trucks, while overall sales fell 3.9 percent to 192,616 units in October hurt by lower passenger car demand. U.S. car sales, which dropped 2 percent last year from a record high of 17.55 million in 2016, are expected to fall further in 2018, hurt by rising interest rates and the return of more late-model used cars to dealer lots. The seasonally adjusted annualized rate of sales for October will be 17.57 million units, higher than an expected 17.10 million units.

Domestic News

6. The Politburo, a top decision-making body of the ruling Communist Party,  reiterated that China will maintain a proactive fiscal policy and a prudent monetary policy, citing "the downward pressure on the economy has increased. Some enterprises have more operational difficulties." China will take more timely steps to support its economy, which faces increasing pressures, the politburo said.

7. China will unveil a raft of pro-investment measures to counter economic slowdown, which will focus on infrastructure spending, including poverty-alleviation projects, railway, road, waterborne transport, airport, and water conservancy, etc.. The problem is where such amount of money comes from amid the background of risk-prevention and de-leverage.

8. The Caixin Manufacturing Purchasing Managers' Index (PMI) for October was only fractionally above the 50-mark that divides expansion from contraction as demand slightly improved. But factory output dropped to lowest in 2-1/2 years amid weak expansion, dragging business confidence among manufacturers to an almost 1-year low. Market concern over increasing pressures intensified as the Politburo confirmed that the downward pressure on the economy has increased.

9. China's cabinet has unveiled guidance on reasonable investment, saying that investment shall be focused on key areas and weak links, and played the infrastructure card to invigorate the sluggish sectors. The government will also guarantee the normal financing demand of financing platform firm, and allow them to extend financing for ongoing projects under negotiation with financial institutions, without expanding construction and with risk under control.

II. Market Overview
1. Global Market

The British pound logged its best day in eighteen months on Thursday, following reports that London is close to sealing a financial services deal with Brussels, and as the Bank of England kept interest rates steady but hinted future interest rate rises would be slightly faster if Brexit goes smoothly. Sterling was 1.97 percent higher on the day, its best day since April, 18, 2017. The euro was up 0.87 percent. More broadly, the dollar index, a gauge of the greenback's value versus six major peers, fell 0.88 percent to 96.27, its lowest in more than a week.

2. Home Market

China's yuan edged up on Thursday, holding above 6.97 per dollar. But the midpoint rates fell 24 bps to the lowest since May 20 2018. The gains were limited by forex buying as expected, still under pressure in the near term, despite that the dollar index slipped from the 97 mark. At close, yuan surged 238 bps to 6.9496 per dollar, the highest in almost a week.

Precious Metals

Gold rose nearly 2 percent on Thursday, bouncing off a three-week low touched in the previous session as the dollar fell sharply from recent highs, making the metal cheaper for holders of other currencies. Spot gold gained at $1,232.8 per ounce after rising as much as 1.9 percent to its highest since Oct. 26 at $1,237.39. U.S. gold futures settled up $23.60, or 1.94 percent, at $1,238.60.

1.Crude Oil

Oil fell nearly 3 percent on Thursday, with U.S. crude futures hitting lows not seen since April, due to growing concerns that global demand is weakening at a time when output from the world's major oil producers is surging. Brent crude futures settled down $2.15, or 2.9 percent, at $72.89 a barrel, while U.S. crude lost $1.62, or 2.5 percent, at $63.69, its lowest close since April 9.

2.Base Metals

Aluminium rebounded from a 15-month low on Thursday, rising alongside other metals as buyers returned to markets, denting the dollar. Three-month aluminium on the London Metal Exchange (LME) ended 0.6 percent higher at $1,966 tonnes after touching an August 2017 low of $1,953 on Wednesday. Nickel rebounded from a 10-month low touched on Wednesday, ending 2.7 percent higher at $11,785 tonnes. Copper rose 1.6 percent to $6,089 per tonne, zinc finished the session up 1.9 percent at $2,540, lead added 1.5 percent to $1,953, while tin was flat at $19,100.

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

Reports of a slowdown in U.S. manufacturing, construction and productivity left yields lower ahead of Friday's monthly jobs report which will inform the Federal Reserve's decision on whether to raise interest rates in December. Yields across maturities were down around 2 basis points, with the yield on the 10-year benchmark note last down 1.9 basis points at 3.138 percent.

2. Chinese bonds

The liquidity in China’s interbank market eased in the morning. But strong demand overnight and fund restraint by big banks kept pushing up weighed interest rates, narrowing the spread with the 7-day products to around 10 bps. 

Stock Market
1. U.S. Equities

U.S. stocks rose for a third straight session on Thursday as President Donald Trump said trade talks with China were "moving along nicely," reviving hopes that the two countries can resolve their trade dispute. Adding to the upbeat mood, the latest round of results from companies was mostly positive. The Dow Jones Industrial Average rose 264.98 points, or 1.06 percent, to 25,380.74, the S&P 500 gained 28.63 points, or 1.06 percent, to 2,740.37 and the Nasdaq Composite added 128.16 points, or 1.75 percent, to 7,434.06.

2. Hong Kong Equities

The Hong Kong stock market gained grounds on Thursday on the back of a stronger yuan and policy support for the Chinese economy. Real estate companies lead the advance, but pressure remains on the sector as financing costs rise. At the close of trade, the Hang Seng index was up 1.75 percent at 25416. The Hang Seng China Enterprises index rose 1.39 percent to 10,279.32.

3. China Equities

Stocks in China rose for the third straight day on Thursday, boosted by policy stimulus. But the gains were pared sharply in the afternoon on concerns that the Wall Street might pullback after a strong rebound. The Shanghai Composite Index is expected to linger around 2,600. Any further rally will be determined by government policy.