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15 December 2018, Saturday  |  
 
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Market Commentary - Foreign Markets  
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China Stocks fall on trade concerns, Huawei CFO arrest
(09:46, 06 Dec 2018)
Headline shares of the Mainland China equity market fell down on Thursday, 06 December 2018, amid confusion over US-China trade progress and in the wake of reports that Canada had arrested the chief financial officer of China's Huawei. News of the arrest heightened the sense a major collision was brewing between the world's two largest economic powers, not just over tariffs but also over technological hegemony. In afternoon trade, the benchmark Shanghai Composite Index retreated 1.3%, or 33.98 points, to 2,615.82, meanwhile the Shenzhen Composite Index, which tracks stocks on China's second exchange, fell 1.32%, or 18.22 points, to 1,362.55. The blue-chip CSI300 index was down 1.62%, or 52.73 points, to 3,199.27.

Canada has arrested Huawei's global chief financial officer in Vancouver, where she is facing extradition to the United States, Canada's Department of Justice said on Wednesday. The arrest is related to violations of U.S. sanctions. Huawei confirmed the arrest in a statement and said that it has been provided little information of the charges against Meng, adding that it was “not aware of any wrongdoing by Ms. Meng.” The arrest could drive a wedge between China and the United States just days after President Donald Trump and President Xi Jinping held a meeting in Argentina where they agreed to steps to resolve a brewing trade war. U.S. authorities have been probing Huawei, one of the world's largest makers of telecommunications network equipment, since at least 2016 for allegedly shipping U.S.-origin products to Iran and other countries in violation of U.S. export and sanctions laws.

The arrest reignited concerns over the chances for a longer-term US-China deal on trade. While investors initially greeted the trade ceasefire reached in Argentina with relief, the mood has quickly soured on skepticism that the two sides can reach a substantive deal.

Global equity markets have been shaken and the dollar fell this week after an inversion in a part of the U.S. Treasury yield curve triggered market concerns about economic growth. The spread between the two-year and five-year Treasury yields inverted this week and the two-year/10-year spread was at its flattest in more than a decade amid a sharp fall in long-term rates. A flatter curve is seen as an indicator of a slowing economy, with lower longer-dated yields suggesting that the markets see economic weakness ahead.

Investors are looking for progress on trade as well as clues to the future path of economic growth. U.S. President Donald Trump said China is sending “very strong signals” following trade discussions in Argentina, as uncertainty remains over what commitments were made between the two nations. Over the weekend, President Trump agreed to suspend increases in tariffs on Chinese goods for 90 days, after a meeting with Chinese leader Xi at the G-20 summit in Buenos Aires.

The Federal Reserve's Beige Book economic report showed fading optimism over prospects for growth at U.S. firms even as a majority of districts continued to report a modest expansion in recent weeks.

ECONOMIC NEWS: China's services sector grew at its quickest pace in five months in November thanks to an uptick in new orders, a private survey released yesterday showed, although the outlook for businesses over the next year worsened for the third month. The Caixin/Markit services purchasing managers' index (PMI) rose to 53.8 in November from 50.8 in October, well above the 50.0 mark separating growth from contraction. The bounce off the 13-month low in October suggests pockets of strength in domestic demand in a sector that accounts for more than half of China's gross domestic product and urban jobs. The subindex for new business in China's services sector rose to 52.5 in November, also a five-month high, from 50.1 in October, although the rate of growth was modest and within recent ranges. Firms also increased their staffing in November, but at a more gradual pace than a month earlier. The subindex for employment was at 50.7 versus 51.1 in October. Operating expenses continued to rise in November, with a number of firms citing higher raw material prices and fuel costs, according to the Caixin survey. The subindex for input prices stood at 53.3, unchanged from October. Despite the upward pressure on input costs, companies raised their prices only marginally, with some firms saying they had to stay competitive. The intense competition and uncertain outlook on client demand hit business sentiment, with the confidence gauge towards the next 12 months slipping to a four-month low of 56.1. Caixin's composite manufacturing and services PMI, also released yesterday, rose to 51.9 in November from 50.5 in October, although the growth rate was relatively marginal compared with previous months.

CURRENCY NEWS: China yuan weakened against greenback on Wednesday, after central bank set softer mid-point rate. Prior to market opening, the People Bank of China set central parity rate at 6.8599 per US dollar, weaker from previous day mid-point rate of 6.8476. In China's spot foreign exchange market, the yuan is allowed to rise or fall by 2% from the central parity rate each trading day.

China's central bank lent 187.5 billion yuan ($27.28 billion) to financial institutions via its one-year medium-term lending facility (MLF) on Thursday, effectively rolling over the same amount of such loans that were expiring. The interest rate for the one-year MLF was 3.30 percent, the People's Bank of China (PBOC) said, unchanged from the previous such operation.

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