Daily Posts

Nov PMIs, MSCI Rebalance Today, Live from Buenos Aires it’s Saturday Night Live

TGIF! Busy morning on multiple fronts.

Manufacturing PMI:
50 versus estimate 50.2 and Oct’s 50.2

Non-Manufacturing PMI:
53.4 versus estimate 53.8 and Oct’s 53.9

Composite PMI:
52.8 versus Oct’s 53.1

Takeaway: Weakness in manufacturing was driven by input and output prices which fell 7.7% and 5.6%. It would be easy to cast blame on the trade war but exports picked up ever so slightly. Along with collapsing commodity prices, the culprit is weak domestic demand as new orders declined. Non-manufacturing was led lower by weakness in construction though the index is still in expansion territory. While the Manufacturing print will garner attention, the Composite is also still firmly in expansion territory. Policy makers are unlikely to deviate from their deleveraging campaign unless the trade war escalates. Many expect policy support next year in the form of tax cuts to stimulate domestic demand. The sooner the better in my opinion! We have CICC’s equity strategist with us next week so I’ll be sure relay his thoughts.

Hang Seng gained +0.21% as volumes surged day over day 15% as MSCI’s index rebalance caused elevated volumes with 27 advancers and 19 decliners. Energy company CNOOC gained +3.74% worth 27 of the indice’s 55 point gain. Within the MSCI China All Shares’ HK stocks, real estate gained +2.68% followed by energy following crude higher +1.89% and technology 1.15%. It was fairly quiet in advance of the Saturday night’s Trump Xi dinner at the G-20 summit. Southbound volumes were light in mixed trading. Tencent was the #3 volume leader with buyers outpacing sellers.

Shanghai & Shenzhen gained +0.81% and +0.93% on light volumes and strong breadth as markets overlooked the PMI release and looked forward to the Trump Xi dinner. Within the MSCI China All Shares mainland stocks, staples gained +2.21% as food and beverage stocks rebounded followed by health care +1.24%, tech +1.24%, industrials +1.22% and utilities +1.01%. Mega caps and small caps experienced buying pressure while large and mid caps saw selling. Not surprising as the market is warming to small caps/tech on a positive Xi Trump summit while mega caps are up on the MSCI rebalance. Northbound Connect volumes were moderate with buyers outpacing sellers though volume leader Ping An saw selling.

One should expect elevated volumes driven by MSCI’s Semi-Annual Index Review (SAIR) as we saw in HK last night. Index funds and ETFs benchmarked to MSCI indices need to rebalance their portfolio at the close so they match the “new” index Monday morning. Passive firms pre-arrange their trades with brokers who buy the stocks and then hedge them so they can delivered to the client at 4pm close. This makes front running index rebalances difficult though with the growth of ETFs and index funds the size of the trades can be significant. Yahai International (1579 HK) was added as it traded 31mm shares versus Thursday’s 4mm. If you want to experience the power of passive, watch ticker HCM. Hutchison China Meditech is being added to MSCI indices including MSCI Emerging Markets.

China’s Interbank Bond Market is in the news following Bloomberg’s announcement of fixed income trading via the Bond Connect platform for foreign investors. CIBM is the third largest bond market though its exposure in the Bloomberg Barclays Global Aggregate, Citi World Gov’t Bond (WIGBI is the acronym in index geek land) and JP EM debt is ZERO! The Global Agg will begin adding CIBM in April of next year which will make China 5% of the index. EM land is where the CIBM becomes the bull in China shop (apologies for the terrible cliché but I couldn’t resist!). Tradeweb does offer access via their trading platform already. Our onshore FI broker noted that Ford Automotive Finance is planning to sell RMB 1 billion of a 2 year bond in the CIBM with a yield range 3.5% to 4.5%. I assume Ford’s China sales must be picking up!
  • CNY 6.94

The front end of the curve jumped last night from 1.84% to over 2.2%! The front end of the curve can be volatile.

  • Yield on 1 Day Chinese Gov’t Bond 2.22%
  • Yield on 10 Year Chinese Gov’t Bond 3.38%
  • Yield on 10 Year China Development Bank Bond 3.90%

Commodities were mostly higher/mixed on both exchanges with Dr. Cooper firmer