Hope you had a great holiday season! Getting up early on a cold dark morning after a week of holiday was difficult.

December official National Bureau of Statistics released Sunday night:

• Manufacturing PMI 49.4 versus estimate 50 and Nov’s 50
• Non-Manufacturing PMI    53.8 versus estimate 53.2 and Nov’s 53.4

Last night’s private Caixin

• Caixin Manufacturing PMI 49.7 versus estimate 50.2 and Nov’s 50.2

Takeaway: Both the NBS and Caixin manufacturing PMIs were weak. Candidly I am surprised that anyone is surprised by this as tariff front running/loading in Q1 and Q2 will lead to weak economic releases in Q3 and Q4. This narrative has played out though markets appear surprised. As our colleagues at CICC expressed in early December, there are three cycles running concurrently: a market cycle, policy cycle and economic/earnings cycle. The equity market is likely at/near the market bottom while the fixed income market is at its high. While the media continues to point out the poor Chinese equity returns, there is little to no evidence of China’s major bond bull market.  Fiscal and monetary policies have turned more accommodative though it will take time for tax cuts and stimulus to make their way through the economy. Lastly will be the earnings and economic release bottom. Markets tend to be forward looking though last night’s market action appears backward looking to me.

Hang Seng started the year with a thud -2.77% as the weak Caixin PMI weighed on the markets. Volumes were up 108% from Monday’s NYE session though last night’s volume was well below the 52 week average. Breadth was very poor with only HK & China Gas (ticker 3 HK) advancing with 49 decliners. AIA’s -3.15% drop accounted for -73 index points as the Hang Seng fell -715 index points quickly followed by China Construction Bank -2.94%/-60 index points, Tencent -2.36%/-60, HSBC -2.31%/-58 etc (uncle!). Within the MSCI China All Shares’ HK stocks, utilities was the “best” performer falling -2.18% while real estate -5.74% on mixed views on property curbs coming off. Energy was expectedly off -4.66% as crude continues its downward spiral. Healthcare was off -4.47% on fears that the 11 city bulk drug buying program will be extended nationally. Southbound Connect trading volumes were moderate with sellers outpacing buyers not quite 2 to 1.

Shanghai & Shenzhen were off -1.15% and -0.91% on very light volumes and mixed breadth on the first day of trading since last Friday as markets overlooked positive developments around US China trade. Within the MSCI China All Shares’ mainland stocks, communications was the leading sector off -0.04% while healthcare was off -3.41% followed by utilities -1.95% and discretionary -1.65%. Northbound Connect volumes were moderate with buyers outpacing sellers.

New & Noteworthy over the last week

• The Ministry of Finance released a sixteen page list of 706 goods that will have tariffs cut beginning on January 1^st. Martini drinkers should be excited as vermouth will have its 65% tariff cut to 14%.
• JD.com announced a $1B share repurchase program.
• Tencent raised its stake in Vipshop to 7.8%.
• Northbound Connect inflow, ie foreign buying, reached in $45 billion in 2018.

CNY 6.85; CNY has been very resilient

China’s spectacular bond rally has continued into the New Year as the yield curve has shifted lower.

• Yield on 1 Day Chinese Gov’t Bond 1.44%
• Yield on 10 Year Chinese Gov’t Bond 3.2%
• Yield on 10 Year China Development Bank Bond 3.65%

Commodities were off on both exchanges with Dr Copper off -1%