Greetings from the west coast!

• Manufacturing PMI                         49.2 versus estimate 49.5 and Jan’s 49.5
• Non-Manufacturing PMI               54.3 versus estimate 54.5 and Jan’s 54.7

Takeaway: As predicted yesterday, PMIs declined though it is critical to recognize that these are lagging indicators. My prediction was not based anything more than awareness of the seasonal effect of Chinese New Year’s during the month of February. More important is to recognize that equity markets are forward looking which are anticipating a deal in the trade war and effect of monetary and fiscal stimulus. Without putting took much emphasis on the release, the Manufacturing PMI did see new orders and business activity expectations did see pick up though offset by a dip in new export orders and a drop in raw material policies. The Non-Manufacturing PMI remained in expansion territory while new orders dipped slightly and business activity expectations increased. The most important takeaway is the strong confidence readings which are critical for economic growth.

The Hang Seng erased early gains to end -0.43%/124 index points on news the Trump Kim summit ended without an agreement. In our meeting Dr. Henry Kissinger he stated that a denuclearization was unlikely as it is the only bargaining chip Kim has. Trade Representative Lighthizer’s cautious tone on a trade agreement also weighed on markets. (It will interesting to see if Lightheizer will keep his job once Trump returns from Vietnam.) Volumes were elevated/above the 1 year average driven by month end and MSCI’s quarterly rebalance. Breadth was off with only 11 advancers and 38 decliners as AIA gained +1.95%/+56 index points while Tencent dropped -1.29%/-36 index points and China Construction Bank -1.27%/-29 index points. Many brokers are speaking about a consolidation taking place after the strong February move. Within the MSCI China All Shares’ HK stocks, only real estate gained +0.05% while tech was off -1.48% and materials -1.42% as the market was broadly off. Southbound Connect volumes eased but were still elevated as mainland investors once again sold off HK.

The Shanghai & Shenzhen traded in a range all day to end -0.44% and +0.35% as trade and the summit weighed on markets. Volumes were still 2X the 1 year average but came down the elevated levels earlier in the week as breadth was positive. Within the MSCI China All Shares’ mainland stocks, healthcare was a winner +2.08% along with staples +0.98%. though communications was off -2.2% and financials -1.47%. One broker mentioned healthcare being a beneficiary of sector rotation amongst investors. Remember many Chinese institutional investors have missed the rally which may explain healthcare’s recent performance as they buy the dip. Northbound Connect volumes were strong though off the recent very high levels as foreign investors once again bought Chinese A Shares. This raises the streak to 20 of the last 21 trading days. Amazing!

MSCI added two Hong Kong stocks to their indices yesterday at the close Xiaomi (1810 HK) and Meituan Dianping (3690 HK). These two stocks, along with others globally, had been excluded from MSCI indices due to their dual share class structure. MSCI adjusted their policy and is including such stocks for the March 1 rebalance. These stocks are being added to MSCI indices requiring passive ETFs and index funds to buy them.

• Xiomi traded 97mm shares on Wednesday. On Thursday Xiaomi traded 259mm shares! The vast majority were in dozens of 500k share block trades at the close.
• Meituan Dianping traded 6.7mm shares on Wednesday. On Thursday MD traded 21mm shares! Virtually all of the trading at the close.

Please watch the following stocks today at the close as they are also being added. IQ, PDD, TME and ZTO. I can’t predict if they will go up or down but they will trade in size at the close.

Today at 5pm EST MSCI will announce their 2019 inclusion factor for Chinese A Shares. They are likely to raise the weight of their 235 inclusion stocks from 2018’s 5% to 15%. MSCI has added all 235 stocks to their indices though they only added 5% of their potential weight in 2018. MSCI will also likely add growth stocks from the Chinext board and mid caps in 2020. Remember MSCI dictates $14.8 trillion of active and passive assets. The full inclusion will raise China from 31% to over 40% within the MSCI Emerging Markets Index which has ~$2 trillion benchmarked to it.

China Internet Information Center released their annual internet report for 2018 last night. China’s internet population rose 56mm to 829mm raising the penetration rate 3.8% to 60%. More impressive was the number of online shoppers rose 14.4% to 610mm! 97% of China’s internet users do so via a smart phone.

The Ministry of Transportation released a statement supporting self driving cars leading to a rally in the stocks associated with the sector.

E-commerce giant JD.com beat analyst expectations this morning as Q4 revenue and EPS came in stronger than expected.

Online video and entertainment company Bilibi beat analyst expectations as well this morning though the growth company is still generating losses.

CNY 6.69

• Yield on 1 Day Chinese Gov’t Bond 1.96%
• Yield on 10 Year Chinese Gov’t Bond 3.23%
• Yield on 10 Year China Development Bank Bond 3.66%

Commodities were firmer on the Shanghai & Dalian commodity exchanges