Hope all is well!

Overnight Catalysts

• It was a quiet night with little news flow nor significant catalysts as US Trade Representative Lighthizer’s comments on the US’ willingness to walk away from a trade deal led to profit taking.
• Tomorrow we have the monthly economic data release with retail sales, industrial production and fixed asset investment to be reported. What can we expect? Year over Year comparisons will be difficult due to tariff front running in 2018 which compressed 12 months of activity in six to nine months. Markets shouldn’t put too much emphasis on February releases due to Chinese New Year’s.

The Hang Seng opened just below the 29,000 level but eased over the course of the day to end -0.39%/-113 index points on volumes at the 1 year average but -10% day over day. Only 10 stocks advanced with 39 decliners, Ping An jumped +1.57%/+22 index points following their after the close positive earnings and buy back announcement while Tencent was off -0.72%/-20 index points and AIA gained +0.7%/+20 index points. Within the MSCI China All Shares’ HK stocks, real estate gained +0.37% on lower mortgage rates while staples and healthcare were off -1.51% and -1.45%. Healthcare was hit with profit taking after strong YTD return. Southbound Connect volumes are slowly returning to their historical range as buyers and sellers were mixed.

The Shanghai & Shenzhen were off -1.09% and -2.32% as investors took profits especially in small cap stocks on volumes -7% day over day but still 3X the 1 year average. Breadth was negative as decliners dominated advancers. The Chinext Board on the Shenzhen Stock Exchange declined -4.49% as Chinese retail investors stampeded out of the growth stock names which tend to be mid and small caps. Interesting that the top 50 mega cap Shanghai index was up slightly yesterday. Foreign investors have been focused on mega cap/large cap securities which are part of MSCI’s China A Inclusion Index while many of the individual speculators are more interested growth names. Chatter that foreign investors were dabbling in small cap stocks learned a tough lesson overnight. Within the MSCI China All Shares’ mainland stocks, real estate carved out a gain of 2.15% with financials declining just -0.02% while tech fell -5.04% followed by communications -2.85% and interestingly utilities -2.02%. A broker noted that China listed equity ETFs in China have seen redemptions over the past week and YTD. The selling has been concentrated in six ETFs that some speculate have been used in the past by China’s National Team. Relative to the value of China’s mainland trading volumes and size the redemptions are unlikely to be a factor in the market’s performance. Northbound Connect volumes remain very high as foreign investors were 2 to 1 buyers of volume leader Ping An post earnings.

Prior the US open Chinese e-commerce challenger Pinduoduo (PDD) reported Q4 earnings highlighted by very strong revenue growth though losses widened. The stock is trading choppy pre-market though it is hard not to focus on the topline revenue growth.

• Q4 Revenue increased +379% to $822mm (RMB 5.6B) from Q4 2017’s RMB 1.1B
• Gross Merchandise Value (GMV) increased 234% to $68B (RMB 471B) from Q4 2017’s RMB 141B
• Active Monthly Users increased 93% to 272mm YoY while active buyers in 2018 increased 71% to 418mm
• Q4 EPS -$0.24 cents versus estimate -$0.16

Online education stocks in the US yesterday and overnight in HK were off following a Citi report that cautioned on potential policy changes. During the US trading hours several sales traders in the space were surprised at the market reaction.

Morgan Stanley released a report on the Chinese equity market’s sentiment factors such as trading volumes, new account openings and advance decline ratios according to an article in the South China Morning Post. I’ve not seen the report though I do track many of the indicators’ inputs. At a current reading of 51, the 0 to 100 measure is below the 80 warning level and well below the indicator’s 100 level reach in June 2015. The number of overbought stocks on the Shanghai has declined from a high of 73% a week ago to 14% today. Volumes and margin balances have surged as mainland investors’ return to equities after abandoning them in 2018. My colleague Derek spoke to a China based strategist yesterday who cautioned on chasing small cap securities which have been a focus of Chinese retail investors while emphasizing quality/large cap names. I’ll provide an overview of volumes and new account openings tomorrow morning.

Luckin Coffee denied a Reuters article that the coffee chain start up and Starbucks rival would IPO. Coincidentally the WSJ had an article on the rivalry with a focus on delivery. The Starbucks’ multi-story Beijing mega sore is quite impressive having walked by it last year.

CNY 6.70

• Yield on 1 Day Chinese Gov’t Bond 1.74%
• Yield on 10 Year Chinese Gov’t Bond 3.19%
• Yield on 10 Year China Development Bank Bond 3.61%

Commodities were largely higher on the Shanghai & Dalian Exchanges with metals higher and softs mixed.