Hope all is well! 

Key News Overnight

• Treasury Secretary Steve Mnuchin said on CNBC that the US and China had agreed to “an enforcement mechanism” to ensure adherence to trade agreement. This would be a significant step in settling the trade war.
• Tencent’s unsponsored ADR rallied 3.6% Wednesday on volume of 9mm shares versus a 1 year average of 4.8mm and yesterday’s 2.1mm on reports the company had a game included in the latest batch of game approvals. The rally was driven by chatter the popular Players Underground Battlegrounds was renamed and approved. PUBG has 263mm non-Chinese users though has not been approved in China. If the rumors turn out to be true this could provide a significant catalyst for Tencent. In HK Tencent was up 2.98% though eased to close at +0.67% as the market weakened in the afternoon.
  
  

CPI 2.3% versus estimate 2.3% and Feb’s 1.5%
PPI 0.4% versus estimate 0.4% and Feb’s 0.1% 

Takeaway: Analysts nailed their estimates on the release. PPI’s small rise was driven by mining, food and clothing. While not to overstate the importance of one month’s data, PPI could be considered a green shoot as it indicates an increase by demand by industries and increased commodity prices. CPI garnered significant attention as food was the primary driver rising 4.1% year over year driven by higher pork prices which jumped 5.1%. Swine flu fears have decreased the population of Chinese pigs. The trade war also has raised the price of imported pork products from the US. Higher vegetable prices were also a contributor due to seasonality. While the analysts don’t believe today’s number will chance PBOC policy it does put inflation on the radar. Two brokers speculated that the higher CPI jeopardizes a bank reserve requirement ratio cut. For investors, the CPI weighed on mainland staples as higher prices could limit consumer purchases due to higher prices leading to profit-taking.

Hang Seng fell -0.93%/-280 index points on higher volumes as the index dipped below 30k to close at 29,839. Only three stocks advanced while 46 declined as the mainland’s market declined weighed on HK sentiment. Ping An was off -1.82%/-28 index points while Tencent was a rare positive stock gaining +0.67%/+21 index points. Energy giant CNOOC was off -2.28%/-17 index points. Macau gaming stocks were lower joined by Apple supplier Sunny Optical -3.62%/-8 index points after reporting March shipments met analyst expectations. The MSCI China All Shares’ HK were off -1.16% led lower by technology -3.19%, real estate -2.12% and industrials -2.04%. Only Communications managed a gain of +0.1% led by Tencent in a fairly broad sell off. Southbound Connect volumes were elevated as Chinese investors were buyers of HK stocks led by 4 to 1 buying in Tencent. Geely Auto was sold 3 to 1 while CCB saw outsized buying. It is interesting that mainland investors are buying the dip here.  

Shanghai & Shenzhen fell on profit taking as the higher CPI weighed on staples leading to a broad sell off particularly of recent winners. The indices were off -1.6% and -2.19% on volumes 2X the 1 year average but off 9% day over day. Breadth was poor with only 816 advancers and 2,768 decliners. Small caps took the brunt of the selling though it was a fairly uniform sell off. Staples were off -3.52% as the mainland stocks in the MSCI China All Shares fell -2.08%. Healthcare was off -2.91% on reports of a mainland CEO being arrested on murder charges though recent strong performance was the likely culprit as the company is a very small one/non index constituent. Materials, real estate and tech were lower -2.71%, -2.56% and -2.52%. Utilities were the only sector positive +0.08% though financials “outperformed” -1.17%. Southbound Connect volumes were elevated as foreign investors also took profits leading to a small outflow.  

I don’t like to overthink a single day’s price action. The mainland market has had a strong start to the year so profit taking or even a correction are overdue. One broker noted that markets were overdue for a “breather”. I do believe that mainland markets should see a pick up in May due to the MSCI inclusion at month end. The pro forma is released mid-May though we can back into the names beginning in early May. Hong Kong stocks haven’t rallied as much as the mainland while Chinese internet and e-commerce companies’ P/E is well off its historical average P/E of 31 since August 2013 versus 27 today. US internet stocks, as defined by the Dow Jones US internet index, currently have a P/E of 38 and a historical average of 35.9 over the same time period. The wide valuation gap can rectified by US names falling, China names rising or a combination of both.  

A local broker noted a pick up in mainland stock buybacks in the month of April which Bloomberg also reported on. According to Sinolink Securities 146 companies have announced buybacks with an additional 17 companies planning to do so. In doubling checking on Bloomberg, I only see 10 buybacks announced though many of which are significant with seven of ten are purchase of more than 300mm shares. I’m not sure why there is such a disparity though since 12/31/18 Bloomberg analytics show 67 buybacks in the mainland market.  

A mainland media source noted Amazon Web Services will provide China Express Airlines’ cloud computing. The timing is interesting as trade talks have included getting more US cloud computing technology into China.  

CNY 6.71  

• Yield on 1 Day Chinese Gov’t Bond 1.97%
• Yield on 10 Year Chinese Gov’t Bond 3.29%
• Yield on 10 Year China Development Bank Bond 3.74%

Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper off -0.56%