Hope all is well! 

Key News Overnight

• There is discussion that China’s hard line pivot could be driven by the disparity between changing regulations (easy ie lastWednesday’s leveling of playing field for foreign bank and insurance companies in China) and changing law (harder). The US demand that enforcement is backed by Chinese law could be harder for China to implement quickly. This latest round of Kabuki theatre could also just be a negotiating tactic just as threatening to raise tariffs is. Anyone who has bought/sold a house recognizes the arduous final round of tit for tat negotiations (Selling my first house nearly collapsed as the buyer was insistent I replace a fence despite representing 0.01% of the home value. After finally conceding and paying for it, the new owner promptly tore the fence out). Ultimately both sides want a deal done for their own vested interest. The biggest beneficiary in the US are farmers and the auto industry which coincidentally are heavily concentrated in four critical 2020 swing states. The biggest beneficiary in China is a return to the domestic agenda and firming the economy.  More importantly neither side wants their legacy, their history to be known as 2019’s Smoot Hawley. The downsides to an escalation or going nuclear are far worse than a 2% decline in the US. To put in perspective the US equity market has a market cap of $33 trillion versus China’s $6.4 trillion.
• Tencent (700 HK) released Game for Peace which is eerily similar to the globally popular PlayerUknown’s Battlegrounds. The company appears to have found a way to monetize PUBG by releasing  a very similar game under a different name. Tencent gained +1.05% on volumes 2X yesterday as the stock was up as much as +3.73% though was dragged down by the broader market. 

April Trade Data Year over Year in US $ (the number used by the media)
Exports: -2.7% versus estimate 3% and March’s 14.2%
Imports:  4% versus estimate -2.1% and March’s -7.6%
Trade Balance: $13.8B versus estimate $34.5B and March’s $32.6B

April Trade Data Year over Year in CNY (the number no one will quote)
Exports: 3.1% versus estimate 8% and March’s 21.3%
Imports: 10.3% versus survey 3% and March’s -1.8%
Trade Balance: 93.5B versus survey 216.7B estimate and March’s 221.2B

Takeaway: Headlines are that China’s trade number disappoint though if one spent a second to look in CNY it is fine. Why would one quote a foreign country’s economic numbers in US $? Do we quote US GDP in Canadian dollars? Yes the US is a big export destination at 16.2% (down from 20.6% in Sept 2018) plus HK’s 11.3% includes a healthy amount of Chinese goods that go through HK’s port but Europe is 17.5% and Asean 14.3%. There are two issues to be aware of. March was especially strong following Chinese New Year’s in February leading to a potential April inventory build. Another factor was China’s April 1 implementation of a VAT cut from 16% to 13% as importers likely held off on ordering until the cut went into effect. I suppose a shrinking trade balance and stronger imports is a good thing in a trade war. Oil imports likely increased in the face of Iran sanctions. The data release occurred at 11am local time extending the morning rally. The WSJ had a very negative article on the trade numbers despite the facts which is disappointing as a paying subscriber. 

The Hang Seng followed global equity market weakness dropping -1.23%/-359 index points on higher volumes +11% day over day and just above the 1 year average. Breadth was weak with only 7 advancer and 43 decliners as Tencent’s +1.05%/+32 index points was offset by HSBC -1.82%/-54.4 index points, AIA -1.71%/-49.9 index points and CCB -1.92%/42.4 index points. HK stocks within the MSCI China All Shares declined -1.1% as trade sensitive -2.81%, materials -2.19%, healthcare -2.05%, financials -1.93%, discretionary -1.85% etc. Tencent did pull communications +0.52% and beverage names gained pulling staples to +0.08%. Meituan Diangping rose +1.41% on a Citi upgrade. Tencent experience 4 to 1 buying on Southbound Connect while ICBC had a strong buying day. 

Shanghai & Shenzhen opened lower and rallied in the morning though a late day sell off pulled the indices back into the red to close -1.12% and -0.65%. Volumes were off -9% day over day though breadth was better than anticipated with 1,671 advancers and 1,842 decliners. Small/mid caps managed to outperform large cap stocks as bargain holders scooped up tech names -0.51% within the mainland stocks within the MSCI China All Shares. Financials dragged indices lower -2.01% on no news though industrials -1.62%, utilities -1.58%, healthcare -1.58% staples -1.55% energy -1.47% etc were all off. Kweichow Moutai has a new chairman who according to Bloomberg and SCMP is refocusing the company on its core business and shedding non-core businesses. The company had filed to create a new sales/marketing group under the parent and not the listed company leading to a raft of analyst downgrades as it is unclear if this would divert sales from the listed company to the parent. The Shanghai Stock Exchange has inquired on the move which raises questions of governance in a high profile and widely owned company though we don’t know the effect of the move. One broker did upgrade the stock saying the move will have little/no effect on listed company’s revenue. Southbound Connect volumes were elevated/moderate with foreign sellers outpacing buyers as -$731mm was pulled from mainland stocks. Kweichow Moutai saw 2 to 1 selling while Ping An had sellers slightly outpace buyers. There was an interesting divergence between Shanghai and Shenzhen Connect as foreign investors sold the former and bought the latter. 

Autohome (ATHM) an online auto website similar to Autotrader as it assists potential buyers on finding dealers and ascertaining a fair price reported strong results this morning pre-market. Investors Business Daily had a great write up on the company two weeks ago.

• Revenue RMB 1.6B +25.1% YoY versus estimate RMB 1.58B
• EPS 5.87 versus estimate 5.4
• Net income RMB 700.6mm +33.9% YoY versus RMB 520mm
• Diluted EPS $5.41 +33.6% from $4.05 YoY
• Monthly users increased 14% YoY to 30.2mm
• Q2 Revenue Outlook 2.28B to 2.31B versus estimate 2.23B .

Reuters had a good article on JP Morgan Asset Management being approved to buy out their JV partner and go alone in offering asset management in China. 

CNY 6.77 versus 6.76 yesterday. Bond prices firm slightly on equity weakness

• Yield on 1 Day Chinese Gov’t Bond 1.32% versus 1.37% yesterday

• Yield on 10 Year Chinese Gov’t Bond 3.36% Tuesday versus 3.38% yesterday

• Yield on 10 Year China Development Bank Bond 3.75% Tuesday versus 3.77% yesterday .

Commodities were mixed/lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.77%