Trade War Leads to Trench Digging
Hope all is well!
Key News Overnight
- It was quiet night as volumes shrank driven by trade war sentiment as both sides dig in for a protracted negotiation. President Xi spoke of a “long march” regarding the trade war while a New York Times’ article stated that Chinese video surveillance/technology companies such Hikvision could have their US technology purchases limited.
- Chinese software and semiconductor companies had a very strong day as these companies are apt to fill the void left by curtailed US purchases. There is talk that such companies will receive an income tax break the next two years.
- Rare earth stocks fell back to earth as the momentum driven rally fizzled out.
- There wasn’t a lot color but one broker noted that the head of China’s Social Security Fund stated that scope of investments would be expanded. I would assume this means more equities.
The Hang Seng managed to gain +0.18%/+48.7 index points on light volumes below the 1 year average in mixed breadth of 25 gainers and 23 decliners. AIA gained +1.4%/+38.6 index points following a broker upgrade while the Hong Kong Stock Exchange gained +2.04%/+18.2 index points on news they may add foreign companies to stock connect. Tencent was off -0.64%/-17.5 index points on reports their video ad sales have slowed. The HK stocks within the MSCI China All Shares declined -0.17% as AIA and HKeX are HK domiciled companies and thus not “Chinese” companies. Tech gained +2.08% as these companies could benefit from a US tech purchase ban and Xiaomi’s earnings. Solar companies are considered tech companies (another head scratcher, not energy?) which gained on news on solar power generation is to be increased. Staples gained +0.41%, utilities +0.27% while industrials were off -0.71% and Tencent dragged communications to a -0.62% loss. Southbound Connect volumes were moderate/light though dominated by buyers as ICBC and CCB saw outsized buying. Tencent also had buyers. It appears mainland investors are buying this pullback as market sentiment is poor though economic and corporate fundamentals rebound.
The Shanghai & Shenzhen sold off into the close falling -0.49% and -0.51% on volumes just above the 1 year average though breadth was off with 890 advancers and 2,622 decliners. Mega, large, mid and small were off uniformly. The mainland stocks were off with utilities and tech managing gains of +0.5% and +0.3% though materials were off -0.88% led by rare earth stocks and industrials -0.46%. Tech would have done much better though surveillance company and mega cap Hikvision was off -5.54%, though worth noting it opened down -10% but rallied back a bit while fellow surveillance company Dahua -5.74%. Northbound Connect volumes were light though selling persisted as -$650mm was sold. In ten of the eleven trading sessions, mainland stocks have been sold. The selling is interesting as these same names will be bought at month end during the MSCI inclusion. At the same time foreign investors have locked in strong gains following Q1’s rally and concern around the trade war.
A broker had an interesting report on policies being implemented to counteract the effects of a trade war. In a nutshell tax cuts go a long way in offsetting tariffs.
Several sell side upgrades of Pinduoduo and Qudian following their quarterly results on Monday. Vipshops and Ctrip report after the US close today.
- CNY: 6.90 versus 6.90 yesterday
- Yield on 1 Day Chinese Gov’t Bond 2.12% versus 2.25% yesterday
- Yield on 10 Year Chinese Gov’t Bond 3.34% versus 3.32% yesterday
- Yield on 10 Year China Development Bank Bond 3.77% versus 3.76% yesterday
- Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper -0.65%