TGIF! 

Key News

• A quiet night as markets took a breather with a bias to the upside driven by Trump’s late afternoon press conference that Huawei could be part of a trade deal and a meeting at the G-20 between him and President Xi would occur. The other positive was PBOC Deputy Governor Liu Guoqiang’s comments on yuan stability.
• The primary driver of US and global equity performance over the last decade have been technology stocks. Could the trade war’s evolution into a technology war lead to a value comeback? Only time will tell of course! 

The Hang Seng managed to gain +0.32%/+86 index points though gave up -2.12% on the week. Volumes were light running 20% below the 1 year average as thirty four stocks advanced and thirteen gained. China Mobile gained 1.8%/24.4 index points and AIA +0.73%/20 index points though Tencent eased -0.37%/-9.5 index points despite owning 21% of Meituan Dianping (3690 HK) +4.9% after strong revenue growth and positive sell side comments. HK stocks within the MSCI China All Shares gained +0.26% led by utilities 1.68% and discretionary +1.21% led by Meituan and autos on chatter revised sales tax policy. Staples eased -0.63% on beverage weakness while tech -0.53% led lower by semis and despite a strong day from AAC +1.82% after they announced they had bought back 1mm shares. Southbound Connect volumes were light with ICBC, CCB and Tencnet seeing strong buying from mainland investors. 

Shanghai & Shenzhen diverged with the former +0.02% and the latter -0.49% as volumes declined below the 1 year average in mixed breadth with 1,379 advances and 2,091 decliners. The divergence is driven of course by the sector composition of the two composites. This also led to a divergence in mega/large caps outperforming small and mid caps by ~100bps (+50bps/-50bps). Tech and communications declined -0.97% and -0.74% within the MSCI China All Shares’ mainland stocks. Staples and financials gained +1.2% and +0.79% with former led higher by liquor stocks. Autos gained on the tax news which pushed the discretionary sector +0.42%. The divergence continued in Northbound Connect trading as the Shanghai Connect saw inflows while the Shenzhen Connect saw outflows. We finally saw inflows into the MSCI inclusion stocks Kweichow Moutai and Ping An though Shenzhen Connect’s technology stocks saw outflows. 

Yesterday we met with a London based China economist. His main takeaway were similar to what we heard in China last week that China’s economy is stabilizing and on the upswing. The stronger economic footing makes China more prepared for a trade war than in 2018 when they were taken by surprise. 

The IMF released a report that US tariffs on Chinese imports are “borne almost entirely by US importers”. I received an email from the Tax Foundation which had a more dire outlook that full tariffs on all Chinese goods would lead to US GDP declining by 0.74% and job losses of 570k. The GDP decline would negate nearly half of the Tax Cuts and Jobs Act. I’m not familiar with the Tax Foundation nor the credibility of their data but ultimately the trade war is apt lower global GDP growth. 

The New York Times had an article stating that a Chinese rare earth export ban could have unintended consequences due to global supply chains. The US accounts for only 3.8% of China’s exports. Rare earth stocks fell again today.

• CNY 6.90 versus 6.90 yesterday
• Yield on 1 Day Chinese Gov’t Bond 1.97% versus 2.02% yesterday
• Yield on 10 Year Chinese Gov’t Bond 3.33% versus 3.33% yesterday
• Yield on 10 Year China Development Bank Bond 3.74% versus 3.75% yesterday
• Commodities were largely higher on the Shanghai & Dalian Exchanges with Dr. Copper +0.21%

Quiet Night, The Great Tech Divergence?