Daily Posts

Caixin Manufacturing PMI Rises, Trade War Oliver Branches, Very Strong Foreign Buying, BABA’s Altibaba Problem, 10 Year’s Rally = Equity Bottom?

Hope you had a great weekend! 

Caixin China Manufacturing PMI 50.2 versus estimate 50.0 and May’s 50.2 .

Takeaway: The Caixin PMIs are calculated by IHS Markit versus last Friday’s “official” PMIs are calculated by the National Bureau of Statistics. The two PMIs differ in their survey methodology and sample size as the Caixin IHS Markit focuses on small and medium sized private companies in a small sample size while the “official” NBS surveys large SOEs in a large sample size. Thus the Caixin tends to be more volatile though some deem more reliable as Western publicly traded IHS Markit calculates it. The April release was quite resilient in the face of the trade war and Friday’s official Manufacturing release which dipped into contraction at 49.4. While activity picked up in April, the outlook was dimmer on trade concerns. 

Key News Overnight

  • While State Council Information Office published a white paper titled “China’s Position on the China-US Economic and Trade Consultations”, there appears to be optimism that the US and China can meet at the G-20 finance ministers this coming weekend. The optimist narrative would say such a meeting sets up a Trump Xi meeting at the G-20 late this month.
  • CSRC Chairman Yi Huiman provided supportive comments for equity investors during a Sunday evening interview on the resiliency of Chinese capital markets and continued opening up to foreign investors.
  • Two providences have increased their auto buying quotas in a welcome sign for the sector. 5G/telecom names rallied on policy makers commitment to 5G regardless of trade war.

The Hang Seng gave up early gains to ease -0.03%/-7 index points to close at 26,893 after breaching 27k on Friday. Volumes were below the 1 year average in mixed breadth of 22 advancers and 27 decliners. The index would have done worse if weren’t for bargain hunters lifting index heavy weight Tencent +2.33%/+62.4 index points though AIA -1.63%/-42.8 index points. China Mobile gained +2.92%/+38.0 index points on the 5G comments. The HK stocks (which doesn’t include AIA due to its HK domicile) in the MSCI China All Shares gained +0.72% driven by Tencent pulling the communications sector +2.51% though defensive sectors such as utilities +2.07% and staples 0.96%. Real estate and tech were off -0.96% and -0.49%. Southbound Connect volumes were light though Tencent and ICBC saw buying. 

The Shanghai & Shenzhen gave up early gains to close -0.3% and -1.04% on moderate volumes 10% higher than Friday and slightly above the 1 year average and weak breadth of 888 advancers and 2,697 decliners. There was a very large divergence as mega caps were actually positive +50bps as small caps slumped. The mainland stocks in the MSCI China All Shares were off just -0.14% as financials gained +0.27% and discretionary +0.19%. Materials, energy and real estate were off -1.09%, -0.76% and -0.74%. Northbound Connect volumes were light though foreign investors were significant buyers as $638mm flowed into mainland stocks net of sales. MSCI Inclusion stocks Ping An and Kweichow Moutai were bought. 

Alibaba has 114mm shares sold short which equals a short interest ratio of 5.5 (the shares short equals five days of volume). Trade war right? Wrong! Altibaba, the entity holding Yahoo’s Alibaba stake (AABA ticker), announced a month ago it is going to liquidate half of its 283mm shares prior to its June 27th shareholder meeting. Hedge funds are long AABA/short BABA in size! The BABA short interest has nothing due to a trade war but the absolutely horrific decision to publicly announce the number of shares being sold and the exact time table! The ultimate irony is AABA has only hurt itself as its value is determined by BABA’s value. The long saga of BABA and Yahoo ends in a mind numbing decision though AABA will still hold 140mm shares by the end of June. For long term investors is does offer a unique buying opportunity. 

China’s 10 Year Treasury Yield dropped to 3.27% today though above the low reached in March of 3.06% (the 1 year high is 3.68% in September last year while the 5 year high is 4.71% in November 2013.). Asset classes compete with one another as the Shanghai Composite’s dividend yield is now 2.38%. The ratio of the 10 Year Yield/Shanghai Dividend Yield is a great indicator of relative value. One could also use it as a market timing tool. On a historical basis the ratio would indicate stocks appear “cheap”. 

Tencent Music’s IPO lock up expires June 10th.

  • CNY 6.90 versus 6.90 yesterday
  • Yield on 1 Day Chinese Gov’t Bond 1.76% versus 1.71%
  • Yield on 10 Year Chinese Gov’t Bond 3.27% versus 3.31%
  • Yield on 10 Year China Development Bank Bond 3.74% versus 3.77%
  • Commodities were lower (again) on the Shanghai & Dalian Exchanges with Dr. Copper -0.39%