Hope all is well! With HK and the mainland markets closed tomorrow there is unlikely to be a note tomorrow though I’ll evaluate based on news overnight.

Key News

• A very quiet pre-holiday trading session as HK and mainland markets are closed Friday for Dragon Boat Festival. Market sentiment was poor as no major positive trade catalysts arose while several news items weighed on markets US Taiwan arms deal, Putin Xi meeting in Russia, oil/commodity price collapse, Marc Rubio WSJ editorial on raising accounting standards for US listed Chinese companies, mixed signals on a Mexico tariff and a multitude of economic releases next week (Exports/Imports, FDI, CPI/PPI, FAI, IP, Retail Sales). No mas!/Uncle!
• On the positive front, several government agencies proposed cutting auto sales curbs and encouraging purchases of home appliances leading to a rally in both segments. The Ministry of Industry and Information Technology granted four 5G licenses to the three telecom giants and cable companies. 5G related names sold off on the news having previously run up. Foreign investors have returned as buyers of mainland stocks this week. Markets appear to have little confidence in Mnuchin and PBOC Governor Yi meeting this weekend at the G-20 finance minister meeting though I am a bit more optimistic. In theory Mnuchin is meeting one of his biggest shareholders due to China’s holdings of $1.1 trillion of US Treasuries.

The Hang Seng managed a +0.26%/+69.8 index point gain on very light volumes 2/3 of the 1 year average and lowest volume day since the day before Chinese New Year’s. Breadth was positive with 32 advancers and 15 decliners as AIA gained +0.75%/+20.1 index points while energy giant CNOOC slumped -1.78%/-11.6 index points and China Construction Bank gained +0.49%/+9.8 index points. Tencent was off slightly at -0.18%/-4.8 index points while real estate names rallied on potential Fed cuts. The HK stocks within the MSCI China All Shares eased -0.06% as tech was particularly weak on the lack of trade progress -1.19%, energy -1.11% as oil prices collapsed, and staples off -0.27.4%. Autos’ rally lifted discretionary +0.87%, utilities +0.37% and real estate +0.33%. Southbound Connect volumes were anemic in mixed trading though volume leader ICBC saw outsized buying relative to selling while Bank of China saw outsized selling and Xinyi Solar saw 2.5X buying to selling. 

The Shanghai & Shenzhen were weak in advance of the third day holiday as a lack of positive trade catalysts weigh on the market as the indices fell -1.17% and -2.08% on very light volumes that one mainland broker called “boring” and poor breadth with only 656 advancers and 3,163 decliners. The mainland stocks within the MSCI China All Shares slumped -1.14% as the trade war weighs on tech -2.87%, profit taking in communications -2.82%, staples off -1.67% as food and beverage stocks were weak, healthcare continues to digest further regulation and nationalization of the drug procurement pricing policy -1.63% and industrials off -1.23%. All sectors were in the red with utilities and financials easing -0.24% and -0.4%. Small and mid caps underperformed falling ~-2% while mega caps were off ~-0.5%. Rare earth names were higher as they become a potential tool in a trade war. Northbound Connect volumes were anemic but foreign investors were buyers of $156mm of mainland stocks. It is interesting to see foreign investors coming back into the mainland markets this week as they are clearly buying low. In comparing mainland stock yields to Chinese 10 Year Treasury Yield, one would be buyer of stocks today. 

A broker provided a research report on their China risk aversion model based on mainland call and put option prices. They found China’s financial conditions were the primary driver of risk aversion among several factors. Risk aversion is currently is low as mainland investors appear to be focused on domestic policies. Having been in Beijing a few weeks ago, there was little evidence of the trade war was having a noticeable effect on the local population. Given this is a small sample size I noticed that equity ETFs in China have seen only moderate outflows in the past week (-$93mm) .

Macau gaming stocks received a boost from a sell side upgrade.

• CNY 6.91 versus 6.90 yesterday
• Yield on 1 Day Chinese Gov’t Bond 1.61% versus 1.68%
• Yield on 10 Year Chinese Gov’t Bond 3.25% versus 3.25%
• Yield on 10 Year China Development Bank Bond 3.74% versus 3.73%
• Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.86%