May FAI/IP/Retail Sales Released, Lujiazui Forum Day 2
- Fixed Asset Investment: 5.6% versus estimate 6.1% and April’s 6.1%
- Industrial Production: 5% versus estimate 5.4% and April 5.4%
- Retail Sales: 8.6% versus estimate 8.1% and April’s 7.2%
- Jobless Rate: 5% versus April’s 5% .
Takeaway: “A Tale of Two Chinas” was a piece we wrote several years ago to describe the divergent performance of traditional China versus New China economic sectors. While IP and FAI missed expectations as external and domestic factors weigh on China’s economy, retail sales surprised to the upside. The trade war is clearly having a negative effect though policy makers’ efforts on raising domestic consumption appear to be working. It is not anticipated that May’s weak economic releases will see an expansion beyond targeted stimulus though if the trade war escalates policy makers won’t have any choice but ratchet up stimulus. The data was released at 3pm (mainland market closes at 3pm, HK 4pm) though markets had already started an afternoon slump.
- Lujiazui Forum Highlights: ex-PBOC Governor Zhou speech spoke to the dangers of currency devaluations while PBOC Vice Governor spoke about eliminating the QFII system.
- 521 US companies and 141 trade organizations wrote a letter to President Trump warning the negative effect of tariffs on “American businesses, farmers, families and the US economy” according Tariffs Hurt the Heartland in advance of next Monday’s US Trade Representative Office hearings. The hearings will provide companies to voice their opinions as the press release states “Tariffs are taxes paid directly by US companies.” What is most fascinating to me is that this press release was reported widely in China as Walmart and Target participated in the letter. The press release received almost no media coverage here in the US. Broadcom’s post US close earnings miss yesterday weighed on technology in Asia as the company conference call provided a somber picture of the trade war effect on the company. It is by no means the only company that is will be being adversely effected by the trade war. While both sides appear to be digging in, let’s hope they take notice. One broker reported that Apple CEO Tim Cook met with President Trump yesterday at the White House who would be a fantastic broker on bringing both sides together.
The Hang Seng slid lower to close -0.65%/-175 index points while volume was light despite the Hang Seng indices rebalancing at the close. Breadth was weak with 12 advancers and 35 decliners as AIA declined -1.67%/-44.6 index points, Tencent off -1.26%/-33.2 index points and HSBC -0.78%/-22 index points. Protests have died down though may flare up this weekend as Broadcom weighed on Asia tech and market sentiment. The HK stocks within the MSCI China All Shares slid -0.68% as energy and utilities gained +0.37% and +0.35% though tech and communications fell -1.87% and -1.16%. It was a fairly uninspiring session in quiet trading as trade war induced sentiment takes center stage. Southbound Connect volumes were light but mainland buyers were back as CCB and ICBC saw outsized buying.
The Shanghai & Shenzhen slid -0.99% and -1.81% as tech had a terrible day on light volumes though breadth was awful with 487 advancers and 3,031. Mega/large caps held up significantly better as mid caps and small caps fell 100bps worse. As evidenced by the mainland stocks within the MSCI China All Shares fell -0.87% driven by technology -2.05% and communications -1.99% though real estate managed a +0.09%. Northbound Connect saw outflow of -236mm following eight days of inflows. The outflow was driven by selling in Shenzhen Connect stocks especially tech stocks as Shanghai Connect stocks actually had net buying.
- CNY 6.92 versus 6.92 yesterday
- Yield on 1 Day Chinese Gov’t Bond 1.59% versus 1.69%
- Yield on 10 Year Chinese Gov’t Bond 3.26% versus 3.29%
- Yield on 10 Year China Development Bank Bond 3.73% versus 3.76%
- Commodities were mixed/lower on the Shanghai & Dalian Exchanges with Dr. Copper +0.17%