Daily Posts

Tech Rally, FTSE Rebalance/The Power of Passive

TGIF! Apologies for the late arrival as I’ve had a busy morning. I am traveling overseas this weekend but hope to get CLN out on Monday through Tuesday it is going to be difficult.

Key News Overnight

  • The CSRC proposed relaxing listing standards and M&A rules for Shenzhen Stock Exchange’s Chinext Board. There are potentially two factors at work. The current rule on only profitable companies being allowed to list is limiting high growth companies’ ability to go public. Relaxing that rule and allowing private companies to buy publicly traded companies via “back door” listings would promote growth for high tech companies in need of capital. With the Shanghai Science & Tech board getting close to up and running, the regulator might have felt they needed to help the Shenzhen board from feeling left out.
  • Passive portfolios benchmarked to FTSE Russell indices need to rebalance their portfolios at today’s close so they match the refreshed index Monday morning. Volumes across Asia were up as HK’s volumes increased 21% from yesterday and above the 1 year average. I am very well versed in MSCI’s index methodology but less so in FTSE despite the largest EM ETF globally being benchmarked to a FTSE index. Meituan Dianping was added to FTSE indices including the EM ETF mentioned. The effect? Thursday Meituan traded 38mm shares while today it was 152mm! 117mm of the 152mm shares traded occurred at the close. Strange? Not all as index managers have to trade at the close so their portfolios match the index on Monday. FTSE is adding over 1,000 mainland stocks to their indices though the previously mentioned EM ETF’s customized benchmark already includes mainland stocks. Brokers estimate range from $1B to $2B of inflows due to the FTSE inclusion which matches nicely with the Northbound Connect flows today.
  • Trade news/sentiment has been positive as US and China trade teams will meet on Tuesday in advance of the G-20 summit. Could President Xi broker a US North Korea deal?

The Hang Seng eased -0.27%/76 index points to close at 28,473 for a weekly gain of 5% (10% YTD) as traders took short term profits. Volumes surged due to the FTSE rebalance volumes increased 21% day over day in mixed breadth of 12 advancers and 34 decliners as AIA continued its sell side induced winning streak gaining +0.79%/.6 index points though HSBC declined -0.84%/-2.9 index points and utility CLP Holdings dropped -4.27%/-22.1 index points after issuing a profit warning. Energy giant CNOOC had a good day on Middle East tensions +2.59%/+18.8 index points. The HK stocks w/in the MSCI China All Shares declined -0.11% though energy was higher +1.47% and discretionary +0.79% though healthcare and tech lagged -2.6% and -1.8%. Southbound Connect flows were light in mixed trading with buyers slightly outpacing sellers. 

The Shanghai & Shenzhen gained +0.5% and +1.34% on strong volumes 1/3 higher than the 1 year average and almost 2X the volume on Monday and strong breadth 3,141 advancers and 469 decliners. The indices gain +4.16% and +4.81% which bring their YTD gains to +20.3% and +24.4%. Mega caps actually declined slightly while small caps jumped over +1.5% on the listing rule relaxation. The divergence is apparent in the sector performance of mainland stocks in the MSCI China All Shares index which gained +0.47% led by tech +1.75%, communications +0.69%,  energy +0.52% and materials +0.43% while utilities declined -0.84%, staples -0.63% and financials -0.39%. Northbound Connect volumes were strong with buyers out in force. Foreign investors bought $1.06 billion of mainland stocks. In the last 14 trading days, foreign investors have bought in 13/14 days. It appears the saying “buy low” still applies!

  • CNY 6.87 versus 6.85 yesterday
  • Yield on 1 Day Chinese Gov’t Bond 1.3% versus 1.44%
  • Yield on 10 Year Chinese Gov’t Bond 3.2499% versus 3.2499%
  • Yield on 10 Year China Development Bank Bond 3.73% versus 3.73%
  • Commodities extended their recent winning streak gaining on the Shanghai & Dalian Exchanges with Dr. Copper +0.11%