Hope all is well! My flight home was canceled yesterday so I am writing from 35,000 feet.

Key News

• Treasury Secretary Mnuchin’s comments after the Asia market close/5am EST that a trade deal was 90% done has sent futures higher. The comments are in stark contrast to the negative tone driven by the Washington Post article that three Chinese banks have violated US law by dealing with North Korea which sent HK and mainland financials lower on Tuesday. Despite several glaring holes in the article, it had a clear effect on investors’ sentiment. The trade talk roller coaster had taken a positive tone driven by chatter that the US would not impose further tariffs until post-G-20 and US technology companies resuming equipment shipments to Huawei. Lost yet? Me too though we better buckle up.
• Quiet night as volumes cratered as investors wait for G-20 Summit. Healthcare rallied as a defensive play while brokers fell after two companies had controlling shareholders announce stock sales which led to profit taking in the space. Banks rebounded after Tuesday’s WaPo induced decline.

The Hang Seng gained +0.13%/+36 index points to close at 29,221 on very light volumes off -21% day over day and well off the 1-year average. There were 27 advancers and 22 decliners led by China Construction Bank +0.92%/+19.8 index points and Ping An Insurance +0.65%/+10.2 index points though HK Stock Exchange slipped -1.59%/-8.4 index points. The HK stocks within the MSCI China All Shares gained +0.25% led by defensively oriented healthcare 2.39% and materials +1.03% which was led higher by gold stocks while discretionary was off -0.82%. Southbound Connect volumes were light but mainland investors were buyers especially of banks.

The Shanghai & Shenzhen were -0.19% and flat/0.00% on light volumes off -23% day over day and below the 1-year average and mixed breadth as 1,607 stocks advanced and 1,844 declined. Small and Mid-caps outperformed mega caps and large caps driven by the mar financials underperformed and tech outperformed. The mainland stocks in the MSCI China All Shares were off -0.05% as healthcare +1.22%, tech +0.77% and energy +0.74% though mainland materials were off -1.1% on profit-taking in gold stocks and financials off -0.75% as brokers were sold. Northbound Connect volumes were light with foreign investors net sellers of mainland stocks to the tune of -$176mm following Tuesday’s reduction by -$479mm. 

FedEx’s earnings provide an insight into how the trade war is negatively impacting the global economy. US multi-national companies will feel the effect as evidenced by FedEx’s earnings miss. 

A recent Jason Zweig WSJ article came up in a conversation. The article said China and Emerging Markets have underperformed due to IPOs increasing the market cap of the countries while the US stock market has benefited from buybacks. I believe the real culprit is not IPOs but the sector exposure of China and EM indices. The lack of growth sector exposure versus the value sectors in evident by looking at MSCI EM sector exposure (~45% value: financials, energy, industrials and materials). The definition of China has a similar issue though compounded by US-listed Chinese companies (mainly tech stocks) were not added to MSCI indices until late 2015 and early 2016. As of 12/31/2014, the sector exposure of MSCI China was 37% financials versus 24% today. The index didn’t capture the growth the dynamic or as my colleague Jonathan Shelon calls it the "companies that act as transmission engines for domestic consumption". 

From 3/13/2009 to today the weekly return of the S&P 500 is up 383% versus MSCI EM +164%. EM is out of favor right? MSCI EM Technology is up +411% over the same time period .

MSCI China is up +172% over the same time period. Out favor right? MSCI China Technology is up 1,655%. (source Bloomberg)

• CNY 6.87 versus 6.87 yesterday
• Yield on 1 Day Chinese Gov’t Bond 1.09% versus 1.1%
• Yield on 10 Year Chinese Gov’t Bond 3.25% versus 3.2499%
• Yield on 10 Year China Development Bank Bond 3.74% versus 3.75%
• Commodities were stronger on the Shanghai & Dalian Exchanges with Dr. Copper 0.87%