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Risk-Off, North South Connect Flow Divergences (Buy Low versus Sell Low), China Bond Rally

TGIF!

Key News Overnight
Asian equities followed the US’ risk off lower on Trump’s Tweet threatening 10% tariffs on the remaining $300B of Chinese exports. Hong Kong’s weakness was exacerbated as demonstrations continued which are having a material effect on the local economy as July retail sales plummeted. Japan and South Korea’s political and trade relationship continues to deteriorate. Our US institutional brokers roundly commented the US market reaction was overdone while China’s response to the Trump tweet was fairly muted. Trump was direct on what he wants: agriculture purchases and stopping fentanyl neither of which are not high hurdles. The issue are the tactics. As my kids demonstrate on a daily basis nobody likes being told what to do. Certainly not a sovereign nation.

The Hang Seng declined -2.35%/-647 index points to close at 26,918 as volumes surged 43% day over day over the 1 year average for the first time in a month. Only 3 stocks advanced with 47 declining as Tencent -3.84%/-110 index points, AIA -1.94%/-54.8 index points and Ping An -2.47%/-37.9 index points. Apple suppler Sunny Optical declined -7.77%/-14.1 index points as iPhones would be included in the September tariffs. The HK stocks within the MSCI China All Shares declined -2.93% as tech -4.95%, healthcare -4.04%, discretionary -3.8%, communications -3.48%, energy -3.17% and materials -2.44%. Southbound Connect volumes were moderate though buyers were very active in 2 to 1 buys/sells as volume leader Tencent 3 to 1.

The Shanghai & Shenzhen declined -1.41% and -1.48% on lower volumes off -7% day over day and well off the 1 year average. Breadth was awful with only 416 advancers and 3,131 decliners. It was a real risk off day with mega caps off slightly more than mid and small caps. The MSCI China All Shares mainland stocks declined -1.86% as tech -2.53%, financials -2.31%, energy -2.19%, industrials -2.1% etc. Stock Connect volumes were moderate as foreign investors turned sellers with $981mm coming out of mainland stocks. The irony of course is MSCI’s month end rebalance will cause this money to come back in.

Morgan Stanley is buying the controlling 2% stake in their mainland joint venture Morgan Stanley Huaxin Securities.

Hao Peng, the head of State-Owned Assets Supervision and Administration (SASAC) met with Tencent Pony Ma to learn how the company’s big data and AI technology could be incorporated by SOEs. The potential purchases from SOEs could be a nice win for the company as SASAC hopes to make the SOEs more efficient and profitable.

China Bond Connect announced in its July wrap up release the 1,105th investor signed on including an the first Bahamas based investor. Similar to Stock Connect, Bond Connect allows an easy access route for foreign investors in China’s Interbank Bond Market, the world’s second largest bond market globally.

Han’s Laser (002008 CH) declined -8.81% after the CEO went off on a TV reporter questioning the company’s European efforts which some have accused as potentially fraudulent.

CNY 6.93 versus 6.90; 55bps overnight is huge move following yesterday’s 27bps

Bond rally picked up some steam on further equity weakness.
Yield on 1 Day Chinese Gov’t Bond 2.03% versus 2.04%
Yield on 10 Year Chinese Gov’t Bond 3.12% versus 3.16%
Yield on 10 Year China Development Bank Bond 3.61% versus 3.65%

Commodities cratered on the Shanghai & Dalian Exchanges with Dr. Copper -0.47%.