Daily Posts

It Takes Two to Tango

Hope you had a great weekend. CLN will be on a holiday schedule this week and next as a I have some time with the family though I plan on getting the report out around major earnings announcements.

Key News

  • Monday was shaping up to be a difficult day with continued Hong Kong protests that increasingly target transportation hubs, HSBC’s CEO surprise departure and deteriorating relations between South Korea and Japan. China’s response to Trump’s proposed 10% Sept 1 tariff was allowing the renminbi to fall above the psychological level of 7 and halting US agriculture purchases. The renminbi’s slide was occurring as China’s economy slows due to the trade war though by not defending the renminbi it opens criticism of currency manipulation and “weaponizing” the currency. If it wasn’t for the trade war, the Fed’s less aggressive cutting posture would have been the explanation. There are reports denying the US agriculture purchase halts. Today’s price action will be exacerbated by summer holidays post US earnings season. Traders were much more focused on HK demonstrations than trade/renminbi as several recommend avoiding HK retailers and real estate. HK’s July Whole Economy PMI plunged to 43.8 from June’s 47.9 while Asia was a sea of red with Korea hit hard (again).
  • August 2015 was a difficult month as the mainland equity markets were coming off their early June highs in a dramatic fashion. China’s surprise currency adjustment/devaluation was a shock to global market participants who were unprepared (ie many were levered long renminbi). To top it off, US listed Chinese companies had a soft August earnings season. June, July and August were very difficult months. What turned things around? The lows in August led to multi-year run as MSCI included US listed Chinese companies in their indices in November 2015 while earnings picked up. There are similarities between then and now though obviously the trade war is a different animal. The low was only the low in hindsight. At the time I though about our investment thesis and if anything had changed. Like today there isn’t any change. This Wednesday at 5pm MSCI will provide the pro forma for the August 27th rebalance which will include adding 5% more market cap of a select number of Chinese mainland stocks. 

July Caixin Services PMI                 51.6 versus estimate 52 and June’s 52

Takeaway: The slight softening keeps the Services PMI in expansion territory though at a slower pace. The release was largely ignored by as bigger marco issues took center stage.

The Hang Seng fell -2.85%/-767 index points to 26,151 on lighter volume than Friday though higher than the 1 year average. Only one stock advanced while 49 declined as Tencent -4.27%/-117 index points, AIA -3.26%/-89 index points and CCB -2.53%/-47.9 index points. Hang Lung Properties managed a +0.21%/+0.25 index points to be the only gaining stock as real estate companies Sun Kung Hai -5.22%/-20.9 ip, CK Asset -5.08%/-21.2 ip, and Wharf Real Estate -4.39%/-7.3 ip. The mainland stocks within the MSCI China All Shares fell -3.06% with real estate -4.18%, communications -4.06%, industrials -2.87%, healthcare -2.77% and materials -2.7%. Mainland investors were active buyers in Southbound Connect though volumes were light. Volume leaders Tencent and Pin An were bought 2.5 to 1. 

Shanghai and Shenzhen were off -1.62% and -1.47% on light volumes and poor breadth of only 800 advancers and 2,755 decliners. It was a fairly uniform risk off day with large, mid and small in line with one another. The mainland stocks within the MSCI China All Shares index were off -3.3% as the currency’s depreciation added to the stocks decline. Real estate was very weak off -4.23%, discretionary -3.97% as liquor stocks continue to experience a rotation, healthcare -3.52%, financials -3.44%, utilities -3.37%, tech -3.36% etc. Northbound Connect flows were moderate with sellers outpacing buyers 3 to 2 as volume leaders Kweichow Moutai and Ping An were sold 6 to 5 and 8 to 3. Shenzhen Connect had modest outflows compared to Shanghai Connect. Foreign investors sold $491mm of mainland stocks.

CNY 7.03 versus 6.93; 1.39%

Bond rally picked up some steam on further equity weakness. 

Yield on 1 Day Chinese Gov’t Bond 1.94% versus 2.03% 

Yield on 10 Year Chinese Gov’t Bond 3.13% versus 3.12% 

Yield on 10 Year China Development Bank Bond 3.57% versus 3.61%

Commodities cratered on the Shanghai & Dalian Exchanges with Dr. Copper -1.06%.