Trade War Casualties
Asia markets followed US equity markets south following President Trump’s escalation of tariffs on Friday as his reversal this morning didn’t come in time for most of Asia. Due to its time zone, India was the only market still open thus ended positive as markets fell on the trade war’s escalation as trade sensitive Japan and Korea were hit especially hard. A mainland broker noted that China did not call President Trump as he is claiming. Vice Premier Liu He did publicly comment overnight that an escalation is a bad thing and expressed willingness to negotiate.
Hong Kong fell as demonstrations continued. It does appear that Beijing is going to allow HK to deal with this issue and not intervene. Mainland China was off as CNY depreciated 69bps versus the dollar. There is chatter that Japanese investors are being hit hard by the Yen’s safe haven appreciation. Facing negative interest rates, these investors are rumored to be levering up higher yielding currencies particularly the Turkish Lira. It is likely these same investors were invested in CNY due to China’s reasonable yields.
Wall Street’s official reaction to Trump’s Friday tariff escalation are starting to come in. The proposed higher tariffs would shave ~20bps to 30bps from China’s GDP. Estimates on the US are a little less though the tariff tax comes to nearly $1,000 per US household as the president accurately called tariffs taxes for the first time on Friday. One market commentary noted that the trade war is the US economy’s major hurdle. There is bewilderment that the US would implement policies that will self-inflict such serious economic harm. While the US economy has been resilient to the trade war thus far, the global economy is slowing. The timing of slowing coincides almost exactly with the implementation of the trade war as evidenced by global PMIs peaking in January 2018. The trade war’s objective is to help industries but look at US Steel (X US). Its stock is off from a high of $46.01 in March 2018 to Friday’s close of $11.18. The S&P 500 is almost back to its January 2018 level as well.
Lack of Trade War Math
While Wall Street continues to scratch its head at the US’ pursuit of a trade war, I am perplexed at the lack of numerical analysis and verification in the media. For instance, has anyone examined the claim that China steals $300B of intellectual property each year? Where did that figure come from? Is it accurate? $300B is a big number that comes out to 1.5% of the US’ GDP. Where did this number come from? Back in 2013 The IP Commission (ipcommission.org) didn’t calculate the figure, but took it from a July 9, 2012 meeting held at the American Enterprise Institute in which General Keith Alexander of the US Cyber Command and director of the National Security Agency stated that “approximately $300 billion (6%) is stolen over the networks per year.” (page 19 of the IP Commission Report). The General came to the number by estimating that US intellectual property was worth $5 trillion and China was likely stealing 6%. Not exactly scientific but that’s where it came from. President Obama used the IP Commission report to negotiate an agreement with China to curtail Chinese cyberespionage. In our meeting with Henry Kissinger, he stated that Trump’s methods were unorthodox but effective in that he is raising real issues. It behooves China to put these issues to bed. China has evolved due to its economic growth. Their current disregard for intellectual property rights should be familiar to students of history. The US didn’t abide by intellectual property rules until the 1890s. It was at that point the US finally had enough intellectual property to want to protect it. China is at that stage today. China has been implementing strong IP laws as they have a lot of IP to protect.
The Hang Seng fell 1.91%/499 index points on strong volumes +40% from Friday and above the 1 year average to close at 25,680. Only 4 stocks advanced and 46 declined as index heavyweights AIA -2.89%/-78.8 index points, Tencent -2.45%/-64.5 index points and HSBC -1.58%/-37.3 index points. While not in the Hang Seng, Meituan Dianping surged 8.8% after bizarrely reporting strong results after Friday’s close. The HK stocks within the MSCI China All Shares lost 1.92% as utilities and energy were particularly weak, -3.84% and -3.18%, as discretionary fell the least, by 0.33%. Southbound Connect volumes were strong as mainland investors used the sell off to buy HK stocks. Buyers outpaced sellers by more than 2 to 1 overall as volume leader CCB had 5 to 1 buyers, Tencent 4 to 1 and Ping An 3 to 1.
Shanghai & Shenzhen were down 1.17% and 0.77% on flat volumes and poor breadth as 871 stocks advanced and 2,763 stocks declined. Mega caps were off nearly 1% more than mid and small caps as financials were the worst performing sector. The mainland stocks in the MSCI China All Shares were off 2.2% as financials fell 2.82%, tech -2.58% and staples 2.45%. MSCI China healthcare was off 0.21% as strong earnings are increasingly putting the sector on investors’ radar. Northbound Connect volumes were above average but not significantly as Shanghai Connect saw more outflow than Shenzhen Connect. Foreign investors sold $424mm of mainland stocks. A broker noted that Burger King may IPO its China business in HK. Note that tomorrow is MSCI’s quarterly rebalance and we will be reporting on how changes in their indexes affect markets.
Last Night’s Stats
- CNY 7.14 versus 7.08, 69bps move versus the dollar
- Yield on 1 Day Chinese Gov’t Bond 2.16% versus 2.11%
- Yield on 10 Year Chinese Gov’t Bond 3.05% versus 3.06%
- Yield on 10 Year China Development Bank Bond 3.54% versus 3.54%
- Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.5%.