Key News

Asia traded mixed as Korea had a nice pop while Japan and Taiwan had modest gains. Hong Kong, China, India and Malaysia posted modest losses. It truly felt like the last week of August

Tencent Music Entertainment (TME US) was down by 6.82% on reports that regulators are questioning the music exclusivity deals struck by the company. The sell side has been quiet thus far on the news, which reportedly dates back to earlier this year. Tencent (700 HK) sold off by 2.21% on the news though one broker noted the break below HK $320 in the stock likely triggered an automatic sell program. The broker felt the move in Tencent was likely overdone and exacerbated by summer volumes.

The State Council published a twenty-point outline on supporting domestic consumption with an emphasis on relaxing auto sales restrictions and supporting home appliance sales. The announcement is a reiteration of previous statements so its effect is likely to be minimal. Policy makers have been hesitant to tap their dry power in a significant way of late as evidenced by Monday’s move by the PBOC to roll intra-bank liquidity at the same rate. This might lead one to believe the new loan prime rate (LPR) will be implemented incrementally. Additionally, mortgages are excepted from the new, lower rate, which means that real estate will not be included in this round of stimulus.

RMB is experiencing a modest deprecation of 3.86% versus the dollar (spot return 7/31/19 to 8/28/19). For those that have followed RMB, the move in the month of August is outsized, but modest relative to other EM currencies such as the Argentinian Peso -21.9%, Brazilian real -8.36%, South Africa Rand -6.57%, Russian Ruble -4.3%, Mexican Peso -4.3%, Indian Rupee -4.14% etc.  An unintended consequence of the trade war is the more one “hurts” China’s economy through tariffs there is less demand for RMB. Thus, the effect of tariffs is offset by the currency (ECON 101). Safe haven currencies such as the US dollar, Japanese yen (+2.84% versus the dollar) and Swiss franc (+1.22% versus the dollar) have been appreciating as the trade war’s effect on the global economy sends investors to harbors of safety. Adding insult to injury is the ironic reality that tariffs are ultimately paid by the US consumer.

H-Share Update

The Hang Seng opened higher but eased to a loss of 0.19%/48 index points to close at 25,615. Volumes declined 19% day over day and are back below the 1 year average on moderate breadth of 27 advancers and 18 decliners. Tencent led the Hang Seng lower -2.21%/-56.8 on the TME fallout, China Mobile +0.92%/+11.2 index points and CSPC Pharma fell by 4.91%/10.7, the worst performer in the Hang Seng. The HK stocks within the MSCI China All Shares slipped 0.45%. Advancers were utilities +1.1%, staples +0.75% and energy +0.57% while healthcare fell -2.74%, Tencent pulled communications -1.55% and tech -0.37%. Southbound Connect volumes were moderately higher as Tencent had 2 to 1 sellers while CCB had another extraordinary buying day. In aggregate, buyers outpaced sellers marginally.

A-Share Update

The Shanghai & Shenzhen traded in a tight range to close -0.29% and -0.13% as volumes post MSCI slipped -11% day over day though still above the 1 year average. Breadth was mixed with 1,605 advancers and 1,826 decliners as small and mid caps outperformed mega caps marginally. The mainland stocks within the MSCI China All Shares eased 0.23% as healthcare fell on profit, down by 1.06%, and financials -0.87% while staples gained +0.88% and energy +0.2%. Northbound Connect volumes were high, but came to less than half of yesterday’s MSCI volume spike. Shenzhen Connect volume moderately outpaced Shanghai Connect. Volume leader Kweichow Moutai had sellers outpace buyers by a slim margin. On the day foreign investors sold $108mm of mainland stocks following yesterday’s $1.5B of MSCI driven inflow.

Costco opened its first store in China on Tuesday. If you haven’t seen the photos, the ensuing stampede meant the store had to close at 1pm. I can’t think of better evidence of China’s demand for US goods and the opportunities for US companies in China than those photos. Google “China Costco Stampede”.

A mainland media source reported that Ctrip.com expects 800mm travelers during China’s national holiday the first week of October. That is fairly amazing in my opinion.

Last Night’s Stats

• CNY 7.16 versus 7.16
• Yield on 1 Day Chinese Gov’t Bond 2.13% versus 2.19%
• Yield on 10 Year Chinese Gov’t Bond 3.0599% versus 3.0599%
• Yield on 10 Year China Development Bank Bond 3.55% versus 3.55%
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.52%.