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Key News

Asian equities were broadly higher on the solid trade progress between the US and China which emboldened investors to be long risk assets (sarcasm alert). In light of this Sunday’s implementation of 15% tariffs on $300B and the US Trade Representative’s preparation on Thursday for October 1^st’s increase of tariffs to 30% on 6,830 goods valued at $250B, a more likely explanation for the uptick is month end rebalancing. However, Hong Kong and mainland China were conspicuously absent from Friday’s Asia rally as both markets eased in the afternoon sessions. HK continues to be weighed down by poor sentiment as three demonstration leaders were arrested on Friday. The mainland experienced profit taking ahead of the new tariffs.

Investors in China continue to be strong buyers of HK stocks via the Connect program. Why should we care? They started selling Tencent well before the new game ban became public back in 2018. Their selling provided a great signal. Today they are MASSIVE buyers of CCB and Tencent is starting to see more buying. Foreign investors bought an outsized amount of mainland stocks today: $940mm. Despite all the headlines, these are encouraging signs that are worth noting.

Trading desks are watching RMB closely as analysts are throwing out several dramatic estimates on where the currency is headed. However, I recommend that FX investors proceed with caution as these dramatic estimates have historically been proven wrong. However, one certainty is that the PBOC is proactively trying to keep RMB from sliding.

Bloomberg highlighted the strong push by US corporations to garner attention in Washington DC on the consequence of a trade war escalation. The article noted the efforts of US Chamber of Commerce head Thomas Donohue, 150 trade associations lobbying for talks and a US China Business Council survey that 87% of US companies doing business in China are not considering planning on leaving China. Unfortunately there is no evidence that any dialogue is taking place though I hope to be proven wrong.

H-Share Update

The Hang Seng gained 0.08%/21.2 index points to close at 25,724 on decent volume just below the 1 year average while breadth was mixed with 17 advancers and 30 decliners. Tencent had a strong day +1.44%/+37.6 index points, energy giant CNOOC +5.41%/+34.3 index points on earnings and CCB +0.87%/+16.5 index points. The HK stocks within the MSCI China All Shares gained 0.92% as AIA declined by 0.52%  and HK Exchange’s -0.99% are not in MSCI due to their HK domicile, but they did have an effect on the Hang Seng. Remember HK domiciled stocks are tracked by developed market indices. Energy had a very strong day, +3.33% on earnings from CNOOC and PetroChina, utilities +1.52%, tech +1.45%, communications +1.1% though staples and healthcare were off -0.95% and -0.54%, respectively. Mainland investors were active in HK stocks on moderate volumes with buyers outpacing sellers. Tencent had outsized buying, 2 to 1, while CCB had another outsized buying 8 to 1.

A-Share Update

The Shanghai & Shenzhen gave up early gains in an afternoon slump to close -0.16% and -0.74%, respectively, on strong volumes above the 1 year average accompanied by poor breadth of only 569 advancers and 3,054 decliners. Mega caps outperformed mid and small caps by 100bps. The mainland stocks within the MSCI China All Shares gained 0.23% as staples had a very strong day +1.81% as investors reward liquor names for their strong earnings. Discretionary and healthcare gained 0.75% and +0.74%, respectively. Communications and Tech were off -1.8% and -0.89% on trade war concerns while real estate -0.82%. Shanghai and Shenzhen Stock Connect volumes were strong as foreign investors purchased $940mm of mainland stocks today. MSCI inclusion stocks Kweichow Moutai and Ping An exhibited 2 to 1 and 4 to 1 buying ratios. Shenzhen Connect volume outpaced Shanghai Connect by a small margin.

Pinduoduo (PDD US) has shown impressive earnings-fueled performance in the past month. The company’s market cap of $39B is now larger than Baidu’s $36B.

After chatting with Jack Ma at the World AI Conference, Elon Musk visited Tesla’s new factory outside of Shanghai.

Naspers is spinning off of a piece of their Tencent holdings in Amsterdam. The listing is tentatively scheduled for September 10^th and should help Naspers’ stock and maybe even Tencent due to arbitrage. The Amsterdam listing will have an interesting consequence: the stock will go into developed market indices and not EM indices. Why is that a big deal? EM is big with $2 trillion of benchmarked assets though developed markets are bigger. I’ll do more work on this over the long weekend and report back on Tuesday!

Last Night’s Stats

• CNY 7.149 versus 7.14
• Yield on 1 Day Chinese Gov’t Bond 2.13% versus 2.13%
• Yield on 10 Year Chinese Gov’t Bond 3.0487% versus 3.0399%
• Yield on 10 Year China Development Bank Bond 3.59% versus 3.56%
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper flat +0.34%.