August FX and Trade Data; Mainland Telecom/5G/Tech Rally on Very Strong Breadth and Volume
Asian equity markets were up overnight with Hong Kong as an outlier to the downside. Mainland markets were strong following Friday’s post-close Reserve Requirement Ratio (RRR) cut with expectations for further cuts by year end and in 2020. Additionally, the Ministry of Industry and Information Technology (MIIT) released supportive measures on 5G and Internet of Things, which led to the strong performance of both telecom/5G plays and technology stocks as ZTE ripped limit up 10%. With the thawing of trade talks and the potential for a truce, mainland markets have picked up as the Shanghai Comp closed above 3k from its August 2,500 base while the Shenzhen Comp is nearing 1,700 from the August base of 1,500. The Hang Seng is still sitting near the 25,000 level as demonstrations were lighter this weekend. However, the trashing of the Central train station, which is the equivalent of Grand Central here in NYC, was worrisome. While HK visitors declined 40% YoY in August, I am headed to HK in a few weeks and looking forward to it!
There was an interesting an article on Politico about the recent positive trade talks released after the market’s close on Friday. (Yes, we have taken to reading a political news website. Such is the world we now live in.) The article noted that China is proposing a halt in the US October tariff increase and a loosening on Huawei’s US tech purchases in exchange for an increase in US agriculture purchases. Friday’s disappointing non-farm payrolls and a likely ECB rate cut Thursday highlight the necessity for a trade truce. I couldn’t help but notice the performance of US Steel (ticker X) since the trade war began in early February 2018 when the stock hit a high of about $45. Today, the stock is trading below $12 though I can’t speak to factors, global, domestic or company specific, that have caused the dramatic downturn, though competitor Nucor (ticker NEU) fell from a high of ~$70 to $50 over the same time period.
FX Reserves Remain Stable
FX reserves, released on Saturday, were stable despite recent weakness in CNY showing the cavalry didn’t come to the rescue. August FX Reserves came to $3.107 trillion versus the estimated $3.1 trillion and July’s $3.103 trillion. While the PBOC didn’t use its vast reserve of dry powder to ebb the CNY’s weakness, it is clear they will avoid a free fall. I suspect that September data will show a small dip in reserves. We are heading into the October 1st 70th anniversary of China. No one wants to be a party pooper in advance of the celebrations, which should limit further currency losses in September. I suspect mainland equities should have a good month for the same reason.
August Trade Data
|Exports Year over Year||-1% versus estimate +2.2% and July’s 3.3%||+2.6% versus estimate 6.3% and Augusts 10.3%|
|-5.6% versus estimate -6.4% and July’s -5.6%||-2.6% versus estimate -3.1% and July’s +0.4%|
|$34.84B versus estimate $44.3B and July’s $45.06B||239B versus estimate 299B and July’s 310B|
Released on Sunday, the August trade was a tad soft versus market expectations as the year over year comparison was versus a high base. Looking at the data month over month makes it abundantly clear exports were broadly weaker, while imports were more a bit more resilient. As we have often mentioned, China is the middle person in global trade with both upstream and downstream implications. The global economic malaise is on fully display in the trade data as confirmed by the weak economic data from peer global trade bellwethers Singapore and Korea. While US exports in US $ declined -16%, US $ imports declined -22% in August. It was interesting to see that Australian imports jumped 32% YoY which may indicate a possible bottoming process in commodities. China’s Australian imports have slowly increased over the last several months. In addition to the PBOC’s 50bps cut in the bank reserve requirement ratio last week, the State Council is allowing a moderate uptick in infrastructure spending. The data makes it clear the trade war is having an effect, but it is global in nature and cuts both ways.
The Hang Seng chopped around to close -0.04%/-9.3 index points to close at 26,681 as volumes declined 27% from Friday and back below the 1 year average. Breadth was mixed with 21 advancers and 24 decliners as index heavyweights HSBC +0.52%/+12.7 index points, Geely Auto +5.17%/+11.5 index points as August sales beat low expectations. However, Sino Biopharma slumped -4.2%/-9.6 index points. Tencent was off -0.29%/-7.7 index points despite buying back stock for the eighth day in a row. The HK stocks within the MSCI China All Shares dipped -0.14% despite tech gaining +1.73%, energy +0.91% as healthcare and real estate slumped -1.83% and -1.33%, respectively. Southbound Connect volumes were moderate with buyers outpacing sellers though volume leader CCB did see sellers outpace buyers by a small margin. Geely Auto and Tencent had buyers outpace sellers by a small margin.
The Shanghai & Shenzhen gained +0.84% and +1.91%, respectively, on strong volumes +13.8% from Friday and well above the 1 year average. Technical analysts would note the pick-up in volumes accompanying the recent equity upswing. Breadth was ridiculously strong with 3,293 advancers and only 341 decliners. Small and mid-caps outperformed large caps by 200 bps as mega caps were flat on the day. The mainland stocks within the MSCI China All Shares gained +0.82% as tech gained +4.06%, communication +2.56%, materials +1.33% and real estate +1.2%. Only staples were down, off 0.41% as food stocks were weak in advance of this week’s CPI release. Shanghai and Shenzhen Northbound Connect flows were moderate, but buyers were out in force. Foreign investors bought $390mm of mainland stocks.
What we are watching
Ctrip.com reports after the close today which officially ends Q2 reporting season. We are working on an overview of the Q2 season of Chinese internet and e-commerce companies which was fairly robust all things considered.
Neither Xiaomi (1810 HK) nor Meituan Dianping (3690 HK) were added to the Southbound Connect eligible list. The big question is Alibaba’s HK offering which has been very quiet. HK market conditions are depressed driven by continued protests which are weighing on sentiment. My expectations for the HK listing are low until the demonstrations taper off.
Last Night’s Stats
- CNY 7.12 versus 7.12
- Yield on 1 Day Chinese Gov’t Bond 2.08% versus 2.08%
- Yield on 10 Year Chinese Gov’t Bond 3.0298% versus 3.0449%
- Yield on 10 Year China Development Bank Bond 3.55% versus 3.55%
- Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper off -0.29%.