Key News

Asian markets were mixed with Japan closed as Korea and Taiwan were up while India, Hong Kong and China were off slightly. With oil surging, energy stocks had a great day while airline stocks suffered. This is becoming the perfect storm for Cathay Pacific (293 HK) -4.04% which has been suffering from HK demonstrations’ effect on tourism and now higher oil prices. The sell side was expecting a HK pullback after the recent strong move. On the trade front, China is opening up US agricultural purchases as a truce, making a deal look possible once again. On a visit to Russia, Premier Li commented that China’s economy faces challenges.

The RMB has come off the 7.20 level all the way down to 7.06. While last month's depreciation garnered a lot of attention, the counter trend has received little attention. Combined with increasing inflows into the mainland and continued stimulus, investors appear to be reallocating to China. The uptick in mainland volumes is an indication that the retail investor is returning to stocks. Today’s highest volume stock in the mainland was BOE Technology Group which traded 528mm shares.

August Economic Data – Year Over Year

All three economic releases missed analyst expectations and declined from July. The market response is the “bad news is good news” or what Jared Dillian calls the "Constanza trade" after the Seinfeld character (do the opposite of your instincts). The release didn’t have a significant market impact as expectations are for further stimulus measures. The data confirms that China is still in the economic cycle trough as we continue to wait for green shoots which have been hampered by the trade war.

H-Share Update

The Hang Seng declined -0.83%/-228 index points to close at 27,124 as volumes surged 41% from Friday’s light volume though below the 1 year average. Only 7 stocks advanced while 42 declined led by energy giant CNOOC +7.39%/51.3 index points while CCB -1.92%/-38.7 index points and AIA -1.3%/-35.3 index points. Energy giants PetroChina +2.13% and China Petroleum +1.82%. Auto and casino stocks were lower. The HK stocks within the MSCI China All Shares were off -0.55% as energy +4.28% while discretionary was -1.31% led lower by autos, financials -1.22%, and industrials -0.83%. Southbound Connect flows were moderately high with sellers outpacing buyers as the recent buying has abated.

A-Share Update

The Shanghai & Shenzhen diverged -0.02% and +0.23% as volumes increased nearly 9% from Thursday’s light volume day while still well above the 1 year average. Breadth was positive with 2,035 advancers and 1,446 decliners as large caps were weak after the economic data while small and mid caps were up on the day. The mainland stocks within the MSCI China All Shares were +0.06% led higher by energy +2.08%, tech on trade talks thawing +1.07%, and utilities +0.73%. Financials, real estate and industrials were off -0.68%, -0.47% and -0.13%. Connect volumes were moderate with buyers outpacing sellers in both Shanghai and Shenzhen. Foreign investors bought $128mm on the day.

In a sign that the smart money believes China’s auto sales may have bottomed, Tencent and Hammer Capital made an offer to buy online auto retailer Bitauto (BITA) for $16 per share on Friday. Shares had closed at $13.75 before surging to $14.95 on Friday on volume of 3.88mm versus the 1 year average of 828k. The offer seems a touch light in my opinion as a 16% premium isn’t overly aggressive. Competitor Autohome (ATHM) gained +1.24% on Friday.

Last Night’s Stats

• RMB 7.06  versus 7.07; 19bps gain versus the US $ (can you imagine if RMB breaks back below 7?)
• Yield on 1 Day Chinese Gov’t Bond 1.96% versus 1.99% yesterday (Thursday’s close)
• Yield on 10 Year Chinese Gov’t Bond 3.06% versus 3.09% yesterday (Thursday’s close)
• Yield on 10 Year China Development Bank Bond 3.64% versus 3.62% yesterday (Thursday’s close)
• Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper +0.93% yesterday. (Thursday’s close)