Key News

Asian equities were mixed on light volumes as China, Korea, India and Taiwan managed small gains while Japan, Hong Kong and Malaysia were off slightly in advance of the Fed’s decision. The PBOC  is widely expected to follow the Fed in lowering lending rates after today’s decision. The PBOC did roll over 30B of maturing OMO today though all eyes will be on Friday’s reset of the LPR interest rate. Huawei announced the launch of its new mobile phone for Sept 20^th which led to a rally across its supply chain. In addition to the trade war, two potential headwinds for the global economy have been the slowdown in auto sales/manufacturing and mobile phones. We are seeing both Apple and Huawei roll out new phones while several sell side firms have called the bottom in China’s auto industry as purchase restrictions are lifted. While the Fed cut should help HKD due to its peg to the US $, the HK market can’t seem to shake the poor sentiment stemming from protests and the knock on effect on the economy. Not helping sentiment was the cancellation of Wednesday night’s horse races at the famous Happy Valley race track due to a horse running that is owned by a pro-government legislator. It appears to be a one-off cancellation as the races generate massive gambling revenue for the HK government.

China’s fiscal expenditures increased 8.8% during the January to August time period versus the same period in 2018. Fiscal spending combined with tax cuts, cutting red tape, and targeted monetary easing are geared to offsetting the effect of the trade war. The stimulus is targeting private companies which have historically had trouble accessing credit. As an optimist, I find it likely that Thursday’s low-level meetings will lead to senior meetings in early October with the potential for a Xi-Trump meeting at the APEC conference in Chile this November. There were reports that China is buying US oil again, another positive step in thawing relations.

“Our performance continues to be negatively impacted by a weakening global macro environment driven by increasing trade tensions and policy uncertainty,” said Frederick W. Smith, FedEx Corp. chairman and chief executive officer. Sums up the trade war’s global effect succinctly.

Budweiser Brewing Company APAC’s IPO appears to be back after the securing of cornerstone investor Singapore sovereign wealth fund GIC. GIC has committed $1B in what looks to be a $4.8B IPO. Will Alibaba follow with its Hong Kong listing? No word from the sell side as the market sentiment is still poor.

H-Share Update

The Hang Seng eased to a loss of -0.13%/-36 index points to close at 26,754 as volumes fell 12% day over day and well off the 1-year average. Breadth was poor with 19 advancers and 29 decliners as AIA gained +0.7%/+18.8 index points and ICBC fell -0.94%/-11.1 index points and energy giant CNOOC slipped -1.4%/-9.6 index points on lower crude prices. Apple and Huawei supplier AAC ripped +10.1%/+9.1 index points while energy stocks were bottom dwellers. The HK stocks within the MSCI China All Shares fell -0.4% as tech gained 1.77% and discretionary names gained 1.22% as autos and Meituan Dianping had a solid day. Real estate rebounded to a gain of +0.75% while energy fell -1.67%. Southbound Connect saw selling for the 4^th day in a row on moderate volume though volume leader CCB had buyers outpace sellers.

A-Share Update

The Shanghai & Shenzhen gained +0.25% and +0.26% on very light volumes down -17% day over day at the 1-year average after yesterday’s decline. Breadth was positive with 1,970 advancers and 1,478 decliners as large and mid-caps outpaced small caps by 50bps. The mainland stocks in the MSCI China All Shares gained +0.62% as Kweichow Moutai gained 5% after announcing a ramp up in production in advance of the October 1^st anniversary. The gain powered staples to a 3% gain (I find it funny that the liquor stocks are considered staples) while real estate gained 1.2% despite poor housing sales over the three-day weekend, healthcare was up 1% and utilities +0.93%. Energy and materials were off -1.19% and -0.4%. Foreign investors returned to buying the mainland on moderate Northbound Connect volumes. Shanghai Connect volumes outpaced Shenzhen Connect volumes as this newer trend firms. Foreign investors bought $553mm of mainland stocks. Wow! Big day.

Tencent (700 HK) bought back another 110k shares for the 13^th straight day while Xiaomi (1810 HK) bought back 2.75mm shares on Tuesday.

September 24^th marks the expansion of China’s consolidated drug buying program as companies will submit bids to win the right to supply Chinese cities. The program surprised the industry during the first rollout in December 2018 leading to a steep decline in pharmaceutical drug makers. The sell side is cautious going into the auction though one analyst believes any dip should be bought as the industry has adapted to the new playbook.

Last Night’s Stats

• CNY 7.08  versus 7.09
• Yield on 1 Day Chinese Gov’t Bond 2.06% versus 2.06% yesterday
• Yield on 10 Year Chinese Gov’t Bond 3.09% versus 3.06% yesterday
• Yield on 10 Year China Development Bank Bond 3.68% versus 3.65% yesterday
• Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.27% yesterday.