Key News

Asian equity markets were mixed as Japan, China, and Korea gained while Hong Kong, Taiwan, India, Malaysia and Indonesia fell. Although yesterday’s 0.25% rate cut was expected, the FOMC’s split voting and cautious tone dampened optimism for further cuts. While the PBOC has not reacted thus far to the Fed move, the market is expecting a 5bps cut to the Loan Prime Rate (LPR), lowering the key rate to 4.2%. Hong Kong did follow the Fed cut though market sentiment remains poor due to demonstrations. Local media noted the 40% fall in retail store traffic in Hong Kong from clothing store Espirit while hotel workers are being put on unpaid leave due to the lack of tourists. The US Congress’ bill supporting Hong Kong demonstrations could threaten the city-state’s special US trading status, which would be the last thing Hong Kong’s delicate economy needs.

A trade truce, but perhaps not a deal, is increasingly likely as China’s trade envoy meets with officials in DC today and tomorrow. Agricultural purchases have been highlighted, but crude and LNG purchases might be discussed as well. This week’s meetings will tee up an early October meeting between lead China negotiator Liu He and USTR Robert Lighthizer, which could lead to a Xi-Trump meeting at APEC in November. There is a balance that the two countries and economies need to maintain. China needs soybean, pork, oil, LNG, airplanes and semiconductor chips from the US, while US multinationals need to sell into China’s massive consumer market. Additionally, the sand thrown into the gears of global trade is causing a global economic slowdown that has begun to pull the US economy down with it. China’s position as a middle man in world trade means that hurting China has both an upstream and a downstream effect. Global trade bell weathers Singapore and South Korea have reported poor economic releases. The US is not an economic island. Our inverted yield curve might be telling us that a recession is on the horizon.

So why a truce and not a deal? I believe a full deal would be difficult as US trade hawks still have the President’s ear while several US demands could be difficult to accept. Stepping back, global PMIs peaked exactly with the first trade tweet. A truce could help reverse this trend.

The OECD lowered its 2019 economic forecast from 3.2% in 2019 to 2.9% and 2020 forecast from 3.4% to 3% on the trade war’s effect on the global economy.

President Xi mentioned the need for further infrastructure investment while visiting Henan province.

H-Share Update

The Hang Seng slumped -1.07%/-285 index points to close at 26,468 as volume picked up 18% day over day but off the 1 year average. Breadth was poor with only 4 advancers and 44 decliners as index heavyweights AIA fell -3.04%/-79.3 index points, Tencent -1.34%/-35.3 index points and Ping An -1.12%/-17.6 index points. Apple suppliers AAC and Sunny Optical were strong the Huawei and Apple new roll outs gained +5.86%/+5.5 index points and +2.82%/7.3 index points. The Hong Kong stocks within the MSCI China All Shares eased -0.88% with the tech sector +1.3%, utilities +0.11% and healthcare +0.1%. Communications was off 1.3%, real estate -1.28%, staples -1.16%, materials -1.1% and discretionary -1.05%. Southbound Connect volumes were moderate with buyers edging sellers as CCB had 2 to 1 buyers, Tencent had slightly more buyers than sellers and AIA sold.

A-Share Update

Shanghai and Shenzhen gained +0.46% and +1.03%, respectively, on flat volume day over day and above the 1 year average. Breadth was positive with 2,334 advancers and 1,143 decliners as small caps were up nearly 1.5%, mid-caps +1%, and mega caps up slightly. The mainland stocks within the MSCI China All Shares gained +0.33% as tech +2%, discretionary +0.86%, healthcare +0.47% and industrials +0.35% while real estate was off -0.52% and utilities off -0.4%. Northbound Connect volumes were moderate though Shenzhen outpaced Shanghai volumes. Buyers were also more aggressive in Shenzhen than in Shanghai, though both saw net inflows from foreign buyers. In total, foreign investors purchased $379mm of mainland stocks.

Last Night’s Stats

• CNY 7.09  versus 7.08 yesterday
• Yield on 1 Day Chinese Gov’t Bond 2.06% versus 2.06% yesterday
• Yield on 10 Year Chinese Gov’t Bond 3.10% versus 3.09% yesterday
• Yield on 10 Year China Development Bank Bond 3.67% versus 3.68% yesterday
• Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.25% yesterday.