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1-Year Loan Prime Rate Cut, FTSE Russell and S&P Global Indexes Rebalance To Include A-Shares

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Key News

Asian equities had a positive day as volumes surged. Mainland equities were propelled as FTSE Russell and S&P rebalance their global indexes to include A-shares. Brokers estimate approximately $5B of inflows due to index inclusions. US volumes will surge as it is also Quad Witching (stock and index futures and options expire). India stood out for gains following a surprise corporate tax rate cut while most markets were up modestly. Michael Pillsbury’s comments that President Trump could raise tariffs “to 50 to 100 percent” were widely disseminated in Asia. A trade truce as opposed to a deal is driven by several trade hawks such as Ross, Navarro and Lighthizer. Pillsbury is an outspoken China hawk. On the positive front, the China trade team is in DC meeting with their US trade equivalents. Hong Kong gave up modest gains as sentiment remains poor. FTSE and S&P rebalances likely pulled some money out of HK and into the mainland market. While the mainland is apt to ride positive sentiment heading into the 70th anniversary and Golden Week, the week-long holiday, Hong Kong will miss out on Chinese tourists which are only exacerbating the demonstrations’ effect on the local economy.

The PBOC cut the 1-Year LPR rate to 4.2% from 4.25%, as expected, while maintaining the 5-Year LPR, which is tied to the mortgage rate. The PBOC doesn’t want to push housing prices higher by cutting the 5-year LPR. Northbound Connect flows were strong with $2.096 billion of inflows which bring the weekly inflow to $3.028 billion.

Earlier this week the WSJ had an article naming passive managers the “New Kings” of Wall Street. The article focused on ETF and index fund assets eclipsing actively managed mutual funds though did not include institutional separate accounts, CITs etc. Today’s FTSE and S&P rebalances will elevate volumes at their close while their inclusion led to mainland inflows. There is an opportunity to watch the power of passive as at 3:59 index funds and ETFs will have to trade. There are many names being added/deleted or their positions changed but check out APLT which is being added to the Russell 2000. I am not predicting it will go up or down but it will trade massive volumes versus its average.

Huawei’s new Mate 30 phone is receiving rave reviews as the 5G enabled phone comes with an array of features. The phone is using an open-source version of Google’s Android operating system due to US tariffs, which means that, outside of China, the phone won’t come with Google Maps, Search etc.

H-Share Update

The Hang Seng eased -0.13%/-33 index points to close at 26,435 as volumes surged 33% due to the index rebalances. Breadth was off with 16 advancers and 26 decliners as AIA declined -1.37%/-35.3 index points, HSBC gained +0.5%/+13.5 index points and energy company CLP Holdings +2.75%/+12.1 index points which was the HSI top performer. There was some profit taking in recent strong performers such as AAC, which was off -2.55%/-2.3 index points. The Hong Kong stocks within the MSCI China All Shares were off -0.11% as materials, industrials and real estate gained +0.54%, +0.43% and +0.35%. Utilities -1.1%, discretionary -0.99% and communications -0.28%. Southbound Connect volumes were moderate with mainland investors small net buyers of HK stocks.

A-Share Update

Shanghai & Shenzhen gained +0.24% and +0.16%, respectively, as volumes gained 11% day over day and well above 1 year average. Breadth was mixed with 1,589 advancers and 1,912 decliners as mid-caps slightly outperformed large caps, which slightly outperformed small caps. The mainland stocks within the MSCI China All Shares gained +0.38% led by tech +0.98%, healthcare +0.96%, utilities +0.87% and staples +0.85%. Discretionary and real estate were off -0.41% and -0.15%. Northbound Connect volumes were high with very strong buying as Shanghai volumes exceeded Shenzhen. As mentioned, $2.096 billion of mainland stocks were bought following the FTSE and S&P rebalances.

Tencent Music Entertainment (TME US) is benefitting from Chinese pop star Jay Chou’s new song release which sold 10 million downloads in two hours. I’m not familiar with Mr. Chou’s work but clearly I am in the minority.

Last Night’s Stats

  • CNY 7.09  versus 7.09 yesterday
  • Yield on 1 Day Chinese Gov’t Bond 2.07% versus 2.06% yesterday
  • Yield on 10 Year Chinese Gov’t Bond 3.09% versus 3.09% yesterday
  • Yield on 10 Year China Development Bank Bond 3.65% versus 3.67% yesterday
  • Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.0% yesterday.