Key News

Asian markets were positive after President Trump’s press conference with Japanese Prime Minister Abe included positive comments on a China trade deal. The 180 from yesterday’s UN speech, which sent markets tumbling, had a positive effect today in Asia following the positive effect in the US yesterday. Mainland markets were outliers as retail investors sold recent winners especially media technology names, gold, and small caps. Pork related stocks were sold on a potential trade deal. It is important to remember that retail investors account for 80% of mainland stock trading. However, their ownership has declined from 70% in 2014 to 50% in 2018 as the mainland market institutionalizes. India’s recent tax cut led to another nice rally today.

The Ministry of Finance made an interesting circular stating that banks with high loan coverage ratios should pay out the excess reserves via dividends. Banks were a stand-out overnight in the mainland market on the news. Approximately a dozen banks have debt coverage ratios twice the mandated ratio and in excess of 400%.

News flow and volumes are apt to begin drying up as the mainland market is closed next Tuesday through the following Monday and Hong Kong is closed next Tuesday.

H-Share Update

The Hang Seng gained +0.37%/+96 index points to close at 26,041 as volumes declined almost 7% day over day and well off the one-year average. Breadth was mixed with 29 advancers and 21 decliners as Tencent gained +1.22%/+31.5 index points, CCB +1.02%/+19.9 index points and HSBC +0.59%/+15.7 index points. China Resources Land was the best performer +2.34%/+6.4 index points though CSPC Pharma +2.3%/+5.2 index points as healthcare names in Hong Kong rallied as several domestic companies were winners the national drug procurement auction. PetroChina slumped -1.98%/-5 index points as crude slips. The mainland stocks within the MSCI China All Shares gained +0.43% led by materials +0.69%, communications due to Tencent +0.68%, healthcare +0.67%, real estate +0.62% and financials +0.59% and drawn down somewhat by energy -0.83%. Southbound Connect volumes were moderately higher as buyers were active with CCB seeing high two-way volumes, though buyers slightly outpaced sellers, CM Bank sold 2 to 1 and Tencent bought.

A-Share Update

The Shanghai and Shenzhen slumped -0.89% and -2.51%, respectively, on volumes +2.5% day over day and above the 1-year average as mainland investors raise cash for their coming holiday. Breadth was atrocious with only 459 advancers and 3,211 decliners as small caps slumped nearly -3%, mid-caps -2% and mega caps flat. The mainland stocks within the MSCI China All Shares were off -1.04% led lower by tech -3.01%, staples -1.94%, materials -1.8%, communications -1.61%, healthcare -1.42%, industrials -1.39% and discretionary -0.67%. Financials and real estate managed gains of +0.33% and +0.19%, respectively. Northbound Connect volumes were moderate higher with buyers out in force as foreign investors scooped up Shenzhen stocks retail investors are selling. Shenzhen Connect volumes exceeded Shanghai Connect as MSCI inclusion picks Kweichow Moutai and Ping An Insurance had more sellers than buyers. Netting sells, foreign investors bought $350mm of mainland stocks overnight.

Tencent (700 HK) bought another 110k shares yesterday.

Ctrip.com (CTRP US) announced an offering of 31mm shares worth 0.125 ADRs as shareholder Baidu says “see ya” to 3.8mm of its 7.9mm position. Knowing that Baidu is only selling half of its position could create an overhang on the stock which faces the headwind of both Chinese tourists avoiding Hong Kong and a slightly weaker CNY making overseas travel more expensive. If there were one security that, on paper, should undoubtedly benefit from China’s rising urban class and their affinity for travel, it is Ctrip. The reality is that revenues at year end 2015 to year end 2018 tripled though EPS is barely up.

Last Night’s Stats

• CNY 7.13  versus 7.12 yesterday
• Yield on 1 Day Chinese Gov’t Bond 1.65% versus 1.65% yesterday
• Yield on 10 Year Chinese Gov’t Bond 3.14% versus 3.12% yesterday
• Yield on 10 Year China Development Bank Bond 3.60% versus 3.58% yesterday
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.15%.