Key News

Asian equities followed the US equity market downwards in an ugly session as US unemployment underwhelmed following large downward revisions of August data and US tariffs on the EU following a WTO judgment citing European subsidies. Japan’s Nikkei 225 was off -2% while the region was generally down ~-1%. Hong Kong was an outlier reversing from a -0.9% loss in an afternoon rally driven by news of a proposed ban on wearing masks to gain +0.26%. Short covering was cited as one catalyst for the swing. The morning also brought news China bought 1.5 million tons of soybeans, according to the USDA. The olive branch news had no effect on the Hong Kong market as economic data took precedence over the trade war. While the US media continues to focus on the demonstrations and their link to China, they are missing a critical change that has occurred. Previously, demonstrations numbered in the hundreds of thousands if not higher due to the widespread rejection of the proposed extradition bill. After the bill was shelved, demonstrations have become significantly smaller though much more violent and destructive. The latter protests are driven by predominantly young, unemployed men tired of Hong Kong’s vast income and wealth inequality, which is exacerbated by a lack of affordable housing. The effect of demonstrations has taken a significant toll on the local economy as tourists and conferences have avoided Hong Kong, hurting hotels, and restaurants. The proposed prohibition of masks would allow police to stop demonstrators before they become violent. However, a real solution would address the underlying causes of the outbursts.

It is a slow week on the news front, but one interesting development has picked up some positive and very contrarian calls on Macao. Tourists are avoiding Hong Kong by flying into Macao’s airport instead of the Hong Kong airport. While VIP gaming revenue has been soft, several side analysts have noted the strength in Macao visitors despite the HK demonstrations. This was reaffirmed as early indications point to strong Golden Week visitor numbers.

H-Share Update

The Hang Seng gained +0.26%/+67 index points to close at 26,110 as volumes increased 1% day over day but were very light. Breadth was positive with 37 advancers and 10 decliners as HSBC lost -1.34%/-35.3 index points, China Mobile +0.92%/+11.3 index points and Galaxy Entertainment (a Macao casino stock) +2.67%/+8.7 index points. CSPC Pharma was the biggest gainer +3.32%/+7.6 index points with HSBC the largest decliner. The Hong Kong stocks within the MSCI China All Shares gained +0.36% led higher by tech +1.26%, staples +1.2%, discretionary +1.15%, healthcare +1.09% and real estate +0.96%. Materials and energy were laggards off -0.47% and -0.35%. Southbound Connect is closed.

A-Share Update

PayPal has been approved by the PBOC to enter the mainland China’s massive mobile payment space via an acquisition of Gopay Information Technology. Paypal faces steep competition due to the dominant position of Ant Financial’s AliPay and Tencent’s WePay, which are linked not only to the Alibaba e-commerce network and Tencent’s Wechat, but also their numerous aligned partners. I wish them good luck as they are going to need it! There were reports that BlackRock is looking to partner with Tencent, which is similar to reports of Vanguard working with Alibaba earlier in the year. Hard to say why the companies that are financial giants in their own rights would need a foreign asset manager, but, as Paul Simon sang, “who am I to blow against the wind?”

Monday’s Prices - Mainland China closed until Tuesday

• CNY 7.14  versus 7.12 Friday
• Yield on 1 Day Chinese Gov’t Bond 1.83% versus 1.75% Friday
• Yield on 10 Year Chinese Gov’t Bond 3.10% versus 3.11% Friday
• Yield on 10 Year China Development Bank Bond 3.69% versus 3.68% Friday
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.60% .