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Trade Talks Swing Markets & MSCI Wishes Upon a STAR

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Key News

The latest round of trade negotiations begins today in Washington. It was a Jekyll & Hyde session as news flow swung from positive (US China FX deal, truce/not deal feasibility, US Huawei exemptions) to bad (little progress on Monday/Tuesday US China lower level trade dialogue, NBA, visas) back to positive leading to a mixed overnight session as Japan, HK and China gained while Korea and India were down on the day with Taiwan closed for holiday. Expectations for a deal in Asia appear muted though technology stocks took an optimistic view of trade negotiations. I believe that US equity markets have become more geared/correlated to trade war news following the disappointing Manufacturing ISM report. US equity markets likely “need” a deal in order to reach 2020 S&P 500 EPS projections. Without those projections US equities would swing from fairly valued to overvalued. On the other hand, Mainland Chinese equities appear to have become somewhat bored with trade war news and more focused on domestic policies.

MSCI announced Shanghai Stock Exchange's Sci-Tech Innovation Board (STAR Market) securities would become eligible for inclusion in their indices including the MSCI China A Inclusion Index beginning with the November Semi-Annual Index Review. The STAR inclusion would further differentiate MSCI’s exposure from fixed numeric competitor CSI 300 index exposure which is already happening with the inclusion of mid-cap stocks in November. The new STAR companies are mainly technology and healthcare companies versus the financial-heavy CSI 300.

Interesting to note the Hang Seng is now in negative territory year to date while mainland equities are up nearly 30%. The nearly 3,000 basis point disparity between “Chinese” stocks highlights the necessity for index exposure due diligence.

H-Share Update

The Hang Seng opened lower but grinded higher before weakening into the close to gain +0.1%/+25 index points at 25,707. While turnover was below the 1-year average it did uptick 4.8% day over day accompanied by 28 advancers and 18 decliners. Index heavyweights HSBC -1.12%/-28.8 index points, AIA Group -1.1%/-26.9 index points and Link REIT -3.01%/-15.5 index points. Interesting that the three biggest Hang Seng index movers were all Hong Kong domiciled companies meaning they are in the MSCI Hong Kong and developed market indices and not MSCI China and emerging market indices. In fact, 9 of the 10 worst performers were Hong Kong domiciled companies (Henderson Land, MTR, Hang Seng Bank, Bank of China HK, CK Asset Holdings, and Hang Lung Properties). The best performers were Apple suppliers AAC and Sunny +6.3%/5.6 index points and 4.26%/+10.85 index points. The Hong Kong listed Chinese companies within the MSCI China All Shares gained +0.71% led higher by tech 2.8%, healthcare 2.18%, discretionary 2.03%, staples 1.39% and utilities 0.91%. Materials and real estate were off -0.13 and -0.03%. Southbound Connect volumes were high with buyers out in force. CCB, HSBC and Tencent were the volume leaders with outsized buying activity.

A-Share Update

The Shanghai & Shenzhen grinded higher all day and into the close for gains of +0.78% and +1.41% as volumes jumped 15% day over day though slightly below the 1-year average though breadth was strong with 2,723 advancers and 796 decliners. The lower the market cap the better as small caps outpaced mid-caps, which outpaced large caps (+2.5%, +1.5% and +0.6%). The mainland stocks within the MSCI China All Shares gained +1.08% as healthcare gained 3.41%, tech +1.85%, industrials +1.38%, discretionary +1.34%, energy +1.28%, staples +1.05% and communication +0.81%. Utilities was the only losing sector -0.22%. Northbound Connect volumes were moderate with foreign investors net buyers of mainland stocks. Investors purchased $19mm of mainland stocks today following yesterday’s outflow of $310mm and Monday’s inflow of $244mm.

Tencent bought another 110k shares following purchases for the same amount on Monday, Tuesday and Wednesday.

Last Night’s Stats

  • USD/CNY 7.13 versus 7.13 yesterday
  • Euro/CNY 7.85 versus 7.83 yesterday
  • Yield on 1-Day Government Bond 1.80% versus 1.80% yesterday
  • Yield on 10-Year Government Bond 3.13% versus 3.10% yesterday
  • Yield on 10-Year China Development Bank Bond 3.54% versus 3.52% yesterday
  • Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.13%