“Very Well” Indeed
Asian equity markets cheered President Trump’s comments on the first day of trade talks and reports that he will meet with Vice Premier Liu He today. While a long-term or consummate deal is not expected, a partial deal would be paramount for the relationship between the two countries and is perhaps required as a precursor to a full-scale trade deal. All markets were green other than Taiwan, which was closed. Hong Kong had a strong day on the trade news and chatter that Carrie Lam will address housing in a speech next week leading to a nice rally in real estate stocks. Mainland large caps outperformed as small and mid-caps experienced profit taking after news MSCI will include STAR board stocks in their indices.
There remains a strong possibility of establishing a currency pact with Beijing as part of a partial trade deal. If established, both sides will explicitly agree on exchange rate policies. The pact would mimic similar pacts that the US already has with its other major trade partners such as Canada and Mexico. As I have discussed before, China does not manipulate its exchange rate, but selectively manages it in the same manner as most developed world central banks. Therefore, any such agreement is likely not to change the PCB’s exchange rate policy very much. However, establishing a common understanding with the US on currency is an important steppingstone to a full-scale agreement as currency misunderstandings have contributed significantly to trade impasses in the past.
I leave for Hong Kong and Beijing this weekend for on the ground reporting.
The Hang Seng ripped +2.34%/+600 index points to closer at 26,308 on volumes 24% higher day over day and above the 1 year average. Breadth was very strong with 48 advancers and just 2 decliners as index heavyweights HSBC +2.61%/+69 index points, AIA +2.16%/+53.9 index points and Tencent +1.88%/+47.6 index points. Techtronic Industries was the best performer +6.31%/+15.3 index points, while healthcare led on the downside with CSPC and Sino Biopharma -6.1%/-13.8 and -0.37%/-0.84 index points, respectively, on reports of drug inspections. The Hong Kong stocks within the MSCI China All Shares gained +1.95% led higher by energy +3.65%, real estate +3.13%, materials +2.8%, financials +2.44%, industrials 2.16% and communications +1.85%. However, healthcare was off -1.06%. Southbound Connect volumes were elevated with buyers outpacing sellers, though volume leader CCB was sold two to one. CM Bank was sold and Tencent bought nearly 5 to 1.
The Shanghai & Shenzhen gained +0.96% and +0.88%, respectively, on strong volume up nearly 9% day over day though just off the 1 year average. Breadth was mixed with 1,920 advancers and 1,659 decliners as large caps had a strong day outperforming mid- and small caps, which experienced profit taking, by 150 bps. The Mainland stocks within the MSCI China All Shares gained +1.19%, led higher by energy +2.27%, financials +2.27%, real estate +1.03%, utilities +1.02% and materials +0.97%. Most sectors were in the green, but tech and communication lagged on profit taking +0.16% and +0.56%. Northbound Connect volumes were moderate though foreign buyers were very active. Shenzhen Connect volumes slightly exceeded Shanghai Connect, but the latter had more pronounced buying. Foreign investors purchased $524mm of mainland stocks. Foreign investors purchased $477mm of mainland stocks this week. Tencent bought back another 120k of stock today.
Last Night’s Prices
- USD/CNY 7.10 versus 7.12 yesterday
- Euro/CNY 7.84 versus 7.85 yesterday
- Yield on 1-Day Government Bond 1.69% versus 1.80% yesterday
- Yield on 10-Year Government Bond 3.16% versus 3.13% yesterday
- Yield on 10-Year China Development Bank Bond 3.57% versus 3.54% yesterday
- Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.69%