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The Power of Passive: MSCI Rebalance, October Trade Data: Less Pain Than Expected

Key News

Asian markets were largely lower other than Japan, Malaysia and Indonesia. Hong Kong was off on profit taking following a strong week and anticipation of a disruptive weekend. It was announced Friday that a student died after falling from a parking garage during protests a week ago. Students at the Hong Kong University of Science & Technology trashed the school as demonstrators took to the streets. Obviously, it is a tragedy for a young man to lose his life. Mainland also suffered from a bout of profit taking though trade related names held up well. The He-Said-She-Said back and forth on tariffs being called off makes the ultimate outcome difficult to discern. However, the fact remains that a roll back makes a whole lot of sense for both sides.

MSCI released their pro forma for the November 26th Semi Annual Index Review. From the release:

  • MSCI will implement the third step of the weight increase of China A shares in the MSCI Emerging Markets Indexes.
  • 204 China A shares, 189 of which are Mid-Caps, will be added to the MSCI China Index and the inclusion factor for 268 existing constituents will be increased from 0.15 to 0.20.
  • China A shares will have a weight of 12.1% and 4.1% in the MSCI China and MSCI Emerging Markets Indexes, respectively.

What’s interesting to me: China will be 712 of 1,412 stocks in the Emerging Markets Index up from 501 of 1,203 while China’s percentage country weight will rise to 33.6% from 32%.

October Trade Data

US $ Year over Year

Imports -6.4% versus estimate -7.8% and Sept’s -8.5%
Exports -0.9% versus estimate -3.9% and Sept’s -3.2%
Trade Balance $42.8B versus estimate $40.1B and Sept’s $39.6B

CNY Year over Year

Imports -3.5% versus estimate -5.4% and Sept’s -6.2%
Exports 2.1% versus estimate -1.4% and Sept’s -0.7%
Trade Balance 301.2B versus estimate 283.3B and Sept’s 275.1B

Takeaway: The data exceeded expectations as trade is falling at a pace that is slower than anticipated. One reason is that China lowered tariffs on other countries’ imports so Chinese consumers could avoid paying more for American goods, tariffs on which were raised. Regardless, there is a strong incentive for both sides to get a deal done.

H-Share Update

The Hang Seng opened higher but slid all day to close -0.7%/-196 index points to close at 27,651 as volume +2.3% day over day but off the 1-year average. The Hang Seng gained +2.03% on the week (+6.99% YTD). Breadth was weak with only 10 advancers and 39 decliners led lower by Tencent -1.92%/-48.9 index points, AIA -1.14%/-32 index points and China Construction Bank -1.37%/-29.2 index points. Geely Auto was the best performer +1.83%/+4.74 index points while Henderson Land was the worst performer -2.59%/-4.5 index points. Apple supplier AAC Tech was off -0.48%/-0.5 index points after missing Q3 earnings. The Hong Kong stocks within the MSCI China All Shares Index slipped -0.77% led lower by communications -1.57% pulled down by Tencent, tech -1.23%, real estate-1%, staples -0.85%, financials -0.62% and utilities -0.52%. Energy managed to gain +0.51% and discretionary -0.04%. Southbound Connect volumes were moderate/light with sellers slightly outpacing buyers as CCB had 5 to 3 sellers and Tencent 1.5 to 1 sellers though Meituan Dianping had a very strong buying day.

A-Share Update

The Shanghai & Shenzhen were both higher for most of the trading day but slumped into the close to end -0.49% and -0.19% as volumes picked up +13.1% day over day and below the 1-year average. For the week, Shanghai and Shanghai gained +0.2% and +0.71% (+18.8% and +30% YTD), respectively. Breadth was off with 1,283 advancers and 2,231 decliners as small and mid-caps “outperformed” large caps by not falling as far. The mainland stocks within the MSCI China All Shares eased -0.52% led lower by financials -1.14%, real estate -0.83%, communication -0.8%, industrials -0.69%, energy -0.63% and materials -0.62%. Tech, utilities and discretionary gained +0.28%, +0.26% and +0.08%, respectively. Northbound Connect flows were moderate as Shenzhen Connect had strong volume and buying pressure versus the Shanghai Connect. Shanghai Connect was tilted to a small sell while Shenzhen saw very active buying. Foreign investors bought $195mm of mainland stocks today, bringing the week total to $1.9B.

Baidu (BIDU) saw multiple upgrades post earnings. Next week is a big week for earnings.

Last Night’s Prices & Yields

CNY still appreciating versus Euro though stabilized versus dollar, supporting my contention that interest rates remain the primary driver of foreign exchange.

  • CNY/USD 6.961 versus 6.9976 Yesterday
  • CNY/EUR 7.70 versus 7.72 Yesterday
  • 1-Day Government Bond Yield 1.70% versus 1.71 Yesterday
  • 10-Year Government Bond Yield 3.27% versus 3.27% Yesterday
  • 10-Year China Development Bank Bond Yield 3.71% versus 3.71% Yesterday
  • Commodities on the Shanghai & Dalian exchanges were lower though Dr. Copper +0.38%.
The Shanghai Stock Exchange