Key News

Asian equity markets were mixed with mainland China, Korea, Australia and India up while Japan, Hong Kong, Taiwan, Malaysia, Thailand and Indonesia were off. 

The WSJ report that trade talks have hit a snag was likely a factor as markets, especially the US, had anticipated that the two sides could get a deal done. The US appears to want a China commitment to $50B in agriculture purchases, which is an absurdly large number. If we throw in Boeing airplanes, LNG and oil we can get to $50B, but not in agriculture products alone. After the WSJ article, there was news that the US wants China to adhere to the farm vote buying amount (I apologize, I meant farm goods buying) in monthly, quarterly and annual statements. As my children often remind me, nobody likes to be told what to do. A sovereign nation being told to sign a monthly report card? Good luck on that. It shows the level of mistrust from the US negotiating team.

China wants to see tariffs rolled back before committing to a deal which could be difficult. On the positive side, we did have Ministry of Commerce spokesperson Gao Feng comment that negotiations are continuing, which is a positive sign. Huawei’s tech purchase exemption is coming due soon, which may provide an opportunity to extend an olive branch. Mainland markets shook off the 10am economic data release as investors focused on news that capital requirements (the amount of cash needed to put down) for infrastructure will be lowered.

Hong Kong was dragged down by Tencent’s disappointing results released after the Hong Kong close yesterday. Students continued disrupting access into the financial district leading to the closing of several banks. This tactic can’t be tolerated by the Hong Kong government as corporations can’t have their employees caught up in the mayhem.  We may need to tighten our seat belts a bit (as an investor we have surprisingly little exposure to Hong Kong stocks – big exhale!).  

Alibaba’s issued the prospectus for its Hong Kong listing with pricing on November 20^th and listing on November 26^th. The company will issue 500mm new shares, which should raise $13.4 billion based on a price of $24 (HK $188). The 26^th is also MSCI’s rebalance day, which should make for massive volumes in Hong Kong that day.

Trip.com (TCOM), the former Ctrip.com, reported after the US close yesterday. Both top and bottom managed to beat analyst expectations though the Q4 forecast is a touch light.

• Revenue +12% to $1.5B (RMB 10.5B) versus estimate 10.49B
• Net income $115mm (RMB 820mm) up from a loss the year earlier.
• Adjusted EPS $0.19 (RMB 1.35) versus estimate RMB 2.08 and a loss a year earlier
• Q4 revenue growth forecast between 8% to 13%

Sina and its spin off Weibo reported earnings pre-US market open. Sina’s results appear strong with bottom top and bottom line beating analyst expectations. Weibo’s revenue looks slightly weak while net income beat analyst expectations. Both are off in pre-market trading.

October Data Release Year over Year

Fixed Asset Investment	5.2% versus estimate 5.4% and Sept’s 5.4%
Industrial Production	4.7% versus estimate 5.4% and Sept’s 5.8%
Retail Sales	7.2% versus estimate 7.8% and Sept’s 7.8%

Takeaway: President Trump is correct in stating China wants a deal, as evidenced by today’s data release. Any optimism by September’s pick up were snuffed out. However, October did include China’s one-week holiday, which likely had an effect on the data. Even considering the seasonal effect it was a disappointing number. This explains Premier Li’s quote yesterday that counter cyclical measures are still needed. The retail sales number was likely affected by shoppers holding off on their big purchases until Singles Day sales this month. The Industrial Production numbers have a wider global repercussion and illustrate why the global economy needs a deal.

H-Share Update

The Hang Seng lost -0.93%/-247 index points to close at 26,323 as volume fell -5.8% day over day and well off the 1-year average. Breadth was poor with only 6 advancers and 42 decliners as Tencent’s disappointing earnings made it the worst performer in the index (I still don’t believe they were that bad) -2.32%/-57.8 index points, AIA -1.74%/-45.2 index points, and HSBC -0.6%/-15.6 index points. The best performers were Apple suppliers AAC +3.71%, Sunny Optical +0.81% and CSPC Pharma +1.44%. The Hong Kong stocks within the MSCI China All Shares Index were off -1% led lower by Tencent pulling communication -1.96%, discretionary -1.16%, staples -1.11%, energy -1.11%, utilities -0.97%, industrials -0.97%, materials -0.83% and real estate -0.63%. Southbound Connect volumes were moderate with buying volume outpacing selling volume. Volume leader CCB had 2 to 1 buyers, Tencent was sold slightly and Kingsoft sold 3 to 1 despite the stock +8.03% after announcing spin off of their cloud computing business in an IPO. Month to date, Southbound Connect volume represents 8.8% of Hong Kong turnover.

A-Share Update

Shanghai & Shenzhen managed to gain +0.16% and +0.61% with the former bouncing to a small gain while the latter grinded higher all day. It will be interesting to see if the 2900 level for Shanghai and 1600 for Shenzhen act as support. Volumes picked up +7.97% day over day though well off the 1-year average. Breadth was strong with 2,188 advancers and 1,276 decliners as Mid and small caps outperformed large caps by ~50bps. The Mainland stocks within the MSCI China All Shares Index gained +0.15% as tech +1.37%, healthcare +1.14%, industrials +0.41% and materials +0.24% while utilities -0.78, financials -0.43%, energy -0.42%, and communications -0.2%. Northbound Connect volumes were moderate/light though Shenzhen Connect volume and buying once again outpaced Shanghai Connect. Foreign investors bought $172mm of mainland stocks today. Month to date, Northbound Connect volume accounts for 4.5% mainland turnover.

Last Night’s Prices & Yields

• CNY/USD 7.0216 versus 7.0218
• CNY/EUR 7.72 versus 7.73
• Yield on 1-Day Government Bond 2.10% versus 2.11% yesterday
• Yield on 10-Year Government Bond 3.26% versus 3.240% yesterday
• Yield on 10-Year China Development Bank Bond 3.65% versus 3.64% yesterday
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper -0.13%