Key News

Asian markets traded higher led by Japan, Hong Kong, Mainland China, Korea, Australia, India and Thailand. Taiwan, Singapore, Malaysia, and Indonesia were off. Hong Kong’s local elections went off without a hitch as pro-democracy candidates had a landslide victory. Real estate companies had a strong day in Hong Kong as investors believe the Hong Kong government will take a more conciliatory approach.

Both the US and China have communicated that trade negotiations are going well leading to improved sentiment. We also had the National Intellectual Property Administration state the intellectual property laws will be strengthened and enforced to a greater degree following a new IP law that went into effect on November 1^st. IP has been an area that has been universally viewed as a “sticking point” to getting a deal done. We have written numerous times as to why this view is incorrect as China’s increased focus on IP as evidenced by Telsa and more recently German chemical giant BASF being allowed to open factories without a JV partner. China has IP that it wants to see protected which is why I felt IP wasn’t a major issue for them. Taking a victory lap is the kiss of death (the Australians call it the tall poppy being cut) though I do believe we have been way ahead on this issue. I really just want to justify multiple pieces of pecan pie Thursday.

The Mainland had an interesting day as YTD winners were sold as we saw late last week as the White Horse stocks (tech, liquor/alcohol, home appliances) took a hit as brokers believe year-end profit-taking/locking in gains is leading to a slight rotation to more defensive sectors. There was positive news on building materials staying firm which helped “old” economy stocks.

Foreign investors were very active in buying Mainland stocks as we discuss below in advance of tomorrow’s MSCI Semi Annual Index Review. Passive managers are required to rebalance their portfolios at the markets close which will make for a very active day, globally. After tomorrow’s close Chinese companies will be 712 of 1,412 stocks within MSCI Emerging Markets while China will be 33% by market cap. Chinese A-Shares account for 472 of the Chinese stocks in EM accounting for ~4.1% of EM.

Tomorrow is Alibaba’s Hong Kong listing (9988 HK). The listing should have a positive effect on the US listing due to arbitrage between the two listings. The rumors on how oversubscribed vary but several hundred times over show the demand for the company.

H-Share Update

The Hang Seng jumped +1.5%/+397 index points to close at 26,993 as volume +12.9% though below the 1 year average. Breadth was strong with 47 advancers and just 3 decliners led by AIA +3.62%/+98.9 index points, Tencent +1.56%/+41.1 index points and HSBC +1.46%/+38.6. Real estate companies Wharf Real Estate and Country Garden +4.68%/+7.7 index points and +3.68%/+9.5 index points while healthcare names Sino Biopharma and CSPC Pharma -1.95%/-4.5 index points and -1.3%/-3.65 index points. The 204 HK stocks within the MSCI China All Shares +1.04% led by materials +3.28%, real estate +2.53%, industrials +1.94%, communications +1.36%, energy +1.32%, discretionary +0.88%, tech +0.78% and financials +0.69%. Healthcare was off -1.62%. Southbound Connect volumes were moderate with buyers slightly outpacing sellers. Volume leader Tencent was sold 2 to 1 while CCB was heavily bought.

A-Share Update

The Shanghai & Shenzhen diverged +0.72% and -0.44% though volume was off -10.6% and breadth was off 1,818 advancers and 1,805 decliners. Large/mega cap outperformed mid and small caps by nearly 2% as the former gained nearly 1% and the latter lost 1%. The 466 mainland stocks within the MSCI China All Shares gained +0.55% led by real estate +3.14%, energy +2.69%, materials +2.6%, industrials +1.52%, utilities +1.37%, discretionary +1.13% and financials +0.93%. Tech was the big loser off -2.23%, healthcare -0.83%, staples -0.63% and communications -0.47%. Northbound Connect volumes were moderate/strong as Shanghai buying outpaced Shenzhen while volumes were higher on Shenzhen than Shanghai. Foreign investors bought a massive $801mm of mainland stocks today!

• Amazon announced it would sell into China through Pinduoduo’s platform.
• Vipshop (VIPS US) will outsource its delivery to SF Express which should help the company’s margins.

Last Night’s Prices & Yields

• Big rally in CNY/Euro overnight.
• USD/CNY 7.036 versus 7.0413 Yesterday
• CNY/EUR 7.7466 versus 7.834 Yesterday
• Yield on 1-Day Government Bond 1.801% versus 1.83% Yesterday
• Yield on 10-Year Government Bond 3.1573% versus 3.171% Yesterday
• Yield on 10-Year China Development Bank Bond 3.7562% versus 3.7165% Yesterday
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.36% .