Key News

Asian equity markets were largely up except for Japan and Indonesia. China hawk Peter Navarro’s comments on Fox News yesterday evening that a tariff waiver wasn’t a given didn’t move the market. Even with the US economy and stock market performing well, there is no denying the negative effect tariffs and disruption of global supply chains are having on the US economy.

Because the US economy is mainly a consumption economy, the effect on manufacturing and industrials is largely hidden or washed out. One never knows, but implementing a major tax on the US consumer during the holiday season seems illogical. China’s decision to remove foreign computers and technology from government offices didn’t raise much attention here nor on potentially affected stocks. The move didn’t get much attention as it was assumed to simply be China’s response to the US kicking out Huawei. Oddly, it wasn’t viewed as a negotiating tactic, which perhaps it should have been given that US tech companies do very strong business in China. 

China’s strong new loan and financing figures did have a positive effect on financials in both Hong Kong and the Mainland, leading to a large-cap rally. Real estate had a strong day on chatter that property development restrictions could be loosened, leading to a rally in “old economy” sectors while Hong Kong tech cheered the release of an inexpensive 5G phone in China. Strong performers such as tech were hit with profit-taking on the Mainland.

Inflows into Mainland Chinese stocks have been on a tear over the last month. As discussed below, this week alone has seen $1.3B of inflow on top of last week’s $3B and $4B the week before last. What’s happening? Three weeks ago we heard that hedge funds were going into China via Connect trading. Another factor is active EM managers, many of which are underweight China going into year-end. Mainland China has been one of the best performing stock markets globally this year, which means your underweight position is leading to underperformance i.e. how you get fired. No Bueno! Better to buy some Chinese A-shares and sprinkle them in your top holdings before year-end.

H-Share Update

The Hang Seng opened down but grinded higher all day to close near the day’s high +0.79%/+208.8 index points at 26,645. Volume jumped 20% day over day, though still well of the 1-year average while breadth was strong with 39 advancers and 8 decliners. Index heavyweights led the charge higher as Tencent +0.95%/+25.7 index points, Ping An Insurance +1.51%/+23.1 index points and HSBC +0.78%/+20.4 index points. Apple supplier AAC Tech was the biggest gainer +5.63%/+7.3 index points while pork giant WH Group was off -0.88%/-1.8 index points. The Hong Kong stocks within the MSCI China All Shares Index had a much stronger day +1.24% with every sector in the green as tech +2.5%, materials +2.14%, real estate +1.64%, financials +1.38%, industrials +1.27%, discretionary +1.26%, healthcare +1.04%, utilities +1.02%, communication +0.95%, energy +0.71%, and staples +0.4%. Southbound Connect volumes were light, though buyers outpaced sellers as Mainland investors bought US $209mm of Hong Kong stocks. Southbound Connect volume accounted for nearly 8% of Hong Kong’s turnover.

A-Share Update

The Shanghai & Shenzhen diverged as Shanghai grinded higher to manage a +0.24% gain to close at 2,924, while Shenzhen chopped around to lose -0.44% at 1,639. Both indexes are above support levels of 2900 and 1600, respectively. Volume ticked up slightly 2.6% day over day, though off the 1-year average while breadth was off with 1,286 advancers and 2,244 decliners. Large caps outperformed significantly, managing +0.5% as mid and small caps were down on the day between -0.5% to -1%. The Mainland stocks within the MSCI China All Shares Index gained +0.43% in a large sector divergence as financials +0.73%, real estate +0.61%, energy, and utilties +0.36%, discretionary +0.16% and industrials +0.02%. Tech was off -0.82%, staples -0.79%, communications -0.29%, healthcare -0.23% and materials -0.05%. Northbound Connect flows were light though foreign investors were in a buying mood, Shenzhen Connect volume and buying exceeded its bigger sibling in Shanghai. Foreign investors bought a total of $336 million bringing the weekly total to $1.237 billion. Northbound Connect flows accounted for 4% of turnover on the Mainland.

Last Night’s Prices & Yields

• CNY/USD 7.039 versus 7.034 yesterday
• CNY/EUR 7.807 versus 7.792 yesterday
• Yield on 1-Day Government Bond 1.909% versus 1.815% yesterday
• Yield on 10-Year Government Bond 3.170% versus 3.178% yesterday
• Yield on 10-Year China Development Bank Bond 3.57% versus 3.59% yesterday
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.45%