Key News

Asian equities were a sea of green as investor sentiment turns risk-on following the US-China trade deal with only Australia, Singapore, and Thailand in the red. Volumes were very strong in both South Korea, Taiwan, mainland China, and Hong Kong, all of which gained more than 1%. The number one volume stock in China today, BOE Technology (000725 CH), traded 2.47 billion shares.

Yesterday, the highest volume stock in the US with a market cap of over $50mm was Danaher, which traded 92mm shares. But, Danaher wouldn’t even have made the top 100 volume stocks in China! All sectors in both Hong Kong and Mainland China were in the green as brokers had a strong day as the CSRC, China’s SEC, announced several reforms deemed friendly to investment banking. Both Shanghai and Shenzhen cleared important resistance levels, which could see short term momentum continue. All told, it was a strong day as sentiment turns positive.

Today saw several potential emerging trends worth noting. There was a disparity between the trading of Chinese domiciled companies and Hong Kong domiciled companies listed in Hong Kong. We have noted in the past that companies such as AIA and Hong Kong Exchange Group (HKEX) are not considered Chinese companies because they are domiciled in Hong Kong. They are actually part of the MSCI Hong Kong Index, which is considered a developed market index. Confused? Buckle Up. We're just getting started. The Hang Seng, which is comprised of only 50 Mainland and Hong Kong domiciled companies listed in Hong Kong, gained +1.22% today. The Hang Seng China Enterprises index, which is comprised of Mainland domiciled companies listed in Hong Kong, gained +1.73% while the Hang Seng HK 35, which is comprised of only Hong Kong domiciled companies, gained +0.54%.

The South China Morning Post had an article today noting the dilemma global companies face in staying in Hong Kong due to the protests and their effect on the local economy. Protests have toned down recently, but underlying issues have yet to be resolved. Increasingly, Macau’s is on the rise due to increased interest in Hong Kong’s peaceful neighbor. Additionally, in order for China to meet its agriculture purchase commitments, routing trade directly to China as opposed to going through Hong Kong makes sense.

The other big trend has been the inflows into Mainland China following MSCI’s November rebalance/inclusion. It is likely that active managers are buying Mainland stocks as they’ve been very underweight China due to the optics of holding China during a trade war. Additionally, Mainland China continues to be one of the top performers in Emerging Markets. Active managers need to show their holdings at year end in what is called window dressing. The inflows are hard to deny. But, there could be another effect. Who is buying Mainland China? The largest US mutual fund families! Who is the financial media’s biggest advertising clients? The largest US mutual fund families! I suspect financial media sentiment to China could do a 180 and warm significantly over the next year.

H-Share Update

The Hang Seng grinded higher +1.22%/+335 index points to close at 27,843 as volume increased +30% day over day and above the 1-year average in a strong sign of confirmation. Breadth was good with 34 advancers and 15 decliners as Tencent shot to a +3.17%/+93.7 index points, CCB +2.01%/+43.4 index points and ICBC +2.44%/+32 index points. Pharma names CSPC and Sino Biopharma rebounded to be the top movers +4.2%/+10.9 index points and +3.69/+8.2 index points, respectively. Real estate names were the laggards with China Resources Land -2.49%-7.9 index points and CK Infrastructure -1.31%/-1.7 index points. The Hong Kong stocks within the MSCI China All Shares Index gained +1.82% driven by communications i.e. Tencent +2.76%, health care +2.39%, staples +2.35%, energy +2.01%, financials +1.76%, industrials +1.47%, discretionary +1.45%, utilities +1.33%, tech +0.44%, materials +0.43%, and real estate +0.3%. Southbound Connect volumes were high with buyers outpacing sellers. Volume leader Tencent had 5 to 1 buyers to sellers while CCB 5 to 1 and Sunny Optical mixed. Southbound Connect volume accounted for 9% of Hong Kong turnover while Mainland investors bought $643mm of Hong Kong stocks (buys minus sells).

A-Share Update

The Shanghai & Shenzhen grinded higher from dawn to dusk ending +1.27% and +1.33% as volume gained 20% day over day and well above the 1-year average. Shanghai cleared the 3,000 level while Shenzhen punched through the 1,700 level. Breadth was strong with 3,115 advancers and 554 decliners in the second straight day of more than 3k gainers, which is the longest such streak in recent memory. It was a broad rally though large, mid and small outpaced mega caps slightly. The Mainland stocks within the MSCI China All Shares Index +1.41% led by real estate 2.2%, financials +1.71%, staples +1.54%, tech +1.44%, materials +1.36%, energy +1.34%, industrials +1.32%, discretionary +1.05%, healthcare +0.92%, communication +0.44% and utilities +0.41%. Northbound Connect volumes were quite strong with Shenzhen Connect volume outpacing Shanghai Connect. However, Shanghai saw slightly more buying than its younger sibling. Foreign investors bought $1.259 billion of mainland stocks today!  That is a BIG number for a non-index rebalance day. In fact, it is the biggest inflow day except for the November MSCI rebalance since Sept 20^th. Northbound Connect volumes accounted for just under 4% of the Mainland’s volume.

Financial Times had a nice write up on Meituan Dianping (3690 HK) over the weekend. The article details the company’s growth and transformation from a delivery company operating at a loss to a profitable services company.

A sharp-eyed broker noted that Tencent (700 HK) reported to the SEC that it has increased its ownership in Vipshop (VIPS).

Last Night’s Prices & Yields

Yields rose across the board as CNY was relatively unchanged relative to USD, but fell slightly compared to stronger Euro.

• USD/CNY 6.99 versus 6.99 yesterday
• CNY/EUR 7.80 versus 7.79 yesterday
• Yield on 1-Day Government Bond 1.88% versus 1.79% yesterday
• Yield on 10-Year Government Bond 3.21% versus 3.19% Friday
• Yield on 10-Year China Development Bank Bond 3.63% versus 3.60% Friday
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.61%