Daily Posts

Risk On, Foreign Reserves Climb

Key News

Asian equities were a sea of green as markets turned risk on following US equity markets higher with only Taiwan off. Oil and gold’s decline led the energy and material sectors lower in Hong Kong trading. Automaker Geely (175 HK) gained +1.55% after strong December sales though 2019 sales declined nearly 10% in 2019. Mainland stocks had a very strong day, which we discuss further below. There was not a large amount of single stock news as the market sentiment appeared to lift all stocks.

I spent yesterday at a China investment conference that included talks from several US and Chinese companies, economists, strategists and analysts. I’ll aggregate my thoughts into a coherent message tomorrow. I came away with the view that there will be a great deal of scrutiny of the details of the “phase one” trade deal when they are released next Wednesday. Concerns may surround China’s ability to meet agricultural and energy purchase quotas. If they fail to meet quotas, then tariffs could be raised. This uncertainty could be problematic for investors as the question is not only whether China can buy the goods, but also whether the US can supply such high amounts. Overnight, there was talk that China wouldn’t raise its agricultural purchases. Nonetheless, the Chinese investment professionals that I spoke to seemed less concerned about the trade war than their US counterparts as they felt that Mainland investors had moved on.

I do feel it is worth noting the very strong inflows into Mainland Chinese stocks via the Connect trading program. Connect is now the predominant way foreign investors access Shanghai and Shenzhen listed stocks. The inflows have been robust over the last two months before the MSCI Semi Annual Index Review at the end of November and have continued into January. Foreign investors appear to favor Shenzhen listed stocks over Shanghai listed stocks as MSCI’s November inclusion included more mid cap stocks, which are predominantly listed on the Shenzhen Exchange. Mainland investors are also participating in the rally, evidenced by the significant increase in Mainland China’s trading volumes.

H-Share Update

The Hang Seng bounced back overnight though came off its highs to close +0.34%/+241 index points to close at 28,322 as volumes moderated day over day though were just off the 1-year average. Breadth was mixed with 26 advancers and 22 decliners as Tencent ripped +2.17%/+66.8 index points as the Hang Seng’s best performer and AIA group +1.19%/+33.8 index points though China Construction Bank -0.6%/-13 index points. PetroChina reversed from yesterday’s gain -1.67%/-4.3 index points.

Both China and Hong Kong domiciled companies gained +0.3% as measured by the Hang Seng Enterprise Index, which captures Mainland-domiciled companies that trade in Hong Kong, and the Hang Seng Hong Kong 35 indexes, which track Hong Kong-domiciled names. Companies such as Tencent are considered Chinese due to their domicile in China while AIA Insurance, for example, is a Hong Kong stock due to its domicile in Hong Kong. China is an emerging market while Hong Kong is considered a developed market. This is also important considering that Hong Kong’s local economy has faltered as a result of ongoing protests.

The Hong Kong-listed stocks within the MSCI China All Shares Index gained +0.63% led higher by a rebound in healthcare +2.26%, discretionary +1.9%, communication +1.53%,  staples +1.02%, real estate +0.61%, utilities +0.6% and industrials +0.008%. Materials were off -0.75% followed by energy -0.55%, tech -0.27% and financials -0.16%. Southbound Connect volumes were strong as Mainland investors continue their buying of Hong Kong stocks. Today’s volume leader was Tencent, which saw 4 to 1 buyers to sellers. CCB had sellers slightly out pace buyers and Xiaomi had 5 to 1 buys to sells. Chinese investors bought a total of $358mm worth of Hong Kong stocks today while Southbound Connect accounted for just over 8% of Hong Kong’s volume.

A-Share Update

The Shanghai & Shenzhen saw strong moves ending on the day’s highs to close +0.69% and +1.31%, respectively. Both exchanges saw high volume that, despite being lower day over day, was well above the 1-year average. Breadth was strong with 3,006 advancers and only 671 decliners as small and mid caps outperformed large caps by nearly 1%. The Mainland stocks within the MSCI China All Shares Index gained +1.23% led higher by communications +3.33%, staples +2.33%, healthcare +1.96%, discretionary +1.56%, real estate +1.33%, financials +1.03%, industrials +0.83%, utilities +0.75%, tech +0.65% and materials +0.43%. Energy was the only losing sector off -0.55%. Northbound Connect volumes were elevated as Shenzhen Connect volume and buying once again outpaced Shanghai Connect. Foreign investors were very active buyers of Mainland stocks overnight, purchasing $648mm. Northbound Connect volumes accounted for just over 4% of the Mainland’s turnover today.

The Power of Passive

Back on December 20th our China Last Night title was “The Power of Passive,” highlighting the FTSE Russell index rebalance that day. I failed to provide a follow up on two of the stocks I highlighted prior to the rebalance due to a FTSE weight increase.

  • Alibaba traded 26mm shares on the FTSE rebalance day versus 12mm shares the day prior and the 1-year average of 16mm shares. After the close, there was a block trade of 10.496mm shares at the close, representing nearly 50% of the day’s trading.
  • iQIYI (IQ US) traded 10.559mm shares on the rebalance day versus 6.4mm shares the day prior and a 1-year average of 8mm shares. After the close there was a trade for 10.4 million shares! Again, more shares traded in one post-close block trade than had been traded all day.

December Foreign Reserves      

$3.107 trillion versus estimate $3.110 trillion and November’s $3.095 trillion

Takeaway: Several years have passed since FX reserves were widely followed and covered by the media. Considering CNY’s strength, it is worth noting the uptick in reserves.

Last Night’s Prices & Yields

  • USD/CNY 6.94 versus 6.98 yesterday
  • CNY/EUR 7.74 versus 7.80 yesterday
  • Yield on 1-Day Government Bond 1.42% versus 1.30% yesterday
  • Yield on 10-Year Government Bond 3.14% versus 3.14% yesterday
  • Yield on 10-Year China Development Bank Bond 3.58% versus 3.57% yesterday
  • Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper flat.