Daily Posts

Rate Cut Rally?

Key News

Asian equity markets rallied in the morning but eased in the afternoon as optimism stemming from a conference call held by G-7 finance ministers diminished over the course of the trading day. But, what can developed countries do when interest rates are already negative? Even in the US, does it really make sense to cut when the 10-Year yield is already as low as 1.13 and fundamentals remain strong? I would recommend the US and China relax tariffs on one another’s goods. Taxing consumers and disrupting global supply chains is an impediment to global growth. The reality is that emerging market finance ministers have much more room to cut rates compared to their counterparts in developed markets. With 10-year yields at nearly 3%, China is in a far better position to cut rates than the US and Europe.

Japan was an outlier selling off more than 1% while Hong Kong was flat. The remainder of Asian equity markets were positive with Thailand and Indonesia gaining nearly 3%, India and Taiwan over 1%, and Korea, Mainland China, Australia, and Singapore up by just under 1%.

According to the John Hopkins coronavirus blog, there are now 91,320 cases of which 80,151 are in China of which 67,217 are in Hubei province. 48,164 people have recovered from coronavirus of which 36,208 are in Hubei province. New cases in Hubei province were down to 114 while outside of Hubei there were 6 new cases. Cases outside of China: South Korea 5,186, Italy 2,036 and Iran 1,501.

Like the flu, the coronavirus is having a very unfortunate effect on the elderly. The unfortunate deaths in Washington state were all in their 70s and 80s from the Life Care Center in Kirkland, WA.  News website Verge noted that the coronavirus has been in Washington State for six weeks. Of the 180 staff members at the nursing home, 25 have tested positive for the virus. Coronavirus also has a variable affect on different individuals. However, it tends to be very serious for the elderly. While technically South Korea is an emerging market country, it is a developed country in my mind. In South Korea there have been 28 deaths which means the fatality rate is 0.5399% (28/5,186). I would suspect those deaths were among the elderly though I’ve been unable to find a listing of the fatalities to verify that hypothesis. It is important to note that, as a developed country, South Korea enjoys world-class health care facilities. Iran is suffering terribly. My colleague Jonathan heard recently that many rich Iranians have been fleeing the country. However, my biggest worry is over an outbreak in India, which lacks sufficient health care infrastructure to cope with its spread.

From China’s dealing with coronavirus, we know tourism and travel industries will be adversely affected. From an investment perspective I would avoid airlines, cruise lines, hotels, casinos, and restaurants.

According to CICC’s high frequency data, 88% of migrant labor is now back to work while freight logistics utilization has now recovered to over 70% of pre-Lunar New Year levels. Coal, property sales and steel have all ticked up off of low bases. Commodity prices remain weak. However, they did have a strong day today.

Everbright Securities is a large Mainland institutional broker that we count as a friend. They noted today that several major construction projects are being announced by seven provinces. This may explain the strong day in commodity prices. The PBOC is injecting ample liquidity into the financial system, which historically has helped equities.

H-Share Update

The Hang Seng Index gave up gains into the close -0.03%/-6.8 index points to close at 26,284 having come off of intra-day highs +0.9%. Breadth was mixed with 24 advancers and 22 decliners as volume declined -7% day over day though still well above the 1-year average. Index heavyweights were mixed with Tencent +1.13%/+35.4 index points, AIA Group -1.24%/-31.3 index points and the day’s worst performer Hang Seng Bank -4.01%/-14.4.

Healthcare stocks were the best performers today with Sino Biopharma and CSPC Pharma +2.99% and +2.01%. Chinese domiciled companies listed in Hong Kong were flat while Hong Kong domiciled companies listed in Hong Kong pulled a James Bond -0.07% using the HS China Enterprise and HS HK 35 indices as proxies. The Mainland stocks listed in Hong Kong within the MSCI China All Shares Index gained +0.23% led by healthcare +1.74%, utilities +1.48%, communication +0.74% and financials +0.1%. Materials were the worst performer –2.02%, real estate -0.44%, staples -0.42%, energy -0.36%, discretionary -0.25%, tech -0.19% and industrials -0.13%. Southbound Connect volumes were elevated though this is the new normal as Mainland investors once again were buyers of Hong Kong listed stocks. Volume leader Tencent was bought 3 to 1, CCB had outsized buying again while Meituan had buyers on the Shanghai Connect but sellers on Shenzhen Connect. Mainland investors bought $347mm of Hong Kong stocks as Southbound Connect accounted for 8.5% of HK turnover.

A-Share Update

The Shanghai and Shenzhen gained +0.74% and +1.03%, respectively, though were off the intra-day highs as volume picked up +14% day over day. Breadth was strong with 2,617 advancers and 959 decliners as small caps outperformed mid and large caps. The Mainland stocks within the MSCI China All Shares Index gained +0.46% led higher by healthcare +2.48%, staples +1.21%, tech +0.58%, utilities +0.47%, energy +031%, industrials +0.17% and financials +0.03%. Real estate was off -0.73%, communication -0.57%, materials -0.31% and discretionary -0.05%. Northbound Connect volumes were high (again) as Shenzhen Connect volumes exceeded Shanghai Connect though buying was more pronounced in Shanghai. MSCI inclusion stocks Kweichow Moutai and Ping An Insurance had buyers outpace sellers 3 to 2 and 2 to 1. Foreign investors bought $68mm of Mainland stocks while foreign trading accounted for not even 4.4% of Mainland turnover.

Last Night’s Prices & Yields

  • CNY/USD 6.98 versus 6.96
  • CNY/USD 7.76 versus 7.74
  • Yield on 1-Day Government Bond 1.25% versus 1.25%
  • Yield on 10-Year Government Bond 2.75% versus 2.74%               
  • Yield on 10-Year China Development Bank Bond 3.21% versus 3.21%
  • Commodities rebounded on the Shanghai & Dalian Exchanges with Dr. Copper were off +1.4%