The Great Unwind
Asian equity markets were largely lower. While Japan managed a small gain, large losses in Korea, Taiwan, Indonesia and Singapore overshadowed the few positives. Investors appear to be de-risking their portfolios by selling indiscriminately. One broker noted a global unwind of leveraged trades across asset classes including currencies and equities. Investors will borrow cash in low yielding currencies and execute carry trades by buying high yielding currencies. Other managers will put on paired trades of a long versus a short position. There are also risk parity trades of long bonds and leveraged stocks occurring. These trades are being unwound in a dramatic fashion, which may lead to strong selling at a time when no one is buying. This explains an element of the dollar’s strong rise as this money comes back to the US.
Overnight, the renminbi fell versus the dollar despite China having significantly higher interest rates than the US. A fixed income trader friend noted that the US bond market is now in “no bid” territory i.e. there are no buyers. You may have noticed this if you’ve tried to refinance your mortgage. US interest rates are at zero so isn’t it a great time to do so? Wrong. There are simply no buyers of mortgage bonds. Paradoxically, US mortgage rates have increased. We need liquidity in financial markets, especially in fixed income just as we saw in 2009 during the GFC. Remember the PBOC hasn’t cut interest rates in China though they have pumped liquidity into the financial system. Hopefully the Fed will do the same here in the US. Maybe mortgage rates’ rise is a sign of the equity bottom? Only time will tell!
Hong Kong and Mainland China were not immune to the selling. However, they did not fall to the extent of the rest of Asia. Yes, China has beaten the coronavirus. Even Hubei province is now reporting no new cases. However, more important to the market’s resilience are expectations for the PBOC to cut the loan prime rate (LPR) tomorrow. We also saw a policy statement on supporting the “new consumption model” i.e. internet and e-commerce companies. Alibaba’s Hong Kong listing and Tencent were up overnight despite Hong Kong’s sell off. The Hang Seng is now back to the level it was at when I joined KraneShares in 2013! Hong Kong is clearly oversold and overdue for a bounce back. However, I suspect these New China economic sectors and the underlying stocks will lead the way higher. This could happen in the US and Europe as asset-light companies are likely to weather the storm better than old economic sectors.
This morning I received a news alert that India would suspend inbound commercial flights. Thus far, India has had relatively few COVID-19 cases. The first cases in the country were from foreign tourists. Limiting air travel is such an obvious way to curtail the spread, but the extent to which passenger air traffic is curtailed varies by country. The WSJ noted in separate articles both the Mexican government’s indifference to the coronavirus and the UK’s decision to allow rock concerts to take place as planned this past weekend. Conversely, Chile and Peru have taken drastic measures. It is easy to Monday morning quarterback this. Despite our study of China, I completely missed the extent to which coronavirus was spreading despite noting more than a month ago that global air travel was still taking place. I am paying for it financially and will do my best efforts to prevent such an error in the future. As we saw during the trade war, we are in a global economy and we need to recognize the consequences the come with that.
Online travel company Trip.com (TCOM US) reported Q4 earnings after the US close yesterday. However, the company’s strong results were overlooked due to the company’s dismal Q1 forecast, which should surprise nobody. The stock is trading at less than half of its value a year ago.
- Revenue +10% YoY to RMB 8.3B versus estimate RMB 8.25
- Adjusted EPS RMB 1.94 versus estimate RMB 0.84
- Q1 revenue forecast down -50%
Social networking company Momo Inc (MOMO US), also known as the Tinder of China, reported Q4 earnings prior to the US open.
- Revenues +22% RMB 4.687B ($673mm)
- Adjusted EPS $0.81 versus estimate $0.71
- Q1 Revenue forecast RMB 3.45B to 3.55B versus estimate RMB 4.28B
The Hang Seng came off intra-day lows of -5.17% to close -2.61%/-582 index points to close at 21,709. Volume picked up 15% from yesterday which is more than twice the 1-year average. Breadth was weak with 8 advancers and 42 decliners though it certainly felt worse. Index heavyweights were weak with AIA -5.67%/-120 index points, Tencent -2.69%/+61 index points and Ping An Insurance -3.83%/-49 index points. Today’s best performers were predominantly tech/growth oriented such as Techtronic +4.54%/+9.9 index points, AAC Technologies +4.34%/+3.3 index points and Tencent +61.7 index points. Real estate firm CK Infrastructure cratered -12.6%/-11.8 index points, Power Asset -9.5%/-18.2 index points and Swire Pacific -8.74%. The China-domiciled companies listed in Hong Kong outperformed the Hong Kong-domiciled companies -2.74% versus -4.16% using the HS China Enterprise and HS HK 35 indices as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares Index were off -1.73% with communication and tech +1.68% and +0.02%. Consumer Staples was off -0.73%, industrials -2.85%, discretionary -2.85%, financials -2.92%, health care -3.08%, health care -3.08%, real estate -4.61%, materials -4.68%, energy -5.05% and utilities -5.71%. Mainland investors were very active buyers of Hong Kong stocks via the Southbound Connect trading platform. Volumes spiked as buying volume exceeded selling to 2 to 1 in the highest volume day I’ve seen. Volume leader Tencent was bought 3 to 1, CCB 4 to 1, and Sunac 2 to 1. Mainland investors bought $2.048 billion worth of Hong Kong stocks today. Meanwhile, Southbound Connect trading accounted for 12.1% of Hong Kong turnover. Volumes on both are the highest I’ve seen.
Shanghai & Shenzhen staged a late afternoon rally which limited losses on the Shanghai and allowed Shenzhen to end the day positive as the two indices diverged, ending up -0.98% and +0.28%, respectively. Breadth was surprisingly strong with 1,959 advancers and 1,687 decliners as volumes declined a touch -1.6% from yesterday. Mega and large caps were smacked -2% while mid-caps were off slightly and small caps managed a small gain. The Mainland stocks within the MSCI China All Shares Index were off -2.35% as tech managed a small gain +0.55% though communication -0.42%, industrials -2.38%, materials -2.63%, staples -2.72%, health care -2.9%, utilities -2.97%, financials -2.98%, discretionary -3.4%, energy -3.86% and real estate -4.01%. Foreign investors were sellers in both Shanghai and Shenzhen via the Northbound Connect trading platform. Volumes were higher in Shenzhen though sold off moderately more in Shanghai. MSCI inclusion stocks Kweichow Moutai and Ping An Insurance were both sold, but neither hit 2 to 1 selling. Foreign investors sold $1.436 billion worth of Mainland stocks as Northbound Connect trading accounted for almost 6% of Mainland turnover.
Last Night’s Prices & Yields
- CNY/USD 7.12 versus 7.05 yesterday
- CNY/EUR 7.66 versus 7.66 yesterday
- Yield on 1-Day Government Bond 1.29% versus 1.31% yesterday
- Yield on 10-Year Government Bond 2.73% versus 2.71% yesterday
- Yield on 10-Year China Development Bank Bond 3.09% versus 3.09% yesterday
- Commodities were significantly lower on the Shanghai & Dalian Exchanges with Dr. Copper were off -8.02%