Daily Posts

Asia Cheers Fed Liquidity Action

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Key News

Asian equities rebounded strongly following the Fed’s decision to open swap lines for central banks, which addresses the issue of overly strong demand for US dollars. There are simply too many sellers and too few buyers of risk assets as leveraged trades in commodities, currencies, fixed income and equities are unwound. This is the right step, though I’m told the weekly swaps need to be done daily to fully alleviate illiquidity. We are apt to see the Fed become the buyer of bonds given that banks are reluctant to take on the risk and are handcuffed by regulation such as the Volcker Rule.

Taiwan, Korea and Hong Kong had very strong rebounds after dramatic drops left them very oversold while all markets were up. However, Japan missed out due to Vernal Equinox market holiday. Mainland China was up as well despite the PBOC not cutting the Loan Prime Rate as expected. There is chatter that interest rates might be cut and that another round of fiscal stimulus is on the way. Today marked FTSE’s inclusion of China A shares leading to a strong day in large caps, which outperformed mid and small caps by 1%. Today mimicked yesterday’s trading session in the US. It was a short squeeze but markets rebounded from extremely oversold conditions. The Fed’s action will help. However, the inevitable rise in US cases will dominate headlines in the weeks to come.

Self-quarantine and working home is fine for many white collar professionals, but for many it simply isn’t possible. While China and Italy’s quarantines have garnered much attention, the playbooks of South Korea and Japan should be followed closely here in the US. Mass testing allows for the identification of asymptomatic coronavirus carriers, whose infections may or may not evolve into COVID-19. Ideally, those who are unable to work from home would all be tested. Imagine if GM tested their workers and allowed workers who test negative to resume work following a short self-quarantine period. Testing is the key as it would allow workers resume work without a headache. California has imposed work from home and there are nonetheless flights into and out of San Francisco airport in the air right now. Curtailing domestic travel can impede the spread of the virus as well.

H-Share Update

The Hang Seng opened higher and never looked back +5.05%/+1,095 index points to close at 22, volume +15% from yesterday and twice the 1-year average. Breadth was strong with 43 advancers and 7 decliners led by AIA +7%/+158 index points, today’s best performer, China Mobile +13.5%/+138 index points, HSBC +5.38%/+124 index points and Tencent +4.84%/+116 index points. It is worth noting that Hong Kong conglomerate CK Asset Holdings was up +13.5%/+41 index points, casino operator Galaxy Entertainment +11.92%/+33 index points, phone company China Unicom +11.79% and energy giant CnOOC +11.41%/+44 inex points. HK & China Gas was off -8%/-34 index points, understandably.

China-domiciled companies outperformed Hong Kong-domiciled companies +6.53% versus +3.41% using the HS China Enterprise and HS HK 35 indexes as proxies. The Chinese companies within the MSCI China All Shares Index +6.05% led higher by energy +9.09%, real estate +8.4%, discretionary +8.4%, utilities +7.83%, materials +7.73%, communication +6.25%, health care +5.96%, tech +5.85%, industrials +4.86%, financials +4.69%, and staples +1.88%. Southbound Connect trading volume was 50% higher than normal though off the 2X we’ve seen recently. Mainland investors remain buyers at the rate of 3 to 2 led by Tencent 2 to 1 buyers, CCB 8 to 1 and Meituan Dianping 2.5 to 1. Mainland investors bought $684 million worth of Hong Kong listed stocks as Southbound Connect trading accounted for 8.3% of Hong Kong’s turnover.

A-Share Update

Shanghai and Shenzhen bounced to gains of +1.61% and +1.28%, respectively, as volume fell -1.6% though breadth was strong with 2,660 advancers and 963 decliners. Large caps outperformed mid and small caps for a change. The Mainland stocks within the MSCI China All Shares Index gained +1.79% led higher by real estate +3.01%, staples +2.89%, health care +2.61%, communication +2.46%, financials +1.9%, materials +1.87%, discretionary +1.65%, industrials +1.62%, utilities +0.82% energy +0.77% while tech lost -0.02%.

Northbound Connect volumes were high. However, for the first time in a long time, Shanghai saw net buying while Shenzhen saw net selling by a small margin. This was likely driven by the FTSE inclusion, which was geared toward Shanghai large caps. Volume leaders China Merchants Bank, Kweichou Moutai and Ping An Insurance all had buyers outpace sellers by 2 to 1, 1.5 to 1 and 5 to 3. Foreign investors bought $237 million of mainland stocks today as Northbound Connect trading accounted for 5.9% of mainland trading.

Last Night’s Prices & Yields

  • USD/CNY 7.11 versus 7.05 yesterday
  • EUR/CNY 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%
  • Commodities were rebounded higher on the Shanghai & Dalian Exchanges with Dr. Copper were off +1.05%