Asia Takes the Rally Baton From The US
Asian equities rode a wave of positive developments, not the least of which was the massive rally yesterday in US equities. Contributing to the rally were the Senate agreement on a fiscal stimulus package, which took place during Asian trading hours, and news that the PBOC will cut interest rates in the coming days. The Financial Times also reported that the PBOC will cut interest rates in the coming days. The renminbi weakened on the speculation to 7.10 versus 7.06 yesterday. President Trump may waive tariffs on imports of food, which makes sense to me though cutting tariffs across the board would be a stronger move.
Less publicized were Nike’s strong earnings post the US close yesterday. The company reported positive China results as consumers shifted from buying in stores to online. Other industries are also rebounding quickly within China. A broker noted that Cargill reported its China poultry plant is running at 80% capacity after falling to the 30% to 40% range during the thick of the quarantine. Japan had a strong day up nearly +7%, Korea rebounded nearly +6%, and India was up +6%. The Hang Seng had a strong day +3.8% as autos rebounded on expected policy support while Mainland stocks were led by real estate on chatter about similar supportive policies.
I had cited US mortgage rates as an indicator of the effectiveness of the Fed’s efforts to shore up the financial system’s plumbing. Last Thursday, the 30-Year Fixed Mortgage rate hit 4.05% as buyers of mortgages were unable to access financing. Yesterday, the rate stood at 3.88% versus 3.73% at the end of January, according to Bakrate.com, which was prior to the Fed cuts. In theory, I would assume the rate should be around 3% due to the Fed interest rate cuts.
There is a debate among our brokers as to whether the rebound is a “dead cat bounce” or a bottoming process. Only time will tell though we know cases will rise in the US as more testing is done. The bulls are arguing that the retail capitulation i.e. selling stocks, potential pension buying and stocks could climb a wall of worry. Their view is that like in the 2008/2009 financial crisis the market rebounded due to measures such as we saw from the Fed on Monday. The bears argue that the economic consequence of self-quarantine may continue to curtail risk appetites. It is hard to know, though the market usually does the opposite of what investors think, which would be further upside in the short term.
According to high-frequency economic data from our partners at CICC, coal consumption is at nearly 80% of its pre-Chinese New Year level, property sales continue to rise, and freight logistics capacity utilization has reached 94%. What effect will the global quarantine and economic weakness have on China? The depth of the global downturn will be a critical factor and is dependent on government policies to contain the spread of the virus as well as supportive fiscal policies. China’s fiscal policies are focused on supporting the economy. While China cannot control global demand, it can assist with domestic consumption. Similar to the trade war, export-driven manufacturing may suffer though domestic consumption can help offset the weakness.
The Hang Seng gained +3.81%/+863 index points to close near the day’s highs at 23,527 on volume up very slightly from yesterday. Breadth was strong with 49 advancers and only 1 decliner as index heavyweights led the way higher with AIA +6.58%/+156 index points, Tencent +4.-5%/1-2 index points and HSBC +2.66$/+60 index points. Hong Kong-domiciled companies outperformed China-domiciled companies +4.47% versus +3.76% using the HS China Enterprise and HS HK 35 indexes as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares Index gained +4.2% led by discretionary +7.77%, energy +6.79%, real estate +6.69%, health care +5.83%, utilities +5.75%, tech +5.08%, industrials +4.38%, materials +3.6%, communication +3.28%, staples +3.11% and financials +2.92%. Southbound Connect volumes were strong (again) as Mainland investors were buyers of Hong Kong stocks (again). The buy to sell ratio was not quite 2 to 1 with volume leader Tencent seeing not quite 2 to 1 buying, China Construction Bank seeing outsized buying and Semiconductor Manufacturing seeing slight selling. Mainland investors bought $740mm worth of Hong Kong stocks as Southbound Connect trading accounted for almost 10% of Hong Kong turnover.
Shanghai & Shenzhen also closed just off the day’s high gaining +2.17% and +2.92%, respectively, accompanied by strong volume +4% and exceedingly strong breadth of 3,457 advancers and only 282 decliners. Small outperformed mid which outperformed large caps by a small degree. The mainland stocks within the MSCI China All Shares gained +2.39% led by real estate +4.64%, discretionary +3.96%, health care +3.33%, tech +3.16%, industrials +2.45%, communication +2.36%, staples +1.99%, materials +1.87%, financials +1.57%, energy +1.02% and utilities +0.42%. Northbound Connect volumes were strong with buying on both the Shanghai and Shenzhen. MSCI Inclusion stocks diverged for the first time I can recall Ping An had selling 11 to 7 while Kweichow Moutai had 2 to 1 buying. Foreign investors bought $352 million of mainland stocks today as Northbound Connect accounted for 5% of mainland turnover.
Last Night’s Prices & Yields
- CNY/USD 7.10 versus 7.06 yesterday
- CNY/EUR 7.68 versus 7.63 yesterday
- Yield on 1-Day Government Bond 1.09% versus 1.05% yesterday
- Yield on 10-Year Government Bond 2.63% versus 2.63%
- Yield on 10-Year China Development Bank Bond 3.05% versus 3.04%
- Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper were off +1.99%