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US Day Traders Send Asian Equities Lower

Key News

Asian equities were off as markets were spooked by the US stock market sell-off yesterday. As our friend Ken in Hong Kong noted, hedge funds tend to short low-quality names and long high-quality names. If their short positions go against them, they have no choice but to sell their quality long positions, which puts downward pressure on the whole market. As market volatility rises, it sets off a whole chain reaction. Correlations rise, the US $ and other safe-haven currencies rise, and commodities fall, etc. Hat tip to Ken for the clarity while proving the necessity of having a relationship with a salty grizzled veteran trader with a few rodeos under their belt.

As mentioned yesterday, we are in a correction following a very strong start to the year and strong performance in 2020 for Asian equities. In speaking with technical analyst Katie Stockton of Fairlead Strategies yesterday, she also believes that we are in a correction, though many Asian markets are showing strong relative strength versus US equities. Decoupling (ie. US stocks down/Asia stocks up) very rarely occurs, though a pullback is healthy despite being painful emotionally and financially. I suspect investors who are underweight in China, broader Asia, and emerging markets have an outstanding opportunity to take advantage of the dip that is apt to play out over the next several days or weeks. In full disclosure, my track record in market timing is awful!

Outperforming sectors took the brunt of today’s pain, though there was nowhere to hide on a day like today. An example would be that Apple’s Chinese supply chain stocks were off despite the great earnings discussed below. We did see repo rates increase in China despite the PBOC saying that they aren’t going to tighten. We usually see liquidity come into the market prior to Chinese New Year so I would expect this situation will rectify itself soon. It was reported that JD.com’s financial unit and Ant Group removed bank deposit products per regulators’ request. Seems easy to me. There is a big effort to contain a coronavirus flare-up in northern China in advance of Chinese New Year, which is called the biggest human migration annually. One broker felt that if travel is curtailed, then online video platforms and online entertainment stocks could be a beneficiary, which makes sense to me.  

The Hang Seng Index opened lower and stayed down for the count off -2.55%/-746 index points to close at 28,550 as volumes increased from yesterday at nearly twice the 1-year average. The sole positive today was another strong round of buying via Southbound Stock Connect as Mainland investors bought a healthy $1.318B of Hong Kong shares. Emphasis was on Tencent, which had $426mm of buying today, which accounted for nearly a third of all total purchases. Meituan also saw very strong buying with $235mm of net buying. Hong Kong volume leaders were Tencent, which fell -2.92% on 2.5X the value traded of the second volume leader, Meituan, which fell -2.31%, Alibaba Hong Kong, which fell -3.23%, Hong Kong Exchanges, which fell -3.06%, Xiaomi, which was off -0.85%, BYD, which dropped -7.09%, China Mobile, which was flat at 0.0%, Semiconductor Manufacturing, which dropped -8.56%, JD.com Hong Kong, which fell -6.01%, and Geely Auto, which fell -6.94%. Uncle!

Unfortunately, Mainland China was off too as Shanghai, Shenzhen, and STAR Board were off -1.91%, -2.82%, and -2.52% respectively. Volumes were just above the 1-year average while only 1 stock advanced for every 3 declinings. Foreign investors sold nearly $1B of Mainland stocks though Northbound Connect flows have not been a good market timing tool. CNY was flat though copper and other industrial metals were off. 

MSCI announced that five Chinese companies will not be removed their indexes yesterday. I’ve mentioned the chaos caused by the Executive Orders (EO), though it appears that the OFAC is responding to the US financial industry’s difficulty reading the tea leaves of the EO. Eliminating the EO seems like the easiest solution to me. 

Baidu was approved by California to run autonomous driving trials.  

As you are very aware, yesterday Apple reported outstanding quarterly results. What jumps out is the sharp increase in Greater China revenue from $13.578B to $21.313B – a 61% growth year over year! 

Starbucks’ quarterly report released Tuesday provides a nice insight into China’s economy. For the quarter, global sales were off -5% driven by a -21% decrease in in-store sales, and non-China international sales were off -3%. China sales grew +5% driven by a 9% increase in the average ticket, which more than compensated for a decline of -3% in the number of transactions. 2021 guidance for China comparable-store sales growth is between 27% and 32%, with 600 new stores planned on being opened. That’s on top of the 4,863 stores already in China (versus 15,340 in the US). It is worth noting that in the US ticket sales were down, but the average ticket price increased by 19%. Those that could buy Starbucks coffee were willing to pay more. Hopefully, this is people splurging rather than a sign of wealth inequality. 

H-Share Update

The Hang Seng sank -2.55%/-746 index points to close 28,550. Volume increased +5.76% from yesterday, which is not quite 2X the 1-year average while breadth had 7 advancers and 42 decliners (maybe a tribute to Hank Aaron? RIP). The 196 Chinese companies listed in Hong Kong within the MSCI China All Shares Index were off -2.88%, with health care off -4.02%, industrials -3.8%, materials -3.78%, discretionary -3.47%, tech -3.11%, real estate -3.11%, communication -2.81%, utilities -2.37%, energy -2.02%, and financials -2.02%. Southbound Connect volumes were high again running twice the 1-year average as Mainland investors bought $1.318B of Hong Kong stock today as Southbound trading accounted for 15.2% of Hong Kong turnover.

A-Share Update

Shanghai & Shenzhen were off -1.91% and -2.82% to close at 3,505 and 2,352. Volume was off a touch -0.6%, which is still just above the 1-year average while breadth saw 982 advancers and 2,824 decliners. The 511 Mainland stocks within the MSCI China All Shares Index were off -2.57% with utilities up +2.15% while tech fell -4.69%, materials -3.88%, industrials -3.59%, discretionary -3.2%, health care -3.1%, energy -2.26%, real estate -2.08%, and communication -1.6%. Northbound Stock Connect volumes were moderate as foreign investors sold -$990mm of Mainland stocks today as Northbound Connect trading accounted for 6.8% of Mainland turnover.

Last Night’s Exchange Rates & Yields

  • CNY/USD 6.47 versus 6.47 yesterday
  • CNY/EUR 7.83 versus 7.84 yesterday
  • Yield on 10-Year Government Bond 3.20% versus 3.16% yesterday
  • Yield on 10-Year China Development Bank Bond 3.61% versus 3.56% yesterday
  • China’s Copper Price -1.39% Overnight