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Sum of All Fears

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Asian markets were mixed as India and Japan rose while China, Hong Kong, and the Philippines were off. The Hang Seng plunged -4.97%, driven by the sum of all fears as US ADR delisting risk due to the Holding Foreign Companies Accountable Act (HFCAA) drove the Hang Seng Tech Index down -11.03%. While we have been voicing our concerns about the HFCAA for over a year, last Friday and today’s market action shows that HFCAA and its consequences are now being fully understood by investors in Asia.

Panic and capitulation are apt descriptions of today’s market action as the Hang Seng Index closed below the 20,000 level, ending the session at a level not seen since June 2012. Remember that structured products are very popular in Hong Kong, which have knock-out prices when price levels are reached on individual stocks or indexes. I would assume that many structured products were liquidated not only on the stock moves but also on the Hang Seng breaching the 20,000 level, which puts even more selling pressure on the market.

Reports that Russia asked China for military supplies weighed on sentiment though I doubt that this is true as it is in China’s economic best interest to see a resolution to the conflict in Ukraine.

There are clearly fears that Russian sanctions, which deprive the country of access to the global economy and global financial markets could be applied to China. While Russia has an important role in global natural resources and commodities trade, it is a minor player economically. China, as the world’s second-largest economy and the United States’ third-largest trade partner, plays an outsized role in the global economy and financial markets.

The Wall Street Journal reported that “according to people familiar with the matter” Tencent will be fined by the PBOC for inadequate WeChat Pay compliance procedures. The release, which arrived late in the afternoon, exacerbated Tencent’s down day, bringing the stock down by -9.79% by the close. The downdraft was on volume that was +16.95% higher than Friday, which is 151% of the 1-year average.

Meanwhile, there were only 30 advancing stocks and 482 declining stocks overall in Hong Kong. The only positives I saw overnight were buying from Mainland investors in Tencent, Meituan, and Kuaishou via Southbound Stock Connect. Li Auto announced that its Hong Kong share class is being added to Southbound Stock Connect, which is a positive.

Shanghai, Shenzhen, and the STAR Board closed -2.6%, -2.93%, and -3.01%, respectively, on volume that was -7.6% lower than Friday, which is 92% of the 1-year average. There were only 497 advancing stocks and 3,897 declining stocks. Shenzhen entered a coronavirus lockdown that dampened investor sentiment while adversely affecting reopening stocks. Foreign investors sold -$2.3 billion worth of mainland stocks via Northbound Stock Connect though Kweichow Moutai was a net buy. CNY was off versus the US dollar today while Treasury bonds rallied and Copper was off slightly.

What the space needs are catalysts for buyers to come in. Buybacks, go private deals, and spin-offs would help. A resolution on Russia’s invasion of Ukraine would also help. Solving HFCAA would be another strong catalyst as well. For the Mainland market, a strong vaccine would prevent lockdowns such as the one that Shenzhen is currently experiencing, and that which Hong Kong has been enduring for some time now.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.36 versus 6.33 Friday
  • CNY/EUR 6.97 versus 6.95 Friday
  • Yield on 1-Day Government Bond 1.54% versus 1.57% Friday
  • Yield on 10-Year Government Bond 2.77% versus 2.79% Friday
  • Yield on 10-Year China Development Bank Bond 3.05% versus 3.01% Friday
  • Copper Price -0.17% overnight