Key News

Asian equities were largely lower though Japan outperformed while several countries were off for Eid al-Adha, which is the most important holiday celebrated in Islam. Mainland China and Hong Kong were down overnight on covid outbreaks in China with a particular emphasis on Shanghai as Macau casinos closed as a precaution.

Foreign investors freaked out about the outbreak, sending Hong Kong down significantly while Mainland China was off, but not nearly as much. The recent outbreak reignited fears of citywide lockdowns, though thus far that has not occurred. Obviously, we cannot predict the future, but it has been our belief that a city wide lockdown similar to what Shanghai went through last month is unlikely. Since Shanghai’s lockdown, we have seen more targeted neighborhood and apartment complex level lockdowns. In June, China’s government released new guidelines for city governments when dealing with COVID outbreaks that are meant to soften the economic impact of disease management. However, only time will tell and the market decided to shoot first and ask questions later.

Adding to Hong Kong’s downdraft were several internet companies, including Tencent and Alibaba, being fined for previous anti-trust violations. Tencent was fined HKD 7.03 million ($895,000) while Alibaba was fined RMB 2.5 million ($372,000). Tencent lost $13 billion in market cap due to a $895,000 fine! Alibaba HK (9988 HK) lost $20 billion on a $372,000 fine! We do believe China’s internet regulatory cycle is over as no new rules have been announced. However, that does not mean companies cannot run afoul of the new rules. The market’s reaction seems just a touch dramatic.

After the market close in China, June aggregate financing was released, exceeding expectations. I would suspect the market will overlook this good data though wise investors should take note! This is evidence of China’s dovish policy stance and lower rates, which contrasts with aggressive tightening in the US, Europe, and many emerging economies.

The Hang Seng and Hang Seng Tech indexes dropped -2.77% and -3.86%, respectively, on volume that was +12.86% higher than Friday, which is 84% of the 1-year average. Only 63 stocks gained while 421 declined. Hong Kong short sale turnover increased +17.7% from Friday, which is 97% of the 1-year average while short sale turnover accounted for 18% of Hong Kong turnover. Value factors outperformed growth while large caps outperformed small caps. All sectors were down, including real estate, which fell -5.09%, consumer discretionary, which fell -5.05%, and information technology, which fell -3.3%. Online education, nuclear power, and telecoms were among the few winners today while e-cigarettes, tobacco, and Macau casino stocks were among the worst performers. Southbound Stock Connect volumes were light as Mainland investors sold Hong Kong-listed stocks including Tencent, Meituan, and Kuaishou, which were slight net sales. Meanwhile, Li Auto was a small net buy.

Shanghai, Shenzhen, and the STAR Board were off -1.27%, -1.47%, and -2.07%, respectively, on volume that fell -1.97% from Friday, which is 93% of the 1-year average. 1,133 stocks advanced while 3,326 stocks declined. Value factors outperformed growth factors today as large caps outperformed small caps. Utilities was the only positive sector, gaining +1.26%. Meanwhile, materials fell -2.77%, information technology fell -2.49%, and energy fell -2.49%. Among the sub-sectors, the hydropower, chicken, and pork sub-sectors were among the top performers overnight. Meanwhile, lithium, electric vehicles (EVs), the EV ecosystem, and battery stocks were among the worst performers. Northbound Stock Connect flows were moderate as foreign investors sold -$159 million worth of Mainland stocks overnight. Treasury bonds rallied, CNY was off -0.24% to 6.71 per US Dollar, and copper declined -1.61%.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.71 versus 6.69 Friday
• CNY/EUR 6.76 versus 6.82 Friday
• Yield on 1-Day Government Bond 1.22% versus 1.22% Friday
• Yield on 10-Year Government Bond 2.83% versus 2.84% Friday
• Yield on 10-Year China Development Bank Bond 3.07% versus 3.09% Friday
• Copper Price -1.61% overnight