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Risk Off Ahead of Taiwan Trip

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Northern Asia equities, i.e., Japan, China, Hong Kong, Taiwan, and South Korea, had a significant risk-off day while Southern Asia held up surprisingly well. 

Nancy Pelosi’s Taiwan visit led to a significant risk-off session as the Hang Seng Composite had only 32 advancing stocks and 470 declining stocks with only 4 of the top 100 most traded stocks ending positive. Shanghai and Shenzhen had 386 advancing stocks and 4,203 declining stocks. The Mainland saw the heaviest volume day since July 15th on a buyers’ strike.  

Light summer volumes exacerbated today’s move as Hong Kong short sellers pressed their bets, taking advantage of the lack of buyers. The Hang Seng Index broke below the 20,000 level, which would have triggered a large liquidation of structured products that are redeemed at round number levels, which also intensified today’s move. 

China has more than $1 trillion reasons (the size of their US Treasury positions) not to have Pelosi’s trip lead to significant escalation. I am sure the Biden Xi call last week was the former explaining his inability to control Pelosi’s travel schedule. The latter will need to respond in some form to satisfy the domestic audience. Assume some level of saber rattling but I doubt/hope nothing more than that.  

It is worth pointing out that several local brokers were more focused on issues such as recent online game approvals that included neither Tencent nor NetEase. We also had underwhelming PMIs not only from China but also from key trading partners, including Europe and the United States. The PCAOB head stated yesterday that negotiations are occurring between the US and Chinese regulatory bodies, though the US will only accept full audit access, which is not anything new. 

The only positive today was the buying of Hong Kong stocks from Mainland investors via Southbound Stock Connect. Tencent saw the third day of heavy buying from Mainland investors.  While today is shaping up to be a rough day in the US market, I take confidence in Mainland investors purchase of Hong Kong stocks. 

The Hang Seng and Hang Seng Tech lost -2.36% and -3.01% on volume +2.79% from yesterday which is 86% of the 1-year average. Only 32 stocks rose while 470 declined. Hong Kong short sale turnover declined -2.73% from yesterday which is 96% of the 1-year average as short sale turnover accounted for 18% of the total turnover. Value factors “outperformed”, i.e., fell less versus growth factors while large caps outperformed small caps. All sectors were down today with utilities being the “best” performer -1.74% while tech -3.37%, real estate -2.92%, and healthcare -2.89%.

Luxury goods was a rare outperformer led by Hong Kong listed Prada +2.65% while online education, solar, semis, auto, and liquor sub-sectors were among the worst. Southbound Stock Connect volumes were light/moderate/a little above the recent average as Mainland investors were net buyers of Hong Kong stocks led by another large day for Tencent. Li Auto had a decent day though Kuiashou and Meituan were net sold.

Shanghai, Shenzhen, and STAR Board were off -2.26%, -2.92%, and -0.48% respectively on volume +18.74% from yesterday which is 110% of the 1-year average. Only 386 stocks advanced while 4,203 stocks declined. Growth and value factors were mixed as large caps “outperformed” small caps. All sectors were down with staples “outperforming” -1.32% while communication -3.16%, materials -2.88%, and healthcare -2.49%. Semiconductors were the best performing sub-sector while education, environmental protection, and water sub-sectors were among the worst. Northbound Stock Connect volumes were light/moderate as foreign investors sold -$341 million of Mainland stocks. Treasury bonds were flat, CNY was off slightly versus the US $ -0.11% to 6.76 from 6.75, and copper off -1.05%.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.76 versus 6.75 Yesterday
  • CNY/EUR 6.92 versus 6.92 Yesterday
  • Yield on 10-Year Government Bond 2.73% versus 2.73% Yesterday
  • Yield on 10-Year China Development Bank Bond 2.91% versus 2.90% Yesterday
  • Copper Price +1.71% overnight