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Buyers Remain Sidelined

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Key News

Asian equities were lower overnight as Hong Kong underperformed. 

The lack of a US debt ceiling solution is leading to risk-off sentiment as buyers stand on the sidelines.  Western media noted a COVID spike in China, though I’m not seeing anything on this from local media, brokers in China, or research contacts. I will keep an eye out, but it could be clickbait news articles. Meanwhile, the SOE reform and high dividend payers trade has been unwound and profits have been taken as value sectors were off in both Hong Kong and Mainland China.

Real estate was the worst-performing sector in both Mainland China, where it fell -2.78%, and Hong Kong, where it fell -2.93%. Individual companies continue to face challenges with individual coupon and principal repayments.  The sector’s very slow recovery has really weighed on stock performance as the sector has come off dramatically in the last two weeks. Hong Kong’s weakest sectors were real estate, industrials, and financials, reopening subsectors such as Macao casinos, restaurants, and travel-related subsectors such as hotels and airlines. Foreign luxury goods providers in Europe are selling off as concerns about China’s reopening are increasing, though it could also be profit-taking. 

Political concerns are not helping as US officials cry about Micron’s China ban, though the US’ actions against Huawei were similar. The Financial Times had a great interview with Nvidia’s CEO Jensen Huang as he speaks out against technology export bans and building capacity in the US due to increased supply. President Xi's meeting with Russia’s Prime Minister in China optically doesn’t look great. China’s new ambassador to the US Xie Feng remarked on his new appointment noted the “profound differences between the two countries, and the relationship is faced with serious difficulties and challenges.” He noted the opportunity to mend the relationship in a proverbial “olive branch” outreach. China’s Ministry of Commerce Wang is also in DC, in a positive sign. 

Out of Hong Kong’s 50 most heavily traded stocks, there were only three positive stocks as Tencent fell -0.95% despite stock buybacks, Alibaba fell -2.35%, Ping An Insurance fell -2.73%, China Construction Bank fell -2.64%, and Meituan fell -1.81%. Southbound Stock Connect was a rare net sell though the selling was concentrated in the Hong Kong Tracker ETF, which had a -$446 million sale, while Tencent, Meituan, and Kuaishou all had small net buys. CNY and the Asia Dollar Index were both off as, ironically, the US dollar strengthens on a “flight to safety”.  Similar to Hong Kong, value sectors were off overnight. Northbound Stock Connect was a net sell too, though selling appeared concentrated in Longi Green Energy. Ironically solar stocks outperformed.

Pinduoduo will report Friday, rather than today as I had mentioned in yesterday's note.

The Hang Seng and Hang Seng Tech fell -1.62% and -1.99%, respectively, on volume that increased +13.41% from yesterday, which is 82% of the 1-year average.  58 stocks advanced while 439 stocks declined.  Main Board short turnover increased +30.51% from yesterday which is 93% of the 1-year average as 19% of turnover was short turnover.  Value factors “outperformed”/fell less than growth factors as small caps fell less than large caps.  All sectors were down with real estate -2.94%, industrials -2.61%, and financials -2.08%.  Southbound Stock Connect volumes were light as Mainland investors sold -$446 million of Hong Kong stocks driven by a large sale in the Hong Kong Tracker Fund (2800 HK). 

Shanghai, Shenzhen, and STAR Board fell -1.28%, -0.46%, and -0.43%, respectively, on volume that increased +4.49% from yesterday, which is 87% of the 1-year average.  2,186 stocks advanced while 2,460 stocks declined.  The growth factor outperformed the value factor as small caps outperformed/fell less than large caps.  Tech was the only positive sector while real estate -2.81%, financials -2.19%, and energy -1.61%. Northbound Stock Connect volumes were light as foreign investors sold -$635 million of Mainland stocks with large sell-to-buy volumes in Longi Green Energy Technology 4 to 1 and Ping An 2 to 1.  CNY and the Asia dollar index fell -0.08% and -0.14% versus the US dollar while Treasury bonds sold off.  Copper and steel were whacked.  

Last Night's Performance

Last Night’s Exchange Rates, Prices, & Yields

  • CNY per USD 7.05 versus 7.06 yesterday
  • CNY per EUR 7.59 versus 7.59 yesterday
  • Asia Dollar Index -0.06% overnight
  • Yield on 10-Year Government Bond 2.70% versus 2.70% yesterday
  • Yield on 10-Year China Development Bank Bond 2.87% versus 2.86% yesterday
  • Copper Price -1.14% overnight
  • Steel Price -1.98% overnight