Key News

Asian equity markets were nearly universally higher overnight after the US Fed cut rates by 0.50%, despite a lackluster reaction on Wall Street.

Hong Kong and Mainland China were both higher, though Hong Kong outperformed as internet and real estate stocks led gains. JD.com led the pack in E-Commerce names thanks, in part, to its focus on appliances receiving consumer purchase incentives, gaining +7.19%. All sectors were higher in Mainland China and all but Health Care were higher in Hong Kong.

We have been saying that the US needs to cut before China continues with more cuts and stimulus. We are likely to see more cuts to the medium-term lending facility (MLF) and banks’ reserve requirement ratio (RRR), the amount of money banks need to hold on their balance sheets relative to how much they lend out. The PBOC is already known to have been discussing these additional easing measures and now they have a reasonable backdrop to do so.

According to June data, Central Huijin and other state-backed investors currently hold a record-high of over RMB 3 trillion worth of A Shares. China’s sovereign funds are taking a page from Japan in supporting the equity market. We believe this is a positive trend as it demonstrates a willingness to support equity investors and injects a margin of stability in the market. As the US has cut rates, their holdings will likely increase.

Home appliance names rose on Midea’s IPO, which soared +8.7% on the second day of trading as Hong Kong’s largest new listing in years.  Midea is a massive air conditioner manufacturer with global sales. The home appliance sector could be a sleeper bright spot as more consumers upgrade due to the incentives instituted following the Third Plenum.

The White House has urged changes to the “de minimis” rule, which allows shipments below a certain weight to avoid paying tariffs. This rule has helped many online retailers lower their tariff payments, including US-based E-Commerce companies. Any significant change to the rule will likely be met by opposition from industry groups. “China Week” in Congress has resulted in many proposals and bills that still need to pass the Senate. The “de minimis” proposal and the Biosecure Act, which, in its current form, would restrict the use of China-based contract research, are the most potentially impactful and controversial, in our opinion, and, as such, will likely be met with opposition despite China being a bipartisan issue.

In other tariff news, China removed its tariffs on certain agricultural goods coming from Taiwan.

Premier Li Qiang held a meeting with the State Council to discuss finding new ways to encourage more venture capital investment.

The Hang Seng and Hang Seng Tech indexes gained +2.00% and +3.25%, respectively, overnight on volume that increased +36% from Tuesday. Mainland investors bought a net $333 million worth of Hong Kong-listed stocks and ETFs via Southbound Stock Connect. The top-performing sectors were Real Estate, which gained +6.98%, Consumer Staples, which gained +3.86%, and Consumer Discretionary, which gained 3.54%. The worst-performing sectors were Health Care, which fell -0.98%, Energy, which gained +0.43%, and Financials, which gained +0.88%.

Shanghai, Shenzhen, and the STAR Board gained +0.69%, +1.58%, and +0.63%, respectively, on volume that increased 31% from yesterday. The top-performing sectors were Real Estate, which gained +3.22%, Materials, which gained +2.48%, and Consumer Staples, which gained +1.49%. Meanwhile, the worst-performing sectors were Energy, which gained +0.13%, Utilities, which gained +0.36%, and Financials, which gained +0.76%.

Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.07 versus 7.08 yesterday
• CNY per EUR 7.86 versus 7.89 yesterday
• Yield on 10-Year Government Bond 2.05% versus 2.04% yesterday
• Yield on 10-Year China Development Bank Bond 2.12% versus 2.13% yesterday
• Copper Price +1.20%
• Steel Price +1.61%