Key News
Asian equities were mixed as yesterday’s zeros turned heroes, mitigating some of yesterday’s losses.
Japan’s Topix gained +9.3%, Taiwan gained +3.38%, and South Korea gained +3.3%, as the US dollar rallied versus Asian currencies.
It was a quiet night except for two items:
1. The State Council announced it will host a press conference Friday at 10 am to discuss “the Opinions on Promoting High-Quality Development of Service Consumption” release from a few days ago. Is even more fiscal policy coming? We’ll have to wait to see, though a Mainland media source noted a sell-side/research analyst expects the release “to have positive implications for the internet and media industries in China”.
2. Yum China Holdings (9987 CH, YUMC US) gained +10.59% after reporting Q2 financial results as revenue was a slight miss with a +1% year over year (YoY) gain, adjusted net income increased by +7% YoY, and earnings per share (EPS) increased by +17%, both beating estimates with the bottom-line enhanced by their strong stock buyback. I anticipate this as a theme for Q2 China internet results: low top-line growth, but EPS beats due to strong stock buybacks.
There is an interesting pick-up in sell-side analyst chatter as companies enter their quiet periods. Hong Kong and Mainland China were mixed on light news with the Hang Seng posting a small loss, Hang Seng Tech posted a very small gain, and Shanghai and Shenzhen saw small gains on light volumes and strong breadth (advancers versus decliners).
Hong Kong’s most heavily traded stocks by value were Tencent, down -0.62%, Alibaba, up +1.42%, Meituan, down -1.12%, CNOOC, down -1.26%, and China Mobile, down -1.26%, while JD.com gained +0.77%, NetEase fell by -2.47%, Trip.com gained +1.87%, Baidu fell by -1.3%, and Bilibili gained +0.49%. Mainland investors bought a healthy $768 million worth of Hong Kong-listed ETFs and stocks via Southbound Stock Connect with the Hong Kong Tracker ETF seeing a large net buy. Hong Kong and Mainland Chinese financials were led lower by banks and insurers on more rate cut chatter. Semiconductors, computer hardware, and pharmaceutical stocks had a strong day.
The National Team rode to rescue in afternoon trading, or so it seemed, stepping on the buy pedal of their favorite ETFs. However, foreign investors appeared to be heavy sellers overnight.
Several agencies announced plans to upgrade the electricity system in order to “increase the transmission of clean electricity through the grid, upgrade coal-fired power plants, and expand charging infrastructure for electric vehicles.” Something feels a little out of place in that statement.
There are multiple plausible explanations for why equity markets have sold off, though the easiest explanation is the concentration of ownership globally in the US’ “Magnificent 7”, Japan, India, global semiconductor stocks, and AI plays in South Korea and Taiwan (ASML in the Netherlands as well). Except for India, these “different” plays are not that different. Japan, Taiwan, and South Korea have significant corporate revenue exposure to the US and a high correlation to US stocks. We have long warned, based on our observation in a meeting with institutions globally, that they are all overweight US stocks after 15 years, which is 60 quarterly statements, not to mention investment committees, board, and trustee meetings.
The money movement out of non-US stocks into US stocks has created a negative feedback loop as more money goes into the US, the more non-US underperforms, which forces the next investor to sell non-US equities, etc. Where we go from here is anyone’s guess, though a weaker US dollar would remove a significant tailwind for US stocks and weigh on foreign investors. Seismic changes in sentiment and ownership do not happen overnight, though one could argue we’ve seen a shot across the bow.
The Hang Seng and Hang Seng Tech indexes diverged to close -0.31% and +0.09%, respectively, on volume that decreased -28.56% from yesterday, which is 94% of the 1-year average. 339 stocks advanced, while 134 declined. Main Board short turnover declined by -16.44% from yesterday, which is 100% of the 1-year average as 18% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Growth and small caps outperformed value and large caps. The top sectors were healthcare, up +3.26%, utilities, up +0.97%, and technology, up +0.66%, while materials fell by -1.43%, financials fell by -1.11%, and communication fell by -0.89%. The top sub-sectors were pharmaceuticals, media, and healthcare equipment, while insurance, telecommunication services, and automobiles were the worst. Southbound Stock Connect volumes were moderate/light as Mainland investors bought +$768 million of Hong Kong stocks and ETFs, with the HK Tracker ETF a large net buy, the HS China Enterprise ETF a moderate net buy, and Meituan a small net buy, while China Mobile was a small net sell.
Shanghai, Shenzhen, and the STAR Board gained +0.23%, +1.18%, and +1.36%, respectively, on volume -17.33% from yesterday, which is 81% of the 1-year average. 4,118 stocks advanced, while 812 declined. Growth and small caps outperformed value and large caps. The top sectors were real estate, up +2.04%, technology, up +1.39%, and healthcare, up +0.88%, while financials fell by -1.23%, utilities fell by -0.74%, and consumer discretionary fell by -0.39% and were the worst. The top sub-sectors were education, power generation equipment, and catering/restaurants, while insurance, highway, and precious metals were the worst. As foreign investors sold Mainland stocks, Northbound Stock Connect volumes were moderate/light. Treasury bonds were sold. CNY and the Asia dollar index fell versus the US dollar. Copper and steel fell.
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Last Night’s Performance
Last Night’s Exchange Rates, Prices, & Yields
- CNY per USD 7.15 versus 7.13 yesterday
- CNY per EUR 7.80 versus 7.81 yesterday
- Yield on 10-Year Government Bond 2.14% versus 2.14% yesterday
- Yield on 10-Year China Development Bank Bond 2.21% versus 2.20% yesterday
- Copper Price: -2.59%
- Steel Price: -0.89%
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