A Busy Week Starts Slowly

Key News

Asian equities were slightly lower on light volumes as India and the Philippines were closed for holidays.

The mid-morning release of October’s industrial profits, which were up +2.7% year-over-year (YoY) versus September’s +11.9% YoY, weighed on sentiment early in the session as both Mainland China and Hong Kong fell in morning trading, though managed to cut losses later in the session.

A flu outbreak affecting children also weighed on sentiment, though health care stocks did not react.

This week will be busy. Meituan and Pinduoduo will report Q3 earnings tomorrow. Meanwhile, November PMIs will be released Wednesday and MSCI’s
MSCI
Semi-Annual Index Review rebalance trade will be Thursday. Then, Hang Seng Indices will rebalance on Friday.

The Hang Seng Tech Index managed a small gain, though not to the extent of Friday’s rally in US-listed China stocks. Hong Kong’s most heavily traded stocks were Tencent, which gained +0.5% on reports that ByteDance will end its online gaming initiative, BYD, which was off another -2.71% after Friday’s fall on concerns that November discounts will lead to a price war among electric vehicle (EV) players, Alibaba, which fell -0.13% as CEO Eddie Wu articulated the company’s strategic business plans, Meituan, which fell -0.46%, and AIA Group, which fell -1.4%.

Alibaba’s CEO Wu stated that the company’s three priorities are a “technology-driven internet platform businesses, AI-driven technology businesses, and a global commerce network.” Wu’s focus on technology is not surprising considering his information engineering degree. He was Alibaba’s first technology director in 1999 and subsequently held tech roles within mobile payment system Alipay and core E-Commerce platform TaoBao. I wonder whether Mr. Wu will reconsider the spinoff or business unit separation strategy given the current environment.

Real estate stocks were off on profit taking in both Hong Kong and Mainland China. The downdraft comes after recent talk of financing policy support. Asia’s high yield, US dollar bond market continues to rally.

Senior policymakers including President Xi attended the Central Committee meeting that focused on economic policy support and anti-pollution measures for the Yangtze River Economic Belt.

The PBOC’s Q3 Monetary Policy Implementation Report recognized the economy’s slow recovery, though hinted that Q3 GDP data could exceed market expectations. Policy support, including an “increased personal income tax deduction and a reduction in existing mortgage interest rates” should lift domestic consumption. The PBOC also noted that low headline inflation was due to pork prices’ decline, a trend which should reverse itself soon, steering the economy away from deflation again.

Shanghai and Shenzhen posted small gains as the two indexes continued to consolidate after the recent rally, though are now at support levels. The rally will require further fuel to have legs, as I would expect the state backed Central Huijin to step in coupled with a bank reserve requirement ratio (RRR) cut announcement. Further policy support will be clarified at the Central Economic Work Conference (CEWC
EWC
) in December.

The micro-cap Beijing Stock Exchange (BSE), which is comprised of 232 stocks with a total market cap of RMB 37 billion versus Shanghai’s 2,256 stocks with a market cap of RMB 47 trillion and Shenzhen’s 2,834 companies with a market cap of 31.9 trillion, has risen +46% this month in speculative rally.

The Wall Street Journal had a good article on the growth of China’s EV exports and the US’ efforts to keep them out. It is amazing to me that more US automakers have not partnered with China-based EV companies on technology licensing. The partnership between Ford and Contemporary Amperex Technology (CATL), which is back on following some congressional scrutiny, is a good example of the potential here.

The Hang Seng and Hang Seng Tech indexes diverged to close -0.2% and +0.17%, respectively, on volume that declined -14% from Friday, which is 70% of the 1-year average. 154 stocks advanced while 329 stocks declined. The Main Board short turnover declined -47% from Friday, which is 76% of the 1-year average as 18% of volume was short turnover (remember Hong Kong’s short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). The growth factor and large caps outpaced the value factor and small caps. The top-performing sectors were technology, which gained +0.99%, health care, which gained +0.79%, and energy, which gained +0.15%. Meanwhile, real estate fell -2.09%, financials fell -0.64%, and consumer staples fell -0.36%. The top-performing subsectors were semiconductors, technical hardware, and software. Meanwhile, autos, real estate, and insurance were the worst-performing. Southbound Stock Connect volumes were light as Mainland investors bought a net +$44 million worth of Hong Kong-listed stocks and ETFs as Semiconductor Manufacturing (SMIC) and CNOOC saw some net buying while Tencent, Meituan, China Mobile, and Li Auto were all slight net sells.

Shanghai, Shenzhen, and the STAR Board diverged to close -0.30%, -0.38%, and +0.38%, respectively, on volume that increased +2.1% from Friday, which is 95% of the 1-year average. 2,263 stocks advanced while 2,554 declined. Large caps outpaced small caps while the value and growth factors were mixed. The top-performing sectors were energy, which gained +1.00%, technology, which gained +0.11%, and consumer discretionary, which gained +0.07%. Meanwhile, real estate fell -1.49%, communication services fell -1.25%, and consumer staples fell -1.03%. The top-performing subsectors were coal, computer hardware, and semiconductors. Meanwhile, cultural media, real estate, and insurance were among the worst. Northbound Stock Connect volumes were moderate as foreign investors bought a net $46 million worth of Mainland stocks including computer component maker Hygon Information Technology, Wuxi AppTec, and Inovance. Meanwhile, foreign investors were net sellers of China Merchants Bank, CATL, and Foxconn. CNY and the Asia Dollar Index were flat versus the US dollar. Treasury bonds sold off while copper and steel gained.

Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.15 versus 7.15 Friday
• CNY per EUR 7.82 versus 7.83 Friday
• Yield on 1-Day Government Bond 1.56% versus 1.56% Friday
• Yield on 10-Year Government Bond 2.71% versus 2.17% Friday
• Yield on 10-Year China Development Bank Bond 2.79% versus 2.77% Friday
• Copper Price +0.04% overnight
• Steel Price +0.18% overnight