Key News
Asian equities were mixed overnight as Mainland China outperformed and the US dollar strengthened.
The People’s Bank of China (PBOC), China’s central bank, cut the 1 and 5-year loan prime rates (LPRs) more aggressively than expected. The cut to both was 25 basis points, versus market expectations of 20, to 3.10% and 3.60%, respectively, from 3.35% and 3.85%. PBOC Governor Pan Gongsheng stated last week that they would cut the LPR by 25 basis points, but not one economist changed their forecast. He also stated they would cut the bank reserve requirement ratio (RRR), the amount of capital that banks must keep on their balance sheets rather than lend out, before year-end, which we all should assume will happen.
Also helping mainland sentiment was news that three companies have tapped bank loan lines to buy back shares, including Sungrow and Sinopec, which were among the first movers, with loan amounts of approximately RMB 700 million each. This is a very positive sign as companies have been reluctant to increase borrowing throughout the current easing cycle.
Mainland markets were led higher by growth stocks and sectors as well as small caps.
We did not receive the date nor the agenda for the National People’s Congress (NPC) meetings. as hoped over the weekend, which is disappointing.
Profit taking, adjusting positions going into earnings season, and the looming US Presidential election weighed on sentiment offshore as popular growth stocks and sectors underperformed. Many investors appear to be taking President Trump’s campaign rhetoric as economic reality, though we believe this is the “Art of the Deal”, i.e. a proposed negotiation tactic, which tracks from the previous Trump Administration, which cut tariff rates in half upon the signing of the “Phase One” trade agreement. If Trump’s proposed 60% tariffs on Chinese imports were to be a reality, what would the consequence be on US inflation and the profits of Amazon, Walmart, Home Depot, and Costco? Everyone assumes the tariffs are only bad for China, as though US companies were immune.
Today saw a disparity between the performance of the Mainland (onshore A-Shares, predominantly held by domestic investors, and the Hong Kong (offshore) market, predominantly held by foreign investors. Given the same piece of information, foreign investors sold while domestic investors bought. In fact, domestic investors were more than happy to buy the Hong Kong shares sold by foreign investors, based on the healthy $1.60 billion worth of net buying in Hong Kong by Mainland investors via Southbound Stock Connect.
After the close, Ping An’s results looked good though CATL missed. It is a busy week for Hong Kong stocks reporting, including Sands China, which reports today, and Hong Kong Exchanges and Sinopharm on Wednesday.
The Hang Seng and Hang Seng Tech indexes fell -1.57% and -2.37%, respectively, on volume that decreased -24.51% from Friday, which is 162% of the 1-year average. 114 stocks advanced while 380 stocks declined. Main Board short turnover increased +17% from Friday, which is 107% of the 1-year average, as 11% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Value and small caps fell less than growth and large caps. Materials and Real Estate gained +0.72% and +0.67%, the top-performers, while Communication Services fell -2.44%, Consumer Discretionary fell -2.36%, and Energy fell -1.76%. The only positive subsectors were materials and capital goods. Meanwhile, software, retail, and consumer services were among the worst-performing. Southbound Stock Connect volumes were high, at 2X the average, as Mainland investors bought a healthy net $1.6 billion worth of Hong Kong-listed stocks and ETFs, including the Hong Kong Tracker ETF, SMIC, Xiaomi, and Traditional Chinese Medicine (TCM), which all saw large net buys. Meanwhile, Meituan and Tencent small net buys and Alibaba was a small net sell.
Shanghai, Shenzhen, and the STAR Board gained +0.20%, 1.58%, and +2.22%, respectively, on volume that increased +4.07% from Friday, which is 258% of the 1-year average. 3,395 stocks advanced while 1,553 stocks declined. The growth factor and small caps outpaced the value factor and large caps. The top-performing sectors were Technology, which gained +1.75%, Communication Services, which gained +1.10%, and Materials, which gained +1.07%. The top-performing subsectors were aerospace, business services, and software. Meanwhile, securities firms, steel, and construction were among the worst-performing. Northbound Stock Connect volumes were very high, at 2X the 1-year average. CNY and the Asia Dollar Index both fell versus the US dollar. Treasury bond prices were flat. Copper and steel gained.
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Last Night’s Performance
Last Night’s Exchange Rates, Prices, & Yields
- CNY per USD 7.11 versus 7.10 Friday
- CNY per EUR 7.72 versus 7.71 Friday
- Yield on 10-Year Government Bond 2.12% versus 2.12% Friday
- Yield on 10-Year China Development Bank Bond 2.20% versus 2.20% Friday
- Copper Price +0.22%
- Steel Price +0.21%