Week I Review
- Asian equities were lower this week except for Mainland China, the Philippines, India, and Malaysia.
- China reported Q2 GDP growth of 4.7% versus an estimated 5.1% on Monday, raising the probability of increased support going into the Third Plenum important policy meetings.
- China’s Third Plenum policy meetings concluded this week and leaders held a press conference where they acknowledged demand-side shortcomings and vowed to implement policies to counteract this.
- Semiconductor stocks had a volatile week on weaker-than-expected guidance from ASML and jitters about the potential for heightened export restrictions.
Key News
Asian equities ended the week with a thud, as only Mainland China, the Philippines, and Malaysia managed gains.
There was an amazing disparity between Hong Kong and Mainland China markets today as foreign investors freaked out while Mainland China investors did not care. Today was a real risk-off day, so pointing to a single culprit for Hong Kong’s weakness would be disingenuous.
The common narrative is that the Third Plenum communique and today’s subsequent press conference were underwhelming, though expectations were low going into the event. The meeting does not outline the exact policies that will be enacted. That will occur in the weeks to come. The read-out lacks specifics, but today’s press conference acknowledged the economic challenges, which means they are going to do something about it.
From the press conference Q&A:
- Han Wenxiu of the Central Leading Group for Rural Work stated the economy “face some difficulties and challenges, mainly due to insufficient effective demand…this indicates that China’s economic recovery is not strong enough”.
- What are they going to do about it? “The next step is to promote sustained economic recovery”.
- How are they doing to do it? “A proactive fiscal policy should be implemented and effective, accelerate the progress of the issuance and use of special bonds, leverage fiscal funds to promote economic growth and structural adjustment.”
- Shockingly, appliance makers were off despite the statement that the government should “Implement the policy of large-scale equipment updates and trade-in for consumer goods”.
- Mainland media reported that Prime Minister Li Qiang and the State Council had a meeting to “study and support large-scale equipment updates and consumer goods trade-in policy measures”. E-Commerce companies are potential beneficiaries, too, though these stocks were down overnight.
The specter of a Trump second term is a likely an additional factor, though we’ve argued that, at the end of the day, Trump is a businessperson, who is anti-war and did a deal with China in his first term. The market seems to think the election is tomorrow though a lot can happen between now and November.
Hong Kong had an awful day as the Hang Seng Index fell -2.03%, with only 5 advancing stocks and 76 declining stocks, while the broader Hang Seng Composite had only 54 positive stocks and 437 declining stocks. The Hang Seng hitting the 17,500 level likely caused the redemption of warrants and callable bull/bear contracts, adding to the downward pressure. The only positive today was the fact that Mainland investors bought a net $784 million worth of Hong Kong-listed stocks today, including Tencent and the Hong Kong Tracker ETF, which were large net buys. For the week, the total net buy was $2.46 million.
The Mainland market was up today. Yes, the National Team was at work based on the very high volumes in their favored ETFs, though small caps outperformed large caps. The National Team does not buy small caps. Mainland investors noticed that the Third Plenum communique and press conference emphasized technology and innovation. Semiconductors were the second best-performing subsector in Mainland China, behind computer hardware, and the only positive subsector in Hong Kong.
The Hang Seng and Hang Seng Tech indexes fell -2.03% and -2.12%, respectively, on volume that increased +16.53% from yesterday, which is 99% of the 1-year average. 54 stocks advanced while 437 stocks declined. Main Board short turnover increased +53.65% from yesterday, which is 123% of the 1-year average, as 21% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). The value factor and large caps did not fall as much as growth stocks and small caps. All sectors were negative, including Real Estate, which fell -5.18%, Materials, which fell -3.84%, and Energy, which fell -3.39%. Semiconductors were the only positive subsector while energy services, basic materials, and media were among the worst-performing. Southbound Stock Connect volumes were moderate as Mainland investors bought a healthy net $784 million worth of Hong Kong-listed stocks and ETFs, including , the Hong Kong Tracker ETF, and Tencent. Meanwhile, China Mobile was net sold overnight.
Shanghai, Shenzhen, and the STAR Board gained +0.17%, +0.34%, and +1.91%, respectively, on volume that declined -0.41% from yesterday, which is 82% of the 1-year average. 2,981 stocks advanced while 1,850 stocks declined. The growth factor and small caps outperformed the value factor and large caps. The top-performing sectors were Consumer Staples, which gained +1.43%, Communication Services, which gained +0.63%, and Tech, which gained +0.55%. Meanwhile, Real Estate fell -1.93%, Materials fell -0.92%, and Consumer Discretionary fell -0.81%. The top-performing subsectors were computer hardware, semiconductors, and software. Meanwhile, precious metals, motorcycles, and oil & gas were among the worst-performing. Northbound Stock Connect volumes were moderate as foreign investors were net sellers of Mainland stocks, including Cypc, Mindray and CATL. Meanwhile, BYD, Sungrow, and JAC were net sells. Treasury bonds rallied. CNY and the Asia Dollar Index fell. Copper and steel fell.
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Last Night’s Performance
Last Night’s Exchange Rates, Prices, & Yields
- CNY per USD 7.27 versus 7.26 yesterday
- CNY per EUR 7.91 versus 7.91 yesterday
- Yield on 1-Day Government Bond 1.38% versus 1.38% yesterday
- Yield on 10-Year Government Bond 2.26% versus 2.27% yesterday
- Yield on 10-Year China Development Bank Bond 2.33% versus 2.34% yesterday
- Copper Price -1.84%
- Steel Price -0.03%
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