Pre-plenum withdrawal could catalyze policymakers
CLN
Main news
Risk aversion dominated the day in Asia, with the exception of India, which had a positive day while Hong Kong underperformed.
MSCI China has officially entered a correction after rising 31% from January 22.nd until May 20thGrowth stocks that outperformed the index by nearly 10% over the same period will be down about 15% from their peak after today. If you take a step back, the recovery is still intact, even though last month was a decline that “looks” worse.
Overnight, the dates for the third plenum, China’s major economic meeting, were revealed, starting July 15.th. The current market developments should prompt policymakers to implement monetary policies. Such policies could help bring investors back to this sector.
Micron’s May financial results and Chinese industrial profits of +0.7% versus +4% in April were cited as culprits for Hong Kong and China’s decline despite a strong US dollar, summer gloom and the lack of catalysts before the third plenum in mid-July. Like many Asian currencies, the Chinese renminbi (CNY) has fallen against the US dollar, closing today at 7.26 compared to 7.10 at the end of the year (remember that the CNY is quoted at $1 in CNY, therefore the increases are equal to the depreciation). While Hong Kong stocks are pegged to the US dollar, the depreciation of the CNY means the underlying companies are worth less.
The market’s downtrend is somewhat surprising as it has been positive recently, such as Beijing’s lifting of restrictions on home purchases, reports of additional market and economic policy support, and continued buybacks of company shares. Hong Kong and China are at technical support level, with Shanghai at 2,950, Shenzhen at 1,600, Hang Seng just below 18,000 and HS Tech at 3,600.
French The national team was a clear buyer of mainland China ETFs and potentially very large cap stocks, which have significant weight in the indices, as Kweichow Moutai, banks, energy and telecom giants were among the few positive gainers from mainland China. Southbound Stock Connect saw a net purchase of $468 million of Hong Kong stocks from mainland Chinese investors due to today’s weakness. Growth stocks underperformed in both markets, with the most traded by value in Hong Kong being Tencent -1.99%, Xiaomi -7.18%, Meituan -2.82%, Alibaba -1.78% and AIA -2.2%. Mailand appliance makers such as Haier -3.27% and Gree -1.08% fear that EU tariffs on electric vehicles will extend to the export-dependent sector.
The Hang Seng and Hang Seng Tech fell -2.06% and -2.73% in volume +9.54% from yesterday, or 102% of the 1-year average. 48 stocks gained, while 447 declined. Main Board short turnover increased +8.79% from yesterday, or 98% of the 1-year average, as 17% of the turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is determined by market makers’ ETF coverage). Stocks and large caps declined less than growth stocks and small caps. All sectors were negative. Telecom and food/staples were the only positive subsectors, while food/beverages, tech hardware and pharmaceuticals were the worst performers. Southbound Stock Connect volumes were moderate/light, with mainland investors buying $468 million worth of Hong Kong stocks and ETFs with small net purchases of ICBC, Xiaomi and CCB with small net sales of Tencent, CNOOC and Meituan.
Shanghai, Shenzhen and STAR Board fell -0.9%, -1.67% and -1.96% in volume, -2.56% from yesterday, or 75% of the 1-year average. 675 stocks advanced, while 4,270 declined. Value and large caps declined less than growth and small caps. All sectors were negative, except financials which gained +0.22%. The only positive sectors were telecom, land transportation and banking, followed by motorcycles, education and construction equipment. Northbound Stock Connect volumes were moderate/light as foreign investors were net sellers of mainland stocks, with Kweichow Moutai, Midea and Foxconn being small net buyers. Wanhua, CATL and Sevenstar were small net sellers. Treasuries rallied. The CNY fell against the US dollar. Copper was down while steel gained.
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Last night’s performance
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Last night’s exchange rates, prices and yields
- CNY per USD 7.26 compared to 7.26 yesterday
- CNY for EUR 7.77 against 7.76 yesterday
- 10-year government bond yield 2.20% vs. 2.22% yesterday
- Yield on 10-year Chinese Development Bank bonds 2.31% compared to 2.34% yesterday
- Copper price -0.14%
- Steel prices +0.23%
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