Investors Fear Beijing Lockdown After Testing

Key News

Asian markets followed the US’ steep Friday sell-off lower as all markets closed down except for the Philippines, which gained +0.32%, and Australia, which was closed.

Reports of mass covid testing commencing in Beijing’s Chaoyang district against the backdrop of Shanghai’s continued lockdown led to a strong down move overnight in Mainland stocks and, to a lesser degree, Hong Kong. The specter of Beijing experiencing a lockdown similar to Shanghai’s and the potential knock-on effect on the economy led investors to fear the worst-case scenario, though only time will tell.

The Hang Seng Index closed below the 20k level at 19,869, which triggered the liquidation of structured products with redemption features at the 20k level. Meanwhile, rising US interest rates are pressuring China’s currency as CNY declined -1.13% versus the US dollar to 6.57 CNY per USD compared to Friday’s 6.50. We shouldn’t be surprised at CNY’s weakness as Chinese 10-Year Treasury yields have reached 2.81%, on par with US yields. Nonetheless, the government will not want the CNY to slide too much versus the US dollar to avoid being called a currency manipulator. After the close, the People’s Bank of China (PBOC), China’s central bank, cut the amount of foreign currency that banks can hold as reserves, which acts as a brake on CNY depreciation.

Commodity prices are falling globally, leading to weakness in material, industrial, and energy stocks, though there was truly nowhere to hide. Two years ago, internet stocks were called work from home stocks, beneficiaries to covid lockdowns. However, the market’s perception has changed.

Neither the PBOC’s comments over the weekend on more policy support nor a South China Morning Post article on the US and China closing in on a Holding Foreign Companies Accountable Act solution could stabilize markets.

The widely respected China Merchants Bank underperformed on a corruption inquiry into the ex-President, and Q1 net income that grew +13% year-over-year.

The world’s largest electric vehicle (EV) battery maker CATL was off -6.08% after pushing its earnings release to April 30^th from April 28^th.

This weekend’s Barron’s Big Money poll indicated a high optimism toward US equities and a cautious view of Chinese equities and emerging markets. US interest rates are rising when the S&P 500’s P/E is 22 and the Nasdaq’s is 51. The forward 1-year and 5-year P/Es are reasonable at 18.76 and 26.43, respectively, but that requires earnings to hit the mark. In contrast, the Hang Seng Index has a P/E of 7, Shanghai has a P/E of 12, and Shenzhen has a P/E of 26.

The Hang Seng Index and Hang Seng Tech Index closed -3.73% and -4.87%, respectively, on volume that was +24% higher than Friday, which is 93% of the 1-year average. There were only 23 advancing stocks and 481 declining stocks as Hong Kong short sale volume jumped +32% from Friday, which is 130% of the 1-year average. All sectors ended up in the red as value sectors did not fall as far. Real estate fell -3.49%, financials fell -3.49% and utilities fell -3.59% versus today’s worst-performing sector materials, which fell -6.47%. Mainland investors were net sellers of Hong Kong stocks today as Tencent was a small net sell and Meituan was a net buy.

Shanghai, Shenzhen, and the STAR Board fell -5.13%, -6.48%, and -6.13%, respectively, as volume jumped +19.51% from Friday, 82% of the 1-year average. There were only 152 advancing stocks versus 4,325 declining stocks. Large caps and value/dividends held up better than small caps and growth factors. Materials and tech were the worst performers, falling -8.05% and -7.97%, respectively. Foreign investors sold -$671 million worth of Mainland stocks via Northbound Stock Connect. Treasury bonds rallied while CNY depreciated by -1.13% versus the US dollar and Copper was off -0.91%.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.56 versus 6.50 Friday
• CNY/EUR 7.04 versus 7.02 Friday
• Yield on 1-Day Government Bond 1.23% versus 1.28% Friday
• Yield on 10-Year Government Bond 2.82% versus 2.83% Friday
• Yield on 10-Year China Development Bank Bond 3.05% versus 3.08% Friday
• Copper Price -0.91%