Macro Headwinds Weigh On Micro Catalysts, Pinduoduo & Meituan Beat Expectations

Key News

Asian equities had a rough start to the week as investors reacted to Fed Chair Powell’s hawkish comments from Jackson Hole on Friday.

ADXY, the Bloomberg JP Morgan Asia Dollar Index, fell -0.41% today on the US dollar’s strength versus Asian currencies. China’s renminbi fell -0.64% to 6.91, Korea’s won fell -1.4%, the Thai Baht fell -1.2%, and the Japanese Yen fell -0.67%.

The risk-off macroeconomic picture overwhelmed several positive micro developments. Friday, we heard the announcement of a preliminary audit agreement between the US and Chinese regulatory bodies that may prevent the delisting of Chinese stocks from US exchanges, providing clarity for nearly $2 trillion of US and global savers’ money that had been put at risk from the uncertainty of delisting following the passage of the Holding Foreign Companies Accountable Act. The South China Morning Post reported that Goldman Sachs believes the risk of delisting has fallen from 95% in mid-March to only 50% post-announcement. I wouldn’t take the risk to zero, but I am more positive. The US Public Company Accounting Oversight Board (PCAOB) will be interacting with the “Big Four” US accounting firms’ China businesses. While policy errors are possible and individual companies may run into issues, the auditors will likely have a good understanding of what is expected from their US colleagues.

Hong Kong opened lower but mitigated losses as today’s most heavily traded stock by value was Meituan, which gained +2.64% after reporting better-than-expected results after the close in Hong Kong on Friday.

This morning, before the US open, Pinduoduo reported significantly better-than-expected results. Revenue grew +36% to RMB 31.439B ($4.7 billion) from RMB 23.046B year-over-year (YoY) versus expectations of RMB 23.624B, adjusted net income increased +161% to RMB 10.776B ($1.608 billion) from RMB 4.125B versus expectations of RMB 4.195B and adjusted EPS came in at RMB 7.54 ($1.13) from RMB 2.85 versus expectations of RMB 2.75. Management did a good job keeping expense growth low while driving strong topline growth.

Hong Kong was lower on light volume, which was only 56% of the 1-year average, though short seller volume was 83% of the 1-year average. Shorts continue to press their bets in a slow summer tape though Hong Kong internet short volume fell overall. However, JD.com’s Hong Kong listing saw short turnover increase to 26% of total trading versus Friday’s 21%. One would expect asset managers are gaining more confidence in US-listed Chinese stocks following an audit agreement though many are likely still on vacation.

Mainland China was a bright spot in the region, gaining today in local currency terms, though, in US dollars, Shanghai fell -0.47%, Shenzhen fell -0.54%, and the STAR Board gained +0.18%. Energy was the only positive sector in US dollar terms in both Hong Kong and China as the government released more support for utilities on equipment upgrades. It was an interesting day on the Mainland as several index heavyweights were off today, including EV battery maker CATL, which fell -0.94%, liquor stock Kweichow Moutai, which fell -1.01%, Wuliangye Yibin, which fell -2.79%, and ICBC, which fell -5.31%. Foreign investors were net buyers of Mainland stocks via Northbound Stock Connect. We saw another strong rally in Chinese Treasury bond prices today.

Tomorrow, Baidu will report its second quarter financial results. On Friday, Baidu will be added to the prestigious Hang Seng Index.

The Hang Seng and Hang Seng Tech indexes fell -0.73% and -1.23%, respectively, on volume that decreased -10.69% from Friday, which is only 56% of the 1-year average. 124 stocks advanced while 350 declined. Hong Kong short sale turnover increased +8.11% from Friday, which is 83% of the 1-year average, as short trading accounted for 20% of turnover in Hong Kong. Growth factors outpaced value factors while small caps outpaced large caps. Energy was the only positive sector, gaining +0.44%, while technology fell -2.6%, materials fell -2.38%, and healthcare fell -2.27%. The top performing sub-sectors were education, coal, and smart grid technology, while tobacco/e-cigarettes, pharmaceuticals, and hardware were among the worst. Southbound Stock Connect volumes were light as Mainland investors bought a net $224 million worth of Hong Kong stocks though Meituan was sold moderately and Tencent was bought.

Shanghai, Shenzhen, and the STAR Board gained +0.14%, +0.07%, and +0.79% on volume that decreased -9.1% from Friday, which is 88% of the 1-year average. 2,784 stocks advanced while 1,696 stocks declined. Growth factors outpaced value factors as small caps outpaced large caps. Energy was the only green sector, gaining +0.82%. Meanwhile, consumer staples fell -1.84%, healthcare fell -1.81%, and financials fell -1.6%. The top performing sub-sectors were all energy-related, including power generation, equipment, coal, and gas. Meanwhile, liquor, bank, and airport stocks were among the worst. Northbound Stock Connect volumes were moderate as foreign investors bought a net $310 million worth of Mainland stocks via Northbound Stock Connect. Treasury bonds rallied, the renminbi lost -0.64% versus the US dollar, and copper gained +0.06%.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.91 versus 6.87 Friday
• CNY/EUR 6.92 versus 6.87 Friday
• Yield on 1-Day Government Bond 1.15% versus 1.15% Friday
• Yield on 10-Year Government Bond 2.62% versus 2.64% Friday
• Yield on 10-Year China Development Bank Bond 2.80% versus 2.84% Friday
• Copper Price +0.06% overnight