Reopening Drives Market Higher, Ignoring COVID Cases And PMIs

Key News

Asian equity markets were largely higher as Hong Kong outperformed, Japan underperformed, and the Philippines were off for Bonifacio Day in honor of national hero Andres Bonifacio who helped spark the Philippine Revolution of 1896 according to the GoogleGOOG
.

CNY gained +1.06% versus the US dollar overnight closing at 7.08 as the Asia dollar index gained +0.71% versus the dollar. Volumes were high across the region driven by MSCI’sMSCI
Semi-Annual Index Rebalance which requires passive asset managers to rebalance their ETFs and index funds at today’s market close. Despite opening lower, Hong Kong rallied with an upward acceleration on reports of relaxing mobility restrictions across several cities, including Guangzhou and Beijing. The government’s message of loosening such restrictions is implemented locally so it takes a little time. Our China Mobility Tracker shows that Guangzhou continues to see traffic and subway usage decline though next week will be very interesting to see if a reversal takes place. Markets are forward looking so they are anticipating such a change.

We continue to see positive results in Q3 as Bilibili’s results beat expectations as the Hong Kong share class rose +16.76% overnight. Real estate stocks in both China and Hong Kong were hit with profit-taking as several property developers announced equity issuance following the five policy changes announced by the CSRC. We specifically warned about this yesterday in our preference for real estate bonds over real estate stocks. Hong Kong shorts were fairly quiet as short turnover in Hong Kong internet stocks has gone quiet. Interesting right? Mainland China had a mixed day led by discretionary stocks in a sign that market participants are anticipating further relaxation. Markets didn’t pay any attention to the weak “official” PMIs which were off more than expected. Manufacturing PMI was 48 versus expectations of 49 and September’s 49.2 while the non-Manufacturing was 46.7 versus expectations of 48 and October’s 48.7. Markets also didn’t care about the 4,236 new COVID cases along with 33,376 asymptomatic cases. The Hong Kong and China rally is causing pain as investors are woefully underexposed to our Back to Business thesis IMO. XPeng (XPEV US, 9868 HK) announced mixed results this morning prior to the US open.

The Hang Seng and Hang Seng Tech gained +2.16% and +2.77% on volume +33.18% from yesterday which is 180% of the 1-year average. 398 stocks advanced while 104 stocks declined. Short turnover on the Main Board increased +17.11% from yesterday which is 173% of the 1-year average as 17% of turnover was short turnover. Growth factors edged out value factors while large caps outpaced small caps. Financials were the only off sector off -0.66% while staples gained +4.69%, discretionary finished higher +3.91%, and industrials closed up +3.61%. Top sub-sectors were auto, consumer, and consumer durables/apparel while real estate sub-sectors were off. Southbound Stock Connect volumes were moderate as Mainland investors bought $354 million of Hong Kong stocks with Tencent a small net buy and Meituan a moderate net buy.

Shanghai, Shenzhen, and STAR Board were mixed +0.05%, +0.12%, and -0.22% on volume -3.85% from yesterday which is 97% of the 1-year average. 1,813 stocks advanced while 2,730 stocks declined. Growth factors mostly outpaced value factors while large caps outperformed small caps. Top sectors were discretionary up +4.1%, communication up +3.43%, and energy up +2.1% while real estate closed lower -2.21%. Top sub-sectors were auto, telecom, and auto parts while household products, leisure products, and real estate sub-sectors were among the worst. Northbound Stock Connect flows were moderate/high as foreign investors bought $693 million of Mainland stocks. CNY had a strong day versus the US dollar gaining +1.06% to close at 7.08, Treasuries were flat and copper off -0.11%.

China Major China Mobility Tracker

Subway traffic continues to languish though interesting to note Shenzhen’s city traffic is on the rise. Guangzhou continues to see subway traffic decline.

Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.08 versus 7.16 Yesterday
• CNY per EUR 7.33 versus 7.43 Yesterday
• Yield on 10-Year Government Bond 2.89% versus 2.88% Yesterday
• Yield on 10-Year China Development Bank Bond 3.03% versus 2.99% Yesterday
• Copper Price -0.11% overnight