Overseas News And U.S. Dollar Strength Outweigh China’s GDP Recovery

Key News

Asian equities were mixed overnight with Australia closed for Anzac Day, which is in honor of Australians and New Zealanders “who served and died in all wars,” according to Google
GOOG
, while Pakistan and Indonesia remain closed for Edi al-Fitr.

The chief headwind for Chinese equities has been geopolitical tensions driven by a lack of US-China diplomatic communication. This issue flared after China’s French Ambassador’s comments on former USSR states’ sovereignty despite the government publicly distancing itself from his comments. The coming Biden Executive Order defined by the high fence small yard concept of ring-fencing technology that could be used for military purposes has weighed on the Mainland/onshore China, which has historically been immune to geopolitical tensions versus Hong Kong-US ADRs/offshore China. Mainland investors have sold popular stocks/themes such as semis, AI, big data, etc., due to the potential export restrictions, despite the EO likely to focus on private equity more than public equity. The Mainland/onshore was off less than Hong Kong/offshore as foreign investors tend to “freak out” more than Mainland investors though both exhibited awful advance/decline ratios. Yes, there are other macro/risk factors, such as US rate hikes as the US dollar strengthened overnight versus China’s CNY and the Asia dollar index, the US bank crisis, US mega-cap tech earnings this week, and the US and debt ceiling.

Specific to China and Hong Kong, healthcare contract researcher WuXi AppTec (603259 CH, 2359 HK), a popular stock for domestic and foreign investors, fell -10% in China and -11.08% in Hong Kong on inline financial results but a weak outlook. A Bloomberg News article stated that policymakers wouldn’t overstimulate as 2023 GDP estimates rise to 6%. Chatter about a Covid variant, though, you’d expect healthcare to be higher, not lower, except for WuXi. Banks rallied on bank deposit interest rate cuts coming, which might help stocks as investors reallocate to risk assets. Ultimately geopolitics and the US dollar’s strength driven by interest rate hikes are overshadowing China’s economic recovery. Very frustrating as China has so much going for it on a relative and absolute basis. China’s government has been on a “charm campaign” to global businesses though this effort is hindered by political narrative. Hopefully, policymakers understand this and get on an airplane. A Mainland media story noted only twelve weekly round-trip flights between the US and China.

Yesterday I met with a Chinese economist who had a similar view outlook with the 2023 GDP rebound led by consumption and tech investment versus infrastructure and real estate. Good to see our views confirmed.

Great to see Peter Lynch on CNBC this morning. As a teenager, I read his What Works on Wall Street, which helped spur my interest in the stock market and my father’s daily WSJ. I did buy what I knew: TCBY frozen yogurt, which went bankrupt after I bought 2 shares with my caddying money. The $200 commission was 4X the stock price.

The Hang Seng and Hang Seng Tech fell -1.71% and -3.46% on volume +10.59% from yesterday, 88% of the 1-year average. Only 57 stocks advanced, while 440 stocks declined. Main Board short turnover declined -2.2% from yesterday, 98% of the 1-year average, as 19% of turnover was short turnover. Value factors outperformed growth factors as large caps outperformed small caps. Energy was the only positive sector, +0.22%, while healthcare -4.81%, tech -3.99%, and discretionary -3.25%. The top sub-sectors were food, energy, and banks, while semis, pharma, and retailers were the worst. Southbound Stock Connect volumes were light as Mainland investors bought $268mm of Hong Kong stocks, with Tencent a very small net sell, SMIC a small net sell, and Meituan a small net buy.

Shanghai, Shenzhen, and STAR Board fell -0.32%, -1.69%, and -1.78% on volume +4.77%, 124% of the 1-year average. 708 stocks advanced, while 4,063 stocks declined. Value factors outperformed growth factors, while large caps outperformed small caps. The top sectors were staples +0.94%, financials +0.66%, and communication +0.25%, while materials -2.49%, tech -2.41%, and discretionary -2.35%. The top sub-sectors were oil/gas, internet, and banks, while communication equipment, fine chemicals, and base metals. Northbound Stock Connect volumes were high as foreign investors sold -$710mm of Mainland stocks with Kweichow Moutai, China Tourism Group, and Ping An net sells. CNY fell -0.39% versus the US dollar, while the Asia dollar index fell -0.16%. Treasury bonds rallied slightly while Shanghai copper and steel fell.

Happy birthday to my wife!

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Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 6.92 versus 6.89 yesterday
• CNY per EUR 7.63 versus 7.59 yesterday
• Asia Dollar Index -0.16% overnight
• Yield on 10-Year Government Bond 2.82% versus 2.82% yesterday
• Yield on 10-Year China Development Bank Bond 3.00% versus 3.00% yesterday
• Copper Price -0.34% overnight
• Steel Price -0.64% overnight