Markets Look Forward As Headlines Look Backward

Key News

Asian equities were mixed following the US Fed pause as Mainland China and Hong Kong outperformed. All sectors in both markets were positive, led by growth stocks.

Yes, the May data was weak, as anticipated, but markets, unlike media headlines, look forward, not backward. This explains the move higher in China equities today.

Yesterday’s 10 basis point cut in the medium-term lending facility (MLF) rate will lead to cuts in the 1 and 5-year loan prime rate by 10 basis points to 3.55% and 4.2%, respectively. The 5-year rate determines mortgage rates. However, definitive stimulus measures have not been disseminated apart from EV sales support. However, domestic consumption, home appliances, restaurant/dining, and relaxing housing purchases are anticipated, along with further bank reserve requirement ratio cuts.

Unsurprisingly, consumer discretionary and consumer staples were the top-performing sectors in both Hong Kong and Mainland China, as E-Commerce outperformed. Another significant positive was US Secretary of State Blinken’s trip to Beijing, which is planned for this weekend, and Secretary of Treasury Janet Yellen’s comments on the importance of the US-China relationship. We should anticipate a Yellen trip, as Blinken’s trip could pave the way for further communication (fingers crossed). Bill Gates is visiting China and meeting with President Xi while soccer legend Lionel Messi participated in an online Alibaba video while in Beijing.

The economic data was not as bad as the media is stating, with May industrial production up +3.5% year over year (YoY) versus an estimated +3.5% and April’s 5.6%, May retail sales +12.7% YoY versus +13.7% estimate and April’s 18.4%, May fixed asset investment 4% YTD YoY versus +4.4% estimate and April’s 4.7% and property investment -7.2% YTD YoY versus an estimated -6.7% and April’s -6.2%. Within retail sales, online retail sales increased +13.8% YoY, with online physical good sales up +11.8, which accounts for 25.6% of total retail sales of consumer goods. That is good news for e-commerce companies.

While the jobless rate was steady at 5.2%, media headlines love the uptick in youth unemployment. Two things on this:

• High school and college graduations create unemployment!
• China calculates unemployment differently than the US. China’s unemployment rate is anybody who has been unemployed in the past 4 months versus the US’ 4-week look back.

Remember, Covid was in full effect in Q4 2022 and January 2023. I LOVE THE NEGATIVITY, as the pain trade is higher! Remember, many active PMs are underweight China as this dry powder can come back into the space, especially if the US-China geopolitical relationship improves.

Hong Kong volumes were high at 104% of the 1-year average led by Hong Kong’s most heavily traded stocks, which were Tencent, which gained +2.72%, Meituan, which gained +7.72%, Alibaba, which gained +4.52%, BYD, which gained +3.79%, JD.com, which gained +5.22%, and AIA, which fell -0.91%. Tencent and AIA have been buying back stock recently. Southbound Stock Connect was a large net sell driven by Mainland investors selling down their high dividend and SOE stocks. Main board short turnover was high, but only 15% of total volume. Mainland China has gained with foreign investors buying a healthy $1.285B of Mainland stocks! Wow! CNY was off slightly versus the US dollar. It was interesting that Treasury bonds sold off as investors could be reallocating to stocks.

The Hang Seng and Hang Seng Tech indexes gained +2.17% and +3.59%, respectively, on volume that increased +30.37% from yesterday, which is 104% of the 1-year average. 417 stocks advanced, while 82 declined. Main Board short turnover increased +40.4% from yesterday, 91.2% of the 1-year average, as 15% of turnover was short turnover. The growth factor outperformed the value factor significantly as small caps outpaced large caps. All sectors were positive, with discretionary +5.1%, staples +3.12%, and tech +2.97%. All sub-sectors were positive, with retailers, consumer durables, and auto the top performers. Southbound Stock volumes were high as Mainland investors sold a healthy -$928mm of Hong Kong stocks, with Tencent a small net sell and Meituan a large net sell.

Shanghai, Shenzhen, and the STAR Board diverged to close +0.74%, +1.18%, and -0.14%, respectively, on volume +7.13% from yesterday, which is 117% of the 1-year average. 2,425 stocks advanced, while 2,202 stocks declined. The growth factor outperformed the value factor as small caps outpaced large caps. All sectors in China were positive, with industrials +3.05%, discretionary +2.79%, and healthcare +1.85%. The top sub-sectors were the electric power grid, power generation equipment, and restaurants, while education, computer hardware, and software. Northbound Stock Connect volumes were moderate as foreign investors bought a healthy +$1.285B of Mainland stocks, with Kweichow Moutai a moderate/high net buy, Foxconn a light/moderate net buy, and Longi Green a moderate net sell. CNY and the Asia dollar index were down versus the US dollar while Treasury bonds sold off. Copper and steel notched small gains.

Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.16 versus 7.16 yesterday
• CNY per EUR 7.75 versus 7.74 yesterday
• Yield on 10-Year Government Bond 2.65% versus 2.62% yesterday
• Yield on 10-Year China Development Bank Bond 2.81% versus 2.77% yesterday
• Copper Price +0.12% overnight
• Steel Price +0.13% overnight