Baidu Beats, Hong Kong Short Volume Reaches All Time High, And US Dollar Takes A Breather

Key News

Asian equities had a strong day, less so China and Hong Kong while India outperformed as the US dollar took a breather from its recent strong run.

One has to wonder if the market is starting to question the Fed’s pace of hikes. Above my pay grade! This morning China’s Party Congress date was announced for mid-October which is earlier than I had anticipated. There is speculation that China’s zero covid (lives first) policy will be eased further after this event. China and Hong Kong came off their intra-day lows as China’s currency CNY gained versus the US $ overnight though unfortunately couldn’t get back into the green. Pindouduo (PDD US) gained 14.7% yesterday after better-than-expected financial results on volume +238% at 75 million shares from the day before which had 22 million shares traded. The one-year average for Pinduoduo is 11 million shares traded per day. Short sellers likely scrambled to cover their positions.

Today in Hong Kong, short sale turnover as a percentage of total turnover reached 23% for the first time in a decade, 2,466 trading days. 1 day out of 2,466! Today Tencent’s short sale turnover nearly doubled to 31% from yesterday’s 17%, Meituan 28% today from yesterday’s 22%, Jd.com 33% today from 26% yesterday, and Alibaba HK 16% from yesterday’s 10%. At some point, this level of short volume becomes highly embarrassing for Hong Kong as well as plays into an epic short cover. Shorts are taking advantage of low summer volumes to press their bets.

Hong Kong listed internet stocks were mixed today though after the Hong Kong close Baidu (BIDU US, 9988 HK) reported financial results that beat analyst expectations. Yes, the percentage year over year (YoY) change isn’t impressive but the stock price already reflects that. Revenue was off -5% YoY at RMB 29.647 billion (US $4.426 billion) versus expectations of RMB 23.59 billion, adjusted net income +3% YoY at RMB 5.541 billion (US $827 million), and adjusted EPS +2% at RMB 15.79 billion (US $2.36 billion). Great job considering the challenging macro environment. Management called the recent US China audit deal an important first step as the company will adhere to both US and Chinese law. Sounds positive on their audit review IMO.

In the background is chatter of covid outbreak in the tech hub of Shenzhen which potentially explains yesterday’s weakness in US listed Chinese ADRs. The Mainland market was off on such concerns despite continued positive stimulus talks from the government. Worth noting that the real estate sector, the beneficiary of government support, was today’s best performer +2.02%. Foreign investors were net sellers of Mainland stocks today -$721 million.

The Hang Seng and Hang Seng Tech eased -0.37% and -0.51% on volume +4.74% from yesterday which is 73% of the 1-year average. 174 stocks advanced while 289 stocks declined. Hong Kong short sale turnover increased +17.81% from yesterday which is 101% of the 1-year average as short sale trading accounted for 23% of total turnover. Value factors outperformed growth as large caps outpaced small caps. Industrial was the only positive sector +0.33% while materials -1.39%, energy -1.14%, and staples -1.11%. Top sub-sectors are online education, electric appliances, and ports while car dealers, online video, and coal stocks lagged. Southbound Stock Connect volumes were light/moderate as Mainland investors sold -$11 million of Hong Kong stocks with Tencent, BYD, and Meituan small net buys while Li Auto and Kuiashou were small net sells.

Shanghai, Shenzhen, and STAR Board were off -0.42%, -0.47% and -0.38% respectively on volume -0.69% which is 80% of the 1-year average. 1,956 stocks advanced while 2,532 stocks declined. Value factors outperformed growth factors as small caps outpaced large caps. Top sectors were real estate +2.07%, communication +1%, and financials +0.64% while energy -3.77%, utilities -0.71%, and materials -0.67% were off slightly. Top sub-sectors included Tik Tok ecosystem, online games, and real estate while coal, solar, and gas were among the worst. Northbound Stock Connect volumes were moderate as foreign investors sold -$721 million of Mainland stocks. Treasury bond prices rallied, CNY appreciated versus the US $ +0.11% to 6.90, and copper hit -1.59%.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.90 versus 6.92 yesterday
• CNY/EUR 6.92 versus 6.91 yesterday
• Yield on 10-Year Government Bond 2.61% versus 2.62% yesterday
• Yield on 10-Year China Development Bank Bond 2.80% versus 2.80% yesterday
• Copper Price -1.59% overnight