Financial Contagion Weighs On Sentiment

Key News

Asian equity markets were down as Silicon Valley Bank’s collapse and Credit Suisse’s troubles, despite a decisive move by the Swiss government, which led to a rebound this morning in European stocks, weighed on investor sentiment overnight except for India and the Philippines, which posted a small gain. These fears were well publicized in China as Ray Dalio’s comments of a “rolling crisis” and Larry Fink’s comments that more banks might fail weighed on sentiment.

Energy and materials were the worst performers in Hong Kong, down -3.33% and -3.17%, respectively, and China -3.73% and -2.46%. Today’s macro-driven sell-off is odd, considering that the Asia Dollar index and China’s renminbi (CNY) posted small gains versus the US dollar. In February, new home prices gained +0.3% month over month as the sector attracted policy support. No, I still can’t draw any investors to buy the bonds despite the government’s implied support despite near double-digit yields. I’ll give myself a pass due to the risk off environment. Remember, yesterday’s economic data was broadly stronger than anticipated, while the PBOC added liquidity to the financial system.

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The Wall Street Journal reported that the Biden Administration is “demanding that TikTok’s Chinese owners sell their stakes…according to people familiar with the matter,” which was not a factor overnight. Doesn’t anybody remember a federal judge blocked the Trump administration’s ban as it wasn’t legal? The WSJ article notes that foreign investors own 60% of TikTok! US private equity firm General Atlantic sits on Bytedance’s board. Who does General Atlantic invest for? US institutional investors such as pensions, foundations, and endowments. Awkward!

Baidu’sBIDU
debut of their ERNIE Bot wasn’t a live demonstration leading to a sell off though it was a risk-off day. Hong Kong’s most heavily traded were Tencent -2.5%, Alibaba HK -1.89%, AIA -5.09%, Baidu -6.36%, Meituan -0.32%, and Ping An -3.35%. Mainland investors bought the dip (again) with $262mm of Hong Kong stocks, with Kuiashou a very small net buy and Tencent and Meituan were small/moderate net buys. Mainland markets were off on poor breadth, with Shanghai and Shenzhen off -1.12% and -1.53%. Foreign investors were small net buyers via Northbound Stock Connect, buying $114mm net of selling. Cleantech names were weak as the EU’s retaliation to the US Inflation Reduction Act’s pro-US companies policies will try to do the same for EU companies, potentially to the detriment of Chinese companies. Chinese Treasury bonds rallied despite an intra-day tech glitch leading to a temporary loss of price dissemination.

Team of Rivals: The Political Genius of Abraham Lincoln by Doris Kearns Goodwin is one of my favorite books. Imagine a President making their primary competitors their cabinet. Lincoln did this to foster debate and weigh contrary opinions. The standard TikTok narrative is China banned US online media companies from operating in China. This isn’t true! The US companies failed to adhere to Chinese laws, so they left! Google stated back in January 2012, “We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks, we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all.” Didi beat Uber in China no differently than when Alibaba beat Ebay for twenty years. In Europe, many US websites aren’t available today because they don’t adhere to local laws! Is this confirmation bias or simply intellectual laziness? I am increasingly leaning toward the latter, which means we should be skeptical of those who espouse these false truths.

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Reuters reported that the PCAOB will return to Hong Kong to audit US-listed Chinese companies auditors. Good news! EY, Deloitte, and PWC are expected to be audited. The PCAOB does great work protecting US shareholders. Chinese companies have nothing to hide.

The Hang Seng and Hang Seng Tech fell -1.72% and -1.41% on volume +3.05% from yesterday, which is 90% of the 1-year average. 114 stocks advanced, while 376 stocks declined. Main Board short turnover declined -15.62% from yesterday, 81% of the 1-year average, as 15% of turnover was short turnover. Growth “outperformed’/fell less as small caps fell less than large caps. Utilities and real estate were the only positive sectors, +0.48%, and +0.13%, while energy -3.33%, materials -2.17%, and communication -3.17%. Healthcare equipment was the only positive sub-sector, while insurance, energy, and food/staples were the worst performers. Southbound Stock Connect volumes were light as mainland investors bought $262mm of Hong Kong stocks, with Kuiashou a very small net buy, and Tencent and Meituan were small/moderate net buys.

Shanghai, Shenzhen, and the STAR Board fell -1.12%, -1.53%, and -1.48% on volume +3.6% from yesterday, 94% of the 1-year average. 664 stocks advanced, while 4,085 stocks declined. Value factors “outperformed” growth factors as large caps “outperformed” small caps. Healthcare was the only positive sector, +0.01%, while energy -3.79%, materials -2.52%, and tech -1.99%. The top sub-sectors were the chemical industry, internet, and banks, while power generation equipment, energy equipment, and marine industry were at the bottom. Northbound Stock Connect volumes were moderate as foreign investors bought $114mm of mainland stocks. CNY appreciated +0.11% to 6.899 from 6.904. Treasury bonds rallied while Shanghai copper and steel fell more than -2%.

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Last Night’s Performance

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Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 6.90 versus 6.90 yesterday
• CNY per EUR 7.32 versus 7.37 yesterday
• Yield on 10-Year Government Bond 2.86% versus 2.87% yesterday
• Yield on 10-Year China Development Bank Bond 3.03% versus 3.06% yesterday
• Copper Price -2.47% overnight
• Steel Price -2.39% overnight

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