Hong Kong’s Typhoon Tears Internet Shorts To Shreds As Alibaba And JD.com Rise

Key News

Asian equities had a good day with Hong Kong having a fantastic day despite the morning session, 9:30 to noon followed by a one-hour lunch break before afternoon trading starts at 1pm, being called off due to a typhoon.

Hong Kong listed internet stocks flew as evidenced by Hong Kong’s most heavily traded by value were Tencent +4.84%, Alibaba HK +8.75%, Meituan +8.04%, and JD.com HK +11%. Rumors are flying that Chinese regulators are meeting with the Big Four accounting firms on allowing PCAOB audit reviews. There is nothing tangible thus far on this. Could it be true? Sure, the recent five State Owned Enterprises delisting from the US is a positive due to the sensitive information in their audit review. The rumors could be false. The key is the rumor was the spark on a fire waiting to be lit.

Hong Kong short sellers have pressed their bets on Hong Kong internet stocks as we’ve been writing about for weeks. Despite the Hang Seng Index nearly reaching the 19,000, a big level of psychological support, shorts pressed their bets. With all the negative media coverage of China combined with light summer volumes, who can blame them? The problem for the shorts is it made them vulnerable to moves like today. Worth noting that shorts increased their bets today. Meituan had 28% of its total volume short with Tencent having 20%, Alibaba HK 14%, and JD.com HK 25%. Today’s move could have some legs for this reason as momentum gets in on the fun of running the shorts over.

Today’s move inflects pain on emerging market managers who have been underweight China/Hong Kong and overweight India which closed down today. India is a favorite despite sky-high valuations and a currency falling out of bed while Hong Kong, especially Hong Kong internet stocks, are at low valuations and in a currency pegged to the US dollar! A rational person would say today’s rally was driven by Premier Li and the State Council’s statement we touched on yesterday outlining economic policy support and stimulus. This news came out after the Asia close yesterday. Turns out the support was bigger than anticipated at US $146 billion for infrastructure. Was this the factor in Hong Kong? Yes, but the auditor rumor was bigger IMO. Shanghai was up today +1% though Shenzhen and STAR Board were off. Not too surprising as the housing focused stimulus helps old economy stocks that are more likely to be listed on the Shanghai than the Shenzhen. Also explains growth underperforming value in China today.

The Hang Seng and Hang Seng Tech gained +3.63% and +6.01% respectively as volume was -8.57% from yesterday despite it being only a half day. 412 stocks advanced while 73 stocks declined. Hong Kong short sale turnover declined -14.56% from yesterday also due to the half day as short sale turnover accounted for 19% of total turnover. Growth factors outperformed value as large caps outpaced small caps. All sectors were positive with discretionary +6.99%, communication +5.42%, and energy +3.57% while industrials lagged at +1.07%. Top subsectors were internet related such as Ant related stocks, online video, and e-commerce while property management and food were among the worst. Southbound Stock Connect volumes were moderate despite the half day as Mainland investors sold -$216 million of Mainland stocks with Meituan seeing a net buy for the 1^st time in 15 trading days. Tencent was a small net buy and Kuaishou a small net sell.

Shanghai, Shenzhen, and STAR Board diverged +0.97%, -0.24%, and -1.22% on volume down -12% from yesterday which is 94% of the 1-year average. 1,583 stocks advanced while 2,939 stocks declined. Value factors outperformed growth as large caps outpaced small caps. Top sectors were energy +5.94%, utilities +2.27%, and real estate +1.99% while industrials and tech were off -0.17% and -0.37%. Top subsectors were coal, insurance, and liquor while solar and electricity companies were among the worst. Northbound Stock Connect volumes were light as foreign investors bought $243 million of Mainland stocks. Treasury bonds sold off, CNY appreciated versus the US $ +0.11% to 6.85, and copper fell -0.51%.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.85 versus 6.87 yesterday
• CNY/EUR 6.84 versus 6.82 yesterday
• Yield on 10-Year Government Bond 2.64% versus 2.61% yesterday
• Yield on 10-Year China Development Bank Bond 2.83% versus 2.80% yesterday
• Copper Price -0.51% overnight