Markets Fear Worst As Mainland Investors Buy Foreign Selling

Key News

Asian equities were largely higher though Hong Kong and Mainland China underperformed while multiple markets were closed for Diwali, the five-day Hindu religious festival. Last Wednesday felt like a capitulation day in Hong Kong and US-listed Chinese stocks, though today certainly has the hallmarks of a blow-off.

The Hang Seng Index fell -1,030 index points/-6.36% to close at 15,180, which was first seen in 1997 and last seen in 2009, while the Hang Seng Tech Index fell -9.65%. We had anticipated President Xi would fill key posts in the Politburo and Standing Committee with allies, though the market was surprised by the move, which is as shocking to me as the market’s negative move. The market appears to be assuming that the new leadership will make all the wrong moves despite President Xi’s last Sunday speech, which mentioned modernization 85 times versus 47 times at the 19^th Party Congress five years ago. Leaders instrumental in zero covid policy holding high positions seems to be the real culprit. However, Hong Kong’s reopening despite 5k new covid cases daily is an indication of policy trajectory improving.

The market ignored stronger than anticipated Q3 GDP and industrial production data, while September retail sales were lackluster.

The US dollar gained overnight as the Asia dollar index hit another 52-week low, down -0.46%, and China’s Renminbi (CNY) was off -0.44% versus the US dollar. This morning CNH, China’s offshore currency, is off -1.16% to 7.31. There was a lot of talk about the Bank of Japan intervening in the Yen during US trading hours last Friday, but did anyone else notice CNH’s 180-degree/U-turn Friday as well? I would guess they will come in again.

Hong Kong-listed internet stocks were hit harder than the broad market for no reason other than they are more popular than other names. Hong Kong shorts did not press the pedal, which is interesting. Mainland investors bought a healthy $852 million worth of Hong Kong stocks today as Tencent saw a very strong net buying, which I assume was the largest net buying day ever.

Mainland China was off though foreign investor selling in Kweichow Moutai, which fell -7.56% and is Shanghai’s largest stock and a large weight in benchmarks, had a disproportionate effect. Foreign investors sold a significant $2.5 billion worth of Mainland stocks as Kweichow Moutai saw $601 million worth of net selling. The semiconductor and technology-heavy STAR Board managed a positive return today. Chinese Treasury bonds rallied while copper had another positive day.

The Hang Seng and Hang Seng Tech indexes fell -6.36% and -9.65%, respectively, on volume that increased +72.13% from Friday, which is 131% of the 1-year average. 16 stocks advanced while 497 declined. Main Board short turnover increased +38.3% from Friday, which is 133% of the 1-year average, as 17% of trading was short. Value factors “outperformed” growth factors as large caps “outperformed” small caps. All sectors were down as consumer discretionary fell -11.11%, communication fell -11.09%, and real estate fell -10.01%. The worst-performing subsectors were retailers, software, and insurance. Southbound Stock Connect volumes were high as Mainland investors bought $852 million worth of Hong Kong stocks today as Tencent was a very large net buy. Meanwhile, Wuxi Biologics, Meituan, and Kuaishou were small net sells.

Shanghai, Shenzhen, and the STAR Board were mixed to close -2.02%, -1.76%, and +0.16% on volume that increased +24.62% from Friday, which is 90% of the 1-year average. 953 stocks advanced, while 3,680 stocks declined. Value and growth factors were mixed as small caps outperformed large caps. Tech almost finished positive, but closed down by -0.67%, while consumer staples fell -5.74%, real estate fell -3.68%, and healthcare fell -3.65%. The top-performing subsectors included military/defense stocks, precious metals, and energy equipment, while liquor, insurance, and airports were among the worst. Northbound Stock Connect volumes were high as foreign investors sold $2.5 billion worth of Mainland stocks, as Kweichow Moutai saw the brunt of the selling.

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.26 versus 7.25 Friday
• CNY per EUR 7.14 versus 7.04 Friday
• Yield on 10-Year Government Bond 2.72% versus 2.73% Friday
• Yield on 10-Year China Development Bank Bond 2.86% versus 2.88% Friday
• Copper Price +0.85% overnight