US Dollar Strength Weighs On Asia

Key News

Asian equity markets had a poor start to September following MSCI’s rebalance at yesterday’s close.

The US $ gained again versus Asian currencies as the Bloomberg JP Morgan Asia Dollar Index is close to breaking the 100 level after hitting a 52-week low at 100.17, a level not seen since September 2004. China and Hong Kong were weak on a number of issues that, taken individually, are not a big deal but collectively weighed on sentiment.

The first was the morning release of August Caixin Manufacturing PMI, which fell to 49.5 versus expectations of 50, and July’s 50.4, indicating slower growth as PMIs globally slow. This is not overly surprising as August’s heatwave/drought, along with targeted covid lockdowns, weighed on economic output. Second, mega-city Chengdu is entering a citywide lockdown in order to conduct covid testing. This is the first citywide lockdown since Shanghai as Shenzhen’s Nanshan District is currently in a lockdown. We need to remember China is a big country, so it isn’t the end of the world. There is anticipation that post-October’s Party Congress, the zero covid policy will be eased further. After the close, Walvax Biotech (300142 CH) announced its mRNA vaccine was approved for a clinical trial. China’s issue is not the lack of an mRNA vaccine but low vaccination rates among the elderly.

Semiconductor stocks and the broader tech sector were down after Nvidia warned that $400 million of its China chip sales were at risk due to US export bans. Nvidia gets approximately 20% of revenues from China as this could be a big issue for many US chip makers like Qualcomm (~60% of revenue in China), Applied Materials (~30%), Texas Instruments (~50%), Intel (~25%), Broadcom (~30%), Xilinix (~30%) etc. The company will file for exemptions that will very likely get approved. If not, this is the ECON 101 we’ve warned about, with the first lesson for politicians to learn the hard way how intertwined the US and Chinese economies are. Hong Kong-listed EV companies and the broader EV sector were off on news Warren Buffet trimmed his BYD stake by 1.33 million shares. This is a great example of foreign pessimism as BYD’s Hong Kong share class fell -3.96% though Mainland shares were off only -0.44%.

The Financial Times reported that “according to people familiar with the matter,” Tencent will sell $14.5 billion of its $88 billion in listed stocks, which sent Meituan lower by -5.85% and Kuaishou lower by -2.54%. Maybe true…maybe not! Hong Kong EVs were mixed based on August sales. Real estate was the top sector/only positive sector in Hong Kong and #2 in China. Not what you would think right? Mainland investors bought a healthy $326 million of Hong Kong stocks today. 2^nd strong day of net buying in an interesting contrarian move as Hong Kong sits on long running support levels. Hong Kong shorts pressed their bets (again) as Tencent was down -0.79% and saw short turnover increase to 23% from yesterday’s 22%, Meituan lost -5.85% and short turnover declined to 27% from 32%, JD.com HK -0.73% short volume today was 43% from 50%, and Alibaba HK -2.23% had short turnover decline to 21% from 22%. Tencent bought another 1 million shares today.

The Hang Seng and Hang Seng Tech fell -1.79% and -1.69%, respectively, on volume down -22% from yesterday, which is 81% of the 1-year average. 147 stocks advanced while 325 declined. Hong Kong short sale turnover declined -19.92% from yesterday which is 102% of the 1-year average as short trading accounted for 21% of total turnover. Value factors outperformed growth factors as small caps outperformed large caps. Only real estate was positive +0.2% while staples -3.16%, discretionary -3.04%, and tech -1.75%. Among the top sub-sectors were healthcare related, nuclear, and online education while tobacco/e-cigarette, beer, and EV were among the worst. Southbound Stock Connect volumes were light as Mainland investors bought a healthy $326 million of Hong Kong stocks today with Tencent having strong buying, Meituan, and Kuiashou were sold small.

Shanghai, Shenzhen, and the STAR Board were off -0.54%, -0.74%, and -0.39%, respectively, on volume that was down -20.89% from yesterday, which is 76% of the 1-year average. 1,785 stocks advanced while 2,684 stocks declined. Value factors outperformed growth factors as small caps outperformed large caps. Energy and real estate gained +1.7% and +0.25% while staples -1.73%, communication -1.58%, and discretionary -1.18%. Among the top sub-sectors were covid drug/testing, coal, and real estate, while airlines, travel, and lithium were among the worst. Northbound Stock Connect volumes were moderate as foreign investors sold -$121 million of Mainland stocks. Treasury bonds rallied, CNY eased -0.14% versus the US $ to 6.8997, and copper -1.65%.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.90 versus 6.90 yesterday
• CNY/EUR 6.91 versus 6.89 yesterday
• Yield on 10-Year Government Bond 2.61% versus 2.62% yesterday
• Yield on 10-Year China Development Bank Bond 2.79% versus 2.81% yesterday
• Copper Price -1.65% overnight