Political Relationship Green Shoots Lift Markets

Key News

Asian equities were mixed overnight on light volumes as Hong Kong and Taiwan outperformed while Japan underperformed.

Secretary of State Blinken’s rumored trip to China lifted sentiment in Asia, similar to yesterday’s positive move in US-listed China stocks. Institutional investors are underweight China due to the geopolitical narrative so any improvement in that narrative could bring them back into the space. In addition to the diplomatic green shoots, Chinese policy makers are making incremental policy support moves, including lowering the bank deposit interest rate, extending certain electric vehicle (EV) sales tax exemptions, and increasing chatter on real estate buying curbs being lifted.

Internet stocks, a growth subsector favored by foreign investors, led Hong Kong higher as Hong Kong’s most heavily traded stocks by value were Tencent, which gained +1.33%, Alibaba, which gained +2.06%, and Meituan, which gained +1.4%, though we would like to see higher volumes as an indication of conviction buying. The EV ecosystem, another growth subsector favored by foreign investors along with clean technology, was higher overnight, though Mainland-listed Contemporary Amperex Technology (CATL) was down -5.46% on an analyst downgrade. Remember that the EV ecosystem is seeing policy support. Mainland media seemed aghast that an analyst could downgrade the widely held and respected company. May export/import data was light though most have figured out China’s light exports are an indication of a weak global economy. Weak exports will only increase if Europe and the US’s 60% recession probability comes to fruition.

CATL’s performance weighed on growth stocks/sectors as value names outperformed. The Shanghai and Shenzhen indices still sit at the support levels of 3,200 and 2,000 as investor are wanting more policy support. Foreign investors bought $352 million of Mainland stocks via Northbound Stock Connect. It could be interesting to see if foreign investors, who have been overweight Mainland/onshore China versus offshore China, pivot back to Hong Kong/US ADRs if we continue to see geopolitical relations thaw. Trip.com (TCOM US, 9961 HK) will report after the US close today which should provide an update on the China domestic consumption recovery.

Today, 12.9 million Chinese high school students will sit for the college entrance exam called the gaokao. The rigorous test plays a significant role in determining which university a student can attend. Good luck!

MSCI’s country classification changes are announced tomorrow after the US close. This year’s will be interesting as there are several countries in the mix for upgrades and downgrades. China has checked the box on a number of historical MSCI concerns, though an increase in China A inclusion may be affected by the geopolitical narrative despite the operational/trading ease of doing so. South Korea’s government has rolled out several reforms that could pave the way for an upgrade to developed markets from Emerging Markets. With several reforms being implemented over several years, a consultation to examine an upgrade seems feasible. China would be the biggest beneficiary of a South Korea upgrade as it would receive the most of South Korea’s weight. It would also allow for a “stealth” China upgrade. Saudi Arabia will see its EM weight increased though it is unrelated to PGA/LIV merger news. Vietnam is a tiny market but garners a lot of attention, though inbound investment restrictions are apt to keep country in frontier markets.

The Hang Seng and Hang Seng Tech gained +0.8% and +2.26%, respectively, on volume off -15.36% from yesterday which is 73% of the 1-year average. 305 stocks advanced while 181 declined. Main Board short turnover fell -27.43% from yesterday which is 63% of the 1-year average as 14% of turnover was short turnover. Growth factors outperformed value factors as large caps outpaced small caps. Top sectors were tech +1.79%, communication +1.73%, and discretionary +1.57%, while utilities -0.93%, energy -0.16%, and materials -0.1% were among the worst. Top sub-sectors were media, consumer services, and retailing while telecom, household products, and utilities were the worst. Southbound Stock Connect volumes were light as Mainland investors bought $30 million of Hong Kong stocks with Kuiashou a small net buy, Tencent a small net sell, and Meituan a small/moderate net sell.

Shanghai, Shenzhen, and STAR Board were mixed +0.08%, -0.17%, and -0.38% on volume -12.9% from yesterday which is 88% of the 1-year average. 2,677 stocks advanced while 1,973 stocks declined. The value factor outperformed the growth factor while large caps outperformed small caps. Top sectors were real estate +1.34%, financials +0.65%, and communication +0.6% while industrials -1.48%, healthcare -1.29%, and staples -0.97%. Top sub-sectors were highway, land transportation, and cultural media while electric power grid, power generation equipment, and biotech were the worst. Northbound Stock Connect volumes were light as foreign investors bought $352 million of Mainland stocks with Kweichow Moutai a moderate net sell, Ping An and Longi Green Energy small net buys. CNY and the Asia dollar index made small gains versus the US dollar while Treasury bond prices fell. Copper gained while steel fell.

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Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.11 versus 7.12 yesterday
• CNY per EUR 7.62 versus 7.61 yesterday
• Yield on 10-Year Government Bond 2.68% versus 2.68% yesterday
• Yield on 10-Year China Development Bank Bond 2.83% versus 2.83% yesterday
• Copper Price +0.29% overnight
• Steel Price -0.66% overnight