“688 Rally” Continues Despite Pressure From MSCI’s Index Rebalance

Key News

Asia ended a tough August lower overnight, though Japan, Singapore, and South Korea managed to trade higher.

Volumes were very high as MSCI’s
MSCI
index rebalance required passive index and ETF managers to implement the new refreshed index at today’s close. MSCI USA will be nearly 70% of the developed market’s market cap and 61% of All Country World’s market cap, while China is 29% of MSCI Emerging Markets. While the number of Chinese stocks will increase, the weight of China is down due to the market’s decline, thus pressuring Chinese stocks today.

Apple
AAPL
and Microsoft
MSFT
have a larger weight in the MSCI All-Country World Index than all 766 Chinese stocks combined. Does that make sense to you? Me neither.

Hong Kong and Mainland China were off overnight, though the “688 Rally” continued as the STAR Board managed a small gain. Today’s downdraft was against the backdrop of relatively good news. Several more cities eased home buying restrictions following Shanghai and Guangzhou’s policy adjustments yesterday, though real estate was weak in both Hong Kong, where it fell -2.19% and Mainland China, where it fell -3.98%. Under the new definition, which includes those with a paid-off mortgage, to 4.3% from 5.1% on an RMB 1 million loan with a 25-year term, first-time home buyers’ mortgage rate was reduced. Distressed real estate developer Country Garden remains in the news as it struggles to pay off maturing debt. One of their bonds that matures next year is selling at $9 versus a par value of $100, indicating a high degree of pessimism. Real estate developer Vanke fell -3.94% after reporting a revenue decline of -2.9% and a net profit decline of -19.4% for the first six months of the year, though the CEO’s comments on a long road to recovery may have weighed on sentiment. Vanke President Zhu Jiusheng stated that the industry was in a period of adjustment, though “.….the company’s business safety is no problem, but there is indeed pressure on short-term profits.”

After the Hong Kong close, online real estate broker KE Holdings beat analyst estimates on revenue, adjusted net income, and adjusted EPS, though forecasted a weaker Q3 than Q2.

Although the “official” August PMI was released, it didn’t appear to be a market mover as Manufacturing was 49.7 versus expectations of 49.2 and July’s 49.3, while Non-Manufacturing was 51 versus expectations of 51.2 and July’s 51.5. PMIs are a diffusion index with readings above 50 indicating month-over-month growth and below 50 a decline. Manufacturing exports orders remain in decline at 46.7, though new orders improved to 50.2 and output 51.9. Non-manufacturing new orders declined to 47.5 from 48.1. Once again, business expectations in both surveys remain highly optimistic at 55.6 and 58.2.

I would expect increased policy reforms to be incoming as both the Shanghai and Shenzhen Composites are below the 3,200 and 2,000 levels, respectively. The State Council announced that infant, child care, and child education deductions would be doubled as policymakers beta-tested ways to address low birth rates.

US Commerce Secretary Raimondo visited Boeing’s
BA
facility in Shanghai, which likely means a Chinese airline will order Boeing airplanes. However, there has been talk about 787MAX deliveries to China that will occur soon. Regardless, an order would be a strong signal. I remain in the camp that things are improving/getting less bad, which is good. Hong Kong will likely close as Super Typhoon Saola is expected to hit the island tonight. Batten down the hatches!

The Hang Seng and Hang Seng Tech fell -0.55% and -0.38%, respectively, on volume that increased +26.33% from yesterday, which is 119% of the 1-year average. 173 stocks advanced, while 323 declined. Main Board short sale turnover increased +17.7% from yesterday, which is 119% of the 1-year average as 17% of turnover was short turnover. The value factor outperformed the value factor as large caps outpaced small caps. The top sectors were energy +0.99%, staples +0.63%, and communication +0.08%, while real estate -2.19%, healthcare -1.94%, and discretionary -1.01%. The top sub-sectors were telecom, energy, and food/beverage, while food/staples, retailing, and diversified financials were the worst. Southbound Stock Connect volumes were light/moderate as Mainland investors bought $360mm of Hong Kong ETFs and stocks with CNOOC, Meituan, and ICBC moderate net buys, while Tencent a moderate net sell, PetroChina and East Buy small net sells.

Shanghai and Shenzhen fell -0.55% and -0.58%, respectively, while the STAR board gained +0.32% on volume that declined -15.96% from yesterday, which is 93% of the 1-year average. 1,511 stocks advanced, while 3,201 stocks declined. The growth factor outperformed the value factor as large caps outpaced small caps. Top sectors were utilities +0.92%, tech +0.35%, and healthcare +0.14%, while real estate -3.98%, communication -1.22%, and industrials -0.29%. The top sub-sectors were chemicals, soft drink, and insurance, while real estate, land transport, and securities industry were the worst. Northbound Stock Connect volumes were moderate/high as foreign investors sold -$589mm of Mainland stocks with Ping An, BYD, and Kweichow Moutai small/moderate net buys while Wuliangye, Sanqi Huyu and China Merchants Bank were moderate net sells. CNY and the Asia Dollar Index were flat overnight. The Treasury curve flattened while steel and copper gained.

Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 7.28 versus 7.28 yesterday
• CNY per EUR 7.92 versus 7.93 yesterday
• Yield on 10-Year Government Bond 2.55% versus 2.56% yesterday
• Yield on 10-Year China Development Bank Bond 2.69% versus 2.69% yesterday
• Copper Price +0.26% overnight
• Steel Price +1.00% overnight