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The “More Bark Than Bite” Rally


Chief Investment Officer

Key News

Asian equities ripped higher after President Trump’s Friday press conference was more bark than bite with no specific actions outlined. Hopefully politicians will notice how well the US equity markets responded as well. Bloomberg reported that China will slow US farm purchases after the close, which led to a fall in US equity futures. I don’t consider Bloomberg to be the most connected media source for China leaks though trading algorithms mechanically sold futures on the news. ‘

We saw strong momentum from Friday’s MSCI rebalance trade while Hong Kong protests over the weekend didn’t garner much media attention. Alibaba’s 6/18 Shopping Festival, the mid-year online sale running from June 1st through the 18th, which has been copied by competitors like, is reported to have had a strong start. The South China Morning Post reported that sales in the first ninety minutes exceeded $280 million. Another media source noted that discounted iPhones were a strong seller.

The big three growth stocks were the most heavily traded with Tencent +4.53%, Meituan Dianping +2.25% and Alibaba HK +2.25% though it was a very strong day. NetEase’s Hong Kong listing appears to be imminent with the company issuing 171mm new shares at a sale price of HKD 126 according to Bloomberg. The Mainland China market also had a strong day with growth names taking back leadership.

Friday’s close saw the trading for MSCI’s Semi-Annual Index Review. We had noted Bilibili (BILI US) as a stock to watch. At the close was a 8mm share print! BILI had 19mm shares trade with a total value of $609mm on Friday versus Thursday’s 8mm shares and the 1-year average of 4mm shares. Alibaba (BABA US) traded 43mm shares on Friday with a block trade of 11mm shares at the close versus Thursday’s 18mm shares traded and 1-year average of 17mm shares traded. The power of passive was on full display!

On Friday I called my US Congressperson to discuss the Senate bill that puts pressure on US-listed Chinese companies. I was given the email of the staff member in charge of the legislation who responded very quickly and professionally. It is not known when the House will take the bill up for vote. The key issue is whether it goes to committee. If It does, it would allow the SEC to opine on the issue. On the other hand, if it goes straight to a vote it would unfortunately pass and thus imperil $1 trillion of US savings. As the NetEase HK listing proves, with JD, Baidu and others to follow, institutional investors will simply convert from the US to the Hong Kong share class. Individual investors may not know about the conversion and be left holding the bag. As the companies relist in Hong Kong, imagine the jobs that will go from the US to HK? Let’s hope cooler heads prevail.

Manufacturing PMIs

Takeaway: The Manufacturing PMI stayed in the growth range (above 50) though it was decidedly mixed amongst the underlying components. New orders picked up slightly as did new export orders, input prices, output prices, backlogs and expectations of business activity. Unfortunately, employment slipped from 50.2 to 49.4. Non-Manufacturing growth expanded slightly as several sub-sectors saw an uptick in new orders, export orders, input prices, selling prices, and expectations of business activity. The “official” PMIs are focused on a survey of large companies. While the media may give attention to the PMIs, investors increasingly supplement them with real-time data from mobile phones, GPS providers, and e-commerce companies. The market paid little attention to the weekend release.

Manufacturing Index changes %

H-Share Update

The Hang Seng opened higher and stayed there to close +3.36%/+771 index points at 23,732. Volume was off -15% from Friday’s massive MSCI rebalance day though remained well above the 1-year average. Breadth was strong with 49 advancers and only one decliner as index heavyweights led the way with Tencent +4.53%/+129 index points, AIA +5.17%/+119 index points and China Construction Bank +3.28%/+67 index points. Today’s best performer Sino Biopharma +6.72%/+20 index points while China Petroleum was the worst performer -3.34%/-8 index points. Hong Kong-domiciled companies outperformed China-domiciled companies +3.76% versus +2.85% using the HS HK 35 and HS China Enterprise indexes as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares Index rose +3.32% led higher by real estate +4.81%, healthcare +4.58%, communication +4.15%, tech +3.73%, utilities +3.22%, energy +3.04%, industrials +2.63%, discretionary +2.46%, financials +2.35%, and materials +1.88%.

Southbound Connect volume was moderate in mixed trading. Volume leader Tencent had 3 to 1 buyers, Meituan Dianping was sold and Semiconductor Manufacturing saw sellers outpace buyers by a small margin. Mainland investors bought $225mm worth of Hong Kong stocks today, which accounted for just over 6% of Hong Kong turnover.

A-Share Update

The Shanghai & Shenzhen opened higher and closed at the day’s high +2.21% and +3.16%, respectively, as volume surged +34% from Friday. Breadth was very strong with 3,561 advancers and 183 decliners, which has to be a record. Mid and small caps outperformed large caps by 1%. The Mainland-listed stocks within the MSCI China All Shares Index gained +2.83% led higher by tech +4.96%, communication +3.37%, staples +2.95%, real estate +2.82%, financials +2.57%, industrials +2.39%, discretionary +2.38%, materials +2.3%, utilities +1.94%, healthcare +1.79%, energy +1.64%.

Northbound Connect volumes were somewhat elevated with buyers leading the way. Volume leader Wuliangye Yibin had buyers outpace sellers not quite 2 to 1 while Gree Electric Appliances saw sellers outpace buyers by nearly 2 to 1 and Kweichow Moutai saw buyers outpace sellers by 5 to 4. Foreign investors bought $1.469B worth of Mainland stocks today as Northbound Connect accounted for over 7% of Mainland turnover

Last Night’s Prices & Yields

  • CNY/USD 7.14 versus 7.14 Friday
  • CNY/EUR 7.92 versus 7.94 Friday
  • Yield on 1-Day Government Bond 0.95% versus 1.35% Friday
  • Yield on 10-Year Government Bond 2.73% versus 2.71%
  • Yield on 10-Year China Development Bank Bond 3.02% versus 3.00%

Originally Posted on June 1, 2020 – The “More Bark Than Bite” Rally

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