STAR Board’s “688 Rally” Defies Hong Kong Profit-Taking

Key News

Asian equities were largely higher, though there were several pockets of minor weakness.

Hong Kong growth stocks underperformed as morning gains eased over the trading day as traders took short-term profits after the last two days of strong performance. Remember that Hong Kong represents foreign investors’ definition of China, indicating the lack of conviction in the space. This is despite positive news, including Commerce Secretary Raimondo’s China visit, which I discuss further below, Hong Kong looking to replicate the Mainland’s stock trading reforms that were recently implemented (cut to the Stamp Tax, which is absurdly high), chatter about the iPhone 15 launch, and the PBOC injecting another healthy dose of liquidity into the financial system. Meanwhile, Tier 1 city Guangzhou relaxed home purchase rules.

Foreign investors will slowly recognize that China concerns are dissipating. Last night, Mainland investors took an entirely different perspective, sending Mainland stocks, particularly growth stocks, higher as the government is literally telling investors to buy stocks. Mainland investors bought the dip in Hong Kong-listed stocks overnight as well. The “688 Rally”, as it is being referred to (STAR Market listings all begin with the numbers 688) was big news in Mainland financial media as the STAR Board, China’s growth/tech stock exchange, rose 2.53% following yesterday’s gain of +4.12%. Mainland financial stocks were off on concerns related to the effect that both interest and mortgage rate cuts will have on margins, in addition to liability exposure to distressed real estate companies and shadow banking and wealth management exposure linked to real estate. August’s China PMIs will be released tonight, which will only reiterate the need for more economic policy support.

Wednesday night, I attended the 5th Annual Forbes US-China Business Forum, which included a host of US and Chinese corporations along with a number of diplomats and economic and trade organizations from both countries. It was a great event that highlighted how well business people from both countries are doing against the backdrop of the US-China diplomatic relationship. It does feel like both sides are making an effort to improve the relationship, in my opinion. An interesting insight worth sharing from a speaker was Commerce Secretary Raimondo visiting Shanghai and the Disney park there after concluding the diplomatic element of her visit. By visiting Shanghai, where many US and foreign corporations are located, along with a US company’s China operations, is giving a pro-business signal.

Remember tomorrow is MSCI’s rebalance day, which requires passive managers to buy and/or sell stocks at the close in order to while Friday is Hang Seng Indices rebalance day. There are no crazy additions or deletions, but remember that index rebalance days are like Saturday in pro golf, i.e., “moving day”. Big institutional investors cannot sneak into or out of big positions that easily. Investors can implement portfolio changes by taking advantage of the uptick in trading volumes. It might be the last days of summer, but volumes will be shockingly high tomorrow. There’s one mystery solved for you!

Good luck to our friends in the Southeastern United States with the approaching hurricane. Stay safe!

The Hang Seng and Hang Seng Tracker eased -0.01% and -0.92%, respectively, on volume that increased +6.61% from yesterday, which is 94% of the 1-year average. 163 stocks advanced, while 325 declined. Main Board short turnover declined -3.17% from yesterday, which is 101% of the 1-year average, as 18% of the volume was short turnover. The value factor outperformed the growth factor as large caps “outperformed” small caps. The top-performing sectors were materials, which gained +0.9%, materials, which gained +0.59%, and real estate, which gained +0.33%. Meanwhile, consumer staples fell -1.59%, utilities fell -1.09%, and communication services fell -1.07%. The top-performing subsectors were technical hardware, insurance, and materials. Meanwhile, healthcare equipment, business/professional services, and media were among the worst. Southbound Stock Connect volumes were moderate as Mainland investors bought $585 million worth of Hong Kong-listed ETFs and stocks with top buys being Hong Kong Exchanges which was a moderate/large net buy, energy giant CNOOC was a moderate net buy, and real estate construction group Longfor Group was a small net buy. Meituan, Tencent, and Li Auto were all small net sells.

Shanghai, Shenzhen, and STAR Board gained +0.04%, +0.37%, and +2.53% on volume -5.63% from yesterday, which is 112% of the 1-year average. 2,847 stocks advanced, while 1,879 stocks declined. The growth factor outperformed the value factor as small caps outpaced large caps. The top sectors were tech +1.94%, communication +1.14%, and discretionary +0.45%, while financials -1.44%, utilities -0.38%, and industrials -0.3%. The top sub-sectors were computer hardware, internet, and software, while water, securities/brokers, and environmental protection were the worst. Northbound Stock Connect volumes were high as foreign investors sold -$337 million of Mainland stocks with top buys BYD a moderate/high net buy, Citic a moderate net buy, and CATL a small net buy. Iflytek, Huayou Cobalt, and Hai Tian were small/moderate net sells. CNY appreciated versus the US $ small while the Asia dollar index fell. Treasury bonds rallied along with copper and steel.

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Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

  • CNY per USD 7.29 versus 7.29 yesterday
  • CNY per EUR 7.88 versus 7.88 yesterday
  • Yield on 10-Year Government Bond 2.57% versus 2.58% yesterday
  • Yield on 10-Year China Development Bank Bond 2.69% versus 2.68% yesterday
  • Copper Price +0.22% overnight
  • Steel Price -0.41% overnight

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