No Winners In A Trade War

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Asian equities were mixed overnight as the Philippines, Taiwan, and South Korea outperformed, Thailand underperformed, and Pakistan was closed for Kashmir Solidarity Day.

Tariff tit for tat weighed on market sentiment except for metals and mining companies as gold surged, as well as AI plays such as semiconductors, software, and technology hardware, which could also be related to the early success of the new electronic trade in subsidy.

News that the U.S. Postal Service would suspend non-letter parcels from Hong Kong and Mainland China and that an investigation into Shein and Pinduoduo’s Temu would be conducted weighed on sentiment as well. On Wednesday morning, the U.S. Postal Service stated it is not canceling parcel delivery as the Art of the Deal requires some volatility.

Locals resembled traders rather than investors, taking quick profits, including Mainland investors with a rare net sell of -$680 million, mainly the Hong Kong Tracker ETF via Southbound Stock Connect. News that the Chinese government might investigate Apple is a subtle reminder that they have levers that can hurt the U.S. government and, unfortunately, U.S. investors. We have long stated that there are about ~$376 billion of U.S. goods made and sold in China, according to the New York Federal Reserve Bank, that are not by definition “exports” though those revenues and profits flow to the U.S.

The Ministry of Commerce announced it would begin applying export controls of tungsten, bismuth, molybdenum, and bismuth. Regardless, today’s market action clearly indicates nobody wins in a trade war, so hopefully, the two sides can put the kabuki theater aside and meet.

The most ridiculous thing you’ll read is how the Caixin Services PMI “missed” economist expectations as only five firms, of which only two economists submitted estimates. I would start submitting an “expert” estimate for fun if I had the bandwidth. The January release was 51 versus “expert” expectations of 52.4 and December’s 52.2. It was interesting that consumer stocks were off despite early indications that Chinese New Year vacation numbers were robust.

There were some positives with CATL announcing that it would re-list in Hong Kong after the close. The relisting of Mainland companies in Hong Kong could raise China’s weight in MSCI indices. As an FYI, remember that Mainland listed stocks only get 20% of their market cap added to MSCI indices. Premier Li presided over a State Council meeting that generated nothing tangible except for more sound bites, including the statement “a more proactive approach to promote high-quality development and achieve new results.”

By far, the most interesting news today was a report stating the new home price index in 100 cities increased by 0.23% in January, with 47 cities showing month-over-month price increases, 41 MoM price decreases, and 12 unchanged. Year-over-year, 61 cities had an increase, 39 had a decline, and zero were unchanged. For comparison purposes, in September/pre-real estate stimulus measures, 17 cities experienced an increase, and 63 showed a decline in MoM data. The richer the city, the better real estate is doing, as Tier 1 leads the way back. A Mainland media article noted that the “national “white list” project loan approval amount exceeded CNY 5 trillion” with 3.73 million apartments completed. The article specifically mentioned distressed state-owned enterprise developer Vanke, which last Monday was effectively “localized”/taken over by the Shenzhen local government, which completed 180,000 apartments. If Xi and Trump can do a trade deal, I suspect a major real estate stimulus could occur. Hopefully, they get to it.

The Hang Seng and Hang Seng Tech fell -0.93% and -0.95%, respectively, on volume up +18.74% from yesterday, which is 140% of the 1-year average. 178 stocks advanced, while 309 declined. Main Board short turnover increased by +5.72% from yesterday, which is 148% of the 1-year average, as 16% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Value and large capitalization stocks fell less than growth and small capitalization stocks. The top sectors were materials up +1.15% and technology up +0.62%, while consumer staples fell -2.67%, real estate fell -1.64%, and consumer discretionary fell -1.61%. The top sub-sectors were nonferrous metals, technology hardware, and national defense, while textiles, food, and household appliances were the worst. Southbound Stock Connect volumes were 2x pre-stimulus levels as Mainland investors sold -$680 million of Hong Kong stocks and ETFs, led by HK Tracker ETF and Tencent, a large net sell, Kingsoft Cloud, Meituan, SMIC, and Xiaomi small net sells, Alibaba and Kuaishou small net buys.

Shanghai, Shenzhen, and the STAR Board diverged -0.65%, +0.44%, and +2.9%, respectively, on volume up +15.46% from last Monday, which is 117% of the 1-year average. 3,274 stocks advanced, while 1,744 declined. Growth and small capitalization stocks outperformed value and large capitalization stocks. The top sectors were communication services up +3.22% and technology up +0.99%, while energy fell -2.21%, consumer staples fell -2.07%, and real estate fell -1.56%. The top sub-sectors were internet, software, and education, while soft drinks, motorcycles, and energy equipment were the worst. Northbound Stock Connect volumes were above average. CNY and the Asia dollar index fell versus the US dollar. Treasury bonds rallied. Copper and steel fell.

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