Asian equities were a bloodbath as investors unwound risk assets as the reality of US interest rates staying “higher for longer” sets in with investors. With the US 10-Year Treasury yield back above 4%, the US dollar continues to strengthen, pressuring Asian currencies.
Hong Kong had the worst day I’ve seen going back to the summer of 2015 when Mainland China’s margin-driven bull market bubble popped. Hong Kong’s current dramatic downdraft is not due to margin, but one factor in the decline is clearly the unwinding of popular, callable Bull/Bear Contracts (CBBCs), which are similar to structured products. CBBCs, like structured products, provide exposure to Hong Kong indexes and stocks, though are different from most US and European structured notes in that they embed a forced redemption feature when an index or stock breaches a price level. Thus, there is a “callable” element to them while most US and European notes have a maturity date of 1 or several years. Many investors believe these are conservative due to the knock out or redemption levels. However, maybe not if, as in the case of last night, there are no buyers to take the other side of the selling when knock out levels are reached.
The Hang Seng Index has gone through big, round numbers like a hot knife through butter. Look at the Hang Seng Index at 17,000 on January 2nd, 16,500 on January 7th, 16,000 yesterday and 15,500 today. Using the Hang Seng Index as an example, a CBBC provider must sell their future contracts when a level is hit. In a normal market, this is fine, but, with no buyers, the forced selling only pushes the market down, which creates more selling. The daily turnover of CBBC is $9.7 billion indicating this is a big market though I haven’t found the size yet. This is true not only for individual stocks like Tencent and Meituan but also other popular indices such as the Hang Seng Tech and Hang Seng China Enterprise Indexes.
Why is this just dawning on me? I have spoken about CBBCs in the past, though I vastly underestimated their size. I apologize for that. I would hope the Hong Kong Stock Exchange and/or local regulators step in and do something immediately as their reputations are at stake. South Korea recently suspended short selling of stocks as their investors like CBBCs like vehicles as well. The lack of buyers is another issue but this forced selling is real, which explains an element of the disparity between Mainland China and Hong Kong stock performance. Imagine if they do intervene?
China’s overnight economic release was mixed as it wasn’t great but it wasn’t that bad per the below. The release explains why the People’s Bank of China (PBOC) did not cut rates over the weekend as this is not a supply issue, but a demand one. December housing data was bad as recent efforts to support real estate prices appear ineffective, though I don’t know whether many people buy apartments during December especially in light of northern China’s very cold weather. New and existing home prices fell across China. Real estate support policies clearly need to be dialed up, as evidenced by yesterday’s RMB 1 trillion policy support package.
Retail sales “missed” while online retail sales increased +11% YoY in 2023 versus 2022 as 27.6% of total retail sales of consumer goods took place online.
Yes, the demographic data is not good, but it is good that we are seeing the data released Japanese stocks are really suffering despite the country is negative population growth since 2013. South Korea has the worst demographics of any OECD country (Did you see the great actor/Oscar winner from the movie parasite Lee Sun-kyun killed himself? Heartbreaking news!), but did that stop Samsung from being one of the best performing stocks over the last twenty years? Export-driven economies don’t need a big population versus a domestic consumption driven economy. I’m not going to do a victory lap but I did mention China’s employment data is calculated very differently than in the West and maybe the stopping of youth unemployment was due to them recalibrating the calculation.
% changes are year-over-year (YoY)
Q4 GDP 5.2% versus expectations 5.3% and Q3’s 4.9%
2023 GDP 5.2% versus expectations 5.2% and 2022’s 5.2%
December Industrial Production 4.6% versus expectations 4.5% and November’s 4.3%
2024 Industrial Production 6.8% versus expectations 6.6% and 2022’s 6.6%
December Retail Sales 7.4% versus expectations 8% and November’s 10.1%
2024 Retail Sales 7.2% versus expectations 7.3% and 2022’s 7.2%
Mainland China was off but not nearly as much though foreign investor sold a very healthy $1.8B of large/mega cap growth stocks via Northbound Stock Connect.
I was back up in upper New England for the US’ three-day weekend, which put me in proximity to New Hampshire’s Presidential primary TV ads. Several weeks ago I mentioned a leading candidate’s advertisements were almost solely an anti-China tirade that came off as wanting to start WW3. That candidate’s advertisements had changed completely to domestic issues which I assume was based on some polling. Hard to extrapolate the reason definitively.
The Hang Seng and Hang Seng Tech fell -3.71% and -4.99% on volume +54.65% from yesterday which is 127% of the 1-year average. 13 stocks advanced while 501 declined. Main Board short turnover increased +58.98% from yesterday which is 160% of the 1-year average as 22% of turnover was short turnover (remember HK short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). The value factor and large caps “outperformed”/fell less than the growth factor and small caps. All sectors were negative with real estate -5.92%, materials -5.35% and discretionary -4.89%. All sub-sectors were negative with semis, materials and autos the worst performing. Southbound Stock Connect volumes were high as mainland investors bought $758mm of HK stocks and ETFs with the HK Tracker, CCB and Meituan seeing small net buying while Xpeng a large net outflow, CNOOC and Xiaomi small net outflow.
Shanghai, Shenzhen and STAR Board all fell by -2.09%, -2.54%, and -2.62%, respectively, on volume that decreased -6.75% from yesterday which is 73% of the 1-year average. 237 stocks advanced while 4,776 declined. The value factor and large caps “outperformed”/fell less than the growth factor and small caps. All sectors were negative with staples -3.26%, discretionary -3.17% and real estate -2.91%. Forest was the only positive sub-sector while catering, precious metals and liquor were the worst. Northbound Stock Connect volumes were moderate as foreign investors sold a very health -$1.814B of mainland stocks with Midea Group, Sevenstar and Shanxi Fen Wine small net buys while BYD, Kweichow Moutai and Wuliangye were large net sells. CNY and the Asia dollar index fell versus the US dollar. Treasury bonds had a strong rally while copper and steel gained.
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- CNY per USD 7.19 versus 7.19 yesterday
- CNY per EUR 7.82 versus 7.82 yesterday
- Yield on 10-Year Government Bond 2.50% versus 2.52% yesterday
- Yield on 10-Year China Development Bank Bond 2.65% versus 2.73% yesterday
- Copper Price +0.18%
- Steel Price +0.26%