Investors fear Beijing foreclosure after tests

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Asian markets followed the sharp fall in the United States on Friday as all markets closed except the Philippines, which gained +0.32%, and Australia, which closed.

Reports of massive covid testing beginning in Beijing’s Chaoyang district amid Shanghai’s continued lockdown sent mainland and, to a lesser extent, Hong Kong stocks falling sharply overnight. The specter of a Shanghai-like Beijing lockdown and the potential ripple effect on the economy has led investors to fear the worst-case scenario, but only time will tell.

The Hang Seng Index closed below the 20,000 level at 19,869, which triggered the liquidation of structured products with call-back features at the 20,000 level. pressure on the Chinese currency as the CNY fell -1.13% against the US dollar to 6.57 CNY to the dollar from 6.50 on Friday. We shouldn’t be surprised by CNY weakness as Chinese 10-year Treasury yields hit 2.81%, on par with US yields. Nonetheless, the government will not want the CNY to slide too much against the US dollar to avoid being branded as a currency manipulator. After the close, the People’s Bank of China (PBOC), China’s central bank, reduced the amount of foreign currency that banks can hold as reserves, which is curbing the depreciation of the CNY.

Commodity prices are falling globally, leading to weak materials, industrial and energy stocks, even though there really was nowhere to hide. Two years ago, internet stocks were called work-from-home stocks, beneficiaries of covid lockdowns. However, market perception has changed.

Neither the PBOC’s comments over the weekend about increased political support nor a South China Morning Post story about the US and China moving closer to a solution to the Foreign Corporate Liability Act could stabilize the markets.

Well-respected China Merchants Bank underperformed in a corruption probe of the former president, and first-quarter net profit rose +13% year-over-year.

CATL, the world’s largest electric vehicle (EV) battery maker, was down -6.08% after pushing back its earnings release to April 30.and from April 28and.

Barron’s Big Money poll over the weekend indicated elevated optimism toward US equities and a cautious view on Chinese equities and emerging markets. US interest rates rise when the P/E of the S&P 500 is 22 and that of the Nasdaq is 51. The 1-year and 5-year P/Es are reasonable at 18.76 and 26.43, respectively, but it requires profits to reach the target. In contrast, the Hang Seng index has a P/E of 7, Shanghai has a P/E of 12, and Shenzhen has a P/E of 26.

The Hang Seng Index and the Hang Seng Tech Index closed -3.73% and -4.87% respectively, on +24% higher volume than Friday, or 93% of the 1-year average . There were just 23 stocks up and 481 stocks down as Hong Kong short selling volume jumped +32% from Friday, or 130% of the 1-year average. All sectors ended up in the red as value sectors did not fall that far. Real Estate fell -3.49%, Financials -3.49% and Utilities -3.59% compared to today’s worst performing Materials sector, which fell – 6.47%. Mainland investors were net sellers of Hong Kong stocks today as Tencent was a small net sell and Meituan was a net buy.

Shanghai, Shenzhen and STAR Board fell -5.13%, -6.48% and -6.13%, respectively, as volume jumped +19.51% from Friday to 82% of the 1-year average. There were only 152 rising stocks versus 4,325 declining stocks. Large caps and value/dividends held up better than small caps and growth factors. Materials and Technology were the worst performers, dropping -8.05% and -7.97% respectively. Foreign investors sold -$671 million worth of Mainland stocks through Northbound Stock Connect. Treasuries rallied while the CNY depreciated -1.13% against the US dollar and copper lost -0.91%.

Last night’s exchange rates, prices and yields

  • CNY/USD 6.56 vs. 6.50 on Friday
  • CNY/EUR 7.04 against 7.02 on Friday
  • Overnight government bond yield 1.23% vs. 1.28% on Friday
  • 10-year government bond yield 2.82% vs. 2.83% on Friday
  • China Development Bank 10-year bond yield 3.05% vs. 3.08% on Friday
  • Copper price -0.91%

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