(ATF) Hong Kong: Chinese stocks extended gains, outperforming the region as markets eyed the earnings recovery momentum with expectations consumption will support the rebound trajectory in the second half of the year.
Australia lagged with coronavirus cases on the rise in the state of Victoria, which has forced a lockdown to be reimposed in Melbourne, the country’s second-biggest city.
Overnight US markets were also weighed by the spurt in infections count with California alone reporting over 10,000 coronavirus cases – a record rise for a single day.
But China extended its rally after showing early signs of an economic rebound amid expectations corporate earnings will begin to reflect some of that positive data.
“The muted US response to the Hong Kong National Security Law is giving comfort to investors that the Sino-US trade war was last year’s story,” Mathieu Savary, vice-president at macro research firm BCA Research, said.
“Moreover, the recent breakout of Chinese stocks is attracting foreigners, who are aggressively pouring funds into CNY markets. Unsurprisingly, China’s FX reserves are rising moderately, despite the country’s small current account deficit.”
He said a stronger yuan is bullish for global equities including EM stocks and commodities because a rising Chinese currency diminishes global deflationary pressures. A rising yuan also incentivises Beijing to maintain accommodative monetary and credit conditions, which supports the domestic Chinese economy, he added.
But worries about renewed US-China hostilities have returned following a report US President Donald Trump’s aides debated targeting the Hong Kong dollar. This boosted the lure of gold which rose 0.4% to over $1,800 per ounce.
'Bull market building'
The case for inflows into Chinese stocks is backed by an increase of global asset allocation and structural shift in the equity universe towards the 'New Economy'.
“We see that continuing because of China’s relative macro performance and the sectoral skew in MSCI China (and increasingly, A-shares) to the New Economy (consumer, technology, communications services, and healthcare),” Laura Wang at Jonathan F Garner, and Fran Chen, said in a report.
“A Chinese equity bull market is building with rising volumes amid improved earnings visibility and liquidity, plus regulatory/policy support. We raise targets for all covered indices and still expect A-shares to outperform,” they said, adding that A-shares are benefiting from strong new fund launches and rising retail investor account openings amid regulatory support and an ongoing market reform push.
Morgan Stanley said the expected marginal weakening trajectory of USD/CNY also supports a preference for A-shares to cushion negative translational effect.
The mainland China stock index CSI 300 jumped 1.62% and the Hang Seng index added 0.59%. The rest of the region was flat to marginally weaker with the Nikkei 225 easing 0.78% and the Australian S&P/ASX 200 the regional underperformer tumbling 1.54% amid the rise in infections.
“The news of a resurgence of coronavirus cases in various countries is clearly alarming, with the US, Australia, the UK, Spain and Japan all hitting the headlines,” said Jennifer McKeown, Head of Global Economics Service at Capital Economics.
“But as things stand, it seems that Asian economies including China, Korea, Taiwan and Hong Kong are relatively well-placed. Their willingness and ability to isolate those infected has allowed them to contain new cases and should continue to do so.”
Asian credit markets were flat to marginally wider with the Asia IG index slightly wider at 80/82 and sovereign CDS wider by 1-2 basis points. But that is not deterring new issues from flowing. Overseas Chinese Town, Vista Land, Nonghyup Bank, Hangzhou Finance, and Yankuang Group are in the market with bond offerings.
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# Japan’s Nikkei 225 eased 0.78%
# Australia’s S&P ASX 200 tumbled 1.54%
# Hong Kong’s Hang Seng index added 0.59%
# China’s CSI300 jumped 1.62%
# The MSCI Asia Pacific index fell 0.93%.
Stock of the day
Infant milk formula company China Feihe Ltd rose as much as 7.9% after it said it expects an increase of more than 40% in its revenue for the six months ended 30 June 2020 compared with the six months to 30 June 2019. The significant increase was mainly attributable to the substantial increase in the sales volume of high-end infant milk formula, it said. The company also rejected short sell Blue Orca Capital’s claim that questioned the firm’s financials. The stock had plunged 8.4% after the short seller report. It ended the day with a gain of 7.2%