Investors Pause Ahead of More Internet Earnings, Week in Review

Week in review

• China’s stocks ended a mostly negative week lower as economic and corporate developments gave markets no clear direction.
• China’s CPI release for July indicated slight deflation, while China’s earnings this week were broadly positive.
• The gap between foreign and local investors in China intensified this week. Mainland investors bought Hong Kong stocks for a net $1.8 billion, while foreign investors sold mainland stocks for a net $3.2 billion.
• On Thursday, Alibaba announced a revenue increase of +14% year-over-year in the second quarter to 234 billion RMB, against an expected 224 billion RMB.

Friday’s key news

Asian shares were mixed but mostly lower overnight as mainland China underperformed and Japan was closed.

Internet stocks were mostly lower overnight after a strong move yesterday. However, Alibaba rose +1%, continuing momentum from positive earnings yesterday. Internet earnings continue next week, with Trip.com reporting on Monday and JD.com and Tencent reporting on Wednesday. I would prepare for positive surprises after Alibaba’s.

MSCI completed its quarterly index review. Two China A-share (mainland-listed) names were among the three biggest additions to the MSCI Emerging Markets Index: CNPC Capital and Gongniu Group. Meanwhile, there will be 10 additions and 50 deletions from the MSCI China A Onshore Index and 21 additions and 21 deletions from the MSCI China All Shares Index.

Developer weakness drove Hong Kong somewhat lower overnight as Country Garden heads for a restructuring. According to reports, the developer may post a loss of $6 to $7 billion. Politicians held a meeting with several developers, but Country Garden was reportedly left out. While the government is likely to support demand for real estate, supply-side support may remain weak.

The Hang Seng and Hang Seng Tech indices both closed lower by -0.90% and -2.39% respectively on volume that rose +19% from yesterday. Short sale revenue also increased by 41%, likely due to Internet weakness. Mainland investors bought a net $916 million worth of Hong Kong shares overnight, capping a strong week of net inflows. Real estate was the worst performer in Hong Kong overnight, while telecommunications and energy were among the best-performing industries.

Shanghai, Shenzhen and STAR Board all closed lower by -2.01%, -1.92% and -2.13% respectively on volume up +11% from yesterday. Foreign investors bought mainland shares worth a net $226 million overnight, the first day of net inflows of the week.

Last night’s performance

Last night’s exchange rates, prices and returns

• CNY per USD 7.23 versus 7.22 yesterday
• CNY per EUR 7.93 against 7.93 yesterday
• Interest rate on 1-day government bond 1.35% against 1.35% yesterday
• Interest on 10-year government bonds 2.65% against 2.65% yesterday
• Yield on 10-year China Development Bank Bond 2.75% versus 2.75% yesterday
• Copper price -0.67% overnight
• Steel price +0.25% overnight

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