25 February 2019 Issue 797
Global Market Commentary
- US: China and the United States extended their trade consultations in Washington last week for two days. Both China and the United States claimed that the negotiations have made good progress. For the whole week, the Dow rose by 0.57% to 26,031.81 points. The S&P 500 index rose by 0.62% to 2,792.67. The Nasdaq rose by 0.74% to 7,527.55 points.
- Europe: Lloyds Bank, Glencore and other European companies announced share repurchase, boosting the investment atmosphere. For the whole week, the UK’s FTSE 100 index fell by 0.80%, the German DAX index rose by 1.40%, and the French CAC40 index rose by 1.22%. The STOXX 600 index rose by 0.62% to 371.23 points.
- Asia: Both China and the United States claimed that there has been good progress in trade negotiations last week, which boosted the Asian stock markets. Over the week, the Nikkei 225 index rose by 2.51% to 21,425.51 points. The MSCI Asia Pacific Index rose by 2.54% to 159.56 points.
- US: Sino-US trade negotiations are progressing well, and the US Federal Reserve officials pointed out that inflation should be allowed to exceed the target of 2%, causing the bond yield rate fall. For the whole week, the US 10-year bond yield fell by 1 basis point to 2.659%.
- Europe: Germany’s corporate sentiment judgment index fell to 98.5 in February, lower than market expectations of 99. For the whole week, the German 10-year bond yield fell by 1 basis point to 0.094%.
- Oil: Both China and the United States have indicated that there has been good progress in trade negotiations last week, stimulating oil prices. Over the week, New York oil futures rose by 2.29% to close at $57.26 a barrel.
- US dollar: The Fed released a dovish signal that it may stop shrinking the balance sheet this year. For the entire week, the Dollar Index fell by 0.410% to 96.507.
- China: US President Trump said that he may postpone the deadline for increasing tariffs on Chinese goods on March 1. For the whole week, the yuan rose by 0.757% against the US dollar to 6.721.
- US: The Sino-US trade consultation in Washington last week has extended to weekend, Trump claimed the negotiation was fruitful and would postpone the deadline for the trade truce.
- U.S: Trump said he might use executive order to ban Huawei from selling 5G telecommunications equipment in the US. He also claimed it is a problem that whether should put the Haiwei issue into the trade agreement during the meeting with Liu He.
- U.S: The semi-annual monetary policy report of Fed stated that the global economic slowdown and the market volatility bring potential risks to US economy, so it should be patient in adjusting interest rates in the future.
- U.S: Philadelphia Federal Reserve President Harker said that the fed should stop shrinking the balance sheet while St. Louis Fed President Bullard said that the reduction in balance sheet will only have slight impacts on the economy.
- Euro-zone: Theresa May, British Prime Minister, confirmed that she will not submit the new Brexit agreement to the House of Commons for final voting this week. She also asked parliamentarians to give her more time to renegotiate with EU and promised the vote will held before March 12.
- Euro-zone: Nowotny, European Central Bank Management Committee, believes it is not necessary to rush to launch a new bank loan project of 720 billion euros.
- Euro-zone: The EU Trade Commissioner said it is expected to reach a trade agreement with the United States during this year. Besides, according to senior EU officials, they claims retaliatory tariffs would be put on US goods if the United States imposes tariffs on EU cars.
- Japan: Bank of Japan Governor Haruhiko Kuroda said there are four easing measures can be implemented if Japan’s inflation does not meet the central bank’s target. The fours measures includes lowering current negative short-term interest rates, lowering long-term yield targets to a level below zero, purchasing more assets and accelerate the pace of monetary base expansion.
- Japan: The data of Bank of Japan showed that Japan’s corporate service price index rose by 1.1% year-on-year in January 2019, which was similar with market expectations.
- New Zealand: Statistics New Zealand announced that New Zealand’s retail sales in the fourth quarter of last year rose by 1.7% quarter-on-quarter, far exceeding market expectations of a 0.5% increase.
|China Market Commentary|
|• According to the Xinhua News Agency, the Politburo of the Communist Party of China has a meeting on Friday, discussing the details of the draft of “Government Work Report”, and claiming that it is necessary to maintain the economic operation in a “reasonable range” and it should implement a active monetary policy and stable fiscal policy.
• Xi Jinping, Chinese President, emphasized that the anti-corruption efforts in the financial sector should be further strengthened in order to enhance the economic capabilities of financial services. He also claimed it should further improve the basic system of capital markets and strengthen the supervision over transactions.
New infrastructure investment will be the next theme of A shares market
From the beginning of the year, the CSI 300 Index has risen by 16.9%, and A shares have entered in the spring market. The reason for this round of market rally is the attractiveness of the undervaluation of A shares. The injected liquidity has made the market ushered in the support of money inflow, and with the support of a series of policies during the data vacuum period, the index has risen step by step. The Shanghai Composite Index finally stood above 2800 points on last Friday.
Liquidity creates the rally bellwether
Financial stocks are the main force of this round of stock market rebound, among which the stock brokers are the leaders of this round of rebound. The brokerage index is up 36% year-to-date. Especially after the release of China’s January financial data on Friday, the rally trend of stock brokers more certain. In January, total social financing increased by 4.64 trillion yuan, an increase of 1.56 trillion yuan year-on-year and a record high. On the other hand, the market sentiment also has the obvious recovery. In addition to a series of hot topics, margin trade balance in Shanghai and Shenzhen rose to 751.8 billion yuan, up 40.9 billion yuan compared to the level before the Spring Festival.
Market sentiment determined by infrastructure investment
Lack of economic support the stock market is hard to sustain the rally. Money sloshing around the financial system is not what Chinese government’s final target. Excess liquidity will eventually flow into the real economy. Infrastructure investment led by the government and state-owned enterprises is an important channel. The expectation is that Beijing will begin a new round of infrastructure investment.
In fact, since the second half of 2018, a number of pro-infrastructure policies have been introduced. First, the planned investment in infrastructure projects approved by the NDRC has reached 1.34 trillion yuan, much faster than in the first half of 2018. Second, the overall PPP projects has bottomed out, which reflects that the process of deleverage is over. Most importantly, the project funds ensure the smooth implementation of the infrastructure investment plan. Insufficient cash flow from local governments is the reason for weak infrastructure investment in 2018. However, issuance of local government bonds has accelerated, replenishing capital sources for infrastructure investment. Growth in infrastructure investment rose to 7.8 percent year-on-year in December 2018, after a -5.9 percent dropped in August.
New infrastructure is not the old “4 Trillion Plan”
The new infrastructure fund is different from the past. The new projects will not only stabilize economic growth, but also avoid going back to the old way and establish the foundation for economic transformation and industrial upgrade. In particular, the scale of infrastructure construction in China is already very large, and the growth rate of new infrastructure investment will be lower than the “4 Trillion plan” in 2009. According to CICC calculations, infrastructure investment growth is expected to peak at about 15 per cent in 2019. That means there is some room for infrastructure investment growth to accelerate in 2019.
In terms of sub-sectors, 5G-related industries are the most certain direction for new infrastructure investment. 5G is one of the important areas in China’s industry upgrade, with certainty in telecommunications equipment, semiconductors and other segments. In the railway sector, urban rail has replaced traditional railways as the segment with the most project funds approved by the NDRC. With the process of urbanization, sewage treatment and garbage treatment in municipal engineering is the shortcoming of current infrastructure investment, which will be the direction of accelerating infrastructure investment.
In summary, the current A share rebound has entered the late stage. If economic data do not confirm that China’s economy has stabilized, the rally will stall. It is too risky for investors to chase the leading stocks. The current new infrastructure valuation is attractive, and the government’s increased infrastructure investment will benefit the above-mentioned related industries.