False Dawns in China's Equity Market Makes Skeptics Chase Bonds

(Bloomberg) -- It’s easy to forget that for stocks in Hong Kong and Shanghai, the most bullish start to a month since 2015 was only four days ago.

Blame tech and health care for derailing things this week. Any optimism on a trade truce was quickly unraveled when news broke that the U.S. had requested the arrest of a senior executive at Huawei Technologies Co. Shares of the company’s peers and its vast supply chain sank on concern they’ll take a hit from the Trump administration’s crackdown on Chinese technology. (Click here for a reminder of what happened to ZTE Corp.’s profits.)

What followed was a $26 billion wipeout of China’s health-care stocks after Beijing’s expected but awfully timed decision to slash drug prices in a government procurement list from 11 major Chinese cities. The cuts were far worse than analysts had predicted, as shown by the worst two-day rout in more than 13 years for MSCI Inc.’s gauge tracking the sector.

Only a miracle can bring Hong Kong’s equity market into the black for 2018. The city’s benchmark has flipped between gains and losses for seven straight weeks, and would need its biggest December rally since 1993 even to just end the year where it started. This quarter, which is historically one of the best ones, is turning out to be the worst since China shocked traders three years ago with its currency devaluation.

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Haven demand

The yuan was perhaps the biggest winner after Presidents Xi Jinping and Donald Trump said they won’t announce any new tariffs for 90 days. While the currency pared gains in the latter part of the week, it still clocked in its best performance since September 2017.

Havens continued to be well bid, with Chinese government bonds benefiting from a flight to quality even as a former People’s Bank of China governor suggested traders shouldn’t expect big sweeping monetary stimulus measures any time soon. A variety of sovereign-bond auctions found solid investor appetite this week.

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Chart of the week

This is proving to be a big sell signal for chart watchers. The Shanghai Composite Index failed to hold above its 50-day moving average for a fourth time this year.

False Dawns in China's Equity Market Makes Skeptics Chase Bonds

Catching up

Here’s what else caught our eye.

  • Tips from market pros on how to trade China in 2019.
  • Another Tencent-backed Chinese firm flops on its trading debut.
  • Daimler is gaining more control over its Chinese venture.
  • And Macquarie is in advanced talks to create one.
  • Pricing distortions in China’s popular credit hedging tool.
  • China’s quiet central bank wants to talk more to the market.
  • The Shanghai-London stock connect will start on Dec. 14.
  • One indicator for China’s housing market is flashing red.
  • Asia-focused hedge funds are struggling.

©2018 Bloomberg L.P.