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Medium-term Asia equities outperformance reinforced by stronger yuan

It was a muted session in US stock market overnight, but with several positives as all the major US stock indices ended the day in the green, led by the small-cap Russell 2000, with a gain of +1.97% to close at 2,249, a five-day high.

The broader S&P 500 and technology heavy Nasdaq 100 ended the session with modest rallies of +0.19% and +0.33% respectively, while the Dow Jones Industrial Average was almost unchanged at 34,323.

Advancing stocks outpaced declining stocks by a ratio of 2.1 on the New York Stock Exchange, with stocks listed on the Nasdaq faring even better at a ratio of 2.8. Seven of 11 S&P sectors ended higher, with outperformances in energy (+0.93%), consumer discretionary (+0.90%) and communication services (+0.59%). The consumer discretionary outperformance was attributed to stellar rallies in the textiles and apparel space (+1.97%), which was reinforced by upbeat earnings results and guidance from Urban Outfitters and Abercrombie & Fitch. Tesla's share price gained 2.39%, for an accumulative gain of 14.5% from its 19 May low at $546.98.

A key geopolitical development is taking shape between the US and China. US president Joe Biden has instructed intelligence agencies to redouble efforts on deeper investigation into the origins of Covid-19 and report back to him in 90 days, breathing new life to claims that coronavirus escaped from a Chinese lab in Wuhan. In addition, the US White House’s top official for Asia, Kurt Campbell, has said that the era of engagement with China is over and competition not cooperation is likely to define the US-Sino relationship. So those who viewed Biden’s administration as likely to be less hawkish towards China versus the previous Trump administration, are likely to be living in a state of denial. The latest rhetoric from US seems to be setting the stage for another round of fiery communications, and may led to a further escalation in the ongoing US-China tech war in the second half of 2021.

Another significant development has also occurred in the foreign exchange market. The USD/CNH (offshore yuan) has continued to trade below the 6.40 former major support for the second consecutive day, with a loss of -0.48%, to close yesterday's US session at 6.3786, despite reports of China’s state banks selling the yuan against US dollar late on Tuesday.

A further potential strengthening of the CNH is likely to benefit Asia (excluding Japan) and emerging market equities going forward. The 20-day rolling correlation coefficient between the movement of CNY/USD and Asia ex-Japan and emerging market ETFs has turned positive recently, after being in negative territory for the past two weeks. In fact, China-related stocks have started to outperform the US and rest of the world. From its 14 May low, the Hang Seng TECH Index (a basket of major China big tech stocks) has staged a rally of +8.7% and the Hang Seng Index together with the Hang Seng China H shares Index have both gained +5% over the same period. In contrast, the S&P 500 and the FTSE All-World Ex US ETF have recorded gains of +3.4% and +4.2% respectively from their May lows  

Chart of the day – USD/CNH 

USD/CNH is breaking below the 6.40 major support level.

Select to enlarge chart

Source: CMC Markets


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