China Traders Savor Relief Rally in Stocks, Yuan While It Lasts

(Bloomberg) -- China investors can finally turn their focus elsewhere after a highly-anticipated meeting between Presidents Xi Jinping and Donald Trump showed some progress on trade.

Fund managers weren't expecting much as the two leaders met Saturday at the Group of 20 summit in Japan, with light volume in China's stocks and currency markets suggesting a lack of strong bets either way. An agreement to resume negotiations has been welcomed by investors, with some seeing Trump's decision to ease restrictions on Huawei Technologies Co. as a positive surprise.

The Shanghai Composite Index was 1.9% higher as of the mid-day break, with brokerages and consumer stocks among the top performers. Rare earth shares, which had benefited from speculation China would hike prices to retaliate against the U.S., were among Monday's biggest decliners. The yuan climbed 0.4% to 6.8395 per dollar at 11:44 a.m. local time.

Here are a few snippets of views after the Trump-Xi meeting:

• “It was probably the best possible outcome given the circumstances” - Khoon Goh
• “Investors had never expected easing restrictions on Huawei” - Steven Leung
• “It's likely that the two sides are just delaying the problem” - Jackson Wong
• “This is still a truce, not a deal” - Hao Zhou
• “The consensus expected a truce to be declared so the impact of the news may not be long-lasting” - Mansoor Mohi-uddin
• “The market's patience may eventually run out” - Jingyi Pan

The truce lifted risk assets in Asia on Monday. But skeptics say it will take more than a delay on tariffs to turn around the caution that's already claimed this year's bull market in the tech-heavy ChiNext Index. A weaker economy remains a key overhang, with investors unclear on whether Beijing's measures to support growth will be sufficient. Data Sunday showed the outlook for China's manufacturing sector deteriorated again in June.

“I don't think that this will completely turn around the China equity market or the depreciation of the yuan,” said Paul Sandhu, head of multi-asset quant solutions and client advisory at BNP Paribas Asset Management. “I see this as just a postponement.”

Even though the Shanghai Composite is still among the world's best benchmarks this year, it had lost 8.9% from an April high through Friday. Monday's surge has helped it climb above the key 3,000-point level it's been struggling to hold for the past two months. The yuan weakened about 2.4% against the greenback in a similar period, while government bonds have largely missed out on the huge rally that's taken off globally.

Huawei Reprieve Is Good and Bad News for Asia Tech Stocks

With the G-20 meeting out of the way, here's how analysts recommend trading China's markets in the coming days. Hong Kong's stock market, the hardest hit by the trade war in May, is shut Monday for a holiday.

Stay Hedged

“Hedges were being bought to cover tail scenario for G-20 -- I would say that positions can be moved further into the third quarter now,” said BNP Paribas' Sandhu.

He recommends owning shorter-term high grade bonds alongside higher risk or emerging-market debt, or a hedged position in stocks.

Own Gold

“We continue to stress the importance of focusing on the right sectors, segments, and companies, such as tech leaders, national and regional champions and rising Asian consumption," said Andy Wong, a senior investment manager in Pictet Asset Management's international multi-asset team. “We also like gold as a good portfolio hedge.”

Yuan Risks

“The onshore yuan could dip below 6.80, but it's unlikely to stay there for too long,” said Hao Zhou, senior emerging markets economist at Commerzbank AG. “Fundamentally the yuan is still under depreciation pressure. Certainly the PMI still suggests a challenging outlook.”

Stock Momentum

“This renewed truce should offer support for Chinese equities,” said Jingyi Pan, a market strategist at IG Asia Pte. “A gradual clearance of the outstanding issues from talks will be key to keep the momentum going.”

Fed Focus

“People will price in a positive trade talk outcome in the coming three months, and a possible rate cut by the Fed will lure more capital flow into China,” said Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd. With the Federal Reserve's dovish stance, Hong Kong stocks will have “a good quarter.”

--With assistance from Jeanny Yu.

To contact the reporter on this story: Livia Yap in Singapore at lyap14@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Divya Balji

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