Chief China Strategist
Summary: The Nasdaq announced a special rebalance to reduce the concentration of megacap tech stocks in the Nasdaq 100. As a result, stocks like Alphabet, Amazon, Tesla, Apple, Microsoft, and Nvidia experienced declines ranging from 0.8% to 2.5%, with Alphabet being the hardest hit. However, Meta saw a 1.2% gain as its new Threads App reached 100 million users. Treasuries rallied, leading to falling yields ahead of the upcoming CPI report. The Hang Seng Index rebounded with a 0.6% gain, driven by Chinese Internet and consumer stocks, with Alibaba rising by 3.2%. Consumer prices in China remained flat while producer prices fell deeper into deflation. The Japanese Yen strengthened due to the decrease in US Treasury yields, with USDJPY falling by 0.7% to 141.30.
Megacap tech stocks declined as Nasdaq announced a special rebalance to reduce the concentration of the Nasdaq 100 on the largest stocks in the index, effective on July 24, 2023. Alphabet (GOOGL:xnas), Amazon (AMZN:xnas), Tesla (TSLA:xnas), Apple (AAPL:xnas), Microsoft (MSFT:xnas), and Nvidia (NVDA:xnas) were among the top losing stocks in the Nasdaq 100 on Monday, with declines ranging from 0.8% to 2.5%, with Alphabet experiencing the largest decline. Despite the downturn in these megacap names, the Nasdaq 100 managed to finish the session nearly unchanged. The S&P 500 Index, buoyed by strong performance in industrial, healthcare, energy, and financials sectors, gained 0.2%. Conversely, small-cap stocks outperformed as the Russell 2000 Index advanced 1.6%.
On a positive note, Meta (META:xnas) saw a gain of 1.2% as the social media giant's new Threads App reached 100 million users. As the stock is ranked 7th by market cap within the Nasdaq, it may not be as heavily impacted by the upcoming rebalancing.
Treasuries rallied, resulting in falling yields as traders adjusted their positions ahead of the upcoming CPI report on Wednesday. Significant steepening trades occurred in the futures market, while a considerable amount of buying in the cash markets focused on the front end and the belly of the curve. This led to declines in yields for the 2-year and 5-year notes, with decreases of 9 bps to 4.86% and 12 bps to 4.24% respectively. In contrast, the 10-year yield decreased by 7 bps to 3.99%, and the 30-year yield only slid by 1 bp to 4.03%.
The Hang Seng Index rallied 0.6%, snapping a three-day consecutive loss as investors welcomed the People’s Bank of China’s (PBOC) statement last Friday evening that suggested the end of the scrutiny of financial services businesses of China’s internet giants after it imposed fines on Alibaba’s Ant Group and Tencent’s Tenpay. Alibaba (09988:xhkg) gained 3.2%, and Tencent (00700:xhkg) added 0.7%. The Hang Seng Tech Index gained 1.1%. The information technology sector, rising 1.4%, was the top-performing sector within the Hang Seng Composite Index.
While China’s June CPI inflation was flat Y/Y and the PPI fell 5.4% Y/Y in June, consumer discretionary stocks outperformed disregarding the consumer price disinflation and producer price deflation. Prada (01913:xhkg) gained 4.5%, and Jiumaojiu added 3.1%. China Tourism Group Duty Free (01880:xhkg) surged 6.6%.
Despite the Hong Kong Monetary Authority relaxing mortgage financing ratios last Friday evening, Hong Kong developers pared early gains, and some leading names reversed to losses.
In the A-share market, northbound flows ended three consecutive days of net selling and registered net buying of over RMB 1 billion. The CSI300 gained 0.5%, driven by tourism, catering, white liquor, solar, lithium battery, and electric generation stocks.
The US dollar index (DXY) declined by 0.3%, as the dollar weakened against the majority of G10 currencies, excluding the AUD and CAD. The Japanese Yen demonstrated significant strength, primarily influenced by the decrease in US Treasury yields. In addition, a Bank of Japan report highlights moderate upward pressure in wages across all regions in Japan. USDJPY fell by 0.7% to 141.30. Despite China's soft CPI and PPI figures, USDCNH remained relatively stable at 7.2270.
NYMEX WTI crude oil futures (CLQ3) slid 0.9% to USD73.20 per barrel in a thin session.
The Nasdaq 100 index is preparing for a significant adjustment to address the issue of concentration. Currently, seven stocks—Microsoft, Apple, Nvidia, Tesla, Alphabet, Meta Platforms, and Amazon—hold a substantial 55% of the index's total weight. To tackle overconcentration, a special rebalance is scheduled before the market opens on Monday, July 24. The aim is to redistribute the weights and reduce concentration. The new weightings will be announced on Friday, July 14. It's important to note that no stocks will be added or removed from the index during this process.
Currently, the weightings of the magnificent seven are as follows: Microsoft at 12.9%, Apple at 12.5%, Alphabet at 7.4%, Nvidia at 7.0%, Amazon at 6.9%, Tesla at 4.5%, and Meta Platforms at 4.3%. The rebalance will likely result in a reduction in the combined weight of the top five companies, which currently stands at 46.7%, down to 38.5%. Additionally, the weight of Tesla may also experience a slight decrease as component stocks outside the top five market cap companies are not supposed to have a weight exceeding 4.4%.
China’s CPI came in unchanged in June from a year ago but fell sequentially 0.2% from May. Energy prices fell 0.7% M/M and 9.3% Y/Y, weighing on the CPI. Prices of manufactured consumer goods fell 0.3% M/M and 2.7% Y/Y, probably impacted by the 618 promotion discount. PPI declined 5.4% Y/Y and 0.8% M/Y, diving deeper into deflation, driven mainly by weaknesses in raw material prices, such as crude oil and coal.
In its quarterly Regional Economic Report released on Monday, the Bank of Japan (BoJ) said “many regions reported cases where wage increases by small and mid-sized firms were broadening at a degree unseen in recent years”. The report also said all nine regions reported economies in their respective regions “had been picking up or recovering moderately” and the employment and income situation had been “improving moderately”.
According to Tokyo Shoko Research, the number of corporate bankruptcies rose to 4,042 cases, a 32% increase from last year and the highest level in five years. The credit research company cited the pandemic, rising material costs, and higher labor costs among the factors causing financial stress in Japanese corporate.
Taiwanese microchip contract manufacturer Foxconn said on Monday that the company has come to an agreement with India’s Vedanta to withdraw from a semiconductor and display manufacturing joint venture in Gujarat, the home state of Indian Prime Minister Modi.
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