As the Labor Day holiday unfolded in early May, the Hong Kong stock market welcomed the return of traders on May 2 and 3, while the offshore foreign exchange market continued its usual operationsThere has been a noticeable uptick in international sentiment towards Chinese assets, reflected in the Hang Seng Index's impressive rebound of nearly 5% over the weekAccompanying this trend was a significant, almost 700-point increase in the offshore yuan against the US dollar, pulling the USD/CNH rate down from approximately 7.28 to below 7.2.

Concerns about the US labor market surfaced, with non-farm payroll data falling short of expectationsFederal Reserve Chair Jerome Powell downplayed the likelihood of immediate rate hikes, thereby allowing foreign capital to flow back into undervalued marketsSome QFII investment managers spoke about a clear trend of offshore funds exiting markets in Korea, Japan, India, and the US, with particular interest from hedge funds seeking opportunities in Hong Kong stocks

April witnessed a continuous net inflow of southbound capital, yet long-term investors appeared to remain on the sidelines.

The recent developments have officially pushed the Hang Seng Index into a technical bull marketThis milestone arrives after the index bottomed out on January 22, 2024, at 14,961 points, a figure that harkens back to levels last seen in 1997. However, even the most stagnant markets can experience technical reboundsDuring the week of April 15, for instance, the Hang Seng soared by a remarkable 7.5%, leading gains among major global indicesFollowing this, the index continued to climb higher.

According to Jerry Chen, a senior analyst at CMC Markets, the week of April 15 marked a bullish engulfing pattern in the weekly chart for the indexThe past eight trading days leading to April 29 saw a consistent upward trend, breaking through a three-year decline trendline and a 200-day moving average

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The bullish sentiment suggests that the next significant focus for buyers is around the 18,000 to 18,200 mark, surpassing the 18,500 threshold reached during the Labor Day holidayThis area lies close to the upper channel line and was also a peak observed in the fourth quarter of the previous year.

This resurgence can be attributed to various factorsNotably, the previously bustling markets of the US and Japan have hit stopping points, while Hong Kong's stock evaluations have reached levels deemed extremely oversoldAdditionally, the Chinese government has signaled a commitment to revitalizing its real estate sector, alongside multiple measures to stimulate economic recoveryConsequently, funds have begun to flow into Hong Kong, with notable withdrawals from markets like Japan, Korea, and the US.

Analyzing fund positions reveals a growing inclination towards investing in the Chinese market, especially in Hong Kong stocks

Data from Goldman Sachs’ Prime Services indicates that approximately 7.5% of net allocations by global hedge funds (with net purchases observed in four out of the last five months) have been concentrated in Chinese stocks, primarily H-sharesIn sharp contrast, Japanese markets, which experienced a significant inflow previously, have begun to see funds flowing back out since late March, highlighting a subtle sell-off in April.

For many active funds still considering allocations to China, there is a willingness to adjust exposure and enhance positions in the Chinese marketHowever, for those funds that have already exited or do not have any investments in China, a strong indication of substantial reallocation remains elusiveThe liquidity challenge within the Hong Kong market can lead to volatile trading patterns, with only rare instances of breaking the 100 billion mark, while A-shares have been known to exceed this benchmark

Analysts caution that sustaining momentum from inflows into Hong Kong’s stocks will require further observation.

Additionally, some overseas funds have expressed that the potential for further gains in both the US and Japanese markets appears limitedAs a result, there’s a growing interest among some Southeast Asian and Middle Eastern long-term funds towards investing in ChinaCompounding this interest, the Nikkei index recently witnessed a pullback exceeding 6%.

On the governance front, reforms in the capital market have attracted significant attention from foreign investors, who have already experienced positive returns in markets like Japan and KoreaOn April 12, the emphasis on strengthening liquidity management of cash dividends and enhancing dividend yields to promote stable shareholder returns became a part of the narrativeThe subsequent week, the China Securities Regulatory Commission introduced five supportive measures aimed at fostering Hong Kong capital market development, effectively broadening the existing Shanghai-Hong Kong Stock Connect to include various asset classes such as ETFs and REITs, enticing more funds towards Chinese firms planning to IPO in Hong Kong.

Moreover, a circulating sentiment surrounding policies to stimulate the real estate sector has bolstered market confidence

Wang Qiang, head of the research department at Nanyin Wealth Management, noted that an April 30 meeting highlighted the importance of ensuring the delivery of pre-sold properties, while notably omitting references to three key infrastructure projects, including affordable housingMarket responses interpreted this as a positive shift, with central government focus pivoting from strengthening affordable housing to safeguarding the effectiveness of pre-sales, suggesting a meaningful stride towards mitigating risks associated with the real estate sector.

Economically, China's macroeconomic landscape began the year with promising momentum, exhibiting a GDP growth of 5.3%, which outperformed market expectationsKey drivers included robust import-export figures and industrial output; however, consumer spending remained lukewarm, and real estate metrics faced significant headwindsIn the initial three months, total import-export value surpassed 10 trillion yuan, reflecting a 5% year-on-year increase and marking the highest growth in six quarters

On the production side, industrial value-added saw a commendable increase of 6.1%. In contrast, consumer retail sales increased by a mere 3.1% in March, while newly started construction areas and sales areas in real estate dropped by 27.8% and 19.4%, respectively.

The offshore yuan has experienced a revival, showcasing impressive performance parallel to the Hong Kong stock market reboundThe week of the holiday saw a significant increase of nearly 700 points, pushing the USD/CNH rate down to 7.2411 on April 30, further dropping to 7.1925 on May 3.

Market expectations were initially set on offshore shorts capitalizing on the downtime during the Chinese holiday to provoke a depreciation in the yuan, only to witness an unexpected reversal upon market reopeningOne forex trader from a Chinese bank remarked about monitoring the initial performance of the onshore yuan upon market opening that Monday.

The Federal Reserve’s recent interest rate meeting kept rates unchanged

On one hand, there’s recognition that progress against inflation remains limited, which could postpone plans for cutsHowever, Powell's comments, indicating that the "next move is unlikely to be a hike," led to sharp declines in both the dollar and US Treasury yields over consecutive days.

The disappointing April non-farm payroll data exacerbated the downward trend for the dollarAccording to the US Department of Labor, the increase in non-farm employment for April marked the smallest in six months, with added jobs totaling 175,000 against expectations of 240,000. An unexpected uptick in the unemployment rate, rising to 3.9% from March's 3.8%, coupled with lower-than-expected wage growth further fueled the dollar’s decline.

Subsequent to the employment data release, traders adjusted their expectations for the Fed's first rate cut, moving the timeline from November to September

This resulted in an uptick in both US stocks and bonds while the dollar weakened significantly against most foreign currenciesFor instance, the dollar's decline against the yen soared beyond 1%, reaching rates around 152.09, indicating a cumulative decline of 4% since the previous week—the most substantial drop since November 2022. Analysts anticipate that the yuan may continue its rebound against the dollar in the upcoming week.

The latest commentary from Nick Timiraos from the Wall Street Journal highlights that based on the now-revised US three-month average unemployment rate, the “Sahm rule” recession indicator stands 0.36 percentage points above the lowest level in the past 12 months, marking a peak for the current economic cycle.

Barclays recently reported a notable shift in sentiment towards a stronger dollar, positioning markets favorably towards the perception that the euro, yen, and yuan may further depreciate