Sept 2 Asia muted trading FT China & US diplomacy, Tencent Ex China, Hogs & Strikes


02 Sep

This and previous notes can be found at Substack ( Asian Market Sense )
Check out ERI-C.com  for your research needs

Australia
Market opened lower and sold down to 7,440 in the first hour with BNP going ExDiv along with others and weak commodity prices.  But then worked slowly higher on good data Currently -65pts (-0.9%) @ 7,463.
Data 
Balance of Trade Jul A$12.117b vs 11.11b Jun (F/cast was 10.0b)
Exports Jul +5% MoM vs +4.1% Jun revised (F/cast was +2.3%)
Imports Jul +3% MoM vs +1% Jun (F/cast was +0.7%)
Home Loans Jul -0.4% MoM vs -2.5% Jun (F/cast was -1.2%)
Investment Lending for Homes Jul +1.8% MoM vs +0.7% Jun (F/cast was +0.2%)
Japan
Nikkei opened higher and initially tested to 28,600, but then reversed and trended down to 28,410 level before bouncing and was 28,478 at lunch.  PM opened higher but saw resistance at 28,550 and eased back, currently +74pts (+0.3%) @ 28,524
Topix traded in a similar pattern; currently flat @ 1,981
Rail names weak on news of the JR West -15.7% on share sale. Pharma weak as Astellas cancels trial. Tech saw good interest
Data
Foreign Stock Investment ¥25.3B vs -550.2b prior revised
Foreign Bond Investment ¥-545.5B vs -182.5b prior revised
S Korea 
KDCA reported 1,961 new covid cases (-64 DoD)
Kospi opened lower following largely in line data and trended lower to 3,172 then a small bounce but now easing; currently -32pts (-1%) @ 3,176.
Kosdaq opened higher but sold down to 1,042 around 10am. Rebounded to 1,048 and now trading a round flat.
Foreign and Insto selling Financials, Tech and Chemicals. Kakao Bank -6.5% following block sale by Korean Post. Auto’s weak on poor sales data.
Data out
GDP Growth Rate Q2 +6% YoY vs +1.9% Q1 (F/cast was +5.9%)
GDP Growth Rate Q2 +0.8% QoQ vs +1.7% Q1 (F/cast was +0.7%)
Inflation Rate Aug +2.6% YoY vs +2.6% Jul (F/cast was +2.3%)
Inflation Rate Aug +0.6% MoM vs +0.2% Jul (F/cast was +0.2%)
Taiwan 
Taiex opened flat and initially trended up to 17,523 but then trended lower down to 17,350 and then traded sideways in a tight range. Currently -114pts (-0.7%) @ 17,364
China 
CSI 300 opened higher and rallied to 4,890 in the first 20 minutes but then reversed back and trended lower to 4,850 before a small uptick into lunch. Sentiment remains subdued despite PBOC supplying cheap funding to banks for lending to SME’s. IPP’s +VE on news of a new power system for carbon neutrality.
HK 
Pre market opened 26,204 +175pts vs +50pts ADR’s With continued interest in Ecommerce but Financials & Energy remains weak. Market tested higher to 26,300 but then news China was accusing 11 ride hailing companies of unfair competition and they were given to December to rectify their actions. Kuaishou strong on being added to the connect flows.
Europe
Expect a cautious open following a weak Asia and ahead of US Initial Claims today and Payrolls tomorrow  
AHEAD

Eurozone PPI
Germany  No data due
France New Car Registrations
UK  No data due  
US Futures
Opened Dow flat,S&P +0.03% and NDX +0.04%
AHEAD Challenger Job Cuts, Balance of Trade, Unit Labour Costs, Non Farm Productivity, Initial Jobless Claims Jobless Claims 4 week Ave, Continuing Claims, Exports, Imports, Factory Orders, EIA Natural Gas Stocks, LMI Logistics Managers Index.



FT Front Page

Tight game
Football clubs cut spending
Another reflection of the impact of covid.

SEC chief warns crypto platforms must accept scrutiny to survive
• Gensler urges engagement • ‘Sparse’ investor protection • Worries over China shell groups
An interest interview with Gary Gensler of the US SEC that looks at both Crypto trading and US listed Chinese companies that are using offshore entities. The key is that he believes that the crypto exchanges should be talking to the regulators rather than hiding from them. Equally on Chinese companies, just as Beijing is reviewing the VIE structure so to is Gensler; he wants to make sure that the structures do protect investors.
Well worth a read. I think that the crypto exchanges should engage, in doing so they will make it much easier for institutional money to fully embrace the opportunities being offered by the sector. The Chinese VIE structure could be a more difficult issue especially considering President Xi’s common prosperity policy and the pressure on companies to donate profits back to the community in China, in preference to paying western investors a dividend.

UK draws up plans to move nuclear subs to US if Scotland breaks away
Says ‘The UK has drawn up secret contingency plans to move its Trident nuclear submarine bases from Scotland to the US or France in the event of Scottish independence.’ Obviously the plans are not so secret.

INSIDE
GLOBAL INSIGHT ASIA
China’s assertiveness gives US a chance to deepen Vietnam ties
Looks at how China is trying to use vaccine diplomacy to enhance relationships with its neighbours but at the same time its aggressive actions with regards to the South China Sea can undermine it.
With Vietnam being an obvious example. Whilst China offers a lot of carrots it has a problem; ‘The problem for Beijing is the Vietnamese public. Vietnamese are more sceptical of China than any other nation in south-east Asia and their concerns are deepening.’
That gives the US a hope but as it concludes ‘But such sentiment is unlikely to carry Vietnam into America’s arms. The central reason is the economy. Vietnam is more dependent economically on China, its neighbour and largest trading partner, than on the US. Experts say this could change with US re-engagement with TPP, the regional trade deal Donald Trump’s administration withdrew from, as well as efforts to bring more investment to Vietnam as part of a realignment of US supply chains away from China.’
I think there is a huge potential for Vietnam with regard to supply chains and other trade with the US. The Economist had a similarly themed article; Chaguan Why China gets so angry - Nationalist outrage has often served China well, but that may be changing.

Companies & Markets
Tencent steps up overseas dealmaking
Moves come as Beijing tightens regulatory scrutiny of sector
Looks at how Tencent has accelerated its investment in overseas start ups in the face of tighter conditions in China.
Tencent ‘.. struck a record 16 deals in Europe, bringing its total international investments to 34 for the first six months of 2021’ …. ‘That compares with four overseas deals in the same period in 2020 and three in 2019’
An interesting read. Tencent seems to be trying to keep a low profile with regard to the deals both at home and abroad which highlights the tougher operating environment for these companies. Key point that article makes is “Tencent invests in a ‘silent’ manner. They generally leave those companies to continue the excellence that made them attractive,” said Ahmad.

HMM strike threat raises supply chain fears
A strike would be a further disruption to supply chains that are already battling surging costs and shortages of containers and computer chips.
The workers seeing the record profits are seeking their share. HHH has offered an 8% pay increase and a bonus of six months’ salary, but that was rejected. Wages have not risen in the past 8 years so. The sticking point being that HHH wants to gradually raise wages whilst the workers want an immediate solution.
Management is hopeful to avoid a strike; worth noting ‘HHH reported a record operating profit of Won2.4tn ($2.1bn) in the first half, compared with Won136.7bn a year earlier. Revenue almost doubled to Won5.3tn in the same period.’
The wider point is that many workers in many sectors are likely to see their companies making significant profits as the economy recovers and hence are likely to seeking increased wage rises; that is something Fed Chair Powell is keen to avoid happening in the US but it is a risk.

China hog groups shed $75bn after swine fever recovery and ‘peak pork’
Looks at the losses from African Swine Flu which wiped $75b off hog related valuations and suggests that many Chinese no longer favour pork; suggesting that ‘Chinese consumers have passed “peak pork”.’
An interesting read because The Economist last week had an article suggesting that African Swire Flu was still rampant in China. The FT suggests that the fall in pork prices reflects the fact that the Chinese no longer love pork as much and have moved to other proteins. “We’ve entered a period of structurally lower demand,” said Darin Friedrichs, an analyst at Shanghai-based StoneX. “We had years where [pork] prices were high and people switched to beef, chicken or fish. It definitely seems like we’ve reached peak pork in terms of China’s consumption.”
It sets out that ‘as pork stocks have risen, margins for most hog farmers have fallen. That has delivered a punishing rout for the likes of Muyuan, whose market value has more than halved from its peak in March, as well as feed businesses such as New Hope Liuhe,’
The Economist has a different take; that with new outbreaks some smaller pig farmers are selling their pigs because they know the local government cannot pay them compensation.
I’m more convinced by The Economist’s article, because whilst some people may switch the love and association with pork is huge in China. I think China still has not brought African Swine Fever under control and that many small holders are facing a threat to their livelihoods. Short term that will hurt but if is means that small holders with un-hygenic holdings are pushed out and larger herds developed kept in clean commercial farms that could provide China with a better long term solution.

Slower factory activity in August adds to pressures on Beijing policymakers
Looks at yesterdays Caixin PMI data and the official data that preceded it. China is slowing ‘weaker export demand, high prices of raw materials and a slowing property sector.’ That takeaway is that unlike the previous financial crisis and even compared to last year; China is not going to be in a position to pull the global economy out of the current mire.
See also Editorial
China’s changing role in the world economy
Delta variant and supply chain problems are slowing global recovery
It concludes
‘Across the board, China’s government is not prioritising growth as it once did but instead trying to rein in unbridled capitalism, whether the power of big technology companies or rising economic inequality. That may be understandable — a slowdown in aluminium production has been blamed on a determination by the government to cut pollution — but it will mean the country is not the engine of global growth it was after the 2008 financial crisis. This time the rest of the world will have to find other engines to power the recovery.’

US tech delivers epochal moment for Tokyo stocks
Looks at how four US tech stocks are now worth more than the entire Topix. Highlighting the under valuation of Japanese stocks. It concludes ‘Once momentum is achieved, global investors may take a closer look at Japan’s fundamentals, which according to Kale include it leading the global rebound in corporate profitability and a remarkable quarter of Japanese earnings in the three months that ended in June. A record 76 per cent of Topix companies beat consensus forecasts.
The two valuation lines — of the four US Gafa stocks versus the Topix — may turn out to have crossed permanently. Many will decide that the distortion lies in the extreme valuation growth of the US leviathans: the more immediately lucrative distortion for investors may lie in the undervaluations that have fed their rise.’
I do think there is great potential in some Japanese companies at current levels but there is always the worry about Japanese management and whether they serve the shareholders or themselves.

LEX Business travel: infrequent flyer club  Looks at the expectation that business travel will not recover at the same rate as the rest of the business economy -VE for Airlines and Hotels.

LEX SoftBank/bonds: interest rate hawks.   Notes that Softbank is one of Japan’s most indebted companies and has been for so long that people are numb to it and hence it can still issue debt, especially to retail investors.  Worth a read and worth remembering the same used to be said of Evergrande.

Comments
* The email will not be published on the website.