Sept 22 Asia Remains weak & FT Evergrande, Energy and Inflation risks and more

22 Sep

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Market opened lower and dipped to 7,240 as expected but then as yesterday worked higher to test 7,340 around 2pm and since then has eased back; currently +50pts (+0.7%) @ 7,234.  News of an earthquake near Melbourne failed to undermine the market.
Sentiment helped by the news that Evergrande would pay something regarding the onshore bond payment prompting a rebound in iron ore miners helped by an upgrade from Citi. Energy stocks and Gold +VE helping to support the markets
RBA warned on household debt driven by booming property prices could increase the risk of financial instability.
No surprises from the BoJ statement.
Nikkei opened lower again and sold down to 29,600 before bouncing back to flat  only to then later sell down into lunch.  PM opened flat but drifted lower with support at 29,620  before working better currently -165pts (-0.6%) @ 29,674.  Volume increased DoD.
Topix traded in a similar fashion currently -17pts (-0.8%) @ 2,048
Leaders Property, Shippers, Miners and Other Products
Laggards Wholesale, Machinery, Foods and Warehouses.
S Korea 
Market closed re-opens tomorrow
Taiex re opened lower and dropped to 16,900 in early trades and then traded sideways around that level. Good local data largely ignored.
CSI 300 opened down 2% but quickly bounced back to 4,820 and traded around 4,800 in the morning as Evergrande’s Onshore unit to pay bond interest on Thursday although actual amounts unknown. PM seeing the market continue to rebound; currently -31pts (-0.6%) @ 4,826
HK Market closed ADR’s were  -119pts @ 24,102 with broad weakness, only HK EX, Tencent and Meituan +VE. But re-opens Thursday
Expect market to open flat with concerns over energy prices and caution ahead of the FOMC decision.
US Futures
Opened lower Dow futures -30 points, or 0.09%. S&P 500 -0.13 and Nasdaq 100 futures -0.18%.
At 1:30 HK time futures were  Dow Jones +96 points. S&P 500 futures and Nasdaq 100 futures both in positive territory. 
MBA Mortgage Applications and 30 yr Mortgage Rate, EIA Oil Report, FOMC Interest Rate Decision.

China stocks fall in wake of global tumult over Evergrande
Losses limited after indebted developer says it will pay onshore bond coupon due this week. The markets opened lower but have rebounded; I would expect that Govt funds are actively supporting the markets and the fact that there has been an announcement that there will be a payment of the onshore bonds, although no size yet revealed has eased some concerns.

The Big Read Evergrande Real Estate Group
Evergrande and the end of China’s ‘build, build, build’ model 
Valued at $41bn in 2020, the spectacular unravelling of the property group exposes deep flaws in Beijing’s growth strategy.
An interesting read that highlights that however the Evergrande situation is resolved it is likely that a lot of people are going to lose money. The key for the government is ensuring that that does not undermine the party’s mandate to rule.
It concludes ‘ But the promised 7.5 per cent returns from the investment, which cost Rmb200,000, have not materialised. Instead, Evergrande is refusing to pay out as it conserves cash to stave off potentially huge defaults.
“My parents have put all they have into Evergrande,” says Xu. “This is no longer just an economic issue,” she adds, “this is absolutely a huge social issue. There will be serious consequences if the issue doesn’t get properly solved.
“If my mother’s health situation deteriorates because of this,” adds Xu, “I am going to fight Evergrande every day.”’

FT Front Page
Evergrande crisis grows
The Financial Times has revealed that the struggling developer sold billions of dollars of wealth management products to retail investors, including owners of its new flats, and then used the cash to plug funding gaps and pay back other wealth management investors, according to Evergrande executives.
Read also Crisis-hit developer used client cash to fill gaps
World’s most indebted property group availed itself of large sums raised from wealth product sales to retail investors.
BlackRock and HSBC left exposed ‘Funds managed by BlackRock and HSBC added to their holdings of Evergrande bonds months before a liquidity crisis at the developer pushed it to the brink.
BlackRock in August bought up five different Evergrande dollar bonds through one of its high-yield funds, which had holdings in the developer then worth $18m, Morningstar data show……..
An HSBC-run high-yield fund in July was also a net buyer of Evergrande’s debt and has increased bond holdings 38 per cent since February as the fund expanded in size, the Morningstar data showed, though the value of its exposure at $31m declined over that period due to falling prices.’

Also the Editorial
Knock-on effects of the Evergrande affair
Bringing the real estate sector down to size will slow China’s growth.  Concludes ‘But the immediate danger for financial markets — and for China itself — is overkill. If, in their zeal to teach Evergrande a lesson, officials slash domestic property sales and prevent hundreds of developers from accessing the financing they desperately need, then pressures in the offshore US dollar bond market could turn into a rout. Housing starts in China could also fall to anaemic levels, further depressing global commodity markets.
Xi Jinping, China’s authoritarian leader, is clearly a supporter of the property crackdown, saying in 2017 that “houses are for living in, not for speculation”. But he and China should tread carefully as they bring real estate developers down to size. Too much, too fast could provoke an abrupt slowdown in Chinese growth — with global consequences.’
I think two key points; falling property prices hurts individual for whom property is their savings/pension plan and it also undermines local authority financing. Secondly going forward President Xi is less concerned about accelerated growth and more about ideology; key to which are Dual Circulation and Common Prosperity; being the key elements of the party retaining the right to rule.

Energy watchdog presses Russia to ramp up European gas supply
• Traders say Moscow chokes flow • Gazprom probe sought • LNG demand also blamed.
Russia’s Gazprom controlling supplies and keeping reserve storage at low levels; highlights the need to Europe to become more self sufficient. I would not be surprised that despite earlier promises Russia will say it can increase supplies via Nord Stream 2 although that would compromise Ukraine and test the EU’s resolve.
See also CO2 shortage spreading, distributor warns
Continental Europe told to expect reduced supplies after energy price rise  Also Asian buyers outbid rivals in Europe for supplies of US natural gas  Basically Asian buyers are prepared to pay up; “Europe has pipeline supplies and China and Japan don’t have alternatives.”

Universal Music shares soar on debut to hand veteran chief a $140m payday.   A strong debut on the expectation of more deal with the likes of TikTok and others. 

OECD sounds alarm over growing inflation risk

Surging energy costs and increasing wages threaten to drive prices higher. Key being that the rise in energy prices are likely to feed through to higher wage demands. The current gas shortage and rising oil prices underline the situation. The key about the switch to clean energy is that the sun and wind don’t necessarily come out to play everyday. Equally as China found this year the rain may come but it may not be in the right areas; so despite high rain fall overall its hydro plants actually suffered shortages.

Lower timber prices boost US property construction
Looks at yesterday’s housing starts and building which came in ahead of forecasts although the US builders gave weak outlooks still complaining about bottlenecks in the supply of labour and materials.
I suspect that the bottlenecks are going to take time to clear. Lumber is relatively easy to accelerate although coming into winter will impact some supply sources. But other items will also be under pressure and rising prices. But the news should be good for Techtronics (669 HK) which has been trending lower for the couple of weeks but ticked higher Tuesday afternoon.

EU official warns of ‘something broken’ in relations with US
Aukus spat spills over as France pushes to delay trade and technology talks
An interesting read, France is cancelling meetings as a result of losing the Australian submarine deal and not being asked to be part of the Aukus deal. It is also putting pressure on the EU to cancel meetings. Interesting because of France’s dealings with China. But whilst its actions may get some support from EU members I doubt that the EU will do anything substantive as the US support for Nato is paramount to European security; whilst most of Europe remains uninterested in Indo-Pacific events.
see also Paris hopes to raise bloc autonomy from submarine wreck  and  Biden calls for ‘new era of relentless diplomacy’.
Plus in Opinion Biden’s French snub is a warning to Europe

Companies & Markets
Tokyo on horns of a dilemma with mischief-making Shinsei Bank
Looks at Shinsei’s poison pill defence which goes against the governments stance of companies being open but the government is also the biggest swing voter at the forthcoming shareholder vote on whether to implement that.  ‘The government is under pressure to show publicly its stance on the desirability of unsolicited deals and on whether SBI’s move, however aggressive, is value-creating.’
That could shape foreign attitude to investment in Japan.
It also outlines Shinsei’s background which has been drama filled.
It concludes ‘…..the government’s date with destiny is set some time in late October at the Shinsei EGM to approve the poison pill. If the government vehicles vote for the poison pill, the message will be reassuring to much of corporate Japan, but blood-freezing for investors.
If they vote against it, they will appear to be rewarding Kitao’s aggression but tacitly approving his consolidation and preserving the Abenomics narrative of greater government support for shareholders. Their abstention may be the most likely outcome, but it is also the one guaranteed to infuriate the largest number of people.’
A good read.

SoftBank leads $680m bet on fantasy football
‘SoftBank is seeking to score real-world gains from fantasy football and the rise of virtual sports collectibles, as it leads a $680m investment into French start-up Sorare.’

Beijing starts to put minds before money  By Andy Xie
Makes the point that; China may no know the exact out come from the current crackdown on the private sector.
But, he agrees that part of the reason is for the party to remain in control of the next 100 years and that it needs to have its own internal advanced chip manufacturing business. So control of capital allocation is very important. It also needs to be in control of the internet companies.
So can it crack down on the private sector and for the economy to remain robust? History suggests it can and key to that is an undervalued exchange rate; he reckons by 33%. That will allow it ‘channel excessive monetary growth from an undervalued exchange rate into capital formation, turning inflationary pressure into export expansion. This powerful tailwind can keep China going as long as the west, especially the US, keeps stimulating consumption.’
He concludes ‘Modern China has gone through rounds of revolution, reform and restoration. The CCP did three decades of revolution, four decades of reform and is now embracing restoration.
Its main objective is to meld a high-tech modern market economy with a traditional Chinese top-down power structure; money, fame and business cannot be allowed to challenge the prevailing order.’
As I have been writing for a while; it is now about the ideology over growth and putting Dual circulation into play.

For interest
US imposes sanctions on crypto bourse in ransomware clampdown  ‘The US Treasury has imposed sanctions on a cryptocurrency exchange that it says allowed ransomware hackers to launder extortion payments from victims, in one of its most significant interventions to date against a digital asset group.
Working with the FBI, the US Treasury’s Office of Foreign Assets Control announced the curbs on an exchange called SUEX, which it said “facilitated illicit activities for [its] own illicit gains”.’

The rise of the biohacker
The availability of gene-editing tools such as Crispr has led to an explosion of DIY experimentation. But bioterrorism experts say it has increased the risk that a home-brewed lethal pathogen could be created.

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