Sept 24 Asia at lunchtime mixed with uncertainty on Evergrande & FT Norway rate hike, US/China & Taiwan

24 Sep

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Market opened flat but has trended lower through the session; finding support around the 7,340 level and currently working sideways.  Most sectors in the red, the exception being Energy. Health, mining and real estate were the biggest weights, with all other sectors see-sawing throughout the morning.  Press reports European automakers are in discussions with Australian rare earths explorer Arafura Resources about sourcing elements that help power electric cars from outside China, which dominates global supply.
Pre market Inflation data mixed but the PMI data better than F/cast
Nikkei re-opened higher and tested 30,200 in early trades and then traded around that level in the morning session.  Closed at lunch was +562, (+1.9%) @ 30,200.  Huge volume with all sectors +VE with Cyclicals, Shipping, Financials, Autos and Tech leading.
Sony at year high on the Zee TV deal in India.
Laggards Electric Power, Construction and Retail.
Topix traded in a similar fashion. At lunch +41pts (+2%) @ 2,085
Inflation Rate Aug -0.4% YoY vs -0.3% Jul (F/cast was -0.1% )
Inflation Rate Aug -0.2% MoM vs +0.2% Jul (F/cast was +0.3%)
Core Inflation Rate Aug 0.0% YoY vs -0.2% Jul (F/cast was -0.1% )
Inflation Ex Food & Energy Aug -0.5% vs -0.6% Jul (F/cast was -0.4% )
Flash PMI’s
Manufacturing Sept 51.2 vs 52.7 Aug (F/cast was 51.5)
Services Sept 47.4 vs 42.9 Aug (F/cast was 43)
Composite Sept 47.7 vs 45.5 Aug (F/cast was 46)
S Korea 
Kospi opened higher after PPI data better than expected and initially traded around the 3,140 level but then sold down heavily at 10:30am to 3,120 before a bounce to flat but currently -3pts (-0.1%) @ 3,125
Kosdaq opened higher and tested to 1,044 but then eased back to 1,042 but then sold down to 1,036 (the previous close) which became support and index bounced. Currently +2pts (+0.2%) @ 1,039
Data out
PPI Aug 7.3% YoY vs 7.1% Jul (F/cast was 7.7%)
PPI Aug 0.4% MoM vs 0.7% Jul (F/cast was 1%)
Taiex opened higher and tested to 17,273 in the first 35 minutes. Then eased back but effective trading sideway around 17,250 level. Property weak as Central Bank tightens up on loans criteria. Industrials and Materials leading the market.
CSI 300 opened in the red but trended higher to 4,897 in the first hour before easing back to 4,879 at lunch (+26pts +0.5%). PBOC continues to inject capital, Evergrande EV weak on news that staff and suppliers have not been paid. I would imagine ‘Team China’ active to support the market from Evergrande contagion.
Pre market opened @ 24,487 -23pts vs -146pts ADR’s mixed open
Southbound Bond Connect started today. Market initially sold down to 24,340 level in the first 30 minutes. Rebounded back to 24,600 before easing back to flat at lunchtime. The lack of information on Evergrande worrying some investors. Property, Industrials and Tech weak along with Healthcare and Utilities. Energy names strong. Consumer names mixed after Nike supply chain warnings.
Expect market to open higher following the US overnight.
Ifo data (Business Climate, Current Conditions and Expectations)
UK  Consumer Confidence, Distributive Trades,
US Futures
Opened Dow +20 points. S&P 500 futures and Nasdaq 100 futures were little changed.   Ahead New Home Sales, Baker Hughes, Fed Speakers: Powell, Clarida, Bowman.

Front Page

Biden’s Haiti policy ‘cruel’
The US special envoy to Haiti quit yesterday in protest at what he described as the Biden administration’s “inhumane, counterproductive decision” to deport thousands of Haitian migrants.

Norway leads way on rate rises as US and UK tilt towards tightening
• First big western economy to act • Fed and BoE hint at changes • Other banks stay put.
Key in the statement ‘citing economic activity that was above its pre-pandemic level and the need to counter a build-up of financial imbalances. It indicated another rise was likely in December and that rates would reach about 1.7 per cent by the end of 2024.’
The bank’s governor pointed out that other countries have different policy considerations but inflation seems to be a key worry.

Frankfurt fund manager ‘offended’ by pay rise admits to €8m insider trading.
Worth a read,  enabled in part by the fact few people were in the office.  ‘
He said he had aimed to make only €500,000: “Things then got out of control. It became an addiction. Every successful trade generated a feeling of elation and superiority.”He never spent the profits as he “had no idea what to use the money for”.’

Fed to set out pace of tightening policy
Central bank prepares way for November announcement on end to stimulus programme.
An interesting read but no new info but it does look as if the policy of keeping the market informed seems to be ensuring that a taper tantrum does not occur.

Beijing urges end to Afghan sanctions
Call for Taliban to gain access to frozen funds highlights rift with west.
The country is in need of funds China is trying to get internationally held funds released but Western government are reluctant to hand over the money that effectively belongs to the people of Afghanistan to the unelected Taliban. Whilst China says the money should not be used as a bargaining chip, the reality is that the West has no other way of trying the protect the human rights of the ordinary people.

Quad group’s role in focus after Aukus pact
Experts predict US, Australia, Japan and India alliance will turn to diplomatic initiatives.
An interesting read that highlights that the US and other alliance members will need to set clear objectives as to what each groups’ aims are and who is going to be involved and to what extent.
Nice quote ‘Japanese officials have welcomed Aukus but are keen to demonstrate the Quad is an initiative capable of achieving its objectives through non-military means. “The reason Japan is taking part in Quad is because of aggressive actions taken by China and everybody knows it,” said Mitoji Yabunaka, a former vice-minister for foreign affairs and now a visiting professor at Ritsumeikan University. “But it is more of a diplomatic institution and different from a military-orientated [one] like Aukus.”’

US-China clash is not unthinkable despite Biden’s diplomacy 
‘The most worrying aspect about talk of a new cold war is that it breeds complacency.’
An interesting read; the US is building up local alliances to counter China but it is at the same time failing to engage directly with China and that creates its own risks. His stated aim is to work with China on common areas like climate and covid but to confront on divergent ones like ‘human rights, Taiwan, freedom of navigation and technological rivalry.’
Key though is the current hawkish concensus towards China in Washington. The other key element is trade with China, it notes China’s application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) came just after the Aukus was announced. Also though the problems that China may have in gaining membership because of China’s actions against Japan and Australia. Additionally that could be further complicated by Taiwan’s application to the CPTPP too. China whilst not being a member has already said Taiwan’s application should be rejected; something that will not go down with the existing members in my view; many of whom have been increasing their ties to Taiwan.
It notes that historically Beijing has had greater scope to reward or punish its neighbours with trade, more so than America. It mentions that America joining the CPTPP could counter that and I would add that ‘Dual circulation’ and ‘Common Prosperity’ may curb China’s scope too. It mentions that the US could start talks on data standards and digital services which would be welcomed in Asia but viewed sceptically by some in the US.
It also notes that the US is less focused on global integration than in the past. It says ‘The fact that Washington is happy to wield its Pentagon stick but leave its commercial tools to one side is pushing US-China rivalry in a more antagonistic direction.’ I am not so convinced that is true. I think Pentagon is more aware of the limitations of power projection.
An advantage China has had is in Belt and Road and infrastructure spending. It says the US and allies are unwilling to spend as much. But the UK and EU have recognised the need to spend. Additionally whilst a number of countries signed up to projects now they have to be paid the true costs are being felt and causing problems to many; so the west’s more limited but tested approach may come back into favour.
It concludes by acknowledging that Biden is not looking for more risk with China. ‘His priorities are domestic. Moreover, he has deep faith that the American idea will always win. Aukus came in response to a request from Australia, enthusiastically sponsored by a post-Brexit UK. Biden did not intend to snub France and will doubtless try to mend relations. But that is ultimately a sideshow. The biggest shaper of our futures will be the trajectory of US-China rivalry.
Several near misses during the first cold war taught America that it was wise to get inside Soviet heads and see the world from their perspective. There is less such knowledge of China in today’s DC. The more Biden could acknowledge the possibility of a US-China collision — by accident or ignorance — the more he can reduce the risk’
A good read and the fact that China is moving from accelerated growth to ideology and ‘common prosperity’ will no doubt shift the dynamic.

Taiwan reaps rewards of central and eastern Europe’s cooling relations with China  Looks at how many of the European nations that China was cultivating are now reversing their position.
‘“Because China set up the 17+1, there were very high expectations,” said Justyna Szczudlik, a China analyst at the Polish Institute of International Affairs think-tank, referring to a group Beijing established for dealing with central and eastern European countries. “But gradually we realised that this partnership does not bear fruit and China’s outreach was largely PR.”’
Basically ‘hopes of economic benefits from co-operation gave way to fears of domination by an authoritarian superpower.’
It concludes ‘Estonia and Latvia have made it clear they would prefer the EU to take the lead in relations with China. Marko Mihkelson, chair of the Estonian parliament’s foreign affairs committee, said this month the now 16+1 format had not worked well and more “common action” from the EU would be better.
But experts believe that a swift unravelling of the grouping is unlikely.
Martin Hala, founder and director of Sinopsis, an online platform for analysis about China backed by Charles University in Prague, said it “was easier to join in 2012 than it is now to leave”.’

Blackstone’s halted China deal rattles rival investors
Failed $3bn property purchase leaves buyout groups pondering outlook
A good read key Brock Silvers said ‘Schwarzman was “among the most influential of US dealmakers in China, and even he couldn’t secure the approval for a seemingly benign real estate acquisition. Now foreign private equity funds will probably look at China with a greater sense of caution.”’
‘The head of M&A at a large bank in Hong Kong said: “The reality is that if you created a business in China that’s worth billions, you’ve done so with the blessing of the government, so it’s definitely the wrong time to be cashing in.”’
It concludes ‘A senior executive at a Wall Street bank in Asia said investing in China has always come with regulatory risk. “Everything that has happened in the last six months would tell a regular investor that now everything is political.”’
Key is understanding Dual Cirulation and the fact that Beijing is looking to become self sufficient rather than dependant on US. That said it remains reliant on US dollar investment.

Evergrande worries spread to more Asian borrowers
Traders fret over potential fallout if property developer misses payment deadline
Worth a read, whilst Evergrande is currently the main focus it is not the only developer out there with bond issues and potential problems repaying debts as the property market it China slows.

Opinion Look to Japan for lessons on Evergrande  by Gillian Tett
Compares Evergrande with ‘Hokkaido Takushoku, the Japanese regional bank, which imploded 24 years ago, when more than a tenth of its $75bn loan portfolio turned bad.’
I agree that Evergrade is not a Lehman moment; it could be more akin to AIG. But Gillian’s point is that Chinese faith in property will remain unless investors/citizens doubt the Government will support the sector.
Again I beleive that the government believe the property sector has achieved the goal set 30 years ago; fast growth for China and better living conditions. Now it is a drag. President Xi wants to move into advanced manufacturing and that is expensive and having money tied up in property will not help achieve that aim.
It concludes ‘Chinese regulators have studied this history closely, and want to avoid repeating it. But it is an open question whether they can. Hence the uncertainty about the true value of Evergrande bonds: is it under 30 cents on the dollar, as markets imply, or more? Place your “credit” bet — in the Latin sense of trust.’

Lex Evergrande: preference test.  Worth a read
Notes that China will probably alter the developer model of allowing pre-sales. Also the extent of the debt that Evergrande has built up. It doesn’t mention the wider sector debt.
It concludes ‘Foreign investors are well accustomed to the recurrent slipping deadlines of corporate debt meltdowns in the US and Europe. They should hardly be surprised if battles between classes of debtholders erupt in China. If they are pushed behind in queues for payment, they will discount all Chinese corporate debt accordingly.’

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