FT Thoughts


July 31 FT. Recovery questions? HK Elections, StandChart, China Cold War? And more

MARKETs at 1:30pm HK time
JAPAN opened lower despite good Marco data on unemployment and industrial production. It sold down on rising covid concerns and in thePM is drifting lower/sideways Currently -2.4%
S KOREA opened higher on good retail, industrial and manufacturing data.  Kosdaq has opened higher, sold down rebounded sold down to day low and now working better currently +0.4%.  The Kospi initially sold down but rebounding and trading sideways just below flat currently -0.2%.
TAIWAN opened lower but rebounded to flat but sold down again and now working higher  currently -0.5%
CHINA opened higher and rallied to day high as PMI data was slightly better but then sold down into lunch. PM market trading sideways  Currently +0.4%
HONG KONG Opened higher despite ADR’s indicating lower rallied ahead of China PMI data. Unable to break higher and sold down to day low around 11am (24,530 level) before rebounding into the lunch.  PM seeing selling pressure Currently -0.1%
EUROPE Expect markets to open flat following good US earnings but with covid concerns still evident.
US Futures opened strongly expect a positive open but earnings and covid remain in focus


Plunge in US and German output signals gruelling road to recovery.  Record 10% contractions in GDP • Bond markets rally • Covid flare-ups imperil rebound
The key for me is that it seems to make the prospect of a V shaped recover less likely. Plus the fact that we are seeing a resurgence in cases is a cause for worry. Worth also reading Fed in dovish mood as it hopes for best and plans for worst. Which again underlines the fact the the FOMC and other Central Banks remain very cautious about a speedy recovery; as he said it “depend significantly on the course of the virus”.

Hong Kong bars campaigner from elections. The article looks at the disqualification of Joshua Wong from standing in the forthcoming local elections (unless they are postponed) under the New Security Law. He was not the only one. So far 11 others have also been disqualified and the administration has said there could be more. It also notes that four students (including a teenager) were arrested by the police on Wednesday for forming a group to advocate Hong Kong independence on social media.
Whilst Joshua Wong is well know the administration also barred some members of the Civic party who are known to be more moderate. The reality is that the local elections are not going to be a vote of free expression as Beijing seeks to influence the outcome already.

StanChart warns over Hong Kong tension. Lender highlights dispute between US and China as bad loan provisions triple. Not as badly positioned as HSBC but facing the same struggles with the threat of reprisals from both China and the US.
Interestingly Bill Winters mentioned the massive inflows of capital into the City in Q2 but allude to where it had gone from. The bank mentioned it was seeking legal opinions on how to manage compliance and taking advice from the Hong Kong Monetary Authority.
I don’t think I have every heard of that happening before to such an established bank but it highlights how unusual the situation is.
See LEX Standard Chartered: a Winters’ toil. Notes that Mr Winters is doing well but still needs to cut costs to close the gap with HSBC

Opinion A cold war does not answer China’s challenge Notes that we use history to try and answer the present. A while ago US/China rivalry summed up using Thucydides prediction of the inevitable conflict between an established hegemon and rising power. Now its being likened to the era of soviet stand off . The writers point is that none of that is particularly useful. He looks at Mike Pompeo’s recent speech “Communist China and the Free World’s Future”, and looks at the background of Nixon’s opening China. In that he focuses on George Kennan the the US diplomat who set the framework for America’s cold war policy of Soviet “containment” and the real reason for Nixon opening China which was to isolate the Soviets.
Today the writer says China’s ambitions are not the same as the Soviet ones were. He doesn’t think it is about competing systems but competing states. He doesn’t think that Beijing is seeking to defeat capitalism across the world. Where the Soviets sought to crush capitalism China he thinks depends on it.
He notes that 'Mr Trump and Mr Pompeo, however, are seemingly ignorant of the most important piece of advice in Kennan’s dispatch from Moscow. As vital as it was that the west resisted any Soviet advance, the answer was not provocation or war but to ensure “the health and vigour of our own society”.
Kennan’s last sentence might have been written specifically for Mr Trump: “The greatest danger that can befall us in coping with this problem of Soviet communism, is that we shall allow ourselves to become like those with whom we are coping.”It is an interesting read but I think he is wrong if he thinks that China is not seeking to defeat capitalism. It will happily take advantage of capitalism along to road to achieving its goal which is the demonstration that only communism, as defined by the party leaders ie Mr Xi, is the way.

Samsung eyes recovery in device demand. Expects a good 2H to follow the good results announced yesterday. Worth noting that the high levels of automation at its memory chip factories meant little disruption during the pandemic. I would expect to see robotic companies see improved business as many companies come to realise the benefits. But for Samsung the key will be new smartphone launches which are expected to keep DRAM demand high. It will be interesting to see whether demand for new phones remains resilient if lockdowns continue. The article notes that analysts are also expecting this with the launch of a foldable phone and Galaxy Note flagship phone along with cheaper models. Some also think that is will benefit from the US/China tension as the US puts more pressure on Huawei. I think the likes of Samsung will continue to do well thanks to its diversified range of offerings.

Air travel sector struggles to take off again. Aviation industry battles to restore confidence that flying is not as risky as it may seem. Looks at the pro’s and con’s. Key is that there is not much real data but some good indicators. But I don’t think its going to make much difference in the foreseeable future. Worth a read.

Alcohol volume AB InBev celebrates better sales as beer lubricates easing of lockdowns. Better than expected but still wary of a resurgence in lockdowns and social distancing measures.
See Lex AB InBev: half cut 'Filling up the drinks cabinet and ripping out costs proved a decent strategy for 3G, the Brazilian investor trio. But it has left a big tab behind the bar. Net debt as of end-June stood at $87.4bn. AB InBev spent more than $1bn on finance costs in the quarter.
Depressed volumes stymie the underpinning strategy of operational leverage. AB InBev’s cost of sales per hectolitre rose 15 per cent over the period. Its robust margins — the sine qua non of 3G’s strategy — shrank 825 basis points to 33.2 per cent on the basis of normalised ebitda.
Reducing the net debt/normalised ebitda ratio to the targeted 2 times looks an ever bigger stretch with the end-June multiple standing at 4.86 times. Last year’s dividend cut is unlikely to be the last.'

Investors drive surge in gold price as lockdown squeezes jewellery industry. Notes that data released by the World Gold Council yesterday showed global jewellery demand almost halved in the six months to June, -46% YoY to 572 tonnes. But demand for gold from ETF’s was +734 tonnes. Gold was a little weaker overnight but with all the unknowns about covid and the timing of a vaccine or cure I think Gold will continue to move higher.

Big Tech bosses squirm at antitrust inquisition. Silicon Valley titans accused of throwing their weight around in pursuit of market dominance and then putting up fortifications. Also Blows from Congress did not build a case against Big Tech Whilst there was side points scored its going to be a long battle with no easy answers but at least the dialogue has started. Some interesting admissions came to light and I am sure that there are a lot more out there they the big tech bosses hope remain hidden. Also read the editorial Digital ‘gatekeepers’ face a moment of reckoning
American antitrust laws are no longer adequate for the online era. And also Avoiding a bloodbath on the UK high street A shake-up of how retailers are taxed is long overdue.
The reality is that business has transformed but taxes haven’t really changed at all. No one wants to overhaul the tax system because it is a huge undertaking and there are loads of nuances and loopholes and vested groups. But maybe the pandemic is the right time to start?

For interest
Pandemic has led to tipping point in understanding risk. Sets out that we need to update our assessment and definition of risk. Risk going forward will need to be ‘multidimensional’ it is suggested. Referenced to government bonds will also need to be reviewed as with negative interest rates due to central bank asset purchase programmes distort the risk free rate and distort allocation of credit and solvency issues. Regulatory changes, ESG, covenant variances and even social intolerance are all becoming issues of more importance.
As she says
'Companies that do not pursue sustainable practices on a day-to-day basis are creating real operational and reputational risks — at a time when new regulations can make or break entire industries.
That is why active risk management is vital to delivering consistent returns. By understanding and targeting risk in a measured and informed way, investors are building the foundation of future value creation.'

Private equity has a taste of its own medicine. Notes how buyout groups such as Apollo are complaining in court about aggressive tactics from other creditors in debt battles. In most cases those tactics are ones that groups such as Apollo have used!

Building back better’ requires systemic shifts. Looks the situation in the UK. 'We face systemic challenges. Is this the crisis that will finally trigger real changes — as the 2008 financial one did not? The public appetite seems to be there, as reflected in political upheavals in many countries. The challenge for policymakers talking about building back better is to make sure they mean it.'

Read More  

July 30 FT Suing the Police in China, US Blacklists, China markets different this time? and more

MARKETs at HK lunchtime
JAPAN opened slightly higher, Retail sales were better than forecast but the market has drifted lower. Currently -0.1%
S KOREA opened higher but drifted lower, tested flat and then bounced before trading sideways; Solid earnings from Samsung Operating profit +23% on strong chip sales. Kosdaq currently +0.4% and the Kospi +0.1%.Samsung results https://news.samsung.com/global/samsung-electronics-announces-second-quarter-2020-results
TAIWAN opened much higher, saw some initial selling but now trending higher on good earnings especially in the Tech sector currently +1.2% CHINA opened slightly higher but has seen choppy sideways trading Currently at lunch -0.1%
HONG KONG Opened higher and tested 25k in early trades, then sold down 24,920 support level before working higher to almost 25,200 before easing back into lunch.  At lunch +1.1%
EUROPE  Expect markets to open higher after the FOMC decision and moves in Asia but covid concerns and earnings still overhang the markets.
US Futures opened flat expect upside after some good earnings but today is another big day for tech so initial upside limited.  Rising covid cases still a concern likely to limit upside.

On Line
How safe is air travel during coronavirus pandemic? Aviation industry battles to restore confidence that flying is not as risky as it may seem. Looks at the pro’s and con’s. Key is that there is not much real data but some good indicators. But I don’t think its going to make much difference in the foreseeable future. Worth a read.

A cold war does not answer China’s challenge Guarding the west’s interests and values should not mean an ideological confrontation with Beijing. Notes that comparing the current crisis to the soviet stand off is not that useful.


In Print
Xi critic sues police after university sacking
. Notes how Xu Zhangrun, the former constitutional law professor at Beijing’s elite Tsinghua University, who was detained by police in early July and held for a week on charges of “soliciting prostitution” before being released is to sue the Qingyang district public security bureau in Chengdu who brought the charges. His legal team Mo Shaoping and Shang Baojun are among China’s best-known rights lawyers and previously defended Nobel Peace Prize-winning dissident Liu Xiaobo. He is protesting his innocence and wants the charges rescinded and to get his position back at the university. The article mentioned that many former students sent him money on hearing that he had been fired but he didn’t take the money saying he would work to earn a living.
It is notable that in the past he has focused on trying to hold China’s leaders accountable for “extrajudicial acts that betray the transformation of China into becoming a modern constitutional nation”.
It will be worth watching, not least because such a case is so unusual and now it is in the public domain. For many it highlights the opaque way in which justice can work in China. It also reveals that there are many Chinese who are passionate about their love of China but disagree with the way the current regime is pursuing the goal of making their country great.

FedEx pilots seek to halt Hong Kong flights. Cargo company air crew claim city’s quarantine rules put them at risk. The union is referring to an incident where three of its pilots who tested positive but showed no symptoms where put into a Government hospital for 10 days. Another union Alpa said that several pilots who tested negative but who had been in close proximity with infected people were also put into government camps. This was before the latest clampdown. Now aircrew have to provide proof of a negative coronavirus test taken up to 48 hours prior to boarding a flight to Hong Kong, or be tested on arrival.
Alpa said their concern was that the flight crews were quarantined in conditions that involved up to five patients per room with one shared bathroom, and that the government camps provided “very sparse provisions”.
In Singapore aircrew have to remain in the designated accommodation at all times, on eFedEx pilot was given a four week sentence for going out to buy medicines.
IATA has said it does not support general testing for aircrew as a pre-requisite for flying.
It would appear to me that testing before travelling would make sense, especially for a group that is travelling so regularly. But equally quarantine ought to be in isolation otherwise it would appear to me the risk of cross infection is raised.
We still have a lot to learn about the virus.

US blacklisting fails to derail ambitions of China AI start-ups Megvii and SenseTime. The blacklisting was in connection with the “repression, mass arbitrary detention and high-technology surveillance” in the western Chinese region of Xinjiang. Initially the blacklisting impacted them and their ability to source components from US suppliers but not they see to how found alternatives. Megvii’s has backing from Macquarie and the Abu Dhabi Investment Authority said it has no revenue from projects in Xinjiang in 1H 2019.
The article says that the companies have many contacts within China. For investors it will be a matter of ensuring that that companies revenue is coming from where they say it is and no doubt the US authorities will be watching as closely as the Megvii’s facial recognition does.

China’s rally can avoid the boom and bust of 2015. By Diana Choyleva chief economist at Enodo Economics in London.
She sets out that margin financing is well below the 2015 levels and at historically low levels.
The authorities are focused on reducing risk in the financial system. So they don’t mind new money being attracted to the stock market as long as it reflects an increased risk appetite and not borrowed cash. She notes that Beijing is likely to encourage new money in especially as 'debt-for-equity swaps have emerged as the preferred method to clean up bad loans.’
She also notes that President Xi is determined to halt property inflation making homes to be lived in not as investments only. He sees property as widening the divide between rich and poor and so is trying to address that. She notes that during the pandemic there has been no easing of property curbs as part of the stimulus efforts. The hope being, that people are not tempted to put their savings into property. Although I would note that developers are still running 'lucky draws' for the chance to buy units at a lot of the new projects! She does note that she isn’t expecting a great rotation from property to equity.
A third difference she notes is that China is now part of the MSCI and more open to international money which should bring better governance, risk assessment and professionalism (in time). It is still very much a retail market but it is changing. She doesn’t think that the ’national team’ has been active but I do.
Overall she is right that changes have taken place since 2015 and most are for the better but with so much retail money driven by press reports and tabloid type research there are also still a lot of risks.
The poor performance on the New Third Board Select on Monday shows how retail still expects IPO’s to always go up regardless of fundamentals and that is they don’t the ‘faith’ in the market could be lost.
A good read.

LEX Nomura: beginner’s luck Its new CEO in his first quarter has seen results beat forecasts, obviously thanks to his predecessors and market circumstances has as volatility increasing clients need to rebalance portfolios. Now the question is what to do next. Mr Okuda therefore has a conundrum ahead of him. Nomura must implement cost cuts in excess of the continuing ¥140bn restructuring plan while simultaneously sustaining growth overseas. Lex remains sceptical about the outlook.

Covid crisis drives hard bargain for retail leases Commercial property landlords under pressure to link tenants’ rents to how much turnover their businesses generate.
Historically commercial property has played a part in a lot of UK institutional portfolio’s. Owning freeholds that were capable of giving good income with upward only rent reviews and historically 25 year leases. Over the years the structure has changed, along with the lease terms. The current situation will mean that asset allocators will be reviewing again the asset allocation to the sector in the light of the changing lease structures especially for retail leases.
The article looks at the move to turnover rents which makes sense but many landlords are saying the turnover rents should include an element of on-line sales too. Determining how much will be a very thorny problem. Property valuation was always seen as an art, now maybe it's about to get abstract too.

For interest
FT BIG READ. INTERNATIONAL FINANCE
When a $20tn market wobbles For a brief period in March, the US Treasury bond market seemed as if it might collapse. With conditions now stable, the authorities are working out how to buttress the bedrock of the global financial system.

ETFs are the canary in the bond coal mine. What the Covid-19 market shock has shown is that while the banks played a starring role in the previous big financial crisis, non-bank financial structures, such as ETFs, matter much more now, and not just in the corporate bond world. That means ETFs deserve more scrutiny and debate — from politicians, as well as investors.

Antique Chinese bonds are now in play among dealers. Are investors betting that Mr Trump will really use the bonds to put pressure on the Chinese government? Perhaps. But they may also hope his rhetoric alone will be enough to boost their value. Stranger things have happened

Read More  

July 29 FT China Second Wave? New Third Board Select?, Japan/China, Gold, Central Banks

MARKETs
JAPAN opened lower and has trended lower thought out Currently -1.2%
S KOREA opened flat Kospi initial rallied but then sold back down to flat and has traded sideways Kosdaq just traded sideways Kosdaq currently -0.2% and the Kospi -0.16%.
TAIWAN opened lower after yesterdays record day. Worked higher, then eased back to flat and trading sideways currently -0.14%
CHINA opened lower but driven higher, slight off their highs currently +1.5%
HONG KONG Opened lower but rallied before easing back to flat Currently -0.1%
EUROPE I would expect markets to open flat/lower with concerns over covid cases and caution ahead of Earnings and the FOMC statement.
US Futures opened flat then rose slightly I would expect a flat open Earnings, Covid, FOMC and Tech CEO’s in front of Congress.

Xinjiang rise in infections adds to fears of national second wave. Comes as China’s National Health Commission said there were 64 locally transmitted cases of which 57 were found in Urumqi, Xinjiang’s capital. In recent weeks there are have been a number of new cases announced. Previously when new cases have arisen the authorities have been swift to look down area’s in order to contain the spread. In addition it has implemented contact tracing and testing. Despite China’s best efforts small clusters continue to appear which underlines how little we know about how the virus is able to spread.
China relative to most other countries has been successful in containing the spread and for most people life in China continues relatively normally.
In Hong Kong new strict social distancing measures were introduced to try and control the recent surge in new cases. With the administration saying that is will seek to close any loopholes in the current quarantine requirements. The disruption to everyday life has been immense. Many restaurants are closing for the next seven days rather than just providing take-out services. Leisure facilities are closed and the wearing of masks in public areas has restricted running and other leisure activities during the current very hot weather. The impact on low paid jobs in the leisure and restaurant trade is likely to be very high.

China’s newest trading venue gets off to a stumbling start. Looks at the start of the New Third Board Select (NTBS). The Small-cap board’s initial losses were a blow to investors who are used to seeing stocks surge on their first day regardless of the fundamentals. But on Monday some stocks went up and some went down. That according the article has ‘undermined’ some investors confidence in the market. The article notes that covid has hit millions of SME’s in China and in order to try and help them get access to finance they came up with the NTBS, which has looser listing requirements than the other exchanges; with many of those listed having had previous IPO submissions rejected. Monday was mixed, Tuesday saw 30 or the 32 stocks rising but 20 are still below their IPO level. Retail interest in IPO has been a big driver in China; the article notes 'Public records show that more than 95 per cent of new listings in Shanghai and Shenzhen over the past two decades have jumped on their first day of trading.’ It’s been seen as a ’sure way’ to make money BUT the article warns that if that stops being the case then investors will look for other ways and that will make IPO’s more difficult which would be a big -VE for China. In the past the Government has controlled the IPO prices so investors got a good deal. The NTBS is supposed to be a test bed for new ideas and reforms. Various rumours surround Monday’s performance, analysts the article says think it was institutional investors trying to sell out to retail which drove prices down. But that still leaves the question as to why institutions had taken the shares in the first place if they had no intention in holding them. The reality is that you cannot really have a ‘controlled’ market with arranged valuations and questionable listing data. Open markets find the right levels. It suggests that China needs to do a lot more in its allocation of capital to companies. With the small companies being responsible for around 60% of GDP and 80% of jobs (Govt data) they deserve better treatment by the SOE banks and others.

Japan treads carefully in dealings with China Geographical proximity and business ties are reflected in the response from Tokyo. Notes how after 20 years of trying to get the world to be more aware of the threat from China, Japan appears to have had some success and is now taking a more back seat approach. Japan is aware that it cannot decouple completely from China and so it will need to ‘manage’ its dealings and stance for practical and economic reasons.
Japan is already under threat from China; incursions into its airspace and territorial waters. Japan actions may not appear as strong as some other countries actions but by its standards and considering all the issues at stake it has been forthright. China takes 20% of Japan’s exports and many Japanese companies have operations in China, so it needs to manage the situation carefully but without appearing weak which could lead China to thinking that it could be more assertive with its military incursions. It is a tricky problem for most countries who would like to do business with China but want the business to be fair and balanced. Only a few countries have been hugely confrontational with China and none of them are close neighbours to China.

Nissan warns of record $4.5bn operating loss as pandemic crushes demand. Looks at the poor results as the company continues to battle with numerous issues. At this stage it does not look like cost cutting alone will be able to reverse the company’s fortunes. The results were much worse than expected. See also LEX Nissan: crumple zone 'Nissan’s share price is down by a third this year. That does not fully reflect its predicament. It takes many years to build — or in Nissan’s case, rebuild — a brand. Cash flow constraints mean time is a luxury Nissan cannot afford. The odds of the business continuing in its current form just widened.'

Editorial Rise of gold is a sign of uncertain times By normal standards, the yellow metal is not an attractive investment. Basically makes the point that whist gold is generally not an attractive investment currently the alternatives are worse. Historically Gold rarely holds its highs for long before its disadvantages become apparent. That is all true. I just think that the current circumstances just mean that it may hold out at the top for longer than on previous occasions.

Editorial The US-China rift has now become ideological. What started as a tariff war is morphing into a battle of values. Draws parallels from the US/Soviet confrontational era. It notes that in some ways good has come about in the airing of subjects that had been obscured. But the risk is if it comes down to ideology there is unlikely to be a solution. Noting that the US/Soviet schism was only ended when the Soviet system collapsed. Worth a read.

Rage against central banks is misdirected 'Rocketing house prices, zombie companies, rising inequality, a runaway stock market, struggling savers and even the outright destruction of capitalism — perhaps the only thing that does not get blamed on easy monetary policy from central banks is the weather.’ Sets out that central central concept to economics is the ’natural rate of interest’ and there is little central banks can do to influence it. It cites Japan as the example of what happens if you try to hold rates above their natural rate. An interesting read but I think it fails to appreciate that Central banks since the GFC and maybe before have not just influenced interest rates but also used other tools too try a ’save the economy’ but at no stage have they actually unwound and put away the tools they took out which were only supported to be temporary. For not doing that, I think Central Banks deserve some blame.

Big Tech chiefs face Washington grilling together for first time. Looks at how Apple, Amazon, Alphabet and Facebook heads are set to encounter questioning today before Congress. Looks at some of the issues. The problem with these events, having watched some in the past the time time limits put on the members of the panel and the fact that some of the time is wasted in political niceties. It seems to me that the congressmen and women would do better to agree their questions before hand and devote the time to seeing how the respective heads answer.

Read More  

July 28 FT USD weakness, HK Banks sanctions hit, Tech fizzle?  Evergrande and more

MARKETs at 1:45pm HK time
JAPAN opened flat an initial worked better. Around midday is sold back to flat and current ly trading around yesterday’s close. Currently -0.1%
S KOREA Market opened higher and initially rallied but then trended lower from around 11am Kosdaq currently +0.4% having bounced of flat and the Kospi +1.4% which is starting to trend higher again.
TAIWAN Market opened higher but traded lower and now trading around flat currently -0.3%
CHINA Market opened higher but initially sold down, then bounced back then sold down into lunch. PM trending lower again Currently +0.5%
HONG KONG Opened higher but trended lower through the the morning and into the afternoon. Currently +0.4%
EUROPE I would expect Europe to open flat again with investors watching US/China tensions, new Covid cases and earnings.
US Futures opened flat. Another big day for earnings and investors will be watching covid cases. Gold expected to continue to rally and traders to be cautious as the FOMC two day meeting starts.

Online
Xinjiang reported 57 new Covid-19 cases Xinjiang Monday
, its highest one-day tally since an outbreak was reported there two weeks ago. A separate outbreak in the north-east province of Liaoning also grew with a further 6 cases of Covid-19,
Beijing says it has one new case linked to the Dalian outbreak.
It really is quite amazing how few cases there are in China when the rest of the world is seeing such a dramatic up tick in new cases.


PRINT
Dollar hits two-year low as gold soars on fears over virus-hit US.
As Gold prices rose rising questions over the US recovery. Which comes as the FOMC begins its two day meeting today. The lack of political consensus is a major stumbling point for the parties, no doubt made worse by it being an election year. It quotes Kit Juckes, foreign exchange strategist at Société Générale, who said: “The thing that’s changed in the last few days is that it’s not just gold that has gone up against the dollar, but almost everything. That’s partly driven by a sense that the US is having a harder time controlling the virus than others, which will see the US economy underperform.”
The reality seems to be that having aggressively eased at the start of the pandemic and pumped dollars into the system it put downward pressure on the dollar. With the recovery now faltering that is adding to the pressure on the US. Investors will be catching tomorrows press conference closely to guage the reaction and intentions of the Fed going forward.

Foreign banks refuse accounts of senior Hong Kong officials. As part of the US sanctions HK officials are finding that International banks are no longer able to accept their business and that their accounts are being closed. It notes that the official said that US banks and HSBC were declining to do business with him and others due to the Hong Kong Autonomy Act. At the same Timothy banks are pushing regulators to determine is closing an persons account under the HK Autonomy Act would constitute a violation of the new security law.

Hong Kong tech index falls short of wowing investors and fizzles on debut. Looks at the less than impressive start for Hong Kong’s Tech board on a day when the wider market saw significant selling pressure due to the deteriorating US/China relations and Covid. It probably also reflected the caution about investing in Hong Kong when US there is still potential for more US sanctions. But the promotion of Tech in Hong Kong will see the further demise of Property, Telcos and Finance as the drivers for the Hang Seng. The Tech is Chinese and it is too early to say whether it will gain enough prominence to become a global tech hub but it further cements Hong Kong’s place a the preferred listing venue for Chinese tech companies who need international finance. In the next few weeks watch for derivative products to become available too which will help. I still think there is the potential for the US to restrict US investors investing in Chinese Tech companies and until that overhang is removed there will be caution.

AstraZeneca agrees $6bn Daiichi deal UK group pays Japanese peer to develop potential breast cancer treatment. As ever the devil will be in the detail but the deal appears to allow to Daiichi to use the money saved to be invested in other drugs and for Astra to get the clinical data it requires. It seems to make sense that there should be more co-operation between drug companies in the future but ownership of the data etc will always be a sticking point.

Network trailblazers look to usurp Huawei. Open-source movement gears up to challenge grip of big equipment vendors.
Looks at the growth of ‘OpenRAN’ which is on the verge of launching a national 5G network without Huawei, Ericsson and Nokia.
RAN is Japan’s first new mobile radio access network for more than a decade being developed by Rakuten and it intends to upgrade it to 5G speeds in October. The development is being watched closely, to see if the open source network can work at scale. Traditional networks use proprietary hardware and software from the tradition vendors. OpenRAN is seeking to change that and Rakuten is not the only player out there investigating the concept.
Key it that it opens the playing filed to a lot more entrants to compete.
Detractors say it lacks scale and risks being over hyped. It is early days and it does need more investment; whether it gets it or not remains to be seen but it could be revolutionary. However as one person cautioned; it is low margin, difficult and with little risk capital.

Industry needs a rare earths supply chain outside China. China accounts for 80% of the globally mined supply of rare earths and an even higher amount of the powerful rare earth magnets. As such the US, Europe and Australia are now looking at establishing their own supply chain; which is focusing on Australia and Lynas Corp. But there are another 15 rare earth mineral projects that are struggling to get funding with private investors reluctant to get involved because of the barriers to entry. Namely the process to separate them from the dirt into the constituent parts which involves technical and environmental challenges. At a time when China’s dominance allows it to control prices.
So this week the Pentagon decided to provide funding to Lynas and US based MP Materials to develop processes to break the Chinese monopoly.
Whilst a good start there is a long way to go and further industry co-operation will be required, with western companies focusing they purchasing power on the new non Chinese companies. This is an area China has made its own and now the rest of the world needs to compete. It will take time and commitment but with the Pentagon behind it, it's got a good start.

LEX China property/ Evergrande: disconsulate. Looks at how office vacancies in China have risen to their highest in 10 years in Q2 according to CBRE. Even before covid overcapacity was evident. Covid has made it worse and US companies are delaying lease renewals as China/US relations get worse. That is spooking some foreign investors; debt financings are getting harder; funds raised by the sector fell 10% earlier this year.
Chinese developers look resilient; the housing market is buoyant and buyers enter lotteries for the chance to buy units. Evergrande the biggest raised tis annual sales target and its shares have double from their March low. BUT its looking to sell 200 properties including offices to reduce debt; which will be tough. Even if it sold all its commercial properties at current prices that would cover around 10% of its 2019 debt according to the article. Its debt to equity is currently 230%.
Evergrande has defied prophecies of its demise before. The nature of home building and pre-sales keeps the cashflow working but at some point it could stumble!

Store closures and travel curbs hit LVMH. 1H Operating profit -68%, even after cutting spending onshore leases, hiring and advertising. It was worst than expected. DFS was hit hard. They cut costs but didn't want to cut too far because they want to be ready for the recovery when it comes. It also notes that the ultra wealthy have continued to spend and do not tend the trade down when crisis hits; although it would appear that a number of their clients have judging from the results!

Pandemic sparks race to launch contactless touch screens for cars, shops and elevators. With concerns over touching services firms are looking at the alternatives. An interesting read.

OPINION Genocide or not, the Uighurs need urgent international support. Spends some of the article looking at the creation the word Genocide by Raphael Lemkin; He amalgamated the Greek word genos (tribe or race) and the Latin word cide (killing), to create it and then spent his efforts getting it recognised in the post WWII trials and elsewhere. The key point I think he’s trying to make is that wherever there is the potential of genocide taking place the world needs to act against it. The trouble is that it is not easy. It is amazing that the in today’s world of Facebook and TikTok it is still difficult to mobilise people into action against things like genocide but easy to get thousands of people to watch a swimming pool being cleaned! Something is clearly amiss and those carrying out atrocities are happy about that.

Read More  

July  27  FT  Covid new cases HK & China, Chinese US listings, HSBC denies entrapment

MARKETs
JAPAN
re-opened at its lows and as worked better through the session. Currently -0.3%
S KOREA Market opened higher and rallied for most of the session, he Kosdaq currently +1.1% and the Kospi which is starting to trend lower +1%.
TAIWAN Market opened higher and has traded sideways/slightly lower, currently +2.5%
CHINA Market opened higher but trended lower in very choppy trading. Morning low was just above Friday’s closing level. I would expect more downside in the PM Closed for lunch at +0.3%
HONG KONG Opened higher but sold down to below Friday’s closing level in the first hour. Bounced but again trended lower to a new day low before lunch. Close for lunch at -0.1%
EUROPE I would expect Europe to open flat with investors watching US/China tensions, new Covid cases and earnings.
US Futures opened -60pts but have worked higher since then and are currently +140pts with S&P and NDX also indicating higher. Gold continues to move higher as US/China tensions rise. Investors will be watching new covid cases and earnings with McDonald’s, Pfizer, Alphabet, Apple and AMD amounts others due to report this week. Traders are watching for new of news stimulus as Mnuchin says Republicans had finalized a bill for about $1 trillion in coronavirus relief funds, which he hopes will find bipartisan support. But many doubt that as a wide gap exists between the GOP and Democrats, especially on unemployment benefits and state and local gov’t aid.

FT On line
Coronavirus latest: China and Hong Kong report hundreds of new cases
Hong Kong recorded 261 covid-19 cases over the weekend with clusters around an abattoir, a police station and a university hall of residence amongst others. The government announced new rules which mean ships crews will now have to stay abroad their vessels, If crews are being changed then they can only leave the ship when direct transport to the airport has been arranged.

China reported 57 new covid-19 cases in Xinjiang and Liaoning. It still seems strange to me that Hong Kong should see such a surge in new cases and yet China seems to be unaffected. I was wondering if the surge in new cases was as a result those allowed to travel across the border for business? Many of the new cases are not imported but must be coming from somewhere suddenly. China’s numbers remain low. Underlying how little we know about how this virus really spreads.


In print
Chinese listings surge on Wall Street despite tensions. IPOs more than double this year even as Beijing’s relations with Washington plummet. The rush to list in American seems at odds with the current threat that some Chinese firms will be forced to delist due to auditing standards. To my mind it highlights how China knows it needs the US capital fro its companies to grow and that the way currently relations are that source of funds is under threat of being cut off. The US is th biggest source of liquidity and they want to tap it while they can. For investors I think they should be seeking a higher risk premium to reflect the political risk that should be added to the mix. Trump has ‘advised’ government funds not to invest in Chinese companies; ‘advising’ private money to do the same is only a small step further down that line and can be done without time consuming legislation, under the banner of saving US jobs.

HSBC denies Huawei entrapment claim Allegations in Chinese media rejected as bank is dragged into Sino-US fight. At the weekend HSBC posted a message on WeChat saying that it was not involved in th decision to investigate Huawei or arrest Ms Meng. This was in response to claims in the State controlled Global Times that is was involved. The share price dropped 2.2% in trading this morning, reflecting investor concerns that the bank is falling out of favour with Beijing. It is currently trading at a 5 year low.


Rapid fund churn fuels equity rally in China. Notes that Chinese funds that were launched in Q1 have seen massive outflows in Q2. The ease with which investors can enter and exit funds is undermining them. It mentions E Fund Management, China Universal and GF Fund Management as examples. It notes that the relationship managers who advise clients can earn lucrative commissions by getting clients to buy into new launches and get fees from their clients selling out too. In only one quarter it is hard to believe that investors had time to see any sort of performance; good or bad, that might drive them to exit a product so quickly.

Read More  

FT Weekend. Chinese US listing surge. India, China, US relations. Chips and Gold

No Hong Kong specific stories but a couple of China ones.
Locally investors are concerned by the number of new covid-19 cases which hit 113 on Saturday.
Local press also reports that thousands gathered to see the closure of the US consulate in Chengdu, it's interesting that crowds also gathered to see the closure of the Chinese consulate in Houston.
Tensions remain elevated as China reports that the US flew a record 50 sorties over the South China Sea in the first three weeks of July.

Talk of the US showing its true colours in trying to isolate and overthrow the Communist Party instead of finding ways to coexist as its previous policy had intended are I think interesting.
Comments from Pompeo and others certainly suggest that is th new policy. The fact that the Chinese have highlighted it too raises some interesting points.
Firstly for me is the fact that the previous policy not only did not work, it was used by China to advance China's goals with no thought of co-existence with its neighbours. The example of the South China Sea occupation, the intention to retake Taiwan, by force if necessary, infringement into Japanese airspace and contesting ownership of islands outside its normal waters and more recently the push to confront India.
The reality is that things are becoming increasingly tense and therefore the chance of an ‘accident’ leading to a bigger incident are increasing.


On line
Chinese listings surge on Wall Street despite tensions. IPOs more than double this year even as Beijing’s relations with Washington plummet. The rush to list in American seems at odds with the current threat that some Chinese firms will be forced to delist due to auditing standards. To my mind it highlights how China knows it needs the US capital for its companies to grow and that the way currently relations are that source of funds is under threat of being cut off. The US is the biggest source of liquidity and they want to tap it while they can. For investors I think they should be seeking a higher risk premium to reflect the political risk that should be added to the mix. Trump has ‘advised’ government funds not to invest in Chinese companies; ‘advising’ private money to do the same is only a small step further down that line and can be done without time consuming legislation, under the banner of saving US jobs.


Print
Researcher from China arrested at US consulate. 
Looks at the case of Juan Tang is allegedly a member of the Chinese military who was working as a researcher at the University of California. Who is alleged to have made fraudulent statements on her visa application. She was reported to have sought refuge at the Chinese consulate in San Francisco before being arrested on Thursday evening. She is one of four Chinese military operatives recently arrested for visa fraud.
Somewhat embarrassing for the Chinese who last week asked the US to supply evidence of spying, the reason given for closing the Chinese Houston Consulate.
Additionally on Friday, a Singaporean national admitted to spying for China in the US; his task was to recruit military and government employees with high-level security clearances. Which he did by setting a fake consulting company and placing fictions adverts in order to harvest CV’s and then passing the ‘interesting’ ones on to the Chinese Authorities. He would also recruit people with specialist knowledge to provide reports of specific topics.

India to curb Chinese bids for state contracts. It is citing ‘national security’ concerns following what is considers to be China’s recent aggressive behaviour. The exception being procurement of medical supplies to help battle covid-19.
The border clash which was widely seen as being part of an effort by China’s to put India down but it has triggered nationalistic feelings within India, of a far greater level that I suspect China was expecting.
It is similar to the nationalistic feeling often incited in China. I would imagine that China is a little surprised that another country’s citizens would react in the same way that China has managed to get its citizens to do.
Going forward the loss of another market to China whilst not huge in itself is nonetheless going to hurt China. It needs access to as many markets as possible if it s going to engineer and strong recovery. China exports to India were $68bn reports suggest in 2019. That is going be difficult to replace in the current environment.

China’s tech juggernaut steams ahead Looks at how the DJI, Chinese made drones were used to assist French fire fighters tackle the blaze at Notre-Dame Cathedral last year. But before they could the French had to lift restrictions to allow them to fly.
Some Chinese tech is world class but Chinese companies are largely on the periphery of world markets. Currently as they seek to build their global market share they are facing the same barriers that Western companies have for years in trying to build their businesses within China.
A bipolar world. Countries that allow Chinese tech and those that don’t; who tend to be aligned with the US.
The relationship between whom hit new lows this week with ’tit for tat’ closures of Consulates.
The current situation is a result of the Great Chinese Firewall, which China started building back in late 2002. It primarily prevented foreign competition to its domestic internet and allowed Chinese players to build world class systems. Baidu its equivalent to Google but with heavy censorship and restrictions. Alipay vs PayPal but Alipay runs the worlds largest money market fund, does credit ratings and owns an online bank. (In fact it probably knows more about people than the government does which caused some friction earlier this year). Other giants include WeChat which offers more functions vs the west's WhatsApp but again with surveillance traits.
It notes how some Chinese firms have branched out like Alibaba and Tencent and have had some success although in some areas have struggled to adapt to life outside the Great Chinese Firewall they have had success. Also Huawei who grew unnoticed by most of us into the worlds leading 4G and 5G supplier. After China had learnt the lessons from trying to build its own 3G system in the hope it would be globally adopted. This time Huawei became the standard specifier for 5G.
But now having secured a dominating position Chinese companies are under attack from western politicians and regulators. Just was western ones have been for years in China. The difference being that the Chinese have not been asked to share their technology or hand it over but are facing market access restrictions just like the ones western companies in China have for years.
The article says its playing havoc with China’s ambitions but if we stand back, we can see how China's attitude has played havoc with the growth of many western firms for years.
In many cases the opposition has been on security reasons and the handling of personal data. Inside the Great Chinese Firewall citizens have very little control over what happens to their personal data with the state taking the view that it has a right to see everything. Which most recently has come to a head over TikTok and to an extent the new security law in Hong Kong. The key being that in 2017 China introduced the National Intelligence Law. That requires “any organisation or citizen shall support, assist and co-operate with state intelligence work in accordance with the law”. The law makes it impossible for companies such as TikTok, which denies it has handed over user data to the Chinese government, to prove it hasn’t. Just like with the Hong Kong national security law which makes it illegal to say in some cases that you have handed over information to the authorities.
So recently things have peaked with black lists and bans. But will that stop the Chinese development? The straightforward answer is No. China’s tech companies have deep pockets. BUT as we saw last year with ZTE and to an extent Huawei the US does have some levers that could bring it to a holt. The article mentions Ant Group which is to list in Hong Kong and Shanghai soon and has a $200bn valuation. The key to me is that is Trump decides to ban US pension and investment money then the company will struggle.
It quotes Michael Power at Ninety-One AM who says that in many technologies China is winning and its quite a long list 5G, high-speed rail, high-voltage transmission lines, renewables energy, new energy vehicles, digital payments, areas of artificial intelligence to mention a few.
Not covered but key is what is the west going to do?
It is clear that China is a leader in many areas but it still relies on western tech for some of the key elements that goes into these technologies and that at present is one advantage the west has. For example catching up on chips will not be easy or cheap plus as TSMC always says, they are not waiting for the competition to catch up. Which to me is another reason why the west should be more supportive of Taiwan.
The west has been given a wake up call how it reacts now will be key to the balance going forward.

Launch of Intel next-gen chips pushed back by six months This announcement prompted a sell-off for the stock and sector on Friday in the US and Europe and confirmed TSMC’s leadership. With reference to the China’s tech juggernaut steams ahead article above it also illustrated that problems that China will face too as it seeks to advance in this area. It also undermines the commercial significant of Taiwan to the west and China!

US-China tension and virus outbreaks spur gold to longest winning streak since 2011 looks at the recent rally in the commodity to surpass its 2011 high with people now talking about US$2,000 now possible. Key is that it may indicate people are less convinced by the v shaped recovery and also that more speculative or momentum money was involved, the availability of Gold ETF’s probably also helping the moves. Silver has also seen a recent run and I think Palladium is probably due for a run too.

Brighter numbers for US earnings but investors still wary. Looks at the first two weeks of US earnings. It notes that
1. Analysts were very bearish. They lacked company guidance which may or may not have helped. But the fact that company results consistently beat their forecasts should prompt the regulator to examine the basis on which analysts are forecasting.
2. Companies that are seen to be doing well under covid, who’s numbers then miss got flogged.
3. With no end or solution to covid at hand company guidance has been light.
It was a low bar and many beat, its unclear why; it could have been the stimulus ot the Fed action but as of Thursday 80% had beaten on EPS with earnings about 13% above estimates. Better than the five year average.
It's an interesting read with no real answers. It notes that many economists have raised their number whilst analysts remain bearish.


FT Magazine
For sale: useless gadgets bought during lockdown. Looks at how many ‘gadgets’ purchased during the boredom of lockdown will turn out to be be money wasted. It mentions a new electric air pump and a hair trimming device. Things that looked good on-line but actually turn out to be money wasted. Some people will always buy them. The barrage of advertising these days, especially online makes it almost inevitable. Many of the items seem to have been made in China, so that will help China. No doubt middle men have had a slice of too but for many it will be money wasted. It also notes that some people have spent their time and money on buying things that add value to their property or garden, which will probably turn out to be a better investment.
It's not a new issue, slick advertising and skillful camera work can make a lot of 'ropey' products look good. It's usually not illegal as long as the products don’t make exaggerated claims. But one wonders if it ought to be better controlled to prevent people making impulse decisions that they then regret.











Read More  

July 24 FT HK Knives, HK/UK Property, Consultates China orders US Chengdu to close the next stage..

Markets At 1:10 Hong Kong time
JAPAN closed re-opens Monday
S KOREA Market opened lower but initially traded higher and slightly into the green but then news of China demanding the US close its Chengdu Consulate has markets spooked.Kosdaq -0.9%, Kospi -0.6%
TAIWAN opened higher and traded sideways until the news about China demanding the US Chengdu consulate closure which prompted selling. Although it has seen a slight bounce currently -0.5%
CHINA Opened lower and trended lower into lunch. Seeing more selling in the PM on the consulate closure news Currently CSI 300 -4%
HONG KONG HSI opened lower following the US overnight with signs of Team China giving support to try and hold 25k level but after several attempts the market gave up and then trended lower into lunch. New about the US consulate in Chengdu being ordered to close has prompted further selling in the PM. Expect some margin call later and again on Monday. Currently -2.4%
EUROPE. I would expect markets to open lower on hightened US/China tensions and caution over covid and company results.
US Futures opened flat but expect more downside on the China retaliation.

Breaking news that China has called on the US to close its Chengdu Consulate having revoked the Chengdu consulate’s licence to operate. Saying it was “a legitimate and necessary response to the unreasonable actions of the United States”.

Hong Kong buyers boost UK property market British homes are relatively cheap for territory residents unnerved by China’s actions. Looks at how some Hong Kong home owners are finding that UK house prices will make the potential move to the UK attractive. Especially as the Hong Kong home prices have remained relatively stable. Also making the UK attractive is the weakness of the UK pound at present. Lastly the advantage of the UK is that the property law is very similar to that of Hong Kong with the added bonus of being able to acquire freeholds.
From a lifestyle point of view the UK is also attractive from a language and education option too. It's also worth noting that those leaving are unlikely to trigger a market sell off on Hong Kong property.
For the UK the potential buyers are seem as helping otherwise slow markets but because the interest will be across the whole of the UK again the impact is unlikely to be significant.

LEX Hong Kong stocks: falling knives. Notes how the HSI still looks over valued. Thinks that unlike the mainland markets Hong Kong cannot rely on Beijing’s support. It expects further downside. I would agree with much of what it is saying but Hong Kong will be supported by Beijing until such time as the mainland markets are fully open to International investors and the Rmb is fully convertible. Until then China needs Hong Kong for access to international money. Which is why Trumps threat to remove China’s access to the Swift system or restrict US funds from investing in Chinese equities is so powerful. Without access to USD investments China would be thrown into disarray.

Consulate closure deepens US-Sino hostility The risk of a new cold war has increased, fear some analysts, but others are less convinced. Some say China will retaliate and it has just been announced that China has ordered the US to close its Chengdu Consulate.
Others say the action as necessary to show China that its past and current actions are not acceptable as the deputy US secretary of state, told a Senate hearing on Wednesday; China had failed to embrace the rules-based international order. “The unfortunate trends we see in China make our actions all the more urgent.”
From China’s point of view they are finding it increasingly difficult to find things to retaliate with that don’t actually hurt China too. Equally making a big statement now could have unintended consequences after the US elections depending on who wins.
Today will be interesting as the Houston Consulate says that it intends to remain open saying that it has appealed against the move by the US….. but only after burning a lot of papers.
I think increasingly nations are becoming tired of China taking advantage of their openness and not reciprocating with access to China and also of claiming the benefit of this international norms that benefit China but not those that would have consequences for China.
If you want to play then you have to play by all the rule not just the ones that suit you.

Morgan Stanley reins in China interns over security fears. Chinese interns can’t remotely access the Morgan Stanley virtual networks. Interesting because the other large US banks are allowing their interns access. If it was about security laws and liabilities then surely all the banks would have the same approach.

Beware the effect on savings from new era of financial repression by Russell Napier
He has recently changed his viewing is now the option that there will be a new. Era of inflation. He thinks that holding as much gold as possible and as little government debt is the way forward. Equities that are doing well at the moment will not be able to maintain that performance as governments force life insurers and mutual funds to buy government debt at rated below the inflation rate. That means those investors will see their savings being eaten away by inflation. Worth a read. I listen recently to a talk he gave and it does make sense.

FT BIG READ. ECOMMERCE The struggle to deliver profits. Covid-19 has led to a surge in shoppers buying their groceries online. But the costs of running a delivery network are high, leaving supermarkets struggling to turn a profit from the increased demand.
Nice quote from Sainsbury’s chief executive Simon Roberts summed the situation up, saying Covid-19 was “moving sales out of our most profitable convenience channel and driving a huge step-up in online grocery participation, our least profitable channel”.
A good read which illustrates the difficulty of adapting store to online. Notes that Ocado does well because it didn’t have stores to start with. Some Chinese stores are starting with the delivery and working back which also sets to work.
The key points are that for the UK the move to on-line came quicker than anyone was expecting. It has establish infrastructure which isn’t ideal or easily adapted.
There are a number of different models but costs are high.

Financiers’ call for grants rather than loans is flawed. Worth reading because of the risks involved; namely that badly run companies would benefit better than well run companies; which not only unfair but also lowers the quality of business for all.
Nice quote '“Grants, not loans,” was the student slogan. Our campaign was doomed because we failed to understand that we would be the prime beneficiaries of our higher education, not society at large.'

Read More  

July 22 FT Trump now worse before better, HK cases -VE,  HKEX top but, Chinese spying, and more

Markets at 3:30pm
JAPAN 
Market opened lower as expected PMI data was slightly better than forecast. Covid concerns remain. Market then traded sideways/lower through the day Nikkei closed -0.6%
S KOREA Markets opened around flat. Kospi trade sideways around yesterday’s closing level and closed -0.01%. The Kosdaq initially dipped but rebounded and then traded sideways lower above yesterdays closing level. Saw a small bounce at the end to close +0.6%
TAIWAN Opened higher and traded sideways just above yesterday’s closing level to finish +0.6%
CHINA Opened lower but was driven higher through the morning to the day high 4,790 shortly before lunch. Selling pressure in the afternoon saw the CSI 300 give up most of those gains. Team China in action dispelling concerns of China being excluded from the US Swift payments system or any other troublesome issues. CSI 300 closed 0.5%
HONG KONG HSI Pre Market -60pts @ 25,575 vs -11 pts ADRs @ 25,524 With weakness in E commerce names after yesterday’s strong rally. Petrocehms firm as oil rallied. Market saw initial weakness but then rallied through the morning following China, hit resistance at 25,760 despite trying a couple of times. Sold back down to flat at lunchtime. PM saw more selling the market is trending lower. Currently -0.5% Wirth 30 mins to go.
EUROPE Expect market flat as covid dominates and Trump admits its going to get worse before gets better. No data so market focus will be results, covid and US/China relations.
US Opened flat (-6pts ) but moved higher through the day currently +128pts with the S&P and NDX moving higher too. Pre market reports from Biogen, Baker Hughes and Nasdaq. Then after the bell Microsoft, Tesla, Chipotle Mexican Grill, CSX and Las Vegas Sands report today.

Online.
Trump says coronavirus will ‘get worse before it gets better’.
A big reversal in his attitude but unlikely to be admitted. He will also resume the daily briefings on covid.
Yesterday’s meeting got the process under way and was briefer and less combative that the previous ones. Seems he has finally realised covid is important to his re-election.
He’s even backtracked on mask wearing. ‘When asked why he did not wear a mask in public more frequently, Mr Trump removed one from his pocket, saying: “I do actually do it when I need, I mean, I carry the mask.” ‘
It’s interesting that it comes as some have been outwardly hostile to Dr Fauci who has been steady in his approach which may reflect how serious the situation in the US is getting. That could put a lid on the recent recovery and that the prospects for a V shape recovery are not as good as some had thought.

Print
Quarantine exemptions blamed for surge in Hong Kong cases Executives among those granted special treatment in bid to maintain economic growth. It included initially this in the shipping, aircrew and truck drivers but then was expanded and included business executives of large listed companies. As yet the administration has not identified which groups have been responsible. The article also notes that there may have been some complacency by the public although I think that would be reasonable if you believe that the administration has closed most of the boarders and is controlling those who travel.
Getting it back under control will now be difficult. The administration will now also face further backlash from the public over their inability to keep Hong Kong safe.
It also reflects that even whilst we are seeing progress in the development of vaccines and cures we still know very little about how this virus really spreads.
That for investors should mean showing some caution with regard to the V shaped recovery. Especially as a number of medical parties are saying that covid combined with the annual flu this year is going to put a huge strain on facilities during the annual flu season in the autumn.
Also read Hong Kong cases soar as restrictions relaxed which notes that 'a decision by American and United Airlines to cancel flights to Hong Kong over the subsequent introduction of mandatory testing of arriving crew neatly illustrated the dilemma for local authorities.’ The lack of common standards being adopted by all countries and companies.
See in the print edition
US virus testing will hit crunch point in autumn, warns lab group. Quest and LabCorp who are testing companies are currently struggling to get results out to people within a week which means that the results are almost useless because by the time the results are received the person has pasted the point of being infected. This is going the be a huge issue in the US as flu season approaches; because as the article says, you want to be able to distinguish one from the other!

Hong Kong is world’s most valuable bourse again. The stock was up 9.5% Tuesday although its dropped back today. Key driver has been the intention of some of China’s latest ecommerce companies to dual list in Hong Kong. Its also been helped by the US action to pressurise Chinese companies listed on the Nasdaq to look at alternative listings due to US government pressure. The move by Ant ticks boxes for China; it's a national champion but still needs access to offshore capital. SO listing in Shanghai and Hong Kong works. The big threat as I see it is still Trump weaponising the USD. Talk yesterday about barring China from the Swift system highlights China vulnerability on this; especially as it's focused on Hong Kong. Where China’s actions over the new security law have caused international rebuke.
So at the moment everything is roses for HK EX as it ticks the boxes for China. But the USD is the ultimate Trump card.

US accuses Chinese hackers of targeting virus research. Comes as the US says the two have been hacking for 10 years, aiming to steal trade secrets. The length of the scheme only came to light earlier this year and highlights how naive many governments and companies may have been. The article doesn’t detail how much the two manage to steal much in that time but the article says 'the two accused men were prolific hackers and had been sheltered by the Chinese government, allowing them to hack for their own benefit in return for providing services to the state when needed.’
Worth noting that neither is in custody and are thought unlikely to travel outside China. China continues to any involvement or association with such activities. US investigators recently found that the hackers were targeting companies in UK, Germany , Japan and Australia. Much of the data was aligned with China’s goals for ‘Made in China 2025’. It was military, commercial and also involved data on human rights activities and Chinese dissidents.
Being announced now as the US seeks to embarrass China over its New Security Law in Hong Kong by showing that China really doesn’t care about other people’s security only achieving its state goals….. by what ever means rather than domestic hard work.

Brands buy from group in Uighur dispute Esquel denies allegations linking its subsidiary to forced labour in Xinjiang. The article looks at how a number of US brands have been caught up in the US sanctions. It follows work from Australia on the issue too. Key is the Chinese practice of using forced labour often of ‘criminals’.
Esquel says it allegations are false. But it will all come down to the definition of forced labour. Another move designed to illustrate the vagaries of the Chinese system and the grey areas in its legal system.
Read also Pompeo urges London to join ‘broad alliance’ against China. The focus at present is related to the oppression of Uighurs not Hong Kong at this stage. The US is seeking allies in its approach to China and it will be interesting to watch and see of this is a real change in US policy. The article notes that at this stage sanctions were not discussed but that it was about getting every country including China to act within ‘... an International system in ways that are appropriate and consistent with the international order.”’
It does note that Pompeo and Johnson discussed Huawei and Hong Kong too but those are more difficult issues to address at present. But investors should be aware that they are another overhang for the markets. It seems that the current US approach is to maintain a constant drip feed of issues to keep the Chinese administration under pressure.

Alibaba aims to extend reach of streaming model. Division that targets global shoppers looks to sign 100,000 content creators by April. Livestreaming a mix of marketing and entertainment popular in Asia. Rather like QVC but done by influencers. Its success has helped fend off moves by Pinduoduo to eat into its market share. It is also hoping that it will help its struggling Lazada platform too. The question is where the model will work outside China where is has been so popular. The article notes that 'AliExpress’s livestreamers fall short of the glitz and panache that influencers bring to Instagram, YouTube, or Alibaba’s Taobao feeds.’
It’s rolling out in Europe too.
It's following Amazon and in China; ByteDance’s Douyin and Tencent’s Kuaishou. In China it runs on a commission model but elsewhere the model varies. One issue is language in China everything can be done in one language but outside China then it becomes more of an issue.
It will be interesting to see whether the appeal of live-streaming continues once covid lockdowns are eased. Like many things I suspect that it too will find a niche.

Virus-led sugar merger shows Japan Inc how to bury old rivalries looks at the talks that could see Mitsui Sugar and Dai-Nippon Meiji Sugar merge along with Nippon Beet Sugar Manufacturing that would see an unprecedented group with a sector that for so long has been heavily protected. It could also herald changes in other sectors that might end Japan’s well know ‘vested interests’ which have for so long stifled consolidation in Japan. It will be watched closely by investors coming as it does just after the Line/Z Holdings deal hits the headlines as minatory shareholders complain their interests are not being protected. There are other deals out there being undertaken but historic resistance will be difficult overcome in my view, even with the current pressure. A change in management attitude though would be extremely positive for Japan Inc.

Australia and China share ‘knowledge boom’. Looks at how well things have been going recently in the field of research. With China being the country that Australia is most actively engaged with. This is despite concerns from Canberra about espionage, hacking and theft by foreign parties; especially China. Much of it has happened over the past year as the US has de-coupled from China. But the article notes that in many fields China has become ‘a hub of global knowledge creation’
Canberra has been more active in monitoring links of late.
I think that once again you see the care with which China needs to act. It has threatened Australia over the Covid-19 investigation but China remain reliant on Australia for Iron ore and other products, not least access to research co-operations if it is to continue to develop.

Silver surges to 6-year high as buyers bet on crucial role in ‘green recovery’. It has recovered more than 70% from its March low and out pacing gold. Key being that silver has a lot more industrial uses than gold. Both metals are said to have further run. I prefer gold because I’m thinking we are going to get inflation sooner rather than later due to the amount of stimulus, I’m watching for an increase in the velocity of money too. Both metals have become more popular due to the availability of ETF’s which has made buying them easier. The miners are still an option but ETF’s appeal to momentum players. It is quite likely that we see Platinum also having a run shortly.

LEX Asian techs/Hong Kong: taking sides. Looks at Naver’s decision to quit HK, which it sees as a good move. I’d agree. Makes the point that the ire of Beijing is negligible relative to the potential gains in the US market.

For Interest
‘Blank-cheque’ hotshot thrives in crisis year. Looks at the rise of SPAC shell ventures. Special purpose acquisition companies. The latest craze on Wall Street as a credible alternative to a an IPO.
Nice quote '“Spacs are a good idea but the terms have historically been very investor-unfriendly and too promoter-friendly,” according to one sponsor who has previously launched a vehicle. “It’s a structure that has a chequered reputation because the underwriting fees are enormous, the promoters can end up with a lot of stock and it used to have a bad record.”’
Worth a read.

FT BIG READ. US ECONOMY The long route to a full recovery Is America’s rebound already over? A rise in coronavirus cases in many of the country’s biggest states is damaging consumer confidence and raising the stakes in talks over another federal stimulus package. Another article the reveals that whilst Wall Street may be rebounding Main Street isn’t and the prospect is for more of Main Street to fail.
It shows the importance that the next round of Government stimulus is targeted in the right space.

Opinion The mysterious death of the market rentier (a person living on income from property or investments). An interesting read.
Looks at a recent paper by 'economists Joseph Kopecky and Alan Taylor in a recent paper called “The Murder-Suicide of the Rentier”. It tries to untangle why risk-free interest rates have collapsed during the past couple of decades, and finds an answer with important implications for both the economy and the returns that stock market investors can expect in the years to come.’
A play on the Keynesian comment, who predicted, in 1936, the “euthanasia of the rentier” 'As technology advanced, populations declined and the capital stock grew larger, Keynes imagined that interest rates would dwindle to the point where rentiers — traditional coupon-clipping investors, living off interest in their country homes — could no longer survive.’

Read More  

July 21 FT  Ant lists, PBOC better options, Line test, Australia/China, Can negative rates save us
Markets as at 2pm
JAPAN 
Market opened higher as the Inflation was in-line. Market then traded sideways through the day Nikkei +0.8%
S KOREA Markets opened higher, PPI was better than expected Kospi worked slight better to +1.3% and Kosdaq worked better but then eased back slightly late in the session +0.9%
TAIWAN Opened higher and worked higher +1.8%
CHINA Opened flat but spiked higher the trended slightly higher in very choppy trading day high was around 10:30am (4,714), then sold down lot the low of 4,661 before a small bounce into lunch. PM initial selling back to the morning low and then bounced but effectively trading sideways. Currently -0.2%
HONG KONG HSI Pre Market +369pts @ 25,427vs +105 pts ADRs @ 25,162. T/O was HK$7.38b With E commerce names in focus on the new Hans Seng Tech index and the IPO news which saw HKEX +5.7%. Market continued to work higher in choppy trading. PM saw initial selling but then rebounded currently +1.9%
EUROPE Expect market to open higher as EU leaders reach a ‘deal' over the EU Recovery Fund. Obviously not going please everyone but +VE
US Futures opened flat (-30pts) then rose to slightly +VE and trending higher on news of an EU recovery fund deal.


Print Edition
Alibaba’s Ant payments group set for one of Asia’s biggest flotations
Dual listing in Shanghai and Hong Kong • Company’s implied value exceeds $200bn.
It’s going to be a big deal and no doubt has the full support of Beijing who will use the listing to try and encourage other major companies away from the US. I think the timing has been carefully selected.
The article notes that at this stage the exact timing hasn’t been finalised and the neither has the valuation but the recent transactions in the secondary market seem to indicate a value in excess of US$200bn. That would put it on a par with PayPal which is currently valued around US$204bn.
The recent name change was to stress that Ant Group is a tech company not a financial company. But the evidence would suggest that it is very much linked to the Chinese financial system, with over 600m users depositing funds into its Yu’E Bad money market fund, its provision of financial services like Wealth Management (have just tied up with Vanguard Funds a few months ago, and having on-line lending and insurance facilities.
The article notes that Ant, formally known as Alipay was transferred out of Alibaba in 2011 which triggered a dispute with Yahoo and Softbank two of Alibaba’s largest shareholders at the time by Mr Ma; who said at the time it was to comply with Chinese regulations.
The IPO will no doubt be closely watched. The opportunity to invest in the growing Chinese digital retail opportunity is likely to be highly sought after. On other exchanges there might have been questions over the handling of personal data by Ant and the government but that will not be an issue here. It might raise some ethical questions for some funds but the reality is there will be plenty of investors who will not be concerned over that.

China’s central bank has better stimulus options than US Fed. Compares the two and says that whilst the Fed is portrayed as 'as sophisticated and proactive, while the latter is portrayed as reactive and bureaucratic.’ Ed Cole of Man GlG says though these preconceptions are wrong.
He notes that the Fed has used its balance sheet to support the markets which have subsequently rallied. The PBOC however has resisted traditional QE.
Instead it is using more traditional methods, he says by 'not using unconventional policy’ that the PBOC is avoiding 'the moral hazard that come with it’.
He looks at the historical background of what happened in 2014/15 and the expansion of credit in 2016 and then subsequently withdrawing the credit from 2018 by clamping down on the shadow banking sector.
He notes that 'Before the onset of Covid-19, I was starting to get more optimistic about a cyclical recovery globally and one component was the diminishing drag from a shadow banking crackdown in China.’
But since covid the PBOC’s policy has been to use the policies that have served it well in the past and free up credit. He also points to the fact that '“total social financing”, a broad measure of liquidity and credit in the economy, has expanded again.’ He notes non-bank financing is growing, which should give a boost to the economy.
He accepts that some critics say the PBOC is pushing on a string. Also the three months ago many were saying the Fed was out of options.
He now thinks the PBOC has more options than the US especially if it does more than just use the credit channels. He accepts that use of shadow banking does little to resolve the structure of the economy but as far as getting the country over covid and minimising economic impairment that doesn’t matter.
An interesting read. But I’m not sure whether the PBOC isn’t using credit because it lacks the real balance sheet options of the Fed. Equally the fact that the regional banks are under threat and rumour of collapse I think suggests that there are more fundamental reasons for the PBOC having to use credit. But worth a read.

UK suspends extradition treaty with HK as Beijing ties strained. As expected and also extends an embargo on lethal weapons and equipment that was in place against China to include Hong Kong. He linked the move China’s actions over Hong Kong saying 'the measures were a “reasonable and proportionate response” to China’s “failure” to live up to international obligations in respect to Hong Kong.’
The article also notes that PM Johnson has said he will get tough with Beijing but wanted to remain engaged with China. He also said: “China is a giant factor of geopolitics, it’s going to be a giant factor in our lives and in the lives of our children and grandchildren. You have got to have a calibrated response and we are going to be tough on some things but also going to continue to engage.”
As has been said before the UK, US and others should present a united front to the Chinese in order to be effective.

Australian mining and energy sales to China rise despite row. Underlines how China for all its power is still reliant other other countries for some resources. The current row has seen China impose sanctions on some Australian farm goods and there are fears in some quarters that China will target the resources sector too. In Australia’s favour on resources is the fact that other iron ore suppliers are currently facing problems due to covid-19. But as everyone knows dealing with bully’s is never easy, often costly and not always successful.

Investor anger at Line puts Japan’s merger protections to the test. Looks at the deal by Japanese WhatsApp rival Line, which is facing a potential revolt over the plan to create a $30bn technology group with Soft-Bank-backed Z Holdings. Key is that minority shareholders are unhappy with the low priced tender offer which has been delayed by covid-19. The deal was agreed last November and looks to test 'Japan’s “fair mergers and acquisitions guidelines”, aimed at strengthening protection for minority shareholders. If mishandled, they add, the issue risks curtailing progress on governance that was made before the pandemic.’ It may also put Softbank in a poor light have said it would improve oversight of its subsidiaries after WeWork.
Key is that the offer is too low, especially in the light of the recent internet rally
There are also concerns over the special committee set up to review the deal who are no longer independent, two having been subsequently appointed to the board of Z holdings.
Also whilst the minorities have been locked in at a low price the other parties have negotiated better terms.
How this is resolved is key to how doing business in also viewed. PM Abe in his early years stressed about the three arrows, now few can remember because so little seems to have really changed.

Battle is joined for SE Asia’s online shoppers. China heavyweights place large bets on Lazada, Shopee and Tokopedia. Another article looking at the competition between the firms and their different business models in Indonesia. Lazada is now owned by Alibaba having had a number of previous owners and largely relies on its own logistics and warehouses where as the other two are ‘market places’. Competition is set to increase as Amazon opens in Singapore and expands into the region. It will be interesting to see of Alibaba tech can make the difference one comment was that the Lazada model was too top heavy and sophisticated and that due to its multiple previous owners is seen as a foreign company. I guess time will tell.

Brussels pressed over leak inquiry into alleged self-censoring. Looks at an EU inquiry into the leaking of documents to the press, which then lead to pressure from Beijing to change the wording or face retaliation from China. People are now concerned that the inquiry should not be over just how the documents came to be leaked but also whether the report was toned down because of Beijing being alerted about what was to be said in the report.
Both seem to be worthy of answers and if the governing body wants to be be respected clear answers to both questions are needed. It notes that the person it interviewed left the EU diplomatic service because they were disillusioned by the EU’s response to Chinese pressure. Which raises the question of who is in control? Is it the leaders of the EU or the bureaucrats that operate it? A question to which we will probably never know the answer. But it does show the stark difference; in China everyone knows the answer to that question.

For Interest
Negative interest rates cannot save indebted economies.
By Jacques de Larosière a former IMF managing director, was governor of the Bank of France1987-93
A good read. A key point being that the proposal fails to appreciate the essential question; the value of money; which is based on trust. Trust that the token will be carry worth.
Also that negative rates have many other negative traits too which he outlines.
The final three paragraphs sum it up
'Everyone knows how excessive debt can lead to crisis. We have paid the price of this causality for decades. And yet negative interest rates open the credit floodgates to both governments and the private sector. They are a source of financial instability and help to create asset bubbles.
A more reasoned policy response to over-indebtedness is clear. Undertake, where necessary, debt restructurings with a co-operative spirit and a sense of market priorities. Scrutinise public budgets and prioritise certain future expenditures, such as education, health and research.
Last, undertake the structural reforms that have been postponed for too long but are the only measures that can deliver a sound, sustainable and better future.'

The last one being key every since QE was first introduced there have been calls for it to be unwound. But it has never happened. The ‘can being kicked downtime road’ a future generations' problem. Maybe it isn’t, maybe the reality is that we have to address the issues and take the pain now that everyone has been so keen to dodge? To do the restructuring, to endure the markets tantrums and to come out the other side offering the future generations a better opportunity rather than having to pay for their parents mistakes.

LEX Cadbury: honey, I shrunk the chocolate bars. Looks at the reality of shrinking chocolate bars and many other things too; shrinkflation. Worth a read nice fishing quote on the subject 'On the plus side, a chocolate pick-me-up can be burnt off with a 25-minute run.'

Read More  

July 20 FT  Recovery Fund? UK Extradition, Books in HK, Levi's doubt the Fed

MARKETS as at 11:45am HK time
JAPAN 
Market opened slightly higher but has trended lower. Pre market data was not as good as had been hoped for and combined with increased covid cases sentiment remains weak.
Data out
Balance of Trade Jun Y-268.8b vs -838.2b (F/cast was -40b).
Exports Jun -26.2% YoY vs -28.3% May (Consensus was -24.9%)
Imports Jun -14.4% YoY vs -26.2% May (Consensus was -16.8%)
BoJ Meeting notes
In a quarterly outlook report, the central bank said that Japan's economy is likely to improve gradually from the second half of this year, with the pace is expected to be only moderate while the impact of COVID-19 remains worldwide. Policymakers noted that the outlook for economic activity and prices are extremely unclear, depending on the consequences of the virus and the magnitude of their impacts on domestic and overseas economies. Based on the assumption that a second wave of infections will not occur, the GDP for the 2020 fiscal year is expected to shrink between 4.5% to 5.7%, compared with an earlier forecast of -4.7%. Meantime, the CPI is projected to drop between 0.4% to 0.6%, compared with the previous estimate of -0.5%.
I imagine that with the recent rise in covid cases the assumptions that a second wave doesn’t occur has been dismissed by the market.
S KOREA Markets opened higher but trended lower for the first hour before staging a bounce back. Although the Kosdaq looks to be running out of momentum before reaching Friday’s closing level.
TAIWAN Opened higher but initially sold down in the first 15 minutes but now working its way back and traded just below flat.
CHINA Opened Higher with Loan Rate Data unchanged as expected after some positive data in June. Markets initially sold down in the first hour to just below Friday’s close before seeing a strong rally to the morning high. Closed for lunch at +89pts 4,633
HONG KONG Pre market opened -70pts @ 25,020 vs +20pts ADR’s at 25,109 with light T/O of HK$1.7b but initially spiked 150pts before selling down 400pts in the first 20 mins. Market since then has worked higher in choppy trading as just broken back into the positive. There were a number of profit warnings over the weekend along with increased covid cases and a reimposition of social distancing requirements; all -VE for sentiment. But despite the low pre market volume the sharp rise in the HSI suggests that Team China is back to support the market.
EUROPE I would expect the markets to open lower, following Asia and with no deal on the European Recovery Fund having been announced.
US Dow Futures opened flat +45pts but have edged slightly higher but I would still at this stage expect a flat open. Caution over the covid impact on the economy and the fact that earnings season is underway.


Print
Summit toils to find unity. EU battles to overcome summit deadlock.
Basically talks in Europe over the recovery fund are not gong well. Frugal nations are trying to limit the amount that the biggest recipients will receive; key is the level of non-repayable grants the recovery fund would be allowed to make.

UK signals suspension of Hong Kong extradition treaty. An announcement is expected later today. It notes that the UK foreign secretary criticised Beijing’s “egregious human rights abuses” against its Uighur minority. A group of UK MP’s wrote to Mr Raab and stated that after the imposition of the new security law “We are all going to have to ask ourselves if we recognise the Chinese Communist party’s definitions of secession, subversion, terrorism and collusion, and share the interpretation of mainland judges,”. That will take time to determine because those terms are not really defined the the text of the new law and so we will have to wait to see cases. It is made more difficult by the fact that in China there is no law of precedence! At this stage it seems the UK is unlikely to announce sanctions on China although I would imaging there pressure is mounting for the government to do so. IF they do as many others have said; a co-ordinated and joint approach by many countries would have the bet leverage.

HK publishers self-censor in wake of security law Beacon of free press chilled by Beijing’s move to end pro-democracy movement. An obvious impact of the new security law being to remove books that upset China. A clear sign of censorship. Public Libraries along with publishers and book sellers removing books that could cause embarrassment to China because they give a version of events that does note fit with the way or spin that China’s propaganda machinery has used. It notes that the New York Times has moved its digital publishing operations to S Korea because of the new law.
There are even calls from pro Beijing supporters to report books that are about Hong Kong Independence or ‘products that endanger national security’. The article notes that Beijing backed book shops now dominate in Hong Kong and reminds us that before the new security law five Hong Kong citizens, associated with Causeway Bay Books ‘disappeared’ from Hong Kong. The store was popular for selling books the gossiped about the leaders in China and was popular with mainland tourists.
The article says that Hong Kong has now lost its reputation ‘as the world’s freest Chinese-language publishing community.’
IT does note that Albert Wan a co founder of Bleak House Books, and independent has said he hasn’t removed any books from his shelves. So there is a name to watch out for in the press in the days to come.

Levi’s chief warns retail closures are ‘tip of iceberg’ Fashion brand expects more failures. Bergh seeks to capitalise on turmoil. Worth a read as Levi’s is hoping that the current situation will enable it to capitalise on smaller brands being unable to keep going and so give it the opportunity to grow. It going trying maintain its brand level. Work from home has helped but jeans have been less popular than sweatpants.
My initial reaction is that this means that the stimulus the US government and Fed has put in place is not going to work and that we are going too see a lot more failures. That would be inline with the action from the banks last week in taking large provisions. The impact for Asia must be the a lot of manufacturers are also going to be under pressure as the companies they supply go bust leaving unpaid debts in their wake. It is likely to mean weakness int he apparel makers and I would expect the shoe makers too.

German plan for supply chain law stirs debate over human rights. A proposal for the government to bring in legislation on the entire length of the supply chain, not just that within Germany. It is being opposed by companies and business associations on the basis that it puts too much pressure on small companies. But the fact that its being thought about and makes the press highlights that it is likely to become more of an issue. If Germany and other countries were to introduce such a law that is likely to mean higher costs but also better working standards and wages froths that probably need them most.

For Interest
Opinion Brave Hong Kongers deserve better from investors.
Suggests that businesses have a choice and that there is room for civic minded activism amongst shareholders. It notes the success of such policy in the anti-apartheid era and suggests that 'Hong Kong is apartheid with Chinese characteristics’.
It warns that in moving into China has dangers and quotes La Rochefoucauld '“Hypocrisy is the homage that vice pays to virtue.” Companies operating in China should not count on business as usual when Hong Kong is paying the price in freedom.'

Opinion The EU and US can still beat Chinese tech. Looks at the need for co-operation and alliances between the EU, US and other like minded nations in order to be able to compete and rival China. Notes that this is something that Joe Biden has mentioned to do.

Opinion A flexible inflation target is not a panacea. Looks at what central banks are started to debate what happens if inflation returns and actually is about the target. Takes time to note that inflation and trying to forecast it is remarkably difficult. Worth a read.

FTFm
Vanguard lures 200,000 clients with China venture.
Looks at the success of Vanguards tie up with Ant Financial in its first 100 days. The success seems tone based on investors exiting money markets and rotating into equity offerings. Vanguard says it will be adding more material the platform so worth tracking the next 100 days too.

BNP Paribas fund arm braced for the ‘mother of all recessions’. Someone clearly not in the V shaped recovery camp. It notes a number of other surveys also doubt the V shaped recovery. Also that current market action driven by liquidity is not based on fundamentals or valuation and is overly bullish. The big swing factor as every is a vaccine; with that everything changes. Which suggests that markets are factoring a vaccine being found in the short term. The longer it takes the less of a V recovery we should expect.

Shiny new ETFs prove resilient so far Analysts disagree over whether sector is due for a setback as volatility increases, writes Steve Johnson. Looks at the number of new offerings and the fact that new offering are slowing. Launching over the last couple of months has been good because of the market moves. The real question is whether we are in a recovery mode and things continue to get batter, in which case the market should remain welcoming of new launches. Or things get worse, markets all and people withered money. Again only time will tell but I remain firmly in the cautious camp until the vaccine is found.


Read More  

FT Weekend:- TikTok, Whose vaccine do you want? Huawei, Trading and more

The two big themes remain the US/China stand off and Covid-19 both are increasing the prospect of a twin track world.
The week ahead sees US reporting kick off in earnest and yet covid and vaccines will still be in focus as a number of pharmaceutical companies report.
Feedback and comment welcome.
Stay safe

Trump weighs ban on teens’ favourite TikTok as US-China friction heats up. Allegedly doing so on the grounds that the app gathers personal data on US citizens. Tik Tok says it doesn’t have close ties with its Chinese parent. The key is that it shows that for the Trump administration everything is on the table for discussion. In my view taking action against Tik Tok would alienate Trump from most new voters in the forthcoming election more than it would hurt China, although the impact to ByteDance would be significant. I think the fact that it made the front page is summed up in the quote 'James Lewis, a tech expert at the Center for Strategic and International Studies, said the entity list was the most aggressive option. “They have so much fun with the entity list that they are entertaining that one, too,” he said. “They’re very happy with how that played out with Huawei.”
The cross read must be that if they are considering Tik Tok there are an awful lot of other companies that are being considered and I would expect a number fo listed ones. ByteDance is not listed but a report in the SCMP suggest that CNOOC and China Communication Construction are in line for sanctions that reveals the risk to investors from this current policy.

Pick sides in vaccine fight, says Russian official. Another example of how the world may be divided. First telecoms, now over a vaccine and there is still the fight over the internet and 5G. This comes after the UK, US and Canada accused Russian hackers of trying too steal information on the development of a British vaccine. The US also accused China of trying to steal American research.
Russia has denied the allegation and said that Russian did not need to steal any information because AstraZeneca is about to sign a deal with RDIF to manufacture the drug in Russia. He added that he thought the Russian vaccine was better and would be entering trial soon, although there is little data on the Russian vaccine and no peer reviewed data.
It appears that vaccines are destined to become ideological.

Europe faces a fateful choice on Huawei. With the UK changing it’s mid on letting Huawei have access to its 5G system the rest of Europe is having to reconsider too. Realising that just as the UK will face retaliation from China, they will too; depending upon their decision from either China or the US. For Germany the decision may be hard due to its trading links with China. The key point of the article seems to be that Europe and UK and in fact most nations are middle men in the struggle between China and the US. But if they stand united with one main aim and provide a unified front then at least they have some leverage.
It also seeks to remind Merkel that it was in Leipzig 'that tens of thousands of her fellow East Germans stared down heavily armed police and marched for liberty in 1989. Perhaps it is time to take the side of those marching for freedom and democracy in Asia today.’

Huawei backlash consigns oil’s ‘Sun King’ to the shade. Looks at John Browne’s life. It notes his standing down as the chairman of Huawei UK just before the UK government announced a ban on the firm’s equipment being used in the UK 5G system. He joined Huawei because he saw they had great technology, which I think everyone would agree with. His role was the help them 'navigate a British business culture it did not fully understand’, which he also did well. It is striking at how good the Chinese firm has been at getting good people to join its ranks in order to be able to advance its business. Something that many other Chinese companies would do well to learn from is they want to become world leaders. It also looks at the other avenues of his life; an interesting read. An interesting read, it mentions naivety, trying to cover his homosexuality but what the article does seem to reveal is that having admitted that and lived more honestly he seems to have enjoyed life more. Maybe if everyone did that the world would be a better place.

Japan to promote tourism despite virus spread fears. The government says it will press ahead with the campaign but exclude Tokyo as a place to travel to or from. That will have a significant impact on the success of the scheme and puts the government under pressure as it is not looking to provide refunds for trips already booked. But. He key is it illustrates how difficult it is for governments to revive tourism until we either have a vaccine, a cure or know a lot more about how the virus is transmitted.

Traders warn of slowdown after best quarter in decade. Looks at how US executives are braced for drop-off as prime conditions created by the coronavirus panic fade.
The good results were from 'clients rapidly adjusting their portfolios to deal with fast-changing economic forecasts, and the massive bond-buying programmes launched by the US Federal Reserve and other central banks — which had also slashed interest rates.’
Having got through that exceptional period the outlook is now more stable, at least until we see a vaccine go into production when there will be another big change to client portfolios although whether I think it is doubtful the Central Banks change their policies as quickly. The real problem they have is that markets expect them to act quickly in the light of bad news and slowly in the case of good news. The problem that leads to is having less scope to act next time. Going forward I think that Central Banks are going to have to unwind radical positions more quickly and try and get markets thinking back to previous ’norms’. No doubt markets will not like that and we will see market tantrums but just a nobody likes to take bad tasting medicine; it is necessary. For investors the warning is another reason to be cautious on the US banks. Trading was their saviour this quarter. The size of the provisions they took show they are not confident about the outlook and trading is another reason why. Read also Investors not yet convinced that banks are safer by Robert Armstrong. He focuses on the fact ‘..the biggest problem for the group has not been that assets have turned sour, it is that their lending margins have been squeezed by falling interest rates and a flat yield curve.’ Other issue still remain the fact of provision and the tough outlook still for both mainstream and SME’s. Another aspect to add to the mix is that people in the US are not using their credit cards as much as they were so another important source of income is waning.

Caution ‘thrown aside’ with bets on US stocks. Notes that call option trading is running ahead of put options. The divergence on Wednesday was near a six year low. It notes that part of the reason is that retail investors see options as a good way to make leveraged bets because they trade at fractions of the equity prices. Part of their confidence is froth fact that the Fed has undertaken a number of market supporting moves recently and they assume the Fed will do so again. Which is a questionable assumption. For Asian investors it adds some uncertainty. Asian markets usually follow the direction of US market Tuesday to Friday but there are signs of disconnects arising. As always care is required.

Think carefully before betting on return of inflation. Notes that this is one of the most divisive questions for investors today. It looks at the increase in demand for TIPS (Treasury inflation-protected securities with returns adjusted with moves in consumer prices). Goes through a number of reasons why not least the fact that Iron ore has now outperformed gold this year, largely due to the upswing in China which should theory lead to a bolstering of the global economy. Also the decline in the USD, together with other smaller factors could indicate that inflation could return with a vengeance. That in turn could prompt another up swing for equities and a broadening of the rally from growth and tech to the cyclicals and hence requiring a rebalancing pf portfolios. That might crimp the US markets with the current dominance of the Nasdaq tech names. The BUT it suggest is that in recent past history there have been good reason to believe that inflation would return but it has not. Some are suggesting again stagflation (inflation without growth). Some are suggesting that all we see is a continuing of the same as we saw pre covid; modest growth and low inflation. The only thing for sure is that time will tell. Personally I’m expecting a growth in inflation largely because of the amount of stimulus and the need to governments to find a way to pay for that stimulus.

For interest
FT BIG READ. CORONAVIRUS. ‘A failure of national leadership’ America’s sunbelt states are facing a big rise in cases and deaths amid the politicisation of issues such as wearing masks. But with the economy struggling, there is little enthusiasm for a return to full lockdowns.

Under the hood US airlines fly in different directions on middle-seat bookings. Carriers lose money when flying at partial capacity, but packed planes risk undermining consumer confidence in the safety of air travel. A look at how the US airlines are trying to get people back into air travel. It would appear there are no easy answers. As with many industries the key is a vaccine.

Read More  

July 17 FT China Data, US Consumers, Ivanka Trump & Mongze Xi, Moutai and more

Markets. At 2pm HK time
JAPAN 
Opened slightly higher following the US but trended lower through the day Nikkei 225 currently -0.5%
S KOREA Opened slightly higher Kopsi +0.7% trading sideways whilst the Kosdaq +0.9%saw a small rally mid morning and now trading sideways.
TAIWAN Opened higher and has traded sideways around flat currently -0.1%
CHINA Opened higher and saw an initially rally to the day higher around 10:30 but then sold down into lunch. PM saw a bounce after lunch but then sold off again as retail becomes more cautious ahead of the weekend. CSI 300 -0.4%
HONG KONG Opened higher as recent shorts squeezed then saw some margin call selling from yesterday’s 2% sell-off bounced mid morning before selling down into lunch. Sold off again after lunch to day low, support currently around 25,000 level. Rising local covid-19 and US/China relations continue to overhang the market HSI currently +0.4%
EUROPE Expect markets to open mixed but with caution ahead of the weekend.
US Futures Opened +60pts and initially climbed. I would expect a mixed open with Options expiry confusing the open. Rising covid cases suggest more caution.

My own view
Key to the market’s being able to stage a V shaped recovery will be the production of a vaccine.
Dr Fauci yesterday commented that he expected one later this year, others are less optimistic a few are more. I don’t know but I would err on the side of caution because we still dint know that much about the virus, how it spreads, mutates etc.
So in the meantime covid-19 will be an addition swing factor to add to global trade tensions. Currently economic data is of limited use due to the resurgence in covid-19 cases and so we are left wondering again.
The US Banks, in taking significant provision, are suggesting that the markets should err on the side of caution; which means sticking with good companies, with little debt. But as time passes one must also look at the smaller suppliers to those companies especially if there are key bottlenecks, because even the best companies are only as good as their weakest link.
For traders the volatility looks to remain good whilst retail continues to see the markets as an attractive alternative to having cash in the bank. But sticking with liquid names will remain crucial. If we do see a significant pull back, it is likely to be retail that takes the brunt of the pain, and there will be another raft of retail investors who will have been warned off the market for a significant period of time.




Print Edition
China’s economy returns to growth in sign of virus bounce back.
Looks at yesterday’s data with GDP +3.2% YoY, which indicates a return to growth. Despite that, the markets sold down by the most in 5 months, as other data in the release mitigated the good news. I think the most worrying was the lack of retail spending. That I think reflects how the citizens of China really feel and in this case, it’s not good.
CHINA’s data
GDP Growth Rate Q2 +3.2% YoY vs -6.8% prior (F/cast was +2.4%)
GDP Growth Rate Q2 +11.5% QoQ vs -9.8% prior (F/cast was +10.2%)
Clearly beat but concerns about the resurgence in Covid-19 cases since the data was collected.
Industrial Production Jun +4.8% YoY vs +4.4% May (F/cast was +4.8%)
Retail Sales Jun -1.8% YoY vs -2.8% May (F/cast was +0.5%)
A big concern as people it seems do not feel confident enough to go ut and spend.
Unemployment Jun 5.7% vs 5.9% May (F/cast as 5.7%)
Industrial Capacity Utilisation Q2 74.4% vs 67.3% prior (F/cast was 75%)
Fixed Asset Investment (YTD) Jun -3.1% YoY vs -6.3% May (F/cast was -3.3%)


US consumers help drive recovery. Shoppers’ enthusiasm adds to rising confidence among housebuilders. Looks at yesterdays US data which was showing a positive up tick in the US data, although like China the markets sold down. The other big difference I think is in the amount of media attention that stimulus in the US has received. In contrast China has not been as vocal in what it is doing and that has led to caution within China. But the data from the US is not a ‘get out of jail free card’ the fact that there have been further outbreaks of covid-19 in the last week also makes the data questionable. Confidence to spend was rising on the basis that covid -19 was under control, however if it is not then next months data could show a backlash. With people becoming even more cautious having been ‘fooled’ by a false dawn.


Ivanka Trump offers ‘let them eat cake’ economics to world. Edward Luce looks Ivanka Trump’s speech to the American people urging them to use this time to find a new school. He shows how for her and her husband and even for Donald Trump their lives have been ‘privileged’ as have many in American society. He notes how whilst Mr Trump may be out of a job in November not doubt the lecturing will continue.
One wonders whether the people of China think the same of their leaders? It was in his early years that President Xi told cardes that they had to earn the right for the communist party to lead China. He cracked down on a number of leading families whose sons and daughters where driving around in ‘flash' cars and often drunk and causing embarrassing press coverage. We don’t hear to such things these days; whether that is because the censorship is better or there has been reform but the message is the same there is historic privilege everywhere. The difference in China is that partly officials aren’t subject to elections but can be to purges.
President Xi’s daughter Xi Mongze attended Harvard in 2010; graduated in 2014 and returned to Beijing after that we haunt heard anything. But it was rumoured last year that she had left Beijing in 2018 and returned to the US. Hardly an endorsement of life in China.

China distiller Moutai sheds $25bn of value on graft claims. Stock was -7.9% Thursday after state media accused the company of benefiting from corruption. The stock is trading around 5 year highs. But from early 2018 until end Q1 2019 it has languished again because of its association with corruption and bribery. The reality is that the accusations are probably fair although not directly by the company but by the system under which China operates. It’s known as Mao’s tipple, which gives it prestige. Its supply is limited by the areas that water is drawn from, that is used to grown the grain and used in the process. The factory gate prices have not risen as much as the investment value.
I think more interesting is that President Xi is once again mentioning corruption. That would appear to suggest that he and his recent policies are coming under a lot of pressure from some in the party opposed to his vision.

LEX TSMC: chipper days. Looks at how the pandemic has been good for TSMC judging from the latest numbers. But warns it may not last as it losses Chinese customers (circa a fifth of sales; Huawei was its second biggest customer). TSMC can’t chose sides as it relies on US tech and materials. It also mentions the reasons to be optimistic; good margins and demand for products that it chips are used in. Lex things it will keep rising. I agree and would go further, it mentioned yesterday that is would not have a problem finding customers to take the production that would have gone to Huawei which makes sense. But also it announced increased Capex. Morris Chang the founder believes in staying ahead of the game. He said once when asked about the threat of China catching up, that TSMC was still 5 to 10 years ahead…but more importantly it was still moving forward and not waiting for others to catch up. That to me is the key.

Barr warns against China ‘appeasement’. He took the opportunity to warn US business leaders that advocating for Beijing could fall foul of foreign lobbying laws. He noted that Chinese government officials had been active in urging US executives to support Chinese policies and said that could mean they have to register as foreign agents. His targets seem to have been those working for Tech companies and Hollywood. He made clear in his speech that in applying such pressure China was trying to achieve its own aims and ultimately that meant replacing US executives. He mentioned Google, Microsoft, Yahoo and Apple accusing them of becoming ‘pawns’ to China. For Hollywood he was critical of ‘self-censorship’ to ensure getting distribution rights in China.
It is almost funny how close the actions of Beijing and Washington have become. Beijing accuses those in Hong Kong of being under the influence of Foreign power and Washington does the same for it's people. When the reality is that people are trying to make a living and historically government have tried to put in place the framework for that to happen.
But these are not normal times. The change of policy brought about by President Xi coupled with the changes in technology that enable greater espionage have the changed the playing field forever. It would be nice to think that both governments might take a step back and try to determine what is really in the best interests of their citizens. Unfortunately that seems unlikely.

Dead calm leaves government bond investors stranded. Measures of volatility have plummeted as central banks ramp up intervention policies. Looks at how government bond traders who were so busy at the start of the year are now quiet. It comments that there is a chance that everywhere becomes like Japan which would be a worry. It notes that JPM’s Dimon warned that he expected trading revenues to half in the coming months. The problem is the unintended consequence of huge government intervention; which has dampened the ability of bonds to reflect the potential for growth or inflation. An interesting read and highlights that whether or not the Central Banks move to unwind the recent unprecedented actions designed to alleviate the impact of the covid-19 pandemic there will be a price to be paid …. at some point.
Also worth reading US fund managers seek to safeguard portfolios against risk of inflation. Looks at how demand for Treasury inflation-protected securities (TIPS) which are US government bonds where returns are adjusted in line with movements in consumer prices have recently seen their yields close to record lows in some cases. Suggests that at least seem fund mangers are worried about the potential fro inflation in the light of all the government stimulus being applied at present.

For interest
ESG concept has been overhyped and oversold.
A good read in common sense. It suggest that whilst there is much that is good to do with ESG a lot isn’t. Key it says is 'If, as an individual, you are upset by a company’s behaviour, the best response is to not invest in it or buy its products or services — and vote for governments that will institute the polices you favour.’ That makes more sense.

FT BIG READ. US ECONOMY The comfort of cash in a crisis. Americans are using less cash at the till during the pandemic but they are hoarding more. The resilience of paper money presents the Federal Reserve and other central banks with an expensive challenge.

Huawei and the hard facts facing global Britain. Looks at the background to Britain’s decision from a sovereignty point of view. Nice quote
'No one should be surprised. In 1960, the then Conservative prime minister Harold Macmillan asked his top advisers for a comprehensive assessment of where the world was heading. Their conclusion was that it would soon be dominated by a series of power blocs — the US, the Soviet Union, China and the new European common market.
The danger, these experts said, was that, shorn of empire and standing outside of each of the blocs, Britain would have to sign up to choices made by others. Macmillan’s reaction to the advice was clear-sighted. He lodged Britain’s first application to join the European Community.'

Read More