Nov 23 Asia risk off, light volumes. FT China Covid tracing? US/China AI, Peng Shuai dilemma and more

23 Nov

This and previous notes can be found at Substack ( Asian Market Sense )
Check out  for your research needs.  There is a webinar by PRC Macro Advisors today outlining their Top 5 Economic Predictions for 2022; let me know if you are interested.

Market tested higher in early trades with Energy names and Miners +VE (Fortescue +9.8%) but Gold names weak.  Powell’s re-nominated seen as good for Financials but Tech and Comms in the red; on the expectation of a higher interest rate environment ahead. PMI data inline with expectations +VE.
Woodside +3.3% & BHP +3.9% on news of the Scarborough field LNG project, with Woodside to absorb BHP’s petroleum assets.
Afterpay -5.4%, Xero -3.5%, WiseTech -5.6%, and EML Payments -5.6%. Bapcor -9.6% after its founder and chief executive announced his departure. Telstra hit a four-year high of $4.09 before closing at $4.07.
For interest Macquarie Group’s market capitalisation is now $2 billion bigger than ANZ Banking Group suggesting there is now a Big Five banks except that ANZ and Westpac are seeing their market cap dropping; raising a question over the ‘Big’
Data out
Manufacturing PMI Nov 58.5 vs 58.2 Oct (F/cast was 58.5)
Services PMI Nov 55 vs 51.8 Oct (F/cast was 54)
Composite PMI Nov 55 vs 52.1 Oct (F/cast was 55)
Markets closed, Labour Thanksgiving Day re-open Wednesday.
S Korea 
Foreigner still net buying with focus on Tech. Local Institutions net sellers. Pharma weak with selling by both.
Kospi futures were indicating higher but it opened flat and sold down despite good Consumer Confidence and the rally in Semicons. Initial support at 3,005 but then dipped lower below the important 3,000 level to find solid support at 2,995 level, retested 3,000 but closed -15pts (-0.5%) @ 2,998
Kosdaq opened lower saw an early bounce but then sold down to traded around 1,017 before selling down into the close -18pts (-1.8%) @ 1,014
Laggards Pharma, Autos, Games/NFT’s (rumours they’ll be taxed)
Leader Steel (China Property sector hopes), Insurance
Samsung expected to choose Taylor Texas for new plant.
Celltrion weak Financial watchdog to investigate alleged fraud.
Hanssem strong on share buyback news and dividend news.
Taiex opened lower and tested down to 17,700 before finding support. Bounced and traded 17,680/740 but then sold down at the end to close -137pts (-0.8%) @ 17,666.
Broad weakness as China fines Foxconn for supporting Taiwanese independence.
Laggards Semiconductors, Electronic parts, Optoelectronics
Leaders Materials, Shipping, Chemicals
CSI 300 opened higher and tested 4,930 in early traded then dipped to flat before working better to 4,922 at lunch. PM opened lower and initially traded sideways but sold off mid afternoon to 4,907 before working better to close flat.
Hong Kong 
Pre market opened @ 24,689 -262pts vs -106pts ADR’s with early margin selling too. Ecommerce leading the declines on fears of more regulation but Developers and Consumer Discretionary weak also weak on higher interest rates ahead. Energy names +VE; coal +VE as govt says prices and output to remain stable at a reasonable level; -VE IPP’s. China Property and Steel +VE as banks told to make more loans available to the sector.
Kuaishou (1024) weak ahead of earnings but Xpeng (9868) +VE
Market effectively trading sideways around 24,700 although it did spike to test 24,800 ahead of lunch but sold back down. PM opened lower and trading around 24,650.
Futures indicate a lower open; FTSE -14pts, Dax-52pts and CAC -21pts following a weak Asia as inflation concerns prevail.
Flash PMI data and resurgence in covid cases over hanging the markets.
Earnings come from Severn Trent, Compass and Kingfisher

Opened flat Dow +40pts, S&P and NDX +0.1% but now Dow -33pts with S&P and NDX flat.
AHEAD Redbook, Flash PMI’s (Manufacturing, Services & Composite), Richmond Fed Manufacturing Index, Manufacturing Shipments Index and Services Index.
Earnings   HP, Dell Technologies, Abercrombie & Fitch, Best Buy, Nordstrom, Gap, VMWare, Cracker Barrel, American Eagle Outfitters, Dick’s Sporting Goods, Pure Storage, AutoDesk, Dollar Tree, JM Smucker.

Biden opts for Fed continuity by naming Powell for second term
• Brainard picked as vice-chair • Prices and jobs pose policy test • Progressives criticise choice.
The market initially rallied on the announcement which removed the uncertainty but later the market sold off on the realisation that tapering could be accelerated and rate hikes start sooner as inflation is showing itself to be more persistent than transitory.

Artwork by Kapoor and Bailey sold for millions as NFTs without consent  An interesting read because non-fungible tokens are supposed to be secure and yet if the original creation is done without the owners consent then it seems legal action will result.
Powell faces new pressures in second term as Fed chair
Full employment not yet reached at a time of uncomfortably high price rises.
Looks at some of the issues that are facing him as he starts his next term along with a history of how he got to this point. An interesting read with many feeling the next four years will be more difficult as employment remains stubbornly high and inflation seems to be more persistent. Does note that he has demonstrated his ability to communicate well and plainly.
It concludes ‘In his second term, Powell will advance the central bank’s goals with a revamped inner circle of Fed governors. While John Williams, president of the New York Fed, and Brainard as the new vice-chair will remain constants, he loses Richard Clarida and Randal Quarles, the two current vice-chairs. The White House said it would make additional appointments to the Fed board starting next month.
Those roles will prove even more important as the bank embarks on its next phase of tighter monetary policy in what is likely to be a challenging 2022.’

Doctors hit at China’s contact tracing
Concern over monitoring of phone location data to tackle Covid-19 spread.
An interesting insight into what appears to be growing opposition to the government’s ‘zero covid’ stance. An interesting read, seeing medical concerns, especially interesting since the first doctor who spoke out on covid was reprimanded initially.
The leaderships strict rules reflect the dangers of the delta variant spreading through China. It’s recent construction of special hospitals shows its concerns but even with the hospitals there is still the issue of staffing them.
The flip side of the strict rules is the imposition that it places on people’s lives. Something that was seen in the UK too. It notes that ‘Despite having only 33 new cases since the end of last month, Chengdu forced residents, whose phones placed them near confirmed cases, to self-quarantine for three days and pass two virus tests before they could return to normal life. Within three days of implementing the rules, Chengdu police had identified 82,000 people who they believed had been in the vicinity of just nine people with confirmed Covid infections.’
There is obviously a lot of opinion on the issue even if it cannot be generally aired in public!
It concludes ‘The doctors did not respond to requests for comment.
“We would rather mislabel a thousand close contacts than miss a single real case,” said a Chengdu public health official, who asked not to be identified.
But people identified by Chengdu’s surveillance system are sceptical. Lucy Yang, a Shanghai-based financial consultant, said: “I had a one-day trip to Chengdu on October 22 and the city’s first confirmed case during the latest outbreak wasn’t until October 28.
“The tracing system clearly has an accuracy problem.”
Accuracy is important in any tracing system and getting the guidelines right is important to prevent overwhelming the medical resources. It is also interesting that the doctors refer to social stability being undermined, no doubt aware that is the one thing Beijing want to ensure does not happen, be it because of covid or any other policy.

Companies & Markets
New ground rules Hochschild tumbles after Peru threatens to shut down mines.
  An interesting read because Peru is ‘the world’s second-biggest producer of copper and a significant source of gold, silver, zinc and tin.’  So this radical action by the government could impact world supplies very easily.    The government ‘moved to close two of the company’s mines on environmental grounds, deepening a clash between the mining industry and the left-leaning government.’
The company says the mines operate under the highest environmental standards.
Other significant operators in Peru are ‘Anglo American, Newmont, Glencore and Freeport-McMoRan’ along with ‘Chinese companies, including MMG and Chinalco, and local producers such as Buenaventura.’

Paytm shares fall 37% from IPO after two days’ trading
Further selling after is debut, -VE for its backers ‘Japan’s SoftBank, China’s Ant Group and Alibaba,’.
An interesting read with on the one side ‘But bankers and brokers familiar with the deal said Paytm’s push for a record listing, investor insistence on a high valuation, weak domestic demand and India’s strict rules for allocating shares to different classes of investor had combined to ensure a damaging fall.’
Whilst on the other side ‘“Obviously the way the stock behaved . . . was unexpected,” Madhur Deora, Paytm’s chief financial officer, told the Financial Times. “We’re totally sensitive to the fact that some of the shareholders . . . would not have expected this performance either in the share price.”’
Really does make you wonder.
‘The banker said it had been a “real stretch” for bookrunners Morgan Stanley, Goldman Sachs, JPMorgan and Citigroup to cover the main institutional portion of the book and that many hedge funds “got more than they bargained for”. That over-allocation to institutional investors was compounded by a 10 per cent cap on retail exposure, a near-total absence of Indian mutual funds and weak demand from wealthy individuals.’
Makes you wonder how the feedback from market was handled.

Arm’s reach Regulators pore over Nvidia takeover of chip designer
Looks at the deal under a number of headings
Why do regulators dislike this deal?
Why is the UK especially against it?
Can Nvidia answer these worries?
Can the deal still get done?
When might they call it a day?
What if the deal is scrapped?
It concludes
‘Other chipmakers would be likely to stir up the same regulatory backlash as Nvidia if they tried to buy Arm. That makes a stock market listing the most likely alternative, with the UK a favoured venue among those who see Arm as a national tech champion. But a return to the London listing it had before the SoftBank deal might not be the preferred outcome for its current owners: after all, Wall Street puts much higher valuations on tech companies.
The cash and stock offer, worth up to $38.5bn to SoftBank at the outset, is currently worth $82bn’

Worth noting that to Softbank the deal has been improving because Nvidia’s share price has rallied since the deal was first announced.

Failure to sell Myanmar ventures leaves global groups facing investor unrest
Japanese businesses among those struggling to find buyers for military-linked assets. An interesting read, with funds threatening to sell down their holdings if the firms do not divest. But finding buyers is proving difficult and be further complicated by the junta objecting to proposed new owners.
Some are calling for liquidations as no alternative has been found. It will be interesting to see if the funds really do divest.

China’s crypto machines ban fuels global mining boom
Move triggers ‘frenzied liquidations’ and an international scramble for exiled units.
An interesting read about how the landscape of mining has changed. It notes that in the major centres for mining; US, Canada, Kazakhstan and Russia more modern machines were sent or sold to established farm operators but the prices of machines dropped to reflect the surplus.
Older machines have ended up in the hands of ordinary people in countries like Venezuela that have cheap electricity and can make money out of older power hungry machines and still make US$100 per month which is significant for them.
An interesting read. Having seen the power shortages in China over the recent months it was a sensible move by Beijing, although maybe is was more a reflection on the miss pricing of energy in China?

Tennis star’s plight poses an Olympics headache for China
Looks at the problem Beijing has with Peng Shuai and her accusation against Zhang and the implications that has for the party leaderships social contract with the citizens of China. The article says ‘How many other party cadres have used their power to harass and abuse women in a country where victims cannot speak freely and the media cannot report freely? How many more of China’s 700m women might be inspired by Peng’s example to speak openly of similar experiences?’
One might go further and extend that to men too; remember Li Wenliang the first doctor to raise concerns about covid who was admonished by the authorities.
It concludes ‘So the party will try to keep Peng in a controlled limbo indefinitely, while hoping the rest of the world eventually loses interest in her story.
There is just one problem with that strategy. The Australian Open women’s final will be held on January 29, six days before the Olympics opening ceremony.
If at that time the world’s best tennis players are still asking “Where is Peng Shuai?”, China risks seeing the Olympics turn into an event that, far from reflecting glory on the country and its leaders, becomes instead an international embarrassment.’
The easiest solution would be an open and honest examination of her claims but that might be a view of history that the party is unwilling to adopt.

To catch up with China, the Pentagon needs a new AI strategy by Nicolas Chaillan formerly the first chief software officer at the US Air Force and Space Force. He is now chief technology officer at cyber security firm Prevent Breach.
Starts ‘When I resigned from the Pentagon in September, I warned that without urgent action we would lose the artificial intelligence war against China within a year. Due to our complacency, we have watched the Chinese Communist party not only catch up with the US in many warfighting capabilities but, worse, lead in some of the most crucial ones like AI and cyber security.’
A very frank opinion, one key point not just for the military but business too ‘If you are a leader and you don’t know the subject matter, then educate yourself and be prepared to take advice, or step out of the way.’ Something that often holds both the military and business back.
He concludes making the two good points ‘Finally, we must stop preparing for the wrong battles. The next war will be software-defined, it won’t be won with a $1.7tn programme of fifth generation F35 fighter jets or $12bn aircraft carriers. China can take down our power grid without firing a single shot, because of kindergarten-level cyber security in our critical national infrastructure. This shows we are investing in the wrong defence capabilities. As we have seen recently with the Colonial Pipeline hack, the risk is tangible. We must act now to trade off some F35 jets for scalable autonomous systems such as drone swarming, self-flying jets and ships, hypersonic and cyber capabilities, and military advances in space.
Reports claiming the US has as much as 10 years to take meaningful action in AI are just wrong. Analysts forget that AI innovation progresses exponentially, based on the speed of deployment and the volume of data available to train its models. Since China has more experts engaged in this field, and more data, the US is already at a disadvantage. By this time next year, it will be too late to catch up.’

It underlines how powerful the defence companies are at perpetuating the lie that bigger ships and faster planes will win the next war, mainly one would presume because they have not invested in AI.
Well worth a read.

For Interest
Fixed income. Rates dilemma
US bond bulls hold firm in face of red-hot inflation
Bets maintained that ageing population and high levels of debt will keep prices high. An interesting read that looks at the various opinions on the outlook for US bonds.

Markets Insight
Shock to supply chains raises volatility risk  By David Bowers  co-founder of Absolute StrategyResearch
Looks at the impact on supply chains from covid and the implications going forward and why they are important. He suggests that ‘The more supply and demand move back into balance, the more pricing pressures should abate, and inflation rates fall. In which case, now is not the time for central banks to get dragged into premature rate rises.’ BUT whilst at a headline level things may look as they are returning to normal there is a strong chance that companies will change their business model because ‘High levels of savings and government transfers during lockdowns have underwritten a rebound in global demand but failed to prepare supply, creating a bullwhip effect. Now it is supply that appears to be constrained and “inelastic”.’ So they will move to ‘just in case’ from ‘just in time’.
‘Adapting to these challenges will place additional demands on corporates’ free cash flow and balance sheets. And they could have macroeconomic consequences. Inventory build-up and depletion is a key driver of the economic cycle. The longer inventory levels stay elevated, the more volatile they could become — as could the business cycle.’
He concludes ‘Supply chains have proved to be vulnerable — even if that has been caused by excess demand and underinvestment. Disruptions and increased inventory volatility may not be just a temporary bug.
In which case, if nominal demand continues to grow faster than supply, inflation is likely to stay elevated and spread to the labour market. The stakes for policymakers could not be greater.’

Adding to the mix was the news today that China was fining companies that supported Taiwan Independence. That could have a significant impact on supply chains too.

Where did all the workers go?
FT Series: With millions of people deciding to leave the workforce, labour shortages are spreading in many countries. Is this the result of reduced migration? Or early retirement? And can it be reversed?
An interesting read, it seems clear that for the foreseeable future recruiters are going to have a more difficult job and I would suggest that companies are going to have to provide more both in terms of training and benefits.

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