Nov 26 Asia sells off on new covid threat and Didi delisting. FT China; Slowing, German tone and SK Hynix's dilemma and more

26 Nov

This and previous notes can be found at  Substack ( Asian Market Sense )
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Markets generally in Asia being sold off partly on news of a new highly contagious variant detected in S Africa a couple of days ago and already detected in Hong Kong. Also prompting concerns is news that Didi has been asked by Chinese authorities to delist from the US. Adding to the ‘risk off’ sentiment is a note from Goldman’s expecting the US tapering to be quicker than previously thought and then for rate hikes to start sooner. Seems everybody is coming around to the realisation that inflationary pressures that result in wage inflation are a major concern.

Market has trended lower from the open, found support at 7,300 level and now trading sideways.  Good Retail Sales data ignored as investors sell on the news of a new highly contagious covid variant.
Miners weak as Iron Ore Futures -VE. The Commonwealth Bank has announced yet another increase in fixed mortgage rates -VE. ASIC sues ANZ over home loan referrals -VE. Also AMP has announced it expects to take a $325 million hit to profits in its full-year financial results.
Retail Sales Prelim Oct 4.9% vs +1.3% Sept (F/cast was 2.8%)
Nikkei opened lower and trended lower through the morning Tokyo CPI was higher than expected but the news of a new covid strain the main reason;  re-opening names, travel & leisure worst hit.  However Softbank weak on the Didi news.  Of big concern is the uptick in volumes despite the US being closed.  At lunch -720pts (-2.4%) @ 28,780
Topix same trading pattern At lunch -38pts (-1.9%) @ 1,988
All sectors -VE Worst Airlines, Non Ferrous, Iron/Steel, Shippers
Relative Outperformers Utilities and Pulp/Paper (prices being raised)
Tokyo CPI Nov 0.5% YoY vs 0.1% Oct (F/cast was 0.2%)
Tokyo CPI Nov 0.3% MoM vs 0.1% Oct (F/cast was 0.3%)
Foreign Investments
Stock ¥-47.1B vs ¥165.1B prior
Bond ¥-12.8B vs ¥456.7B prior
S Korea 
Local Institutions seeing increasing selling across most sectors. Foreigners small net buying in Tech. Pharma +VE but Consumer and Financials weak. Game/NFT/Metaverse +VE too
Kospi opened lower with concerns that the govt would re-introduce social distancing measures as new cases surge. Saw an initial uptick but then trended lower, seems to have found support at 2,945 and currently -34pts (-1.1%) @ 2,948
Kosdaq opened higher and traded sideways around 1,018 for the first couple of hours but then sold down to 1,012 and currently -3pts (-0.3%) @ 1,013
Taiex opened lower and sold down to 17,370 but then worked back to 17,400 and trading sideways. All sectors weak. The visit by US lawmakers and comments from the new German Coalition Govt over Taiwan infuriating Beijing.
CSI 300 opened lower and bounced from 4,873 back to the opening level but then from around 10am trended lower to 4,860 just before lunch. Covid concerns prompting Shanghai to cancel 30% of flights.
Most sectors weak but Healthcare and Materials in the green in Shanghai. Material & Industrial in the green in Shenzhen; all other sectors in the red.
Hong Kong 
Pre market opened @ 24,503 -238pts, with Ecommerce names weak; Meituan -2.3% ahead of results along with HSBC and AIA Only Hengan +VE in the Index. Initially found support at 24,300 level and bounced but then the news of Didi being asked to delist from US hit and market sold down further, current support at 24,200. Ecommerce leading the decline but Financials, Macau, Consumer and Tech names also weak. Only CSPC Phama in the green.
Expect markets to open lower on news of the new highly contagious covid variant, which comes as many nations already see a spike in new convid cases. Euro futures indicating a 2% fall

Eurozone Loans to Households & Companies, M3 Money Supply
Germany Import Prices
France Consumer Confidence
UK  Car Production
US Futures
Opened slightly +VE but then sold down currently Dow -400pts, S&P and NDX -VE too.

Front Page
Britain and France clash over response to Channel tragedy

• Blame game after drownings • Strained ties inhibit co-ordination • Macron appeals to EU
It’s really an international problem and highlights the desperation of people to try and find/make a better living. The fact that they were taking their children with them makes it all the more stark.
There are issues of immigration of course but the real problem is in the fact that some countries are far worse off than others but until we advance to a ‘Federated States’ ala Star Trek there is unlikely to be a solution.

Hungary says US will try to interfere in election next year in bid to oust Orban.
An interesting read, I haven’t really followed Hungarian politics but an interesting read.

Emissions fall in China as property and energy sectors suffer.
‘Emissions declined by about 0.5 per cent in the three months to the end of September, according to data published by Carbon Brief, a climate research and news service.’
It says the reason is the slowdown in the property sector resulting in a sharp reduction in steel and cement output and the surge in coal prices.
The report suggests the downtrend will continue short term and goes on to look at China’s commitment to climate change.
It doesn’t say how the data was sourced which would be interesting to know but key is whether those sectors ramp up in due course. We are already seeing some easing of restrictions on the property sector. Which, despite President Xi’s wish to reduce its importance to the Chinese economy, remains a key driver. Additional Premier Li was pushing local authorities to issue more bonds to finance infrastructure projects; so I would think demand for steel and cement will pick up quite quickly although the demand for energy especially for residential heating may mean production has to be curtailed.

German Greens plan shake-up of ties with China and Russia
The new coalition is already making waves and has been rebuked by China after outlining stronger policies on human rights and values. the article notes ‘The Greens have long argued that Merkel placed Germany’s commercial interests ahead of defending western values such as the rule of law and democracy. The Greens viewed her as too soft on China, failing to speak out strongly enough on abuses in Xinjiang and Hong Kong.’ They also mentioned Taiwan and disputes in the South China Sea.
China has already responding telling Germany to respect the ‘one China policy’. But this follows China’s response to Lithuania over Taiwan. Moreover today China has upped the stakes in the South China Sea by demanding that the Philippines remove a rusting freighter that houses a garrison on the Second Thomas Shoal. This follows China trying to stop its resupply by using water cannons from two Chinese Coast Guard vessels about a week ago. The shoal is 40 km from the Mischief Reef which China occupied in 1994 and then built huge facilites on in 2013/14.
It is notable that China often says it respects other countries and doesn’t bully them but as they say actions speak louder than words. Its failure to acknowledge the 2016 international tribunal on its Nine Dash Line further demonstrates that. It is that duplicity that is currently worrying investors about what further regulatory changes could take place under the ‘common prosperity’ policy.

Seoul longs for Trump approach to Pyongyang
South Korea feels Biden policy aims to manage rather than solve problems of engagement.
An interesting read but I think we have to remember that Trump didn’t actually solve the North Korean issue and that the process broke down because North Korea refused to dismantle its nuclear programme. That unwillingness suggests that there is no acceptable solution and hence managing the situation is a reasonable approach.
S Korea has a vested interest in finding a solution but the fact that they have been unable to get North Korea to negotiate and in fact saw North Korea close the cross boarder enterprise zone shows how little respect North Korea has for them.

Companies & Markets
High spirits Rémy Cointreau welcomes eased lockdown restrictions and jump in China sales
Strong cognac sales in China and the US a key driver for the company. But it concludes ‘Luxury-goods groups, including those in fashion, are hugely reliant on Chinese consumers for growth, and worries this year that China could bring in measures to regulate income and redistribute wealth had spread jitters across the sector.’
Many investors are already sidelined on China because they have yet to fully understand the implications of ‘Dual circulation’ and ‘common prosperity’ and today data as its reported that China is asking Didi to delist from in the US which will raise more uncertainty. Add to that China’s ‘zero covid’ policy and it is easy to see why investors are choosing other markets unless they have a mandate that locks them into China.

SK Hynix warned over fallout from US-China chip battle 
‘US opposition to SK Hynix’s plans to upgrade a plant in China will threaten the South Korean chipmaker’s competitiveness, experts have warned, as the sector is caught in growing technology rivalry between Washington and Beijing.’
The key being that the US wants to ensure that China does not benefit from technology transfer. It also notes that “The Koreans don’t want to be strong-armed by the Chinese but they don’t want to be strong-armed by the Americans either.”
Key being the US does not want the technology ending up with the PLA forces and it has the ability to prevent the machines that SK Hynix’s wants to put into China because they use US technology. The problem for SK Hynix is ‘Analysts warn that if the EUV machines are not installed in the next three years SK Hynix will fall behind rivals such as Samsung Electronics and Micron Technology in the race to boost productivity and cut costs.’
It raises the point of whether there are other countries that the US would allow the equipment be shipped to and whether supply chains will change on the basis of disputes like this?  Another issue I think for supply chains in China will be this week’s news that it will fine companies that support Taiwanese independence.  
Wall Street processes the end of Intel’s time as a chip champion

An interesting look at the changing landscape of tech firms. Key being that until Intel can show a solid plan and achievements investors are unlikely to sign up.

Bitcoin miners face bitter winter of power cuts in Kazakhstan
Grid operator rations supplies after relocation of rig ventures from China sparks blackouts.
Follows up an earlier story about the impact of China banning crypto mining and how the mining farms were moved to other countries and Kazakhstan was one of the preferred locations due to cheap power. An interesting read because it underlines how much power these farms can draw; it notes one farm was 2,500 rigs. Worth noting ‘Denis Rusinovich, co-founder of Maverick Group, a mining services company that operates in Kazakhstan, said that while some miners were operating legally, some “moved too fast and cut corners”. These miners “will be targeted because they don’t have any of the paperwork”, he said. To make up for the shortages, from 2022 legitimate miners will have to pay a surcharge of 1 Kazakhstani tenge ($0.0023) per kWh, a move that miners such as Rusinovich view positively, as it will “classify the official miners”.’
But key for Kazakhstan will be its power policy, short term its seeking additional power from Russia but longer term policy will be watched closely. In the meantime many are moving their machines despite the fact that Kazakhstan has a 12% export tax on the value of the machines! Worth a read.

For Interest
Fed can avert a rerun of Obama’s poll ‘shellacking’  By Mohamed El-Erian.
Makes the point that the Fed has been mistaken in saying inflation was transitory. But with new confirmations and new appointees the Fed has the opportunity to reframe its policies and in doing so help Biden win the midterms in Nov 2022.

We must not miss this chance to reform the WTO  By Valdis Dombrovskis  executive vice-president of the European Commission responsible for trade policy.
Starts ‘Ministers will hold the future of international trade in their hands when they meet in Geneva next week. They have a golden opportunity to breathe new life into the World Trade Organization.
Success could accelerate global economic recovery and boost climate action, while failure risks further fragmentation of the global trading system and erosion of trust among its members.’
It notes ‘the WTO’s rule book is badly out of date. Its ability to referee trade disputes is paralysed and it is out of touch with current imperatives such as action on climate change and the expansion of digital trade.’
There is an opportunity but it needs to be grasped.

Asia is the global inflation exception  By Robin Harding
A good summary about how the approach to dealing with covid impacted how much inflation was generated, especially by lockdowns. It concludes ‘For central banks in Europe and the Americas, Asia’s experience adds weight to the view that their high inflation was caused by disruption from the pandemic. That disruption should abate. But western central banks cannot be as sanguine as their Asian counterparts: if wages accelerate, then transitory pressures on inflation will become persistent. Differing choices in the handling of Covid-19 had many consequences. Those for inflation are now becoming apparent.’

LEX US stocks: great expectations 
‘Driven by the strong performance of technology stocks, analyst estimates for US long-term earnings growth are at a record high. Previous episodes of high market optimism have been followed by poor returns for shareholders. Fresh highs for equity markets mean cheap deals are eluding investment managers. Increasingly, there are questions over whether stocks are overvalued.’
Concludes ‘Past periods of exuberant expectations suggest that this is unlikely to be the case. In the run-ups to the bursting of the bubble and the financial crisis, analysts were similarly bullish.’
Worth a read.

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