Oct 11 Asia mixed, S Korea & Taiwan closed. FT China AI supremacy, Global recovery risk, Decoupling, Expensive masks

11 Oct

This and previous notes can be found at Substack ( Asian Market Sense )
Check out ERI-C.com  for your research needs

Asian markets seeing a mixed start with S Korea and Taiwan closed.
Airlines especially Asean ones +VE on opening travel corridors.

Market opened lower with allegations about the casino operator Star Ent -18% being involved in money laundering and other improper activities (-VE cross read).  CBA also opened lower but has recovered as it faces fines for underpaying staff.  Energy names +VE as oil prices rise and Ampol’s take over of  Z Energy.  Iron ore prices +VE as China re-opens and Collins Foods +VE as lockdown in NSW ends.
Market dipped to test 7,250 in early trades which it traded a number of times before working better. Currently -33pts (-0.5%) @ 7,286
Sentiment helped by weak Yen +VE exporters and PM Kishida saying not plans for capital gains taxes but aiming at more stimulus.
Airlines +VE on more talk of travel corridors and opening up. Sony +VE on news of JV with TSMC for semi factory in Japan.
Earnings remain in focus. Yaskawa initial weakness but working better.  
Nikkei opened lower 27,977 but worked higher, slight resistance at 28,400 and then at 28,550 after which it eased back; 28,493 at lunch.  PM drifting slightly lower.
Topix opened higher and worked higher, resistance at 1,993. PM trading around 1,990 level.
Machine Tool Orders due at 2pm Sept (Aug was 86.2% YoY F/cast is 80%)
S Korea Market closed  re-opens Tuesday
Taiwan Market closed  re-opens Tuesday. Tension with China over annexation running high after comments from Chinese President Xi, Taiwan says it will defend its freedom.
China CSI 300 opened strongly, testing 4,980 before trending lower to +23pts (+0.5%) @ 4,953 at lunch.  Coal names surging Xi revises energy pricing after flooding in Shanxi puts supplies in jeopardy.  PBoC pre market drains 190b with reverse repo’s.  But news that Helongjiang relaxing home loan policy, offering subsidies to attract immigrants and +VE terms for Developer pre-sales.  But sentiment remains cautious with Evergrande seen as the precusor for other developers who are in breach of the ‘three red lines’.
Shanghai Comp +14pts (+0.4%) @ 3,606
Shenzhen Comp +3prs (+0.02%) @ 14,417
ChiNext Comp -17pts (-0.5%) @ 3,442
HK Pre market opened @ 25,162 +324pts vs +152pts ADR’s  prompting wider short covering with market rallying to 25,350 levels.  Baba +9.4% and Meituan +8% as Meituan fine was less than expected suggests crackdown easing; Tencent +3%, JD.com +5.3%. Energy strong with coal prices surging; IPP’s +VE as they will be allowed to raise prices.  Tech also firm.  Sportswear weak along with HK Property and Financials.  
Worth noting Severe Tropical Storm Kompasu is enroute towards HK
and could come within 400km tomorrow and increase to a typhoon which might impact the market Tuesday/Wednesday and key as the market will be closed on Thursday.
Europe No data due but expect a cautious open after the US jobs data, US earnings kicking off and a large number of Fed speakers this week..
US Futures opened Dow -71pts, S&P -0.28% and NDX -0.33% caution as Q3 earnings season gets under way (JPM, GS, BoA, MS, Wells Fargo and Citi on Wednesday) and after the weak jobs report Friday and GS lowering their growth forecast.

Front Page 

Bloc support
Poles rally in favour of EU  Public support for remaining within the EU even though the government is pushing back against EU rules, especially regarding the courts.

Kremlin envoy urges Europe to fix Russia ties to avoid gas shortages
• Chizov rejects Moscow role in supply squeeze • Gazprom to act ‘sooner rather than later’
Whilst denying it is responsible for the rise in gas prices, Russia is hinting that Europe needs to tone down its comments against Russia if further problems are to be avoided. Russia has also added that approval for the new Nord Stream 2 pipeline would also help. But many see that as putting Ukraine at risk.

Pentagon’s ex-software chief believes China’s AI supremacy is a ‘done deal’
Looks at the resignation of the Pentagon’s first chief software officer who cited the ‘slow pace of technological transformation in the US military, and because he could not stand to watch China overtake America’.
An interesting read highlighting his complaint that US firms were lagging behind because whilst Chinese firms were forced to work on Chinese projects over AI, US ones declined on ethical grounds.
An interesting read but the freedom of companies to work with governments must be one of the bedrocks of a free society.

FT Tiger index
Brookings data show global rebound at risk
Momentum threatened by supply bottlenecks, energy costs and inflation.
Notes how growth in China and the US is slowing whilst the threat of covid-19 still overhangs. Its key point being that governments are no longer able to just boost spending without that generating its own problems; because of inflation concerns.
It contrasts that data from March which reflected the positives associated with vaccination, with the latest survey which highlights the supply bottlenecks/shortages and rising energy prices. Furthermore there are signs of economic scarring in the EM’s and low income economies. It notes two months of weak US jobs data whilst the US Fed seems committed to starting tapering.
For China a resurgence in covid along with a re-orientation of the economy is creating its own issues, not least the status of property within the existing economy and its place in a future economy where ‘shared prosperity’ and ‘dual circulation’ are more important.

I think there will be some slowing but the approach of christmas may provide a respite, which, coupled with increased business travel and an easing of shipping bottlenecks could spark a new start.
Read also Retail. Distribution
Seasonal shopping crush arrives early in US as supply chains buckle
Large groups are stocking up early but many will struggle to secure popular products.

Companies & Markets
Return to vendor US stock buybacks leap to record $870bn in sign of improved outlook

Companies benefiting from the recovery are using the cash to buyback back stock. Key being that US companies are flush with cash (and inline with the above) are not confident about the recovery and hence but not looking to invest in their businesses but buyback stock.
Key being ‘Share buybacks can appeal to management teams for a number of reasons. The schemes can directly lift companies’ share prices by reducing the number of shares in circulation and increasing demand.
Cutting the number of shares in issue can also provide an indirect boost to stock prices by improving earnings per share — a closely watched measure of profitability.
However, Silverblatt also noted last month that the recent repurchases have had relatively little impact on earnings because share prices are so high.’
The news is not all bad, it notes that ‘the buyback totals have been disproportionately driven by a small number of companies. Just 20 companies accounted for 56 per cent of spending on share buybacks in the second quarter, with Apple, Alphabet and Facebook leading the way.’
That suggests to me another reason for rotation out of the expensive tech sectors as the Fed remains committed to tapering and in due course raising interest rates.

Wall Street banks face rising cost pressure
Earnings restrained by spending on pay and tech to fend off digital upstarts. Worth a read ahead of the start of US quarterly earnings with the major US banks due to start reporting on Wednesday.

Companies prepare for a ‘selective decoupling’ with China   By Leo Lewis.
Notes how law firms are seeing more decoupling than the investment banks are. Law firm’s clients are talking about supply chains whilst investment banks are working with private businesses that are still seeing the support of Beijing. For me the key is being in line with government policy. Fundamentally Beijing is wants to move away from cheap manufacturing and reliance on property for growth and into advanced manufacturing (semi cons, telcos, AI, IOT) and scaling the added value ladder. Which as the article makes clear means selective decoupling. For bankers they are seeing growth in financial services and other areas.
It concludes ‘For now, at least, say bankers, lawyers, academics and investors, the “selective decoupling” narrative may have to do. But we may, at least, have a clean way of monitoring that narrative as it plays out. Japan’s appointment last week of its first minister for economic security may have appeared a broad beat but it is, say political analysts, a tacit admission that the engagement of foreign businesses with China is now a big enough deal to require its own branch of government to oversee.’
It will be interesting to see and Biden builds alliances how much more governments get involved in business investment in China.

Cheap masks come at a high cost for the US  By Rana Foroohar
Looks at the history of mask production in the US in the light of the US trade representative, Katherine Tai’s comment about the US and China that “this bilateral relationship is complex and competitive”.
Notes that during the pandemic (post the imposition of tariffs on personal protective equipment) US manufacturing of masks got cheaper as material costs and production efficiencies kicked in.
It notes ‘Incremental innovation has made countries like China and Germany rich. But the US largely gave up on this model in the last half century, and embraced a more fragmented global production system. This is good for multinationals and Asian workers but less good for much of Middle America, which is the starting point of both Trump and Biden’s trade policy.’
That is now the challenge for US policy competing with cheaper suppliers, especially ones who don’t play by WTO rules.
It concludes ‘If the US is serious about rebuilding manufacturing, it’s going to need a much bigger, broader public sector commitment that moves beyond “just in time”, and towards “just in case”. It is also going to need to look closely at how one-cent masks get made, and whether they’re really worth the price.’
An interesting read.

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