Oct 13 Asia mixed, HK closed for T8, Europe Cautious. FT Xi's gamble, Evergrande & more, Ships and Inflation


13 Oct

This and previous notes can be found at Substack ( Asian Market Sense )
Check out ERI-C.com  for your research needs today is their 6th Global Independent Research Conference, starts at 8.25am BST let me know if you would like details


Australia
Market opened flat and traded in a tight range.  It sold down to 7,260 in early trades before rebounding to 7,290 but unable moved higher and so tested lower before rebounding an closing flat; -8pts (-0.1%) @ 7,273.  Weakness in energy and Iron ore prices a drag on the market. Financials also weak with Bank of Queensland -4.3% after its 2021 results.
Gold moved higher and A2 +13.4% after a positive quarterly update by fellow infant formula business Bubs Australia.
Ex Div includes BlueScope Steel Limited (ASX: BSL), News Corporation (ASX: NWS), and TPG Telecom Ltd (ASX: TPG).
Data
Consumer Confidence Change Oct -1.5% vs +2% Sept (F/cast was +1.5%)
Japan
Nikkei opened lower on the weak Tankan number but quickly rebounded to flat and then tested to 28,364 on the good Machinery orders number but then sold down to 28,160 level and traded sideways for the rest of the day to close -90pts (-0.3%) @ 28,140
Topix followed a similar pattern to close -9pts (-0.5%) @ 1,974
Inflation concerns overhang the market. T/O was light with HK unexpectedly closed. Earnings also in focus
Leaders Property, Fish/Agri, Construction and Food
Laggards Shippers, Iron/Steel, Rubber and Financials
J Front +9.4% keeps FY forecast,
Taiyo Yuden -4.3% as Apple cuts iPhone production target. Nippon Paint -7%, Mitsui OSK -3.5% as BDIY falls as freight rates ease although some interesting FT articles on that today, see below.
Data
Tankan Index Oct 16 vs 18 Sept (F/cast was 20)
Machinery Orders Aug 17% YoY vs 11.1% Jul (F/cast is +13%)
Machinery Orders Aug -2.4% MoM vs 0.9% Jul (F/cast is +1.3%)
S Korea
Local Insts (Prop & Pension) turned buyers focusing on Tech and Auto.  On news Malaysian vaccinations progress meant semi con shortages were being resolved. Hyundai +2.9%, Kia +2.3%
Dooson Heavy +9.7% as nuclear power back in focus.
LG Innotek -3.4% as Apple cuts production target
Kospi opened slightly lower but rallied in first hour to 2,950 which was resistance all day and closed +32pts (+1.1%) @ 2,949
Kosdaq similar pattern resistance approaching 955, support at 950 and closed +14pts (+1.4%) @ 954
Unemployment Sept 3% vs 2.8% Aug (F/cast was 2.7%)
BoK Household lending Sept KR 1052.7tn vs 1046.3tn Aug
MSCI semi annual rebalance may prompt speculation in additions/delations
Taiwan 
Taiex opened higher and tested 16,545 in early trades but then reversed and trended lower, some support at 16,350 but day low was 16,328. Closed -115pts (-0.7%) @ 16,348 Third down day.
Shippers +VE on good Sept revenues Yang Ming +2.8%, Evergreen +3.8% and Wan Hai +3%. Insurers +VE on good Q1 to Q3 revenues.
Banks +VE too.
DRAM’s weak after Trendforce report Nanya Tech -2.3%
T/O US$9.14bn vs US$9.89bn Tuesday
US Department of Defense has reaffirmed its pledge to help Taiwan defend itself against Chinese military coercion, after Taiwan's defense chief warned last week that Taiwan Strait tensions are at their "grimmest in more than 40 years."
China 
CSI 300 opened flat and traded around 4,880 for most of the morning but rallied slightly into lunch as the Trade data was stronger than expected. PM saw the markets open higher and continue to rally. Resistance 4,955 around 2pm, then eased back and traded around 4.940 level to close +56pts (+1.2%) @ 4,940
T/O light as HK closed.
Shanghai Comp +15pts (+0.4%) @ 3,563 T/O US$54,899m (-17.5% DoD)
Shenzhen Comp +218pts (+1.5%) @ 14,354 T/O US$70,690m (-14% DoD)
ChiNext Comp +61pts (+1.8%) @ 3,411
Data
Balance of Trade Sept $66.76b vs $58.34b Aug (F/cast is $47b)
Exports 28.1% YoY Sept vs +25.6% Aug (F/cast is 21%)
Imports 17.6% YoY Sept vs 33.1% Aug (F/cast is 21%)
Reflects the period before the power outages in China But the low import data reflects the controls placed on iron ore and coal imports and to an extent the covid outbreak that closed one of China's main ports. Overall the data is a slight +VE but the low import data means that China is unlikely to be able to maintain that level of exports
Hong Kong 
Market closed all day due to Typhoon 8 market will be closed Thursday too (Double Ninth Festival) ; re-opens Friday ADR’s were -30pts but margin calls after Tuesday’s sell off would have added to downward pressure.
Europe
Markets open slightly lower and dipping with caution ahead of US inflation data and US earnings.  German inflation in line, UK data mixed Balance of Trade missed but GDP and Production data +VE
LVMH Q3 a reassuring numbers but sees growth slowing
Eurozone
Industrial Production due at 5pm
Germany  
Inflation Rate Sept 4.1% YoY vs 3.9% Aug (F/cast was 4.1%)
Inflation Rate Sept 0% MoM vs 0% Aug (F/cast was 0%)
Harmonised Inflation Rate Sept 4.1% YoY vs 3.4% Aug (F/cast was 4.1%)
Harmonised Inflation Rate Sept 0.3% MoM vs 0.1% Aug (F/cast was 0.3%)
UK  
Balance of Trade Aug £-3.7B vs £-2.9B Jul revised  (F/cast was £-2.8B)
Goods Trade Balance Non EU Aug £-8.4B vs £-8.1B Jul revised
Goods Trade Balance Aug £-14.9B vs £-14.095B Jul revised (F/cast was £-11.6B)
GDP 3 Month Ave Aug +2.9% vs +3.6% Jul (F/cast was +2.5%)
GDP Aug +0.4% MoM vs +0.1% Jul (F/cast was +0.6%)
GDP Aug +6.9% YoY vs +7.5% Jul (F/cast was +6.5%)
Industrial Production Aug +0.8% MoM vs +0.3% Jul revised (F/cast was +0.4%)
Industrial Production Aug +3.7% YoY vs +4.4% Jul revised (F/cast was +3.2%)
Manufacturing Production Aug +0.5% MoM vs -0.6% Jul revised (F/cast was +0.2%)
Manufacturing Production Aug +4.1% YoY vs +6.1% Jul revised (F/cast was +4.1%)
Construction Output Aug +10.1% YoY vs +13.1% Jul revised (F/cast was +5.1%)
US Futures
Opened lower Dow -56pts, S&P -0.3% and NDX -0.4% as US House voted on debt ceiling increase.  They eased during the day and currently Dow +7pts, S&P and NDX slightly -VE  Focus on US inflation data, FOMC minutes and JPM earnings.


FT on line
Xi gambles on economic tumult to cement his legacy

Chinese president sees Evergrande crisis and power crunch as chances to enact tough reforms.
Notes that ‘If successful, it will be the latest in a long series of bold political gambles — from the elimination of term limits on the presidency to his pursuit of “common prosperity” — that have made him China’s most feared leader since Mao Zedong. It has also put him on the cusp of an unprecedented third term in power at the Chinese Communist party’s 20th congress late next year.’
I think it may also embolden him regarding Taiwan which would be dangerous. A good read that underlines the pressures that the economy is under.

Europe’s trucker shortage becoming ‘extremely dangerous’

Dearth of drivers blamed on soaring demand, low wages and poor working conditions

FT Front Page Print.
Pile of trouble
Ships rerouted as UK clogs up
A lack of drivers means that it has run out of container space
See also under Companies & Markets
Maersk diverts larger vessels from UK  
Move prompted by Felixstowe congestion amid driver shortage.  Key being this could impact shippers priorities.  It also notes that part of the problem is the high level of empty containers.  Also that this has prompted some to move freight to rail or air.
Also LEX Freight/Felixstowe: boxed in
Concludes ‘Felixstowe is not the only port with bottlenecks. Ships docking at their destinations are doing so an average of 7.6 days late. That is almost double the average of the past three years. The figure is rising. Expect shipping companies to upgrade full-year earnings again this year.’
‘Be very, very vigilant’ as inflation risk rises, IMF tells central banks
• Price pressures mounting • Growth momentum slipping • Early action on tightening urged.
Basically warning that inflation risk is real and may not be transitory; so central banks need to be ready to act quickly. She also said it was too early to say about stagflation especially as there are so many potentially transitory influences. Mentioned weather but I would add things like truck drivers in the UK, skills mismatch in the US and Europe; all things that can be addressed but the longer they are not the higher the long term inflation risk becomes. She highlights that they should focus on ‘signs that companies, households or workers expect high inflation to linger.’ That is the ‘chicken and egg’ issue; people are already seeing price rises and so are likely to seek higher wages; they are not as rational as the FOMC members and do not consider if things are transitory or not; they just want more money to pay the bills!
See also Hopes and fears for global recovery
After the pandemic, the job of central banks is simple — less generous, better targeted assistance By Martin Wolf

EU’s record-breaking €12bn debut flags ambitions in green bond market
The EU attracted strong demand from investors for its inaugural green bond of €12bn of 15-year debt attracted more than €135bn of orders and marked the largest green bond deal, narrowly eclipsing the UK’s £10bn debut last month. Reflects the desire of funds for green bonds; although the green bonds will be based on the EU’s sustainable finance rules, but they have yet to be finalised as governments are split over whether to include gas and nuclear as green activity.

INSIDE

Global insight Taipei
China’s assertiveness forces US and allies to act in Asian waters
Notes the increased activity from a number of navies in the South China Sea; to the annoyance of China.   But China’s recent increased use of it military dominance to pursue territorial claims has effectively forced other countries like US, UK, Australian, Canadian, Japanese and New Zealand to act.  It notes the international presence has upset the PLA’s operations but it has countered by carrying out operations of its own ‘against’ the perceived threat.  It also notes that having weaponised a number of the disputed reefs (despite Xi having told former US President Obama China would not) China has extended its reach and continues to deploy more advanced equipment.  
It also mentions how China’s actions have also rallied nations into offering support for the smaller Pac Rim nations like Vietnam, Malaysia and the Philippines. But its not all one way; China has built up its ties with Cambodia. One thing that is for sure that as China increases its rhetoric over the unification of Taiwan there will be a lot more international activity.
See also Editorial The acute dangers of a conflict over Taiwan
China-US tensions heighten risk of mishaps spilling over into war
Well worth a read. In summary
‘The need for peace and stability does not mean there must be compromise. Beijing will not waver on its territorial claims. No matter what the temptation, Washington should avoid any dealings in which Taiwan becomes a bargaining chip. The democratic rights of 23m Taiwanese people can never be exchanged for concessions on trade or anything else.
Most fundamentally, future decades of peace across the Taiwan Strait depend on recognition that military conflict would be a disaster for Taiwan, China, the US and the world. Quite aside from the hideous human cost of any fighting, any war would overturn a global order under which Taiwan and China have both prospered mightily, to their own benefit and that of their trading partners. Beijing and Washington would emerge from such a conflict to a world riven into hostile blocs. Whoever the ‘winner’, all would lose.
The choice across the Taiwan Strait is between a tolerable status quo and a disastrous conflict. That will not change. On all sides, therefore, the need is for common sense, calm and cool heads.’

Rush for diesel generators threatens China green goals
Factory owners are turning to diesel generators to counter the national power outages which is likely to dent China’s green ambitions.
It is interesting that whilst the some provinces have ordered factories to shut the owners are looking for ways to stay open. The whole issue is being made worse by the approach of winter and the unseasonal wet weather in Northern China.
China has also been forced to increase coal production and usage as well as easing control over the prices charged by the electricity producers.
The article notes ‘Weifang Yuxing Power Co in Shandong province told the Financial Times the company had sold out of diesel generators after a rush of orders in September in the wake of the crunch.’ Now they are waiting for more key parts an indication of the knock on effect of the power outages.
But overall that may be good news for other generator manufacturers in the short term.
Worth noting that yesterday President Xi announced that China has already started building a 100 GW wind and solar project in desert areas; which will help but will take time. I think there is a lot of rehetoric being spoken without much solid planning. When the initial timings were made they were optimistic and were also hoping for technological advances to help them. Furthermore the trouble with some of the desert projects is that they will suffer from sand storms and additionally connecting them to the grid could be expensive.
S Korea presidential hopefuls unveil raft of radical policies
Looks at the various proposals being suggested by the presidential hopefuls all of which seem to fail on the basis of funding. It concludes “With many people in economic trouble, they want a charismatic leader with a strong image,” Shin said, “regardless of how plausible their platforms are.”

Companies & Markets

Inside Business Asia
Evergrande crisis underlines growing risks faced by audit firms
Makes the point that if Evergrande was listed in the UK or US its auditors would be being questioned.  It’s admission that it might not be a ‘going concern’ highlights the seriousness of its current position and yet 6 months ago PwC happily signed off on its accounts.
Basically it looks at how auditors in China work to different standards and how the likes of ratings agencies and brokers take a different view of the annual report and its contents. It highlights how accounting research firm GMT Research had said the company was insolvent and yet the company was able to continue trading and hide off balance sheet debts.
It notes ‘In Asia, the audit firms have avoided much of this public flogging but reputational risks in this part of the world are growing. Already the Big Four have become caught in geopolitical tensions between the US and China over access to the audit documents of Chinese companies listed in New York. And an accounting scandal at China’s Luckin Coffee over fake sales led to questions about the quality of audit work done by EY.
Auditors are also likely to be in the crosshairs of Beijing regulators. China’s finance ministry declared that it would attempt to improve the quality of company audits in 2021, enforcing “strict law enforcement and strict supervision”.’
It would be nice to think that events like this might encourage China to join the rest of the world in implementing a common set of accounting standards but that is unlikely.
Equally the Chairman’s party connections have clearly helped the company’s growth and yet at this stage he is not being singled out by the party or investigated and that to a extent brings the party into disrepute as that link was presumed by many as meaning that the company was good.
All of which highlights the need for not just due diligence but full understanding. It also reveals that the normal market mechanism of shorting poor companies does not necessarily work in China or these days Hong Kong; ‘caveat emptor’.

Deadline on Evergrande $148m interest payments arrives with bondholders still waiting
Looks at the knock on effect from Evergrande’s default to the other Chinese property developers and the Asian high-yield bond market where Chinese developers have been major players and been seen as safe borrowers as the bonds have been effectively underwritten by rising Chinese property prices. That has changed with the change in President Xi’s policy and the introduction of ‘Dual circulation’ and ‘Common prosperity’.
It notes “The problems in the Chinese property sector are now impacting upon investors’ general view of systematic risk,” said Charles MacGregor, head of Asia at Lucror Analytics. Chinese high-yield bonds were “under extreme pressure given a dearth of buyers”.
One of the most worrying aspect is the lack of communication between Evergrande and the bondholders.
I still think that whilst this may not be a ‘Lehman’ moment that it has a lot further to go. Whilst it is becoming apparent that the offshore bondholders are being disregarded and the company and government are keen to see homebuyers and wealth management investors prioritised there are a lot of other moving parts. Whilst the banks direct exposure to the property element may be contained, I have concerns about other suppliers to the property sector, think of the number of boilers, showers, kitchen units, toilets etc etc, all those suppliers need paying and a lot of them run on bank debt. This could have a long way yet to run.

LG Chem to meet $1.9bn of General Motors’ Bolt recall costs
Focuses more on GM than LG Chem and LG Electronics. Interestingly LG Chem was trading higher today now the cost of the incident has been quantified and revealed.

Pages 8 & 9  of the FT is and full page advert for the China Daily; with articles on China’s application for the CPTPP, Farmers using drones, Beoing being bullish on China’s air travel and Digital Money; stressing how advanced China is compared to some countries.  Page 9 EU climate action and Students working with dolphins.  An interesting read.
Heavy retail trading lures quant funds to China
DE Shaw among heavy hitters attracted by improved access and ‘exploitable inefficiencies’
Key seems to be ‘Better tools for hedging, easier access and heavy trading by Chinese retail investors, who create copious opportunities for quant strategies to generate returns, all lure the quant funds in.’
‘The ultimate draw for quants in China are the country’s retail investors, who drive heavy turnover in Shanghai and Shenzhen. “There is a lot of systematic flow there . . . because there is a lot of local retail flow,” said one European quant fund executive.
Industry insiders point to retail investors’ lack of sophistication and frequent failure to conduct fundamental analysis that can make them easier to bet against.’
‘While quants could theoretically trade through Hong Kong’s stock connect programmes with Shanghai and Shenzhen, these link-ups covered less than half of companies trading in the mainland’s so-called A Share market as of the end of 2020.’
It does note the reaction to their arrival is not exactly with open arms; ‘A story in the state-run Securities Times last month quoted unnamed local quants who described foreign competitors as “the wolves arriving”.’
But ‘while Beijing was encouraging “manageable” growth of quant trading, non-Chinese funds would still be vulnerable if markets tanked.
“If [regulators] want to pick someone to blame, they have to blame the overseas quants, because domestic peers are still under-developed,” Pang said.’
An interesting read.
For interest
FT BIG READ. TECHNOLOGY
How Musk transformed the space race
The entrepreneur hopes to take humans to Mars. Though challenges remain for SpaceX, such as ensuring the Starship’s rockets can be reused, rivals fear it will dominate US deep space exploration.

Markets Insight
High-yield debt investors face energy dilemma
Ellen Carr a bond portfolio manager at Barksdale Investment Management.

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