Aug 4 Asia Mixed. FT on Crypto US vs SG, Afghanistan, Tencent , Fleeing HK

04 Aug

This and previous notes can be found at  Substack ( Asian Market Sense )
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Market opened higher and rallied to 7,509 in early trades before pulling back after weak construction data and found support 7,480 before working better through the PM currently  +23pts (+0.3%) @  7,498
Miners strong but Oil weak as China imposes lockdowns again. GUD weak; raised FY guidence but warned of covid uncertainty.
Data out
Construction Index Jul 48.7 vs 55.5 Jun (F/cast was 56)
Services PMI Jul 44.2 vs 56.8 Jun (F/cast was 44.2)
Composite PMI Jul 45.2 vs 56.7 Jun (F/cast was 45.2)
Due later Retail Sales Jun -1.8% MoMvs +0.4% May (F/cast was -1.8%)
RBA Chart Park.
Nikkei opened lower at 27,613 and sold down to 27,490 level before rebounding as PMI data came in better than expected and rallied to 27,635 level which it tested a number of times before easing into lunch.  PM opened lower and selling down as more earnings are being released. Currently -79pts (-0.3%)  @  27,562.  Earnings in focus with circa 130 companies reporting.  Toyota numbers just coming out with a beat.
Shippers were weak in the am session
Topix trading in a similar fashion currently -8pts (-0.4%) @ 1,923 Data due after the open
Services PMI Jul 47.4 vs 48 Jun (F/cast was 46.4)
Composite PMI Jul 48.8 vs 48.9 Jun (F/cast was 47.7)
S Korea
Kospi opened higher and has worked better through the session but saw resistance 3,276 and trading sideways currently +37pts (+1.2%) 3,275
Good earnings supporting the market.
Kosdaq dipped at the open but then traded in a similar pattern; currently +9pts (+0.9%) @ 1,046
Foreign Exchange Reserves Jul US$458.68 vs 454.11b Jun
KDCA announce 1,725 new covid case including at least two cases of the Delta plus variant
Taiex opened higher on good local earnings and effectively trading sideways currently +56pts (+0.3%) @ 17,619
CSI 300 opened lower but rallied strongly in the first 40 minutes after the strong Caixin PMI data to test 4,970 but failed to break above. Consoldiated to 4,950 before working better into lunch +27pts (+0.5%) @ 4,916
Services PMI Jul 54.9 vs 50.3 Jun (F/cast is 50.6)
Composite PMI Jul 53.1 vs 50.6 Jun (F/cast is 50.4)
Pre market data PMI Jul 51.3 vs 51.4 Jun (F/cast was 51)
HSI opened @ 26,162 -33pts vs-5pts ADR’s and initially dipped but then rallied on the strong Chinese PMI data but with resistance around 26,600 level. +410pts (+1.6%) @ 26,606 Ecommerce names rebounded along with the rest of the market. Sportsmakers strong as China intended to promote the sports sector by building/refurbing stadiums.
Expect a cautious open PMI data in focus along with earnings.
Eurozone Services and Composite PMI, Retail Sales
Germany Services and Composite PMI
France Budget Balance, Services and Composite PMI, New Car Registrations
UK Services and Composite PMI
US Futures
Opened slighty weaker but coming off new highs Dow -33pts , S&P -0.1% and NDX flat.
AHEAD MBA Mortgage Applications and 30yr Mortgage Rate. ADP Employment Rate, Services and Composite PMI, ISM Non Manufacturing Data (PMI, Business Activity, Prices, New Orders and Employment) EIA Oil Report.
Earnings : Booking Holdings, CVS Health, GM, Etsy, MGM Resorts, Allstate, Uber, Fox Corp., Electronic Arts, Roku, Kraft Heinz, Toyota, Sony, AmerisourceBergen, Marathon Petroleum, BorgWarner, Entergy, Apollo Global Management, New York Times, Scotts Miracle-Gro, Tupperware, MetLife, IAC/Interactive

FT Front Page
Norwegian rips up record
Olympics still making the front page

SEC’s Gensler seeks new powers to rein in ‘wild west’ crypto markets
• Investors exposed to scams • $1.6tn of assets in play • Regulators scramble to catch up
Some had hoped that with his in-depth knowledge of crypto that Mr Gensler would be more accommodating towards the sector. But he is, rightly, I think, calling for comprehensive investor protection. The key really is that he knows what he is talking about. I think that with good regulation the potential for it to become more mainstream quicker would be enhanced. Good to see a regulator seeking to get ahead of the market.
I still think the adoption of block chain into more areas will accelerate and than too will be positive for the adoption/use of crypto’s

Ukraine police probe death of Belarus dissident found hanged in Kyiv park
The discovery of Vitaly Shishov an opposition activist hanging from a tree in a park near his home in Ukraine, a day after he was reported missing with a broken nose. Local police said his death might have been made to look like suicide. Another negative pointer against Alexander Lukashenko, who recently called for a “mopping-up operation” of “bandits and foreign agents”.

US-Pakistan tension rises after Biden criticised
Top aide says Islamabad is struggling ‘to understand the signal’ from Washington.
An interesting read. It is sad that the elected government is not getting much support from its neighbours and the fact that China met with a delegation from the Taliban suggests that they will not be supporting the Kabul government. Afghanistan has a history of being the graveyard of empires and it will be interesting whether China gets sucked in as it seeks to defend its Belt & Road investments.

Senior Hong Kong broadcaster flees ‘white terror’
Steve Vines along time Hong Kong resident and commentator says he has left Hong Kong for the UK ‘because of a “white terror sweeping” the city that was making journalism a high-risk occupation.’  It also mentions the departure of ‘Initium Media, an  independent Chinese-language news website, said it would move its  headquarters out of Hong Kong to Singapore, and a day after Anthony  Wong, a Cantonese pop star, was arrested for singing at an election rally in 2018’.
The driver being citied is the new National Security Law and whilst it had been hoped that the level of free speech known before the law was enacted would remain, that seems not to be the case.
Interestingly Vines says ‘ he received a warning through a third party from pro-Beijing figures in the city. “They have this band of people who are not officially sanctioned . . . who go around threatening anybody who has, so-called, stepped out of line. Unfortunately, I was one of those,” he said.’
He sees no hope of the situation getting better. Carrie Lam the Chief Executive has ‘dismissed suggestions of any erosion of the freedoms promised to the city after the 1997 handover from the UK.’

I think it is fair to say that Hong Kong no longer has the freedom of speech it once had. The use of third parties to ‘warn off’ people seems strange when you consider the people they have already arrested. One wonders if there are ‘third parties’ whether they are actually endorsed by the administration or just taking ‘matters into their own hands’. Either way it is a big change from how Hong Kong used to operate. If we start to see business leaders, analysts and lawyers leaving then the future for Hong Kong will not be good.

Beijing shuts transport links as variant spreads
With cases of the Delta variant discovered in China the government is keen to try and prevent it’s spread but locking down transport routes until travellers can show that they are covid free. Short term -VE on travel related stocks and Macau names.
One would hope that with the resurgence of the virus in China it might be more open to allowing WHO members to investigate the original cases from China.

Highly paid nomad workers pose risk to nations’ tax revenues
An interesting read about what could become a problem for some countries if high taxing paying citizens decide to relocate to lower tax paying country’s.

Companies & Markets
Japan Inc talks a good game on ESG but more action is needed

Looks at the ‘Olympics and how business and sports people interact.
Opens with ‘Both the Japanese government and businesses are eager to portray themselves as open to diversity and change. The reality may be different, as an embarrassing string of scandals in the run-up to the Games has shown. But companies are under pressure to project a more progressive and socially conscious image with environmental, social and governance objectives suddenly high on boardroom agendas.’
The point it makes it that going forward it will require actions, not just endorsements, by companies for them to be taken seriously.
A good read.

Tencent clamps down on child gaming
After an article was published yesterday the company moved quickly to address the issue that was being raised. It will restrict children under 12 ‘from in-game spending and clamp down on minors playing on adult accounts.’ It also proposed other measures for the sector. The stock today has recovered most of Tuesday’s losses.
There is speculation over who was behind the article ‘A person close to the situation said the article had been intended to “test the waters” and might have been more extreme than regulators’ stance, prompting its removal.’
Whoever was behind it, it has shown that the company is able and willing to move quickly to address concerns. That is good for investors. For the regulator it also will give then confidence that they are in control.
The financials of the move are unlikely to be dramatic. But it could build up resentment from those who are having their choices restricted but its the parents that are likely to face the brunt of that.
Also interesting to note that the government has also announced a plan to get the population fit by building/renovating >2,000 sports parks, stadiums and fitness centers. It aims to boost the sports industry size to reach Rmb 5bn by 2025 together with a push for a nation wide fitness program. The sports names rallied hard on the news; names like Li Ning, Xtep, Anta, Topsports (6110 HK) all up over 6.5% on the open. Clearly Beijing is showing that it ‘cares’ about its people.
It is a great idea but getting people to adopt a new healthy lifestyle may be more difficult that banning the bad and providing the good.

For investors it suggests that there are going to be more policy moves that have direct impact on the citizens. That suggests that property will also be in focus but regulating that is much more difficult.

LEX Tencent/Alibaba: reading between the lions  Worth a read
Lions of stone flank the doors of some traditional Chinese homes in hopes they will stop spiritual threats from entering. State media is playing guardian too, condemning video games with the loaded phrase “spiritual opium”. Investors regard this as a death threat to a lucrative industry. They should remember that such broadsides may prove as perilous as stone lions.
Shares in Tencent, which gets 30 per cent of total revenues from games, fell as much as 11 per cent yesterday. A crackdown that started with fintech and spread to private tutoring and property is claiming another sector. Some western commentators will interpret this as evidence China is drawing back from capitalism.
That is, for the moment, as hyperbolic as comparing Tencent’s popular Honor of Kings adventure game to hard drugs. It is more pragmatic to perceive an official rotation of targets enlivened with a dash of moral panic about the young that is universal rather than specifically Chinese.
Games were the target three years ago too, when regulators halted licensing approvals, citing harm to teenagers. Crackdowns tend to coincide with record highs on a price-to-book basis. They can be read as interventions to cool overheating share prices.
Chaotic collapses would have an outsize impact on household wealth. Retail investors account for 80 per cent of investment in local equities.
Officials may see yesterday’s sell-off as a job well done. Tencent has compliantly pledged stricter limits on playing times for minors. In the last crackdown, its shares fell 45 per cent from 2018 peak to trough. They have since gained more than 70 per cent.
Beijing’s game of sectoral whack-a-mole does mean investors must expect limits on valuations of shares that will follow policy-driven cycles.
Alibaba, first in the current targets, shows what the damage can look like. In May, after a record $2.8bn antitrust fine, the ecommerce giant posted its first quarterly operating loss since its 2014 US listing. Income would have been up almost 50 per cent without the one-off. Second-quarter results out yesterday showed income rebounding to Rmb45bn ($7bn). Shares are down a quarter in the past year and trade at 20 times forward earnings, half the levels of six years ago.
Most of the worst is priced in. Expect a measured recovery.

Singapore set to approve digital asset exchange
A move that many have waited for and many others will hope that they might be next.
It would appear that Singapore sees crypto as an extension to its existing financial services business but is being cautious in its adoption.
An interesting read.
Markets Insight

Stocks turmoil brings Beijing a blessing in disguise By  Michael Pettis a finance professor at Peking university and a senior fellow at the Carnegie-Tsinghua Center for Global Policy
He sets out that the chaos in China’s markets last week was exaccerbated by foreigner sellers. Investors are attracted to China because its recovering quickly. It’s attracted capital and hope to promote the use of the renminbi. But it comes with a cost. ‘As long as it refuses to reimpose capital controls; something that would undermine many years of gradual opening up; Beijing can only adjust to these inflows in three ways. Each brings its own cost that is magnified as foreign inflows increase.
1. Allow the renminbi to appreciate but that would hurt exports
2. Intervene in the renminbi value but that would hurt doemstic monetary control.
'readers will recognise that these are simply versions of the central bank trilemma: if China wants open capital markets, it must give up control either of the currency or of the domestic money supply.'
He then suggests a third way
3. Encouraging the Chinese to invest more abroad, so that net inflows are reduced by higher outflows.
He suggests that is what they have been trying to do; ‘Since October, they have implemented a series of policies to encourage the Chinese to invest more abroad, not just institutional investors and businesses but also households.’
But there are still risks; the imbalance between inflows and outflows which would still leave China exposed to flight risk.
So the current situation is a blessing in that it should reduce inflows.
‘Until it substantially cleans up and transforms its financial system, in other words, China’s regulators should be more worried by too much foreign buying of its stocks and bonds than by too little.’
An interesting read but I think that China is torn about how to react; it needs foreign capital despite its high savings rate. But it still wants total control without having to be responsible for any failures.

For Interest
Inflationary pressures
Rising prices are giving Republicans a line of attack. While Joe Biden insists his spending plans will make the economy run more smoothly, his presidency is vulnerable to accusations of fiscal recklessness.

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