June 11 FT Thoughts Inflation, Global Tax; carve outs, Green China, Toshiba Govt influence and more


11 Jun

This and previous notes can be found at SubStack
Check out ERI-C.com  for your research needs

Asia at noon
Taiwan, China and Hong Kong closed Monday

Australia
Market ticked higher on the open but then consolidated from the new high to 7,275 before working back into the green.  Initially  resistance at 7,320 which was tested a number of times then around 1:30pm broke above; currently +23pts (+0.3%) @ 7,325 new high.  Leaders are BHP, Rio Tinto and FMG rise with tech stocks and gold miners.  AMP announced  Shawn Johnson as AMP Capital’s new CEO slightly +VE. Crown Resorts weak on news Victoria has extended its royal commission into the company.
Monday New South Wales public holiday.
Bisbane named as host for 2032 Olympics
Japan
Toshiba -1.4% after daming independant report on management and govt collusion against shareholders.
Nikkei opened higher but sold down, poor BSI data with Tech Financials, Property and Airlines under pressure.  Initially rebounded off 28,940 back to the opening level. Then sold down to 28,840 before rallying to 29,080 and bounced around there before selling down to 28,916 before a tick up into lunch; -35pts (-0.1%) @ 28.950.
Topix traded in a similarly choppy pattern. Opened 1,957 (flat), morning low was 1,945 then rallied to 1,960 high. At lunch -5pts (-0.3) @ 1,951
Data
BSI Large Manufacturing Q2 -1.4 vs 1.6 Q1 (F/cast was 2)
S Korea
Kospi opened higher and rallied to 3,252 on good exports data. Retrenched to 3,234 and then trended slowly higher in choppy trading currently +18pts (+0.6%) @ 3,243
Kosdaq opened in a similar pattern but trended slightly lower currently +3pts (+0.3%) @ 990
Data
Exports First 10 days June +40.9% YoY
Pre Market
Export Prices May +12.3% YoY vs 11.1% Apr revised from 10.6%
Import Prices May +13.8% YoY vs 15.3% Apr revised from 15%
KDCA reported 556 new covid cases back under 600 +VE
BoK hints at rate rise this year.
Taiwan 
Taiex opened higher at 17,200 worked better to 17,280 around 10 am an then trended lower currently +37pts (+0.2%) @ 17,205. Shipping & Steel +VE along with TSMC and Tech +VE
News reports that China issued an invitation for Taiwanese people to travel to China for inoculation but not many interested.
Market closed Monday for Dragon Boat Festival
China 
CSI 300 opened +4pts but sold down for the first 40 minutes to 5,213 before a bounce back to 5,245 but then sold down to 5,225 with a uptick into lunch -41pts (-0.8%) @ 5,230 China closed on Monday for Dragon Boat Festival but watch for Team China in the PM session. Sentiment -VE on new data security law which gives Beijing the power to shut down tech companies. Anti sanction laws also seen as restrictive.
Govt to release copper reserves to ease prices. CBIRC highlighted 5 key areas for Risk Prevention
HK Pre market opened @ 28,865 +126pts vs +50pts ADR’s   initially ticked higher to 28,965 but then sold down to Thursday’s closing level after 40 minutes, then rebounded to test 28,900 but failed and eased lower into lunch  +112pts (+0.4%) @ 28,851
Prada +VE on CS upgrade. E commerce +VE except Baba. Solar weak as NDRC to Cut Subsidy for Solar Plants to Standardize Electricity Price. Sentiment hurt by news HK amending Film Censorship on National Security grounds
Hong Kong Closed Monday for Dragon Boat Festival.
Europe
Likely to open slightly +VE following Asia and +VE news from G7.
Data
GERMANY Bundesbank Semi Annual Forecasts
FRANCE IEA Oil Report
UK Construction Output, Industrial & Manufacturing Production, GDP 3-month average, Goods Trade Balance, GDP, NIESR monthly GDP tracker
US Futures
Opened Dow and S&P flat, Nasdaq +0.1%
Ahead
Michigan Data Prelim (Current Conditions, Inflation Expectations, Consumer Sentiment, 5year Inflation Expectations, Consumer Expectations) Baker Hughes Rig Count.

FRONT  PAGE
‘Vaccinate the world’ pledge

Leaders of the seven advanced economies will pledge to provide 1bn corona-virus jabs to countries in need, as part of a plan to “vaccinate the world” by the end of next year. The vow is an effort to counter moves by China and Russia to sell their jabs to poorer nations. Other topics on the agenda include climate change and the economic recovery.

Challenge for Fed as US consumer prices rise at fastest rate since 2008
• Inflationary pressure builds • Monthly CPI figure up 5% • Cars, clothes and flights fuel increase
Key being that the markets are currently beleiving the Fed’s line that this inflationary forces are temporary only and will ease in due course (they said the same back in 1970 too). Only time will tell. The key parts being: flights, household furnishings and operations, new cars, rental cars and clothing. Many economists also mentioned used car prices skewing the results.
The Europe the ECB followed a similar path and keep its policies unchanged.  Read also Inflation bets run out of steam as bonds rally  which concludes ‘Despite the pullback in inflation expectations and bond yields, some investors remain wary about calling time on the market’s inflation scare.’

Goldman says US bankers must reveal vaccine status before return to office.   One of the stronger approaches regarding a return to the office.  Interesting to see that the US banks are being a lot more aggressive about staff returning vs the European banks.  The cutltural difference probably goes a long way to explaning the performance differences too I would say.

INSIDE

ECB resists pressure to ease stimulus
Central bank inflation forecast raised but Lagarde says tightening ‘premature’
Key is that it raised growth forecasts for this year and next and switched its comments saying risks were “tilted to the downside” to “balanced”. Like the Fed the ECB believes it is too early to move and wants to see more evidence of the recovery and its strength.

Leak shows US tax rules, not super-rich, are the real problem
Makes some good points.
First ‘It makes no difference whether a billionaire believes they should be paying higher taxes or not. They get away with what they can get away with. Years ago Warren Buffett pointed out his secretary paid a higher income tax than he did. He has done nothing to change that reality.’
Second is it ‘exposes the modest scope of Joe Biden’s proposed tax increases.’
It would reform capital gains tax which would be a meaningful change.
It asks why is Biden not undertaking more profound reform. basically because politically its too difficult to achieve.
It concludes ‘The unanswered question about ProPublica’s leak is where it came from. The news site does not know its origin but has corroborated the data against other sources. A reasonable suspicion is that it was hacked by an entity that does not wish US democracy well. No single IRS officer would have access to all this information. Whoever supplied the leak would know it would deepen public cynicism about America’s creed of playing fair and working hard. The lesson Biden should draw is simplicity is democracy’s friend. If the rules were clear enough for people to understand, there would be less demand for such leaks.’
A good read and a sad reflection on the those that could work for change like Warren Buffett who has committed to giving much of his wealth away.

Researchers warn of possible damage from green strategies
Worth a read, makes the point that just planting a tree might increase the problem rather than solve it. It is a matter of planting the right tree in the right place.
‘“Biodiversity loss and climate change are both driven by human economic activities and mutually reinforce each other,” the researchers said. “Neither will be successfully resolved unless both are tackled together.”’

‘Special pleading’. ‘Pillar one’ talks
US-led corporate tax compromise threatened by calls for exemption
British lobbying to exclude financial services highlights hurdles facing final accord.
Key being that whilst the UK wants the City excluded every country will want certain areas or companies excluded; thus undermining the original intention. The key point about tax regimes is that they should be simple.
‘Dubbed “pillar one”, it needs a global agreement between countries to allow some of their resident companies’ profits to be transferred to another country, using an agreed formula.’
Worth a read.  Also read G7 tax assault leaves multinationals unfazed
Plan to levy at higher rates and where sales take place draws muted response from businesses and investors.
Summed up ‘That would lead to a cat-and-mouse game that the tax authorities would find hard to win, some experts warn. Any attempt to tax individual units within companies would prompt them to restructure to get around the taxes or try to place their most profitable divisions in low-tax countries, said Bob Willens, a US tax analyst.’
Another interesting point to remember is that part of Biden’s goal in this exercise is to prevent other countries from enacting digital tax plans which could cost some US companies more. His global tax ambitions are actually likely to be the lesser of two evils for a lot of US multinationals.

Companies & Markets
Basel banking panel pushes for stringent crypto regime

• Toughest of capital rules proposed
• Watchdogs highlight array of risks
Worth a read because it give more credibility to crypto but also because it shows that the Basel Committee is keen to address the issue with new rules rather than trying to adapt existing rules to fit crypto. Would treat ‘stablecoins’ differently.
Regarding crypto the risks it mentions are ‘market and credit risk, fraud, hacking, money-laundering, and terrorist financing risk.’
Worth a read along with State Street launches crypto management unit and Crypto. Risk concerns
Commercial paper disclosures put Tether among global giants
Stablecoin operator would be one of the largest investors in the US market, says JPMorgan

Swire’s ‘next chapter’ ends as scion leaves Hong Kong
Eponymous trading house shifts focus in wake of Covid hits to airline and property.
Looks at Merlin Swire’s tenure in Hong Kong which co-incided with the protests in Hong Kong and then covid.
Key for Swire now is the existing businesses. Cathay Pacific is now a liability, with few options and having China Airlines has not protected it from political flak. SwireProperties has significant interests still in Hong Kong and potential in China; whilst some accuse it of being slow in China I think their stealth is wise. China is a notoriously difficult market; even Cheung Kong and Henderson have experienced difficulties. Talking with Ronnie Chan, Chairman of Hang Lung Property a while ago; he is very pro China but cautious. They have other businesses too which are well managed but hurt by the pandemic.
It compares Swire with Jardine Matherson, which relocated out of Hong Kong and diversified more into Asian and autos.
The reality is that all these colonially linked companies are in the crosshairs of Beijing.
For Merlin the article portrays him as a humble, observant, private individual. One would hope that his time in Hong Kong has given him a flavour of the environment that will help him when making decisions over the business from London. If it has done that then it will have been time well spent for him, Swire and shareholders.

Commodities
China’s strict goals to reduce carbon emissions fire up prices of metals
Looks at how China’s bold pledges to reducing carbon emissions will require a large revamp of the sector. The expectation being that the deflationary element associated with the export of Chinese steel will ease and that will add to global inflationary pressures.
The proposed cuts it is estimated ‘would leave little spare capacity outside of China to meet demand, according to Serafino Capoferri, an analyst at Macquarie. “In developed economies, the focus is on decarbonising steel production, and many companies are reluctant to spend capital on expansions given the looming outlays required to transition steel production to more sustainable technologies.”’
So far the ‘ministry of ecology and environment issued a draft regulation that will require new energy-intensive projects to include an assessment of their carbon emission. The regulation would cover six industries including thermal power, petrochemicals, coal-to-chemicals, steel, non-ferrous metals smelting and cement.’ The key will be in the details of the implementation.

Lex China: green giant  When Beijing puts its support behind a sector, investors take note. Its  backing for renewable energy projects means that the initial public  offering for China Three Gorges (CTG) Renewables, the largest one this  year, was always going to attract attention.
Concludes ‘Beijing aims to hit a 2030 target of more than doubling the share of wind and solar in local power generation to 25 per cent. This means demand should not flag. Added urgency comes from rising coal prices, due to a local shortage of coal amid booming industrial activity.
Another positive note: renewable energy is not likely to face many regulatory risks. Contrast that with the antitrust crackdowns the local tech sector faces. Given Beijing’s carbon neutrality plan runs to 2060, CTG Renewables offers long-term promise.’
Worth a read.

Independent probe finds Toshiba colluded with government  
A daming report on the Toshiba management, the Japanese government and even PM Suga; who was Chief Cabinet secretary at the time and met a Toshiba executive according to the report. It says ‘The investigators conclude that the plot included “acts suspected to be against laws” and represented an attempt to unfairly restrict the exercise of shareholder rights.’
Key now for investors is whether this was an isolated incident or a sign of more widespread government involvement which would undermine the work of former PM Abe on corporate change. It will be interesting to see how this impacts PM Suga’s re-election chances.
It also casts doubts on ‘Hiromichi Mizuno, the former chief investment officer of Japan’s $1.6tn Government Pension Investment Fund (GPIF), a Tesla board member and a high-profile champion to ESG investors around the world.’
Toshiba shares were trading around 1% lower.

SoftBank helps Klarna to $45.6bn valuation after latest fundraising
The Swedish fintech in the ‘ buy-now, pay-later’ sector already has investment from Silver Lake, Ant Group and Sequoia Capital. Softbank talked the investment up ‘“Klarna’s growth is founded on a deep understanding of how the purchasing behaviours of consumers are changing, an evolution which we believe is accelerating,” said Yanni Pipilis, managing partner for SoftBank Investment Advisers.’
But there are risks partly from the recent problem with its so called ‘super app’ briefly released customer data to other users. There is also potenitally more regulation on whether these companies ‘push consumers to purchase goods they cannot afford.’
I remain sceptical on these companies and expect more regulation to follow.

For Interest 
Markets Insight
Europe weakness to be exposed over long term  By Eric Knight chief investment officer and chief executive of Knight Vinke Asset Management.
See risks coming from the Financial sector and the result being the eurozone breaking into two blocks

FT BIG READ. THAILAND
Side effects of the king’s vaccine
Siam Bioscience, the company producing the AstraZeneca vaccine in the Asian country, is owned by the monarch. But there are signs of delays in the politically sensitive rollout of the immunisation programme.

LEX  Facebook: priced for imperfection  ‘Mark Zuckerberg’s smirking explanation to US lawmakers that Facebook was free to users because “Senator, we run ads” was only ever part of the corporate story.
Facebook is not just an advertising company but a phone network, a would-be financial services company and an ecommerce group. Markets undervalue its earnings potential, ignoring its ability to sell multiple services to the same pool of users.’
It concludes ‘The threat of regulation has not disappeared. But accusations levelled against the company of allowing interference in a US election did not dent profits. Facebook’s earnings can easily continue to defy expectations.’

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