June 17 FT thoughts & lunch update

17 Jun

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

Asia at 1pm HK time
Most markets started lower in reaction to the FOMC’s warning about rate rises.  The exception being China with Team China back after a few days of well earned rest.

ASX 200
sold down for the first 45minutes before finding support at 7,340 level.   Employment data was much better than expected; with employment increasing by 115k MoM.  It then worked higher but encountered resistance at it approached Wednesday’s record high closing price and has drifted lower.
Laggards are miners, CSL, energy stocks, and supermarket Coles
Currently -17pts (-0.2%) @ 7,370.
RBA bulletin showed fees paid by households to Australian banks fell at their quickest pace in a decade last year, as the pandemic led to sharp falls in the use of credit cards, personal loans, and overseas ATM withdrawals.
Nikkei opened lower @ 29,149 it initially ticked higher but then trended lower into lunch 28,900 level.  PM opened slightly higher and working slightly better.   Currently -327pts (-1.1%) @ 28,964
Topix similar trading pattern, opened lower, tested yesterday’s close. Lunch time was 1,959; currently -13pts (-0.7%) @ 1,962
Data pre market
Tankan Index Jun 22 vs 21 May (F/cast was 18)
Foreign Stock investment ¥-33.2B vs ¥94.5B prior
Foreign Bond Investment ¥+410.6B vs ¥665.9B prior
S Korea 
Kospi sold down heavily on the open to 3,251 in the first 30 minutes. Then worked higher and currently -13pts (-0.4%) @ 3,265
Kosdaq intially sold down to 994 but then worked higher to 1,005 around midday but now eased currently +5pts (+0.5%) @ 1,003
Taiex opened lower and dipped to 17,150 in the first 10 minutes but then worked higher to close at the day high +36pts (+0.2%) @ 17,344
CSI 300 opened lower but rallied in the first hour to 5,120 before retrenching to 5,090 level and then worked higher into lunch in choppy trading. PM opened around 5,100 but trending lower. Currently +11pts (+0.2%) @ 5,092
Data on the open
House Price Index May +4.9% vs +4.8% Apr (F/cast was +5.1%).
Pre market opened @ 28,240 -195pts vs -95pts ADR’s
Market saw some early margin call selling before working higher to 28,540 level around 11:30am and then eased back into lunch. PM easing lower +34pts (+0.1%) @ 28,471
Futures indcate a lower open  FTSE -43 points at 7,145, DAX -59  points at 15,651, CAC 40 -24 points at 6,626 and Italy’s  FTSE MIB -80 points at 25,668, according to IG.
Data due
EUROZONE Construction Output, Core Inflation Rate, Inflation Rate.
US Futures
Opened lower Dow -63pts (-0.2%), S&P -0.25% and NDX -0.35%
Initial claims tonight along with Phili Fed, TIPS auction and more.


Biden warns Putin of ‘devastating’ repercussions if Navalny dies in jail
• Activist’s fate high on agenda • Pledge to stabilise ties • US marks ‘red lines’ on cyber attacks
The key thing is that the two parties are talking and there is a resumption of dialogue. It seems to have been conducted in a business like atmosphere with frank exchanges.
Now it is a matter of waiting to see if there is any change in attitude; especially on the matter of cyber. The worry being that Putin, seemingly did not admit that it was a Russian problem or say that he would address the issue. That to me, suggests that the Russian government is more compliant in the matter.

Fed signals first interest rate rise in 2023 as officials predict faster growth.
I think Powell surprised the market with his statement that it might start raising rates sooner than previously expected.
It was always going to be a tricky balancing act to keep the markets onside regarding tapering, inflation and interest rates but I think he got it right.
Effectively saying the recovery, accepting that it was not smooth or uniform but it is stronger than previously expected. There will no doubt be a lot of debate now on what the change in attitude means. It was interesting that he said the dot plot should be taken with a pinch of salt.
Key is that they are still data dependent and as this meeting showed they are prepared to change as the data does.

Strategy paper
EU signals ‘negative spiral’ in relations with Russia.
Worth a read; shows that the EU is taking a tougher view on how Russia is acting and it will be interesting to see if its attitude to China also changes. I think a key for that to happen will be the fact that Angela Merkel is standing down.

Federal Trade Commission
Big Tech critic handed US antitrust role
Khan appointment sends signal of tougher stance towards Silicon Valley
A look at Lina Khan who as a know critic of large tech  could lead to some significant changes in how the sector operates.

Washington plan to keep China in check relies on Philippines
Looks at the strategic importance of the Philippine as a base to counter China’s dominance of the South China Sea.
Currently it is hanging in the balance because President Duterte has decided that rather than renew the ‘Visiting Forces Agreement, the framework governing the deployment of US soldiers in the south-east Asian country,’ he has merely extended its suspension for just six months. Which means the expiry will be just ahead of the Philippine elections in May 2022. Which means links to China and the US are likely to be more in the limelight.
I suspect that Duterte is tryingt to use the agreement as a lever over China but I doubt China sees it as having any real value. Which is why China continues to pursue its own aims in the South China Sea and defy the Philippines sovereignty. Interestingly that could be its undoing as the Philippine presidential election comes into focus.
An interesting read.

Kim raises alarm over food shortages in North Korea
Warning ‘the people’s food situation is getting tense’; blaming a number of issues but the key being the fact that since covid the country has effectively isolated itself.
That policy is failing. The real problem is that Kim is still not willing to accept international help and at the same time further isolating himself by focusing on developing nuclear weapons.
The shame is the impact on the ordinary people and the potential for famine in the country.
S Korea is keen to resume talks about opening the border and the US envoy is visiting this week but for all the good intentions it comes down to Kim. The other unknown factor in the equation is China and the support that it is giving Kim.

Companies & Markets
Biogen’s Japan partner calls for action on Alzheimer’s
‘The US approval of Biogen’s Alzheimer’s drug highlights the urgent need   for a framework for testing and treating a disease that is a “secret   pandemic”, according to the head of its Japanese development partner   Eisai.’
An interesting read on what is a growing international problem. There is controversy over the drug and the cost but it highlights the need for more work on the disease.
It concludes ‘Eisai has been developing medicine to combat dementia since the early 1980s and is best known for Donepezil, the most widely prescribed treatment for Alzheimer’s, which was originally developed as Aricept.
“If you look at us from any angle, we’re all about dementia,” Naito, the 73-year-old grandson of Eisai’s founder, said. “We have knowledge that has built up over a long series of failures and we’ve poured in resources that are comparable to Big Pharma, so I feel we are competitive.”’

Forced labour allegations burst Top Glove’s bubble
Malaysian PPE maker whose fortunes surged in pandemic hit hard by US import ban.
Looks at the fortunes of the company through the pandemic and how recent accustions on the use of forced labour and increased competition for low-cost Chinese producers, and increased raw material prices is hurting the company.
The forced labour charges refer to ‘a Top Glove employee died of Covid-19 last year as an outbreak spread through the company’s factories and worker dormitories, which Malaysian authorities at the time described as crammed, uncomfortable, and lacking proper ventilation.’
The company says it have rectified the situation; ‘Top Glove, which houses nearly 12,000 foreign workers in Malaysia, said it was investing RM200m in additional dormitories for 14,200 staff. Conditions in its hostels now complied with, or exceeded, the requirements of a new Malaysian law on workers’ housing that came into force last year, it said.’
As the article notes that will push up costs and erode the advantages the company has over Chinese rivals. It highlights the need for more monitoring of the working conditions for a lot of developing world workers; not just in Asia but globally.
There will no doubt be a growth in firms prepared to carry out work condition audits for investors although whether they are able to operate in China remains to be seen.

Polestar explores listing in expansion push
‘Polestar, the electric car maker backed by Volvo and Geely, has opened the door to going public via a blank cheque vehicle as it seeks more firepower to compete in an increasingly competitive global market.’
See Lex Polestar: navigator seeks invigorator
What might Polestar be worth? It does not publish financials but it probably loses money at present. Its flagship model, the Polestar 2 SUV, only went on the market last year. Unit sales trends in Europe and China plus IHS estimates suggest Polestar should sell at least 22,000 EVs this year. Even assuming little growth and using the price-to-sales ratios for Tesla and China’s NIO, a $15bn-$20bn valuation appears feasible. Compared with pie-in-the-sky EV start-ups, Polestar offers a brighter future. More importantly, its value should provide a fillip for a future initial public offering by Volvo Cars.’

Suning shares frozen as debt concerns mount
The situation hgihlights the fraught state of a number of Chinese companies; debt.
It is worth noting that a lot of this debt is not straightforward bank debt but from other sources as the Chinese State Banks forcus on lending to the SOE’s.
This comes as investors are worried about PBoC tightening which in itself raises concerns for a lot of Chinese companies.
Also currently in focus is Evergrande, Huarong along with a number of other Chinese companies many of whom have off-shore debts that are coming up for re-financing.
Worth a read. It places the government in a tricky position between allowing companies to go bust to demonstrate investment risk but at the same time it does not want to scare off both local and international investors; because it does need the money.

Beijing pledges to release metal reserves to address price and shortage worries.
The news came as a surprise on Wednesday as the ‘National Food and Strategic Reserves Administration said in a statement yesterday that it would release batches of metals, including copper, aluminium and zinc, making them available to manufacturers.’
This follows a number of earlier steps and warnings against speculation etc. to try and contain price rises. Most people doubt this will have a significant impact; because China is no longer the dominant player in the resources market. Currently China is just one of many countries competing in the market and as the article suggests the actually release may be small and that this is just an exercise in trying to talk the market down.
It does illustrate how China is struggling to contain inflation and is clearly worried about inflation impacting on domestic prices and the ordinary population.

The graveyard of empires calls to China
Military presence may accompany the extension of BRI to Afghanistan.
A good read that recommends that China stay out of Afganistan for fear of suffering the same fate as Alexander the Great, the British empire, the Soviet Union and now the US.
The temptation is being take the Belt and Road initiative through the country the country that would give it access to middle eastern oil; it notes that China has already had talks with the Taliban over infrastructure projects.
But the risk are large. It concludes ‘Advisers to the Chinese Communist party have already recommended that China send peacekeeping troops to the country under the auspices of the United Nations to protect the “safety and interests” of Chinese people and companies there. Such missions have a habit of spiralling into much deeper engagement. President Xi should heed the lessons of history and avoid the fate of other would-be empires.’

Sony Music snaps up leading UK producer in podcast push
It ‘has acquired Somethin’ Else, the biggest independent producer of audio programmes in the UK, as the record label accelerates its push into the fast-growing podcast market.’
The price was not revealed. It makes it clear that podcasts once seen seen as being niche are now being seen as more important; ‘the format has become a crucial differentiator between music streaming services that largely sell access to the same catalogues of music.’
An interesting read.

SK accused by environmental activists of greenwashing following gas U-turn
Basically its completed a large Australian liquefied natural gas deal months after promising to end new overseas oil and gas investments.
SK is defending the deal by saying ‘the development would cut “nearly all” carbon emissions by using carbon capture and storage, a fledgling technology that traps CO2 and pipes it into deep underground reservoirs, as well as through the purchase of carbon credits. “Our investment was made on the condition that LNG is developed in an eco-friendly, low-carbon way,”’
Highlights how committments are open to interpretation but as ESG becomes more important firms are likely to find they have less ‘wriggle’ room. Furthermore it is likely that ESG will one day have a real impact on companies share price.

 South Korean video game group targets $5bn listing
‘The company behind global hit game PlayerUnknown’s Battlegrounds plans to raise up to Won5.6tn ($5bn) in an initial public offering that is expected to be South Korea’s largest.’
Key ‘“The Krafton IPO will be popular among investors, given investors’ growing interest in new growth areas such as EV batteries, games and online businesses,” said an investment banker close to the deal. “But the company is heavily reliant on one game and it is uncertain how long the game’s popularity will last.”’
A good read.

Toshiba scandal is a moment to stand up and be counted  By Brooke Masters
A good read, stresssing that past promises by the company have proved to be hollow promises and that a clean broom is required.
Notes that foreign CEO’s have the ability to do things Japanese ones can’t; which I would suggest is to ensure companies are run for the benefit of shareholders not management or establishment.
But it also high lights the need for existing shareholders and fund manager to stand up and be counted. A little emabarassing for Blackrock , who is a shareholder to have voted with the previous management of Toshiba regarding refusing an independent investigation.
Well worth a read. Only if shareholders become more vocal and the government actually abide by the reforms that PM Abe put in place will Japanese companies be able to perform to their potential.
Something I recognise from my time working with Daiwa Securities where management struggles were more important to the Japanese management than making money.

How Xi’s China came to resemble Tsarist Russia   By Jamil Anderlini
A very good read about how Presdient Xi has changed the party and Jamil suggests that he has followed the Ramanov’s playbook of Nicholas I or Alexander III.
He concludes that Deng from the late 1970’s ‘banned personality cults and introduced collective leadership, mechanisms for intraparty democracy, term limits on top leaders and a process for the peaceful transfer of power between generations of cadres.’
Xi has reversed all these innovations. In doing so, he may well extend his own rule but he is likely to have shortened the life of the party.’
He also notes that today’s party is very good at adapting the facts to fit the party line and says ‘To question the accuracy of this is to commit the crime of “historical nihilism” — an actual crime as of earlier this year, when Beijing introduced jail sentences for anyone who “insults, slanders or infringes upon” the memory of national heroes.’

I have long been of the view that today’s communist party is an elite organisation; with 92m members out of a population of 1.412bn according to the 2020 census; that just 6.5%. He starts the piece ‘The very first line of the Chinese Communist party’s constitution declares it is “the vanguard of the Chinese working class”. The document mentions “revolution” eight times, while the accompanying constitution for the People’s Republic declares it a “socialist state . . . led by the working class and based on an alliance of workers and peasants”.’ It certainly has come a long way from its roots.

Markets Insight
Inflation poses a duration problem for investors  By Seth Bernstein chief executive of  AllianceBernstein; Inigo Fraser Jenkins, co-head of portfolio strategy  at Bernstein Research, contributed to the article.
Basically outlines that the old 60:40 bonds to equities portfolio is not going to work in an environment of rising inflation and interest rates.
They expect higher inflation to last because ‘the change in the policy environment, which has the potential for more active use of fiscal tools.
It will be needed as policymakers will have to overcome deflationary forces that are likely to emerge once the reopening trade is over, including slack in labour markets and the tendency of technology to drive down prices.
However, policymakers are likely to prefer moderately higher inflation to reduce the value of higher debt levels.’

They recommend more ‘real’ assets; primarily infrastructure, property and equities (because they say dividends can rise with inflation).  They also suggest ‘digital tokens of physical assets maintained in a “blockchain” across a network. This  is potentially a technology in the right place at the right time in this  regard. But the real driver of adoption will be real asset demand, not  the technology per se.’
Also buying undervalued companies; value investing.
‘Such assets generally have higher yields and so a larger part of the present value is from cash flows in the near term. Hence, they are less sensitive to shifts in long-run interest rates
There are still plenty of headwinds to the value factor, not least the way that technology has destroyed “moats” that protect certain industries from competition. These prompt questions of exactly how “value” is measured.
But if higher inflation persists, value strategies can be part of investors’ response to a duration problem.’
A good read and I agree with their viewpoint but the smart money has probably already rotated.
The other interesting point will be how bond prices react, they will obviously correct and at some point presumably become attractive again?

For interest
LEX Wall Street/Vix: fear steer

With the Vix back to pre pandemic levels; banks are guiding investor expectations for profits lower.
‘Regular banking should return. Loan growth should pick up later this year. Rising interest rates and loan pricing, with an improving economy, should boost banks’ net interest margins.
For bank bosses, the trading desks’ purple patch will remain useful long after bonuses have been spent and dividends paid. Those profits have proved the value of the universal banking model, whose high costs had left it unloved before the pandemic hit.’

Bank rates of return to the office vary widely
Goldman and M Stanley talk tough on recalling staff while HSBC accents flexibility and SocGen has laissez-faire stance.
An interesting read; a number of the US banks are leading the call for a return to the office. I think the more aggressive stance by the US banks will result in better long term performance. Just as Jamie Dimon noted that they had missed out on deals because their bankers had done zoom presentations rather than in person ones. I expect it to be true for bankers in the office too. Time will tell but an interesting read.
Stress-testing supply chains is key to a durable global recovery
By Stephen Paduano executive director of the LSE Economic Diplomacy Commission
Worth a read; the key seems to be
‘How might supply chains endure tariffs and cyber attacks, droughts and storms, or the outbreak of disease and need for certain medical goods? The key calculation is the difference between a supply chain’s “time to survive” — how long it can meet demand after a disruption — and its “time to recovery” — how long it takes to mitigate or adapt to the disruption. If the time to recover is greater than the time to survive, companies and authorities will see that the supply chain needs strengthening.’

African youth vs the gerontocrats
A potent political force is beginning to test the continent’s ageing rulers. Young, tech-savvy and increasingly urbanised populations are mounting a stiff challenge to regimes unwilling to cede power.

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