June 22 FT thoughts & Asian update China vs Apple Daily, G7 and Xi's new way?


22 Jun

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

Asian Summary @ 1:30pm HK  time  
Markets rebounded by various degrees after Monday’s sell off
Australia
Market opened higher and then worked slowly higher for most of the day to 7,366 before easing back curently +115pts (+1.6%) @ 7,351
Lead higher by Financials, Miners and Energy names.
Flash PMI data tomorrow
Japan
Nikkei opened 500pts higher and worked higher into lunch at 28,800.  PM trading sideways slightly higher currently +832pts (+3%) @ 28,843.  Yesterdays big decliners rebought in early trading.
Topix similar pattern currently +56pts (+3%) @ 1966 Electronics and auto makers were the biggest boosts to the Topix.
Flash PMI data tomorrow and BoJ meeting notes
S Korea
Pre Market PPI increased but not as much as forecast
Kospi opened higher, with yesterday’s shorts squeezed. Eased back and traded around 3,260 through to around 1pm and then worked higher. Currently +23pts (+0.7%) @ 3,265
Kosdaq opened higher and squeezed to 1,017 but then sold down to 1,008 around 10am before working higher, currently +2pts (+0.2%) @ 1,013
Data out
PPI May YoY +6.4% vs +5.6% Apr (F/cast was +5.9%)
PPI May MoM +0.4% vs +0.6% Apr (F/cast was +0.7%)
BoK Financial Stability Report out at 11am local time showed the economy stable but rising financial imbalances worry the BoK.
KDCA reported 395 new cases (+38 DoD)
Taiwan 
Taiex opened higher and rallied to 17,250 after a mixed Export data. Eased slightly and traded sideways for 45 mins before selling down to 17,100. Rebounded to traded around 17,175 until around 12:45pm when it sold down to close +13pts (-0.07%) @ 17,076
After Market Unemployment data due
China 
CSI 300 opened higher at 5,106 and traded sideways until 10:25am when it rallied but saw resistance appraoching 5,120 and eased back into lunch. PM opened higher currently +21pts (+0.4%) @ 5,111
Chinese solar names -VE on fears of a Biden Ban
HK 
Pre market opened @ 28,575 +86pts vs +168pts ADR’s as margin call selling from Monday outweighed the ADR’s and short covering but then sold down to 28,400 before rebounding to traded around flat. PM has sold down again to test 28,400. E-Commerce names weak. Financials +VE Oil & Solar names +VE
Europe  
Expect markets to open higher but a renewed surge in the Indian varient covid cases a concern.
Data
EUROZONE Consumer Confidence Flash, ECB’s Lane speaks  
UK  Public Sector New Borrowing, CBI Industrial Trends Orders
US Futures
Opened Dow +35pts, S&P +0.1% and NDX +0.04%; have eased to Dow +25pts S&P +0.08% and NDX  flat.  Today more Fed speakers along with Redbook, Existing Home Sales, Richmond Fed Manufacturing Index and API Crude Oil Stock Change.

PRINT
Front Page
Laschet warns against cold war with China

• German CDU leader eyes continuity
• Beijing is a partner as well as a rival
Worth a read as he is expected to replace Merkel. Notes that he an Merkel agree on a number of fundamental points but he might not have the same freedom Merkel had if pushed into an power share with the Green’s.
Wants to avoid a cold war with China and cautious over curbing China’s ambitions. Also wants reasonable relations with Russia.
Suggests that he would be China’s preferred option for leader as he would maintain many of the existing policies; presuming that the Greens would allow him. See also the FT BIG READ. GERMAN POLITICS Germany’s continuity candidate.

Spanish pardon Sánchez plans to free Catalan separatists despite objections
highlights that the issue is still highly contentious.

Hong Kong’s press freedom at risk as Apple Daily forced to consider closure.
As authorities freeze its assets under the provisions of the National Security Law. Many see the issue as a threat to press freedoms after the publication had taken a tough editorial stance regarding the Hong Kong and mainland government actions.

What is also highlighted is that ‘“Crowdfunding can’t work as banks are instructed not to process any payments. I have already heard from friends who have not been able to process payments to us,” he (Mark Simon) said.’
The governments line is ‘John Lee, the security minister, has accused the paper of criminal activities and said the police action was not a threat to press freedom. “They are different from ordinary journalists,” he said last week. “Do not engage in any relations with them.”’
I think the key worry must be the fact that the government can now force a company out of business even before the case has come to court. That could lead to companies doubting Hong Kong’s legal protections. Bloomberg reported that many in Hong Kong were now worried about speaking out and quoted activist shareholder David Webb who noted the fact that people were not prepared to speak out reflects worries about the National Security Law.

INSIDE
China lashes out after G7 leaders and Nato criticise ‘assertive behaviour’
Beijing flexes muscles in Taiwan and Hong Kong in retaliation over Biden-led ‘united front’
Worth a read; it is basically what China had hoped would not happen is occuring. It has prompting a significant ‘sabre rattling’ response from China but it is difficult to see what else they can do without escalating the issue and giving the west more ammunition.
It concludes
‘Some Chinese officials and analysts argue that while Beijing will continue to respond forcefully when criticised over Taiwan, Hong Kong or other “core interests”, this does not preclude co-operation with the US on other issues such as climate change or global tax reform.Fu Ying, a former Chinese ambassador to the UK, said recently that the Biden administration wanted to “prevent China from moving forward to replace the US”.Beijing “should stand firm on matters of principle but not be too distracted by anti-China hostility”, Gao said. “In the long term China will have a larger economy than the US. No one can change that. Time is on China’s side.”’

It will remain to be seen whether time is on China’s side. China face a number of internal issues with the wider recovery in China, credit/debt issues, domestic consumption and its dependence on US technology in tech. The bigger concern is likely to be that other nations, annoyed at China’s aggression or domineering nature in Asia decide to align with the west.

Japan allows limited numbers to watch games
Still subject to their not being another state of emergency being imposed. The max number being 10,000 per event or 50% of the total event capacity which ever is the lower.
Little impact on the games or sponsors and difficult to estimate the impact on PM Suga’s chances of winning the next election. Although the lack of spectators will mean the games will not achieve their budget targets; with the shortfall likely to be picked up by Tokyo residents.

Companies & Markets 
Big US banks gear up to return cash
Stress test passing grade set to trigger billions in buybacks and dividends.
Expects the banks to pass the tests and as a result return money to shareholder. Interesting after Jamie Dimon said last week said that JPM was saving cash in the expectation of investing opportunities.
Bearing in mind that the banks are looking over capitalised it is difficult to imagine them not passing the stress tests. Assuming they do then they will be free to return money. But it will be interesting to see how much they do and whether they look to hold cash for investing opportunities.
Many will also be watching the results on foreign banks like Credit Suisse after the Archegos blow up.

Volvo and Northvolt plan gigafactory
Looks at the tie-up between the two firms, which could, although not mentioned in the article, have an impact on Geely; the owner of Volvo going forward.

Private equity ‘raid’ on UK plc sparks fury in City of London
Traditional fund managers speak out against takeovers they say undervalue businesses.
An interesting read, the key being that the Private Equity firms have raised cash and are looking for opportunistic targets. The fact that funds are prepared to speak out reflects the concern that some companies might be willing to sell-out. The fact that Morrisons emphatically rejected the initial offer would suggest that most boards are aware of the improving outlook.
Worth a read and again another indication of the amount of cash in the system looking for an investment.

Prince bets against revival of 70s-style Great Inflation
Bridgewater boss forecasts only ‘moderate’ rise in US prices amid intense debate.
Makes the point that many are expecting some inflation but for it to be moderate.
He notes “There’s not nearly as much potential for a big inflation cycle from private sector credit and spending,” he said. “The government is having to push pretty darn hard with fiscal stimulation to get things going and in addition when you look at inflation, low inflation is a global phenomenon. It’s not a US phenomenon.”

It is a fair point. He also makes the point that a number of other Central banks are not being as aggressive as the US and that the circumstances in the 1970’s was very different. All that said he is still watching out for warning signs that could indicate the situation changing; like sustained wage rises. Something that is inline with what the Fed seems to be referencing too.

He also believes that even if the Fed tapers there will be a lot of other spending to keep the momentum going. But he is not expecting huge retail spending.

It’s an interesting read and a slightly different view from that put forward by his colleague Ray Dalio who was speaking yesterday at the Qatar Forum. He made the point that a worry he had was that the Fed had limited scope to tighten in the face of inflation, largely because of the length of asset duration has been extended beyond the norm.

China pledges to crack down on ‘malicious speculation’ in iron ore
Looks at how China’s NDRC is to investigate the recent spike in iron ore prices with a declaration to  “severely punish” any wrongdoing. It also mentioned the release of strategic reserves to reduce the price too (although that might be more of a threat than a practical option).
It both reflects the fear that China has that the surge in commodity prices could feed through to domestic inflation and the risks for speculators in China.
‘The NDRC said that it would “closely scrutinise changes to spot prices, swiftly investigate irregular transactions” and “severely punish and publicly expose acts such as monopolistic behaviour, spreading around information about price increases, driving up prices and hoarding”.’
The additional problem China has this time is that it is not the price setter (unlike last time). Noe other countries are also looking to source these resources as they too look to stimulate their economies with infrastructure works and as the global recovery continues to gather steam.

Beijing orders banks to intensify anti-bitcoin campaign
A further move against cryptos, following the banning of mining and part of its push to support its own digital Yuan. The PBoC said ‘trading cryptocurrency disrupts the financial system, breeds the risk of illegal cross-border asset transfers and money laundering and “seriously infringes on the security of people’s financial assets”.’
A number of people would question that statement but the key is that it will crimp peoples ability to use crypto in China.
For the PBoC the key is the use of the digial yuan which will allow the government more control and insight into people’s spending habits.
The other key for the PBoC is to try and reduce the dependence on the US dollar in Asia. By being a leader in the design of digital currency it can export that architecture to others and bring countries more countries and companies into its financial universe. Thus reducing the impact of the USD, something it see as more important as Trump has weaponised it. China will try and replicate the success it had in leading in 5G in phones in digital currency.
I think that is why Powell as said that the FOMC is looking at a digital dollar.

Solar power group shareholders burnt by rapid rise in raw materials costs
An interesting number coming as news breaks that Biden considering ban on Xinjiang polysilicon which would prompt a further rise in raw materials.
The article focuses on the ‘higher steel, polysilicon and freight costs.’ Along with supply chain pressures all coming at a time when governments are pushing the green agenda.
It notes that costs dropped 80% between 2010 and 2020 but now are rising. Recent increases have prompted analyst to lower their forecasts for solar installations as costs rise
Today in China a number of the solar names are being hit by the Biden news but as the article concludes
'“There’s certainly inflationary pressure in the space; the question is who absorbs it and it’s still unclear what that sharing will be,” said Max Slee, a portfolio manager at Ecofin in London.
“The macro and micro factors impacting the renewables sector for much of this year has resulted in heightened uncertainty among investors; however, the structural mid- and long-term outlook remains attractive.”
Martin also agreed that rising costs would not derail the solar boom, since it was still cheaper than building a new coal-fired power plant. “The drive to install solar is still as dramatic as it was two years ago,” he said.'

Markets Insight
Meme machine fuels distortion in share prices  By Robin Wigglesworth
Looks at how Meme’s ‘easily-digestible and shareable images or videos’ have influenced retail stock trading. Whilst isolated ones have limited impact; when they go viral they can move stocks. Equally if they are produced by people with a large numbers of followers they can have significant impact.
Effectively they are to retail what a leading analyst is to institutions and hedge funds. If enough people follow the meme or report they become self fulfilling.
It concludes ‘Litquidity (a prominent finance “meme lord” on Instagram), however, worries that the growing appreciation for how social media can be harnessed to make money means that market memefication might prove more resilient than many expect. “I don’t think it’s a good thing, but I don’t think it’s going anywhere unless some sort of regulations are put in place,” he said.’

Just in the same way the research reports are regulated I would suggest.

OPINION GLOBAL AFFAIRS
China has broken the Asian model
By Gideon Rachman
A very good read. Makes the point that whilst President Xi may claim ‘ that, under the wise guidance of the party, China has discovered a unique path to development that the rest of the world can now learn from.’ and ‘that China was “blazing a new trail for other developing countries to achieve modernisation”.’
It is not really true. The base model is the same one pioneered by Japan, S. Korea and Taiwan but China has added scale in its implementation. The other difference is that China has remained a one party state whilst the others liberalised.
China had now politicalised the model to offer authoritarianism vs western democracy.
It raises the question of whether the west’s backlash is too late to for the US to prevent China’s rise. It notes that for Biden this is about democracy or authoritarianism.
It concludes
‘Even so, Xi has taken a big risk by overtly challenging American power. During the first decades of China’s rise, the consensus in Washington was that China too would liberalise politically, as it grew richer. So the US took an encouraging and permissive attitude to China’s ascent — similar to its approach to the other east Asian tiger economies.
In the case of China, American “permission” has now been withdrawn. The US is restricting Chinese access to certain advanced technologies and is organising its allies to push back against Beijing. In this new geopolitical environment, Xi really does need to find a new “China model” — distinct from the east Asian model — if the rise of China is to continue uninterrupted.’
Well worth reading. Only time will tell but without US technology and systems China’s chances of success outside its own borders is made much more difficult. But the risk to the west is that its not impossible as seen in 5G and if it gets the lead in exporting its digital yuan architecture then maybe it will have found a new variant.

LEX HSBC: billionaire boomtime
Looks at HSBC’s aggressive expansion into wealth management in HK and the greater bay area. Notes that it is a very competitive business but thinks it is a good move.

LEX DIY retailers: varnishing returns
Worth a read; suggest that despite lumber prices falling the incentives for DIY remain and hence the outlook for Home Depot and Lowe’s remain good. That should be good for Techtronics in HK (669 HK), stock is off its recent high and struggling to regain the HK$140 level, probably worth accumulating at these levels.

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