June 8 FT Thoughts Biden in Europe -VE for China's expansion but he's good for Chinese listings in NY. PE sees money in Japan.

08 Jun

This and previous notes can be found at SubStack
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Asian markets at 1:45pm HK time
ASX had a rolla-coaster day.  Opened flat, small initial dip, worked better to 7,315 (a new high) mid morning, dipped to 7,268 around 1pm then worked to 7,298 but closed 7,295.  Tech and Health lead, Banks mixed.  Nuix being investigated for overstating sales ahead of listing.
Altium weak on broker downgrade.
NAB Business Confidence May 20 vs 23 Apr revised  (F/cast was 24) Japan
Nikkei opened higher as headline GDP was better than expected dipped initially to 28,990 but then rallied to 29,140 but saw resistance around 29,126 before getting there around 10:20am but sold down into lunch.  PM opened lower dipped to 28,900 before working better;  currently -53pts (-0.2%) @ 28,966
Topix similar pattern opened lower, high was 1,969 low after lunch was 1,959 (the opening level), then rallied to 1,966 currently +3pts (+0.2%)@ 1,964
Ave Cash Earnings Apr +1.6% YoY vs +0.2% Mar (F/cast was +0.5%)
Current Account Apr ¥1321.8B vs ¥2650.1B Mar (F/cast was ¥2000B)
Bank Lending May +2.9% YoY vs +4.8% Apr (F/cast was +4.5%)
GDP data final
Growth Rate Q1 -1% QoQ vs +2.8% Q4 (F/cast was -1.3%)
Price Index Q1 -0.1% QoQ vs +0.3% Q4
Private Consumption Q1 -1.5% QoQ vs +2.2% Q4
External Demand Q1 -0.2% QoQ vs +1.1% Q4 (F/cast was -0.2%)
Capital Expenditure Q1 -1.2% QoQ vs +4.3% Q4 (Consensus was -1.2%)
Growth Annualised Q1 -3.9% vs 11.7% Q4 (F/cast was -5.1%)
30yr JGB Auction 0.693% vs 0.645% prior
Eco Watchers Survey Current May 38.1 vs 39.1 Apr (F/cast was 39)
Eco Watchers Survey Outlook May 47.6 vs 41.7 Apr (F/cast was 41.8)
S Korea 
Kospi opened flat dipped to 3,243 in early trades but bounced back and worked better to 3,265 late morning then trended back to flat, then traded sideways currently -3pts flat @ 3,249
Kosdaq traded in a similar pattern dipped to 983, bounced and worked back to 988 then eased lower before working back to test 988 where it is seeing resistance; currently +2pt (+0.2%)@ 988
KDCA reported 454 new covid cases (vs 485 Monday)
Taiex opened higher and rallied to 17,182 in early trades, on news of possible trade talks with US, but then trended lower in choppy trading back to flat and then traded sideways to close -8pts (flat) @ 17,076
CSI 300 opened lower, worked up to 5,319 in the first 30 mins before trending lower to 5,227 before a small bounce into lunch. PM opened lower and tested 5,201, currently -62pts (-1.2%) @ 5,216.
No sign of Team China, tomorrow we get inflation and PPI.
Pre market opened @28,901 +113pts vs -11pts ADR’s; initially dipped to 28,845 but then rallied to 28,979 before reversing and sold down to 28,638 around 11am. Small bounced but then eased into lunch. PM opened slightly higher but trended lower to 28,653 before a bounced. Currently -109pts (-0.4%) @ 28,674
E-commerce and Chinese Financials weak along with tech like Sunny Optical. Autos +VE as BYD May sales +52% YoY and Pharma +VE Sentiment weak as Carrie Lam says social distancing due to end Thursday would be extended; raising concerns about a forced lockdown for control purposes rather than health. She cited the local infection found last Saturday.
Earnings due from Chow Tai Fook, Evergrande +2.7% bought back 29m shares but remains in focus on debt concerns
Futures indicate a lower open FTSE -8 points lower at 7,072,  DAX -33 points at 15,657, France’s CAC 40 -2 points at 6,544 and Italy’s FTSE MIB +1 point at 25,784, according to IG.
EUROZONE Employment Change, GDP Growth Rate, ZEW Economic Sentiment Index
GERMANY Industrial Production, ZEW Economic Sentiment & Current Conditions
FRANCE Balance of Trade, Current Account
US Futures
Opened in Asian time Dow -18pts (-0.05%), S&P +0.01% and NDX +0.09%
AHEAD Balance of Trade, Exports, Imports, Redbook, JOLTs Openings, API Crude Oil Stock Change
Earnings Thor Industries, Casey’s General Stores, Navista

Front Page
Bezos set to fly into space

Scheduled for July 20 — the 52nd anniversary of the Apollo 11 moon landing.

G7 eyes taxing Amazon by raiding lucrative cloud-computing division
• AWS treated as separate entity • OECD plans vague • Move ensures higher rate for Europe.
On day one they are trying to close the loopholes; Amazon who did not to generate significant profits until 2017 and they have consistently been below the 10 per cent margin threshold set by the G7. So they are considering treating Amazon’s cloud computing division which had a 30% operating margin in 2020. It shows how difficult it is going to be because a good tax system is simple and should not need to include specific measure to ‘catch’ specific companies.
It kind of reveals how the whole tax assessment process needs to be reviewed. Just like existing legislation is not suitable for crypto so too the tax framework is not suitable for modern tech companies.

Alzheimer’s breakthrough as Biogen drug wins approval from US regulators.
‘the first time in almost two decades that a treatment has been approved for the debilitating disease despite a scientific debate over the medicine’s efficacy.’
+VE for its partner Eisai in Japan which was heavily bid pre market.
Very positive for people with Alzheimer’s and their families.

Big Oil’s political clout wanes amid green shift
Transition from fossil fuels set to reshape relations between governments and industry
An interesting read about how the decline of the oil sector.

FT Series
US inflation poses threat to developing economies
Indebted countries face sharp increases in the cost of borrowing
But the real problem is ‘that the US economy will power ahead of emerging economies, causing outflows from their stocks and bonds and, eventually, currency weakness.’
An interesting read mentions South Africa, Brazil, Ghana, Egypt and India.
It concludes “In an interconnected world with a lot of capital flows, US yields have significant spillovers,” she said (Tatiana Lysenko, lead economist for emerging markets at S&P Global Ratings). “It is too early [for emerging markets] to tighten [monetary policy], as to do so now could undermine their recovery. But some countries may not have much space left not to tighten.”

Labour market. Recruitment woes
America’s small businesses get creative to attract workers
Shortages hurt independent operations that cannot offer same incentives as larger rivals.
An interesting read about how small businesses are struggling to compete as larger corporations are able to secure employees with lucrative incentives such as ‘signing bonuses and contributions to college tuition fees’ key is that a lot of small businesses do not have the scope to offer more benefits at present; which suggests that that there is pent up inflation; businesses not passing on real cost to customers in order to try and survive. That pent up inflation is I think going to drive wage inflation and hence wider inflation too.
It notes ‘The Federal Reserve said that the crisis forced 200,000 more small businesses to close last year than it would have otherwise expected. Economists predict that still more could collapse as unpaid rent bills and emergency loans start coming due.’
I think the end of the eviction moratorium on June 30 could be significant although some US states are already extending the terms even though the Fed’s moratorium ends. This is a time bomb for landlords, banks, other mortgage lenders and the CMBS market.
The outlines how in the restaurant trade employers are changing their staffig model; having staff as generalist rather than bar or waiting. But staff are seeking more like more flexible hourd along with more pay … that’s wage inflation.

Attacks test the resistance of America’s doctor
The adviser has worked under many presidents and helped see off a host of global threats.
An interesting read on the flak he is currently getting.
I think the key is ‘Fauci admits being worried. Not about the blowback, however, but about what it says about America. “It worries me about what it says about this country,” he told the Financial Times. “The emails show someone who is always assessing the data as they evolve. But people are selectively pulling emails out to distort what the reality is.”’
Worth a read.

Companies & Markets

LEX China/US IPOs: military manoeuvres
  Despite US moves to blacklist some Chinese companies many Chinese companies still want to list in the US.  Hong Kong has cooled; ‘capital raised is running at half last year’s level.’   First day gains in Hong Kong are less likely.
Key ‘It is difficult to argue that the slowdown in Hong Kong is simply due to weaker fundamentals. JD Logistics gained far less on its first day than stablemate JD Health last year, despite a cheaper valuation.
That explains why Chinese groups plan to press ahead with New York listings if they can. At a headline level, the US and China are locked in conflict over trade, spying and intellectual property. But at a local level, Biden has clarified the extent of apparent ties to the Chinese military that push a company beyond the pale. This is good for the valuations of Chinese tech companies free of close military ties.
He has already removed Xiaomi, which makes smartphones and other consumer goods, from the blacklist. Its shares have more than doubled in the past year. Biden offers no olive branches to Chinese business. But he does offer greater certainty.’
Rather -VE for HK Exchange. 

Central banks’ net zero focus raises mission creep concerns  by John Plender.
A good read about the impact that central bank bond buying could have on climate change.
Histroically to prevent being seen as prefering one borrower over another they have bought bonds ‘across sectors of the economy according to the amount of debt outstanding in each sector. This minimises the impact of bond buying on relative borrowing costs across sectors with a view to achieving market neutrality.’
But ‘Andrew Bailey, governor of the Bank of England, pointed out in a speech last week that there is increasingly persuasive evidence that climate risk is systematically underpriced in financial markets. So “continuing to replicate the structure of the sterling corporate bond market without taking explicit account of the climate impact of bond issuers is no longer in fact a truly ‘market neutral’ approach”.’
It is now considering whether it should favour those making more efforts on climate control? In doing so it hopes to incentivise other bond holders to follow suit and encourage firms to become more green.
It concludes ‘Then there is a wider question about mission creep and whether this and other measures central banks take to recognise the impact of climate change could distract them from their core objectives relating to inflation and employment.
Sir Paul Tucker, a former deputy governor of the Bank, recently told a House of Lords select committee: “One thing that is said about climate change and central banking is that climate change could be very bad for financial stability, and I agree. Wars are very bad for financial stability, too, including civil wars. Should central banks ration the provision of credit to suppliers of arms manufacturers?” It is a powerful rhetorical question.’

Carlyle bullish on Japan deals amid cheap bank financing
‘“Consumer behaviour and [the] business model changed drastically as a result of Covid-19, so companies that were hit have no choice but to carry out structural reforms,” Yamada said. The availability of cheap financing from Japanese megabanks made the  environment particularly attractive to private equity, he said.’  He also noted that pressure to achieve carbon neutrality was also forcing change and spin offs on companies.
Carlyle is not alone; KKK is active too and others are thought to be increasingly interested.
It also notes that activist shareholders are pressurising companies to spin off non core businesses too. One big area of opportunity is in succession; where founders have not heirs interested in taking over and hence the attractiveness of selling to Private Equity. That is something that is true for many countries in Asia.
It concludes but saying
‘Public listings remained the preferred option for many of the chief executives Carlyle had dealt with in Japan and were reputationally important for the companies, said Yamada.
“It’s very important for future marketing to be known as a fund that will allow IPOs,” he said, even though exiting via an IPO was more time-consuming and risky than selling to a competitor for private equity groups.’
Interesting that the pride of being a public listed company is so important, rather than being a successful business, that say a lot about what still needs to change in Japan.

Biden’s plan for China unsettles Europe
The US wants to stitch together a global coalition aimed at restraining China. But while the EU has become more sceptical over Beijing, some leaders worry about Washington’s new cold war rhetoric.
Key is that Europe has a different agenda to the US although there are common areas. Those are the areas that Biden is likely to focus on in order to build a uniform approach; Hong Kong, Uyghurs, aggressive military activity in the South China and East China seas, use of economic coercion to retaliate against critics and I would add pressure on Taiwan and the importance of Taiwan’s semiconductor business to Europe.
It notes that Germany is likely to be the most difficult to winover with Merkel’s pushing through of the trade agreement with China. Although we her standing down later this year and China imposing sanctions on EU members is likely to have weakened her position and with it Germany’s objections.
It focuses on technology and semiconductors where I hope China’s attitude to Taiwan becomes a unifying point.
A good read. Biden was broadly successful in his meetings with PM Suga and President Moon. Lets hope he can replicated in Europe.

Equities. Hidden costs
XTX chief says retail frenzy reveals ‘broken’ US trading
Gerko attacks the ‘perverse incentives’ that drove Wall Street’s meme stock bubble
An interesting read about the hidden costs of ‘zero commission’ trading.
Highlights the fact that the ‘paying for order flow’ (PFOF) model is going to come under increased scrutiny from the SFC’s Gary Gensler.
Concludes ‘Even with those kinds of changes (stripping out PFOF) , however, he doubted that retail investors can emerge victorious from another round of battle with sophisticated trading firms.
“Retail investors have managed to cause some pain to one hedge fund,” he said.” I can assure you in the long run it won’t be retail participants winning this game, that’s just impossible.”
Worth a read, these are the views of a man who ‘Last year, he contributed more to the UK’s tax coffers than the Duke of Westminster, according to The Sunday Times, making him the 13th largest individual taxpayer in the country.’ So he knows about making money from trading.

Amateur traders keep buying the dip in ETFs and cushioning broader losses
An interesting read which highlights that whilst garnering less headling attention that meme stocks are nontheless having a significant impact on the markets.
Significant inflows into ETF’s, especially on the dips means that market downside is muted and means markets have not seen the typical 5% or 10% corrections that one would expect.
It is another example of the wall of money in the market looking for a home.
But more importantly is what will happen if or when sentiment is tested or turns.
It concludes ‘That money is essentially earning zero interest and provides a hefty source of dry powder. “If you’re wondering whether retail investors will ‘buy the dip’ if and when we see further market volatility, all we can say with certainty is that they absolutely have the cash to do so,” said Nicholas Colas, co-founder of DataTrek Research.’
What the article doesn’t say is what sectors the retail investors are buying; because that would give a indication of where the risk lies. Key elements are whether they are buying ETF’s with good underlying liquidity. Whether they are buying specialist ETF’s or broad market trackers. As ever its the detail that would really give the insight.
I think a turn in sentiment on markets is likely to be dramatic with so many invested in ETF’s. It may well be free money from the government but you can bet that if the markets turn people will not want their investments going to zero and therefore there is likely to be a big rush for the exit.

Stablecoins must face hard scrutiny, warns BoE
‘The BoE said it had not decided on its regulatory approach to stablecoins yet but it expected them to have sufficient reserves backing outstanding coins at all times and to offer one-to-one redemption with a strong legal claim.’
Worth a read but again highlights how regulators are behind the curve is knowing how to treat crypto and regulate it.
‘“For stablecoins to be used alongside commercial bank money, the Bank must be satisfied that they are safe . . . and they must not rely on making promises that they cannot guarantee to keep over time,” the BoE said. It has called for consultation on the topic, with feedback expected by early September.’

Markets Insight
Pharma investors must prepare for antitrust action By Andrew Baum head of global healthcare research at Citi.
An interesting read starts ‘Even with a US Democratic administration that holds control of both the House of Representatives and the Senate, the majority of healthcare investors seem largely unconcerned over the risk to drug pricing.
This may be because the prospect of approval of bills such as HR3, which would give the US government the ability to negotiate drug pricing directly, looks close to zero given how slim the Democratic majority in the Senate is.’
But then goes on to show the risks. Even Trump alerted people to the fact that drugs in the US are expensive. China became aware of the issue a few years ago and radically changed the way it purchased drugs, using a central list with pharma companies having to put in their lowest bids to get on the list.
Biden threw out a warning shot in saying the covid vaccines should give up IP. The sector should be aware of the potential for change.
He concludes
‘Drug pricing remains a top-three issue among the electorate ahead of the 2022 House and Senate elections while industry consolidation arguably has led to greater unemployment.
The temptation for pharma to maintain the status quo that has served the industry well for the past two decades would be a profound mistake. Another law of physics states that “pressure in a closed system is transmitted equally throughout”. For drug pricing, the political pressure has reached an all-time high. The drug pricing door might be closed but other doors lead to places the industry would best avoid.’

Green companies must convince wavering consumers
By Judith Evans

The G7 is the west’s last chance to lead
By Gideon Rachman

When it comes to inflation, the Fed needs to consider inequality
By Karen Petrou author of ‘Engine of Inequality: The Fed and the Future of WealthinAmerica’
An interesting read on how inflation data is out of date.
Some interesting snippets
Outlines how the data the Fed uses is misleading it into making wrong decisions. It makes the point that Fed data doesn’t know whether families have ‘debt-free purchasing power’ which is a good point.
‘the indices do not measure discretionary spending or financial resilience in ways that forecast how price increases actually affect consumption’
‘The Fed still assumes that interest rates drive decisions about how to use discretionary income.’ Although when interest rates are at zero I doubt that is true. It goes on ‘But income and wealth inequality is such that now only upper-income households have this marginal propensity, and most of them have more than enough already, so their propensity is small even if their margin is large.’
It concludes ‘This will not end well unless the Fed recognises the profound impact inequality has on the US economy and recalibrates policy quickly to address it.’
Whilst it makes a lot of good points the fact is that ensure social equality is not a Fed mandate. Equality is for the Government and from recent addresses I think Biden is looking to address that. But a good read.

Bitcoin lacks solid footing as an international currency
By Roger Svensson associate professor at the Research Institute of Industrial Economics
Very negative view of bitcoin but worth a read. Interestingly, one of his points is that money should reduce transaction costs and act of as a store of value and he does not think Bitcoin does, however increasingly people are seeing bitcoin as just that. Whilst its use for transactions my be questioned I think its use for stored value is increasing…. along with NFT’s.
Worth a read.

LEX Office space: the Empty Quarter  looks at IWG’s warning yesterday and the place of hybrid working and suggests it is here to stay.  Concludes ‘The steep valuation of IWG shares, trading near all-time highs of 35 times 2022 earnings, lacks the same permanence.’

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