June 9 FT thoughts China tariffs, demand, poverty, HK exit, Nvidia/Arm & China


09 Jun

This and previous notes can be found at SubStack
Check out ERI-C.com  for  research discovery and trading analysis  
Free mifid compliant webinar by Daivd Scott this Thursday 4pm HK time; The title is The shift from an 'Early Stage Inflation Bull Market' to a 'Deflationary Boom', Fundamental Signals for Asian Equities & Global Industry Leaders.

Asia at 1:45am HK time
Australia
ASX opened higher and rallied in early trades to 7,335 (a new high) in the first hour but then trended lower to 7,272 after lunch and then worked better; currently  -6pts (-0.1%) @ 7,287.  Woolies weak on a downgrade.  Brickworks +VE on record earnings.  Banks, Consumer Staples and Property weak.  Miners and Healthcare +VE
Data
Westpac’s Jun consumer confidence figures -5.2% at 107.2 points, vs expectations +0.8% to 114 points (May was -4.8% @ 113.1).
Building Permits Apr -8.6% vs +18.9%
Japan
Nikkei opened lower at 28,900 and traded sideways in the red in a range 28,932/28802 in the am session.  PM traded in a tighter range 28,880/28855 Currently -95pts (-0.3%) @ 28,870
Topix traded in a similar pattern Morning hit 1,964 just in the green then down to 1,956. PM trading 1960/1958 currently -4pts (-0.2%) 1,959
Due later
Machine Tool Orders May (Apr was +120.8% F/cast is +134%)
S Korea
Pre market GDP data was better than expected
 
Kospi opened lower traded sideways in the morning 3,247/3,234 until around 1pm when it saw selling pressure; currently -25pts (-0.8%) 3,224
Kosdaq opened higher and tested to 988 in early trades but then sold down to 983 and then worked slightly better with resistance at 985. saw selling pressure around 1:25pm currently -7pts(-0.7%) @ 980
Unemployment Rate May 3.8% vs +3.7% Apr (F/cast was 3.7%)
GDP Growth Rate Q1 +1.9% YoY vs -1.2% Q4 (F/cast was +1.8%)
GDP Growth Rate Q1 +1.7% QoQ vs -1.2% Q4 (F/cast was +1.6%)
KDCA announced 602 new covid cases (vs 454 Tuesday) Wednesday is usually the peak day.
Taiwan 
Market opened flat despite strong trade data and trended lower, initial support at 17,000 but then dipped to 16,971 bounced back, but around 11:20am selling pressure resumed. Support at 16,907 and a small bounce to close -110pts (-0.6%) @ 16,966
China 
CSI300 opened lower at 5,225 and initial rallied to flat, then slightly higher before selling down to 5,215 after the strong PPI data (which did not include the commodity rally at the end of May) NDC said it would ensure higher PPI didn’t feed into inflation Prompting a rally to 5,250 around 11:10am eased back to 5,243 at lunch. PM opened lower and has sold off on news the Govt looking to impose price curbs on coal which are unlikely to have any long term effect. Currently -5pts (-0.1%)2 5,227
Great Wall being investigated for corruption, linked to an executive who was previously at Orient. Coupled with Banks being asked to test their exposure to Evergrande putting pressure on the bond market. Restructuring of Founder which tries to deal with onshore and offshore creditors are being dealt with under one plan that includes ‘keep well’ bonds; adding to the uncertainty.
Data
Inflation Rate May +1.3% YoY vs +0.9% Apr (F/cast was +1.5%)
Inflation Rate May -0.2% MoM vs -0.3% Apr (F/cast was -0.1% )
PPI May +9% vs +6.8% Apr (F/cast is +8.4%) NDRC says it will seek to prevent PPI rises seeping into the CPI. PBOC action will be key but at this stage no change expected.
Loan data could also be released this week
Guangdong's National Health Commission reported seven more local COVID-19 cases yesterday (8 June), along with one asymptomatic diagnosis.
HK 
Pre market opened @ 28,771 -10pts vs +14pts ADR’s followed the CSI 300 pattern; worked better in the first 30 minutes but then sold down to 28,692. Rallied to 28,860 before selling down into lunch. PM opened lower and currently -63pts (-0.2%) @ 28,716
Ecommerce most -VE but Tencent +VE. Evergrande -6% despite yesterday’s buyback.
Europe
FTSE -6 points lower at 7,092, DAX +9 points @ 15,660,  CAC 40 +12 points at 6,568 and Italy’s FTSE  MIB +77 points at 25,860, according to IG.
Earnings from Inditex beat +VE outlook
Data due
GERMANY Balance of Trade, Exports, Imports and Current Account.
US Futures
Opened flat
AHEAD 
MBA Mortgage Applications and 30 yr Mortgage Rate, Wholesale Inventories, EIA Oil Report.
Earnings : Chewy, Dave & Buster’s, Signet Jewelers, John Wiley


Front Page
Brexit tension as G7 gathers

US investigates leak of records showing billionaires pay little tax
• 25 richest citizens paid just $13bn in 5 years • Bloomberg, Buffett and Bezos data released.
Key being that they were able to do it legally. Suggest that an overhaul of the system is required.

Paris and Berlin lead fight to dilute Brussels’ stricter bank capital rules.
Covers the ‘proposed rules will introduce a new capital minimum, or floor, making it harder for banks to use their own internal calculations to decide the size of their capital base.’ Paris, Berlin, Copenhagen and Luxembourg are saying the rules are designed to penalise European banks.

INSIDE
Poorest nations ‘left behind’ in recovery
Report says record level of post-Covid debt threatens global economic stability. Looks at the latest World Bank twice yearly Global Economic Prospects Report.
Key being developing countries are being left behind and there is risk that if they don’t get vaccines that could get worse. Moreover there is a further risk from increasing prices and increasing interest rates.
Worth a read. It concludes ‘“If, however, inflation expectations risk becoming unanchored, [emerging market and developing economy] central banks may be compelled to tighten monetary policy more than would be appropriate,” the report warned.’

Biden eyes tariffs on China rare earths
Production of neodymium magnets (used in smart phones and Electric vehicles) is carried out predominantly in Asia. China produces circa 88% of them, Japan is another key supplier. Comes as part of Biden’s a new “supply chain strike force” to combat unfair trade practices in a number of sectors.
The key being that if tariffs are high enough it could incentivise the development of a US domestics industry.
Other sectors in focus are rare earths, pharmaceuticals and food with concerns about an over-reliance on China.
Further indication that Biden seeks to constrain China but many are worried about the Chinese lead in other areas like AI, Blockchain, 5G and 6G and IoT, where constraint is more difficult.

US farm belt thrives on Chinese demand
Healthy order books and high crop prices boost incomes while subsidies wane.
Slightly ironic that the sector that Trump was trying to protect with handouts is having its best time ever under Biden.
Key being the increased demand from China for soyabeans, corn, tree nuts, beef, wheat and poultry. The increased demand from China which has suffered from droughts, floods and swine flu comes as Brazil (another soya supplier) was hit by a drought. Key for the farmers is the fact that China is expected to remain a strong buyer, partly because of its promise under the 2020 Trade Deal; which the article notes ‘China was 22 per cent behind its commitment for 2021 as of April, but was “catching up quickly”,’ but also because of the limited number of alternatives.
Good news for the farmers but it must again raise the inflation pressures on China not least because of the shipping costs that have soared because of covid. After todays PPI data the NDRC said it would continue with it’s policies to prevent prices rises impacting inflation but that can only continue for so long. Key will be the PBOC which has promised a stable environment but at some point will have to tighten. A key trigger could be the US inflation data tomorrow and whether the FED is forced to talk about tapering sooner rather than later.

Beijing’s claim of ending poverty challenged
The key being Beijing’s definition of poverty. Bill Bikales, former senior economist for the UN in China, argues Beijing used a limited and inflexible definition of what it means to be poor.
I always think in worth remembering that whilst President Xi claimed a great victory regarding poverty its also worth remembering that it was the communist party’s policies that put those people into poverty.
Anyway Bill Bikales says ‘“China has not eradicated poverty —even extreme poverty. And it will not until it has viable systems in place that will identify poor people everywhere . . . and until the country provide a safety net for all its people [including] those who are hit by a death, serious illness, loss of work or other shock,” he wrote in the report, funded by the Swiss Agency for Development and Cooperation.’
Key being that ‘China considers poverty to be a purely rural phenomenon, even though more than 60 per cent of its population lives in urban areas.’
‘The rigid approach meant that even when the coronavirus pandemic pushed economic growth into decline, antipoverty work in China focused on aiding the remaining 5.51m registered rural poor on the original list. Few resources were directed towards vulnerable households who were not originally registered as poor. “To accurately capture the impact of Covid-19 on poverty anywhere other than in the already identified counties and villages would have required systems that were simply not in place,” Bikales wrote.’
An interesting read, many were already sceptical because the definition that China used for ‘poverty’ was lower than the international standard.
In many ways it further highlights the problem China has with a declining and aging population. It may also give an insight into why China has such difficulty in stimulating domestic consumption. Taking people out of poverty by whatever definition does not make them significant consumers.

Nato allies become alert to the merits of AI co-operation
Worth a read because it notes that China is weaponising artificial intelligence and using it in high-tech warfare. Nato has recognised that it is falling behind; Jens Stoltenberg, secretary-general, acknowledges ‘“We see China especially investing heavily in new, disruptive technologies like artificial intelligence, autonomous systems, big data, and they implement them into new advanced weapon systems, drones, submarines, aircraft and so on.”’
That follows warnings from ‘Eric Schmidt, the former Google chief executive who chairs the US National Security Commission on AI, warned in March that Beijing was planning to undermine conventional forces by “leapfrogging” to new technologies.’
Key being that many in the west fail to recognise the potential for applications beyond their own industry and few in the west think about defence applications.
An interesting read but worrying; mentions AI in the command and control system ‘which could give members a unified picture of the battlefield across multiple regions, using intelligent data analysis to sift information.’ I guess OK as long as it can’t actually fire the weapons! It concludes ‘In the vast arena spanning drones to quantum computing, there was a temptation to cover too much. “It makes massive sense for Nato to look more at this [technology],” she said. “The question is, what exactly are they focusing on? There’s a danger of Nato spreading itself too thin.”’

German solar company pursues Lesotho debt
An interesting read because part of the reason the arbitration failed was ‘because Majoro, then finance minister, favoured a rival project backed by Chinese investors’.
Interesting that Chinese investors would be interested in Lesotho, one of the poorest countries in southern Africa?

Companies & Markets
Hong Kong’s Covid policies threaten its role as a financial hub

Looks at the lack of a plan to exit covid social distancing measures. Comes as Edward Yau was interviewed on Bloomberg with the same conclusion. There is increasing backlash against the administration not just from bankers but also other business sectors.
Historically the financial sector has been important to Hong Kong, contributing more than 20% of its GDP. It notes ‘About 70 of the 100 largest banks have operations in the city, and have so far been mostly shielded from the consequences of Beijing’s tightening grip over Hong Kong.’ Although HSBC and Standard Chartered might be the exceptions.
It notes ‘It is just over 100 days since Hong Kong started rolling out vaccines, and only about 17 per cent of adults — and less than 5 per cent of people over 70 — have come forward for the jabs. That is half as many as in London and Singapore.’
It puts forward that inoculations are hampered by mistrust of the administration; which may be true. But I also think that success of bringing cases under control and the willingness for people to adopt social distancing measures. Also the fact that people experienced and survived SARS without the need of a vaccine. Maybe the administration can be blamed for not explaining the seriousness of covid but the net result is the same.
But the fact that they don’t have an exit plan is also frustrating, travel is difficult, borders closed to non residents and residents facing a 2 or 3 week quarantine regardless of whether you have been vaccinated; raising the question of why bother if the administration doesn’t recognise the vaccination. Interestingly with borders closed flights are expensive and finding a quarantine hotel difficult due to the influx of student back from studies.
Even the recent news of a scheme for key bankers to travel which sounded good has so many restrictions as to be worthless. Nice quote from David Webbe “It’s like day release for prisoners,”
It quotes a banker ‘“We are effectively signalling that we are closed for business,” one Wall Street banker in Hong Kong said this week. “Hong Kong’s position as an important financial centre is in question.”’
It also raises the question of how long will the large expat community put up with not just the restrictions on travel but also the perceived ineptitude of the administration.
The administration been quick to call on business to encourage its staff and the public to get vaccinated; which to an extent underlines how detached the administration is from the society it is supposed to represent.
But still the adminsitration hasn’t outlined a plan or stages. Historically Hong Kong would have wanted to a leader, open before others but not seemingly this time.
The article questions ‘Is it to reopen to the world before rival Asian hubs such as Singapore, or to open the boundary with mainland China? If the latter, Hong Kong would be at the behest of Beijing for its timeline for reopening to international travel. That would probably mean a much longer delay than if the decision on travel had been made for Hong Kong alone.
Hong Kong has so far only approved quarantine-free travel for government officials and executives of big mainland companies such as Tencent. To some in the international finance community, it is a signal that Hong Kong has accepted its fate as a global financial centre for China that is at risk of becoming too reliant on Chinese capital.’
I think the opening for government officials and mainland companies is in itself a significant statement.
Of course the other explanation is that China doesn’t want any embarrassment from Hong Kong as the July 1 Communist party anniversary approaches and keeping people locked down is an easy way to achieve that without Beijing being directly blamed?

Chip crunch Carmakers must ‘put money on table’ to avoid supply shortages, warns Bosch
An interesting read which indicates that car maker attitudes to chip supply is changing. The key thing for the auto makers to appreciate is that auto chips are not that profitable for the chip makers and so their business is not the most important.
Worth a read. Point to note is that paying in advance or holding inventory will raise costs.

Nvidia seeks Beijing’s backing on Arm
Battle over China business adds to challenges as deal is submitted to watchdog.
Worth a read, Nvidia is confident of its timing. The more interesting element is the on-going fight for Arm in China; where Allen Wu remains in legal control because he took the company seal after being being ousted by Arm.
‘Wu brought proceedings against Arm China last summer in Shenzhen, where the venture is registered. The lawsuit, filed by two Arm China shareholders under Wu’s control, alleged that the board’s decision to remove him was invalid. Wu has been permitted to represent both Arm China and the two investors, making him both plaintiff and defendant.’
It’s a case that illustrates the danger of doing business in China. FT has written several articles on it.

Covid spread threatens Taiwan chip supplies.
Looks at a number of covid cases at chip makers; most of the manufacturers have been aware of the issue and taken measures to try and protect their production runs.
Concludes ‘Mark Li at Bernstein, said the disruption was likely to be short term. “My guess is that it will mostly hurt smaller chip design houses as priority will be given to large customers,” he said.’

Ackman’s Universal Music deal heralds Spac 2.0
Worth a read to see how Ackman is developing the Spac model.Stock pickers shine after record May performance
An interesting read; ‘Last month, 70 per cent of active fund managers outperformed the Russell 1000 index, making it “one of the best months in history”, according to Bank of America, and the strongest May in at least three decades.’
Comes as big tech came under pressure and rotation trades saw support and interest in small and medium cap stocks increased.
An interesting read but one wonders how long it can continue.

AI generates a textual revolution in investment  By Robin Wigglesworth
a good read about how tech can now be used to read annual reports along with other transcripts for key signals that give insight into the management.   Mentions ‘Industry insiders say there is a quasi arms race nowadays between ‘‘natural language processing” (NLP) algorithms that scour corporate statements and company executives that  attempt to outfox them by avoiding certain touchy words and phrases.’
‘But there are valuable signals hidden within even the subtlest changes, said Frank Zhao, an analyst at S&P’s Market Intelligence team.’
‘The finance industry loves its buzzwords and anything to do with artificial intelligence is particularly hot these days and should be treated warily.
But we might be at the beginning of a textual investing revolution that could upend the industry.’

Cloud group outage brings down websites across world

• US-based Fastly admits to glitch
• Millions of internet users disrupted.
Interesting read, Fastly doesn’t provide a detailed explanation but it did show how easily systems can be taken down, which with the background of the recent ransomwear attacks will, or should make people worried about the security and dependability of systems.

FT BIG READ. COMMODITIES
Clean energy fuels a new commodities supercycle
Demand for copper is set to explode with the increased focus on renewables technology. But even as prices for the metal rise, years of under-investment threaten to leave supplies short.
A good read about the back ground to under investment and the radical increase in demand due to the green effect which could lead to demand that is higher than China’s urbanisation in the early 2000’s.
Key commodities are copper, cobalt and nickle. Notes that an EV uses 5x more copper (60-83kg) than an internal combustion one and a 3MW wind turbine 4.7 tonnes.
With regard to new supply ‘Ivan Glasenberg, the long-serving boss of miner and commodity trader Glencore, said recently that the copper price would need to rise 50 per cent to meet projected demand from the global green revolution. “You will need $15,000 copper to encourage a lot of this more difficult investment,” he told the Financial Times. “People are not going to go to those more difficult parts of the world unless they are certain.”’
Notes Aluminium as an alternative.
A good read.

OPINION
Economics
The Fed risks being too slow on inflation
And that will be bad news for the rest of the world as it recovers from the pandemic By Martin Wolf
Gives his view following the latest World Bank Report and the divergence between the developed and developing. One key is the global distribution of vaccines.
The other key being the Fed and its new policy of being ‘outcome based’ vs ‘forecast based’; which is worrying because of the lag between changing policy and it being effective.
He concludes ‘Getting the world as a whole out of the pandemic crisis is far from a done deal. Much more still needs to be done on that. Furthermore, the new approach to monetary policy of the world’s most important central bank risks serious overshooting. By responding only to outcomes, it is nigh on certain to react too slowly. It is possible that this will not matter, because expectations remain well anchored, whatever happens. I pray this will be case. The alternative does not bear much thinking about.’
Worth a read.

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