June15 FT Thoughts China & Nato, Fed & Taper, Tech investment in China

15 Jun

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

Asia @ 2:30 HK time Markets except China & HK higher.  
US announces a carrier group operating in the South China Sea.
Market opened higher on news that a trade agreement had been made with the UK. and intially  traded sideways until the RBA meeting notes and House Price data came out and then worked higher hitting resistance approaching 7,395.  It consolidated back to 7,360 level before pushing higher again but without success and drifted lower to close +67pts (+0.9%) @ 7,380 another new high.
Oaktree upped its offer for Crown Resorts -0.5% but Nuix +3.8% saw its CEO and CFO resign after the disastrous IPO.
Leaders were healthcare, consumer staples, consumer discretionaries, technology, and the financials
RBA Meeting Minutes,
House Price Index Q1 +7.5% YoY vs +3.6% Q4 (F/cast was +9.5% YoY)
House Price Index Q1 +5.4% QoQ vs +3% Q4 (F/cast was +5.1% QoQ)
Sentiment encourages by the expectation that the BoJ will leave policy unchanged this week. PM Suga cabinet faces no confidence  vote.  Will decide about state of emergency Thursday.  Markets pulling above their 50 & 100 day moving averages
Nikkei opened higher and rallied to 29,400 and tested higher through the morning to 29,440 before easing back into lunch.  PM opened higher and traded sideways to close +280pts (+1%) @ 29,441
Topix had a similar open but worked better in the PM to close +16pts (+0.8%) @ 1,976
Tertiary Industry Index Apr -0.7% MoM vs +1.1% Mar (F/cast was +0.9%)
S Korea 
Sentiment +VE as KDCA reported 374 new covid cases (-25 DoD) below 400 for a second day. M2 data showed supply +1.5% MoM (+11.4% YoY).
Kospi opened flat, dipped then rallied to 3,262 then effectively traded sideways in choppy trading to close +5pts (+0.2%) @ 3,255
Above the 50 & 100 day moving average
Kosdaq opened higher 998 but sold down to 994 by 11am before working better to close 1pt (-0.1%) @ 997 Closed just below its 50 & 100 day moving average
Taiex opened higher and intially rallied to 17,350 but then sold down to 17,300 support before working better to close at the day high +158pts (+0.9%) @ 17,371 T/O was US$15.63bn (vs 14.77bn Friday). Clearly breaking above the 50 & 100 day moving averages.
Sentiment +VE as CECC reported 135 new covid cases
CSI 300 opened slightly lower but quickly sold down to 5,140 before a bounce and then drifted lower into lunch. PM opened slightly higher and trading sideways currently -63pts (-1.2%) @ 5,162
Market trending down towards the 50 day moving average, well below the 100 day.
Gas stocks under pressure, after the gas explosion at the weekend; President Xi orders safety checks. Sentiment -VE after G7 and Nato statements; which the government rebuked.
Pre market opened @ 28,946 +104pts vs +92pts ADR’s led by Tencent, Ali Health JD.Logistics and Evergrande (on buyback).
But sold down to 28,454 in the first 40 minutes. Bounced to 28,680 before easing back into lunch. PM trading sideways currently -200pts (-0.7%) @ 28,642.
Chinese Financial weak, E-commerce mixed. Tech weak, Auto’s +VE
China Gas suspended -15% may be linked to Sunday’s gas explosion in China.
Market trading at its 50 day moving average, the 100 is currently 29,030
Expect market to open cautiously higher data out largely in line
Futures indicate FTSE +13 points higher at 7,168, DAX +47 points at 15,740, CAC 40 +17 points at 6,631 and Italy’s FTSE MIB +34 points at 25,778, according to IG.
Eurozone Trade balance later but Inflation data for Germany and France inline and UK employment data slight+VE
US Futures
Opened Dow futures -20 points. S&P 500 futures were flat and Nasdaq 100 futures ticked 0.1% lower. Tonight PPI and Retail sales data likely to keep investors cautious.

China’s military goals threaten international order, Nato warns
• Strained Sino relations laid bare • ‘Systemic challenges’ posed • Biden mobilises allies
What is key is the strength of the language used which seems to indicate more unity amongst the members.
Interestingly it said “We call on China to uphold its international commitments and to act responsibly in the international system, including in the space, cyber and maritime domains, in keeping with its role as a major power.” It also made reference to China’s “coercive policies”, ‘its accumulation of nuclear warheads and sophisticated delivery systems, and its participation in Russian military exercises in Atlantic region waters.’
Also of note is that Nato ‘approved a cyber defence strategy and extended existing powers to invoke the alliance’s “Article 5” principle of collective defence, in cases of co-ordinated cyber attacks.’
Cyber is likely to become a more important aspect of defence in the years ahead. When I was in the military we were worried about the impact of a nuclear explosion on electronics today its the infiltration of electronics. Trying to set the boundary between criminal attacks on companies and national warfare will become increasingly important.

American father and son plead guilty to role in smuggling Ghosn from Japan.
It will be interesting to see what they put forward in mitigation. When seeking to avoid extradition to Japan they argued ‘that “jumping bail” was not technically a crime in Japan, the act of assisting someone in doing so could not be one either.’
In some respects a sideshow to the main trial but still it could cause some embarrassment. I would also think the Toshiba revelations of working with the government could also impact.

Concern grows over possible China radiation leak
French government keeps eye on plant partly owned by state-backed EDF.
Key is that the problem is said to be a “a known phenomenon, studied and provided for in reactor operating procedures”. The issue seems to be the details of what is actually happening in this case and the actual levels of the build up.
Nuclear power is an important part of President Xi’s emission reduction plans. Key within that is that China has not had ‘nuclear incident’ unlike Japan or Europe so is still seen positively.

Fed stimulus talks aim to avoid taper tantrum repeat
Powell has promised to give plenty of warning about central bank proposals for slowing the pandemic bond purchases.
Speculation about whether there will be any reference to tapering in the statement on Wednesday.
Key is that so far people believe the Fed’s view that inflation is transitory, giving itself space before having to talk about tapering. But it still faces the issue of when is the right moment to talk about tapering. If it ignores the subject it looks complacent but it if talks too soon about it that raises questions about its view on the inflation outlook.
Basically there is no right moment, I don’t think they will mention it at this meeting but raise the subject about when to start talking about at the Jackson Hole symposium, which is a more general forum. The reality must be that whether they tell us they are formally talking about it or not it must be something that is at the forefront of their thinking.
Read also Markets Insight
The Fed view of inflation comes with high risks  by Mohamed El-Erian  notes that whilst the long term is uncertain the short term US recovery is clearer.  Demand has recovered supply is catching up but facing issues and creating bottlenecks some temporary others less so.  So why did the yield fall; he says for central bank policies can distort market signals because
1. their consistant buying makes people believe that they will continue to buy and are insensitive to valaution moves.
2. that leads to floored policy rates making investors opt for longer dated debt in the search for yield.
He says ‘For the Fed, this has involved three factors: repeating that it’s “not thinking about thinking” about any tapering of asset purchases; an unusually long forward commitment to zero rates; and the shift to an outcome-based monetary framework.’
All of which is good for holders of stock and corporate and emergng bonds. It also pushes people to seek riskier opportunities.
BUT there are considerable risks; like the need to slam on the brakes if it is wrong, which could result in recession. It may increase volatility. That also risks upsetting Biden’s economic and social reforms.
He concludes ‘It would be wrong to reduce the markets’ reaction to inflation risks to a sign of a relaxed approach to the underlying dynamics. Instead, it reflects a grudging respect for the ability of a conviction-driven Fed to distort prices for a considerable period of time. What is risked thereafter, however, should give us all pause to be more humble and open-minded about the nature of inflation.’
Basically as has been noted before there is a huge amount of cash out there looking for a home and at present the best option is the T10

HK-Taiwan spat poses threat to cross-strait business
Looks at the breakdown in relations that has resulted in Hong Kong suspending operations at its representative office in Taiwan, in response to what Beijing sees as support for Hong Kong pro-democracy groups. It comes as Hong Kong had already ceased renewing Taiwan representative visa’s in Hong Kong.
The action effective cuts Hong Kong’s historical role as a conduit for ‘business and financial exchanges between Taiwan and China.’
Beijing is obviously seeking to make Taiwan deal with it directly, trying to give legitimacy to its false claim of sovereignty over the country.
It follows previous attempts at getting Taiwanese representatives to sign a form admitting their country was part of China as a precondition for being issued a visa; something they declined to do.
This to me is just another step in Beijing demonstrating that Hong Kong is just another province of China and effectively revoking its Special Adminstrative Region status.

Monetary systems. Regulation
Central banks confront digital currency dilemma
Loss of financial privacy a threat as policymakers look at official versions of bitcoin.
Contrasts the action by the Basel Committee on Banking Supervision and that of El Salvador recognising bitcoin as legal tender.
It notes that ‘Regulators and central banks are fighting for control of the monetary system as cryptocurrencies become an increasing challenge to fiat currencies, threatening to blunt the levers of monetary policy.’
It suggests that there are two current options; regulation (which I guess includes banning) and competition.
Key seems to be the competition that crypto could be to central government digital coins. Key for digital coins being the insight and control that it gives governments in following how money is used and by whom. Whereas crypto, whilst its an open ledger, it is decentralised.
For China, the other issue is trying to replace the US dollar in Asia; by being a first mover with the digital Yuan (as it has been in 5G). Key being its architecture; which Beijing hopes to be able to export to other countries. This builds on its swap line arrangements with 32 regional and Central banks as it seeks to get more goods priced in Yuan; especially those linked with the Belt and Road.
For me the current cost of crypto rather undermines its use as a currency but its role as a store of value, especially in the face of the financial devaluation of the US dollar, means it has a role to play and explains its growing appeal as a separate asset class.

S Korea ship groups plan IPOs as global trade bounces back
Looks at how shipbuilders ‘Hyundai Heavy Industries and sea cargo groups H-Line Shipping and SM Line are planning initial public offerings worth up to a combined $3.3bn, according to investment bankers with knowledge of the deals, as the companies bet on a potential multiyear supercycle for trade-related sectors after a decade-long slump.’
Key seems to be the current increase in shipping rates and vessel prices.
It notes that the proceeds will be used to ‘developing eco-friendly vessels and expanding low-carbon production facilities to meet stricter environmental regulations.’
It is interesting that recently ship builders have been under pressure because orders have been constrained as buyers waited to see what propulsion system to use to meet the new emissions requirements. As that becomes clearer it is likely that owners will be more inclined to place orders.
It will be interesting to see whether the sector returns to its previous boom/bust cycle, brought on by high shipping rates or whether there will be more restraint.
Short term the outlook looks good for the ship builders.

Companies & Markets
Novavax vaccine trial shows 90% Covid efficacy

The latest trial results were good but it still requires approval but it can be rapidly scaled up once approval is granted.
Interestingly it mentioned ‘the vaccine was significantly less effective against the Beta variant that first emerged in South Africa. Last week, Novavax said that a vaccine tailored for this variant elicited immune responses in animal and human studies against Beta and other strains, potentially paving the way for use as a booster.’
In Asia today a number of pharma names are trading lower.

Toshiba chair brushes aside calls to quit
Nagayama lays blame for woes on ‘confrontational’ stance of former chief. He is saying that it is his role to sort out the issues that were raised by the independent report. Institutional Shareholder Services is recommending that shareholders vote against his re-appointment.
‘A big investor was “simply shocked” by Nagayama’s comments, the lack of an apology and his failure to hold himself accountable.
One of Toshiba’s largest shareholders said Nagayama “sounded like a tourist” and had offered no clarity on why he was fit to lead the organisation.’
Shares were -1.5% at the time of writing having rebounded on Monday back to the pre-report level.

I think a ‘new broom’ is required if shareholder confidence is to be restored and new best practices introduced.

Turning point Orsted chief warns shortfalls in seabed leases put wind farm ambitions at risk  
Looks at the development of offshore wind farms which Orsted are being delayed due to licencing issues. It also highlights the moves in Orsted’s share price and about a “desperate” grab for offshore licences as some Petro companies play catch-up in offshore wind.
An interesting read.

China tech investment moves up a gear as boom in US crosses Pacific
Venture capitalists brave fiercely competitive start-up scene where copycats and regulation pose obstacles.
One of its opening statements is ‘“The capital winter is over, competition for deals is fierce,” said Ming Liao of Prospect Avenue Capital. “You need to bring something to the table more than just cash to get into deals now.”’
A interesting look at investing in ‘software as a service’ (SAAS) in China with a cross read to other areas of investing in China. Key being ‘Each new idea often sprouts a slew of copycats, and even competitive forays from the country’s tech giants. Differing culture and government regulation both add to the challenges.’
An interesting read and really does highlight the difficulties but also how much success is not just the idea but that execution, which is the real key. Along with keeping on the right side of government policy. It also notes that it is a low trust environment, people invest because they believe in the founder more than the company.
It notes that Tencent is the most active investor but mentions other VC firms like GGV Capital, Qiming Venture Partners and Matrix Partners China; all of whom have raised capital to invest. Also mentioned are Carlyle andM31 capital.
It concludes
‘Even though SAAS businesses have yet to take off in China, M31 Capital’s Zhong believes software is the future and finds it valuable to review trends under way in the US. In a recent weekly meeting, his team spent an hour studying how growth accelerated at database company MongoDB as its use cases expanded and examined its valuation.
“In the next 20 years China will follow the US in using software to improve enterprise efficiency,” said Zhong. “We’re not saying it will be the exact same path as the US, but it’s a reference point.”’
Worth a read
Vodafone taps Japan and US to fill Huawei gap  
Looks at Vodafone’s decision to award its Open RAN contract to a host of suppliers; Samsung Electronics, NEC, Dell and Wind River being the winners.
Key being that the it is a ‘concept that threatens to break the stranglehold of the largest telecoms equipment suppliers on the wireless market, which tightly bundle proprietary hardware with software.’ Primarily because it gives access to smaller suppliers.
An interesting read. NEC +4.2% and Samsung +0.3% today.

Fixed income. Riskier debt
CLOs draw in new support after showing resilience
Hedge fund Diameter lines up launch of loan-backed vehicles after $250m seed money.
An interesting read about a sector of the market that was previously considered very risky. It seems to have survived the last year largely because of the amount of liquidity in the market.
Key concern I would guess is how well they will do when liquidity is withdrawn from the market, I still think the lower lending standards could still come back to bite. Worth a read.

Interesting headlines
BlackRock ETF assets race past $3tn as industry total reaches all-time high.

Goldman taps soaring demand for car batteries with cobalt trading expansion

Is it all over for Israel’s ‘comeback kid’?
He has run the country for 15 of the past 25 years but Benjamin Netanyahu is out of power and facing a corruption trial. Yet the coalition that has replaced him is so fragile that some think he could still return.

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