FT PLA misinterpreted? Companies hit with Stockholm syndrome in China, Green gains

06 May

MARKETs @ 12.30pm Hong Kong time
Drug makers under pressure as US and UK back plan to suspend vaccine patents.
Shippers +VE as the covid surge in India could impact global trade.

ASX200 opened higher but sold down after the first five minutes, found support around the 7,050 level and then saw small rebound before trading sideways around the 7,060 level Currently -33pts (-0.5%) @ 7,062  NAB earnings disappointed, Nearmap sold down heavily on news of legal action against it by rival Eagle View.  Appen was weak too following the release of a presentation ahead of its appearance at the Macquarie Group conference.  
Nikkei re-opened much higher and worked higher through the morning to test 29,400 but failed to hold that level.  Opened lower the PM session Currently +481pts (+1.7%) @ 29,287
Topix traded in a similar pattern testing towards 1,940 but then trending lower, currently +30pts (+1.6%) @ 19,29
Investors still concern about the inflation threat; which put Tech stocks under pressure
Kospi opened lower but worked higher resistance at 3,175 level then trended lower to 3,155 now working slightly better; currently +14pts (+0.4%) @ 3,161
Kosdaq opened lower and tested down to960 level then rallied to 972 before trending lower to 964 level and now trading sideways. Currently -3pts (-0.3%) @ 965
Data Pre Market
Foreign Exchange Reserves $452.31b vs 446.13b(F/cast was 450b)Also reported new covid cases dropped to 574 vs 676 Wednesday
Opened higher and worked up to 17,090 level in the first hour but then reversed and sold down to 16,765 level bounced but trending lower again; currently -3pts (unch) @ 16,848 I expect government funds still trying to support/calm the market.
Data due after market
Wholesale Prices, Inflation Rate
CSI300 re opened lower and dipped initially before rallying to test Thursday’s closing level but failed to hold and sold down to 5,040 level ahead of lunch before a small uptick into lunch. Currently -66pts (-1.3%) @ 5,057
China’s state economic planner said on Thursday it has “indefinitely” suspended all activities under the China-Australia Strategic Economic Dialogue. -VE
Pre market opened @ 28,648 +230pts vs +99pts ADR’s
Tested higher to 28,755 level in the first 30 minutes before reversing and selling down to test 28,400 in the next hour. Tested that level for a while before a small bounce into lunch. Currently +49pts @ 28,467
Drug makers weak, E-commerce and Chinese Financials mixed, Shippers strong.
Expect markets to open higher but pre market data likely to impact and expect some caution ahead of the BoE rate decision.
EUROZONE Construction PMI, Retail Sales
GERMANY Factory Orders, Construction PMI
FRANCE Construction PMI, Retail Sales,
UK Services and Composite PMI, BoE Interest Rate Decision, BoE Quantative Easing, Local Government Elections.
US Futures 
Opened flat in Asian time Dow -21pts, S&P and NDX -0.1% during Asian hours S&P and NDX turned +VE
After market Etsy was -7% despite beating estimates, Sunrun was +3% after beating, Zynga +5% after it beat. Moderna was+1% said its its Covid booster shot generates a promising immune response.
Data due Challenger Job Cuts, Unit Labour Costs, Nonfarm Productivity, Initial Claims, 4 week Average Claims, Continuing Claims, EIA Natural Gas Report,
Earnings Regeneron, ViacomCBS, Kellogg, Moderna, Murphy Oil, Beyond Meat, Shake Shack, Square, Roku, Axon, Cushman and Wakefield, Tapestry, Neilsen, AIG, Anheuser-Busch, EOG Resources, Consolidated Edison, DropBox, Expedia, Roku, Peloton Interactive, Datadog, Cardinal Health, Ambac Financial

Olympics sponsors duck questions over Beijing 2022 as boycott calls grow   Linked to situation in Xinjiang

Covid paralyses Asia as western economies prepare for blast-off
Not even Joe Biden’s record stimulus package has managed to lift the spirits of region’s exporters. Asian Development Bank said that the region’s economies were diverging and that more Covid-19 waves were a big risk.

Crypto trading volumes boom as activity cools on stock markets
More and more daytraders and institutional investors shift their attention to more speculative assets


Archegos heads for insolvency as banks seek redress for $10bn loss
• Brokers move to recoup funds • Family office eyes closure • Soured bets sparked crisisNo doubt everyone will be watching what happens. The most likely winners, as ever, will be the lawyers.

Trump rails at ‘radical left lunatics’ after Facebook oversight panel upholds banHe remains blocked from Facebook after a ruling by the company’s independent oversight board that sparked a fierce backlash from the former US president.

Germany raises target for carbon emission cuts by 2030
To raise its target for reducing carbon emissions by 2030 from 55 per cent to 65 per cent, after the country’s Supreme Court said its previous climate goals were not ambitious enough.+VE for green energy plays.See also Acciona wins admirers with plan to make sustainability add up in the Companies & Markets section
LEX Wind turbines: hoping for a turnround. Despite poor results Siemens Gemesa and Vesta’s rallied. 'Optimism is justified. Wind power, especially offshore, has a rosy future. Offshore turbine demand should rise more than 15 per cent a year for the next decade, thinks Vestas. That is a big boost. Almost all its revenue now comes from onshore turbines, which should grow at a low single-digit pace. A secular rise in renewable energy demand shows no sign of flagging. These two turbine makers will benefit. Investors should exploit any weakness as buying opportunities.'

Shot and a beer US campaigns get creative to win over jab sceptics
Looks at incentives to get sceptical people inoculated. It is not just a US problem with other countries facing similar issues, especially those that have had success in controlling the virus so far.

US misreading of military intent plays into China’s hands
Puts forward that the US is wrong in thinking Beijing has altered its medium or long term goal for developing its armed forces. '“Some are saying that the modernisation goal of 2035 has been moved to 2027. That is simply not correct,” said Meia Nouwens, an expert on Chinese military modernisation at the International Institute for Strategic Studies in London. She believes the misunderstanding happened because the party spoke of the need to “accelerate progress toward military modernisation” in the same paragraph — stock language which can be found in almost every Communist party document regarding the PLA.’
It goes onto say 'And experts challenge the notion, increasingly peddled by US military officials, that Beijing is getting confident enough in its military capabilities to risk an attack on Taiwan.’
There is mentioned of how some think that is unlikely because there are 'huge remaining challenges in making different PLA branches work jointly and with the use of networking technologies.’
It stresses that President Xi would have to be 'either pushed into a corner or know beyond doubt that there was no risk of losing that war, analysts say.’
But it does recognise that China’s mliitary strength is rising and that is exerting more pressure on Taiwan. These it feels are less of a step towards war but more about seeking to intimidate Taiwan 'with so-called grey-zone tactics. Fear-mongering over the risk of a Taiwan war plays into the hands of such a Chinese strategy.’
Others feel that the US military is just trying to justify a bigger budget.
I think the key point is that China wants Taiwan and has recently dropped the ‘peaceful’ part of the statement.  Most wars are started by intimidation and probing.  If there isn’t a strong international reaction then the aggressor tends to continue; look at Russia and the Crimea.  Something that China no doubt watched carefully.  Look at the conflict with India, it slowly upped the ante until it got a reaction.  It will be the same with Taiwan.  Yesterday the FT wrote about the whether the US should move to ’strategic clarity’ over Taiwan, there are positive and negative factors in doing so, as it outlines (Washington shies away from open declaration to defend Taiwan).  But it would give Taiwan and China certainty, whilst politicians may prefer the ambiguity the generals on both sides will use it to their advantage.

Biden team damps hopes on North Korea
President unlikely to engage with nuclear-armed dictator, according to regional experts
Basically N Korea is not a pressing need, there are other more important issues. I also think that downplaying N Korea will give China some comfort that the cushion N Korea provides it is not being tampered with.
Worth also looking at The Japan Times article 'Beijing's new flashpoint: A South Korean hot spot for spying’ https://www.japantimes.co.jp/news/2021/05/05/asia-pacific/china-flashpoint-south-korea/
Tensions are rising and it is China that is stoking them, which combined with the previous article on US misinterpreting China’s ambitions and the growing stand off in the South China Sea between China and the Philippines would suggest that there are reasons to be worried.

BlackRock hits flak over stance in P&G palm oil revolt
Accused of inconsistency for supporting a shareholder protest against Procter & Gamble’s sourcing of palm oil from an Indonesian company in which BlackRock itself holds a significant stake.Highlights the care funds, especially ETF ones, are going to have to take on ESG issues.
See LEX Palm oil/BlackRock: bungle in the jungle. Concludes 'Further weakness and the growing power of the ESG movement could cast a shadow on Jardine Matheson too. Astra accounts for nearly a fifth of Jardine’s underlying profit.
Old guard ethical investors, notably the Church of England, which invested in industries it condemned, must be watching BlackRock and muttering “welcome to our world”. It is easier to claim virtue than to preserve it.'

Maersk warning Supply chains set to remain unreliable and container shipping prices high
Good news for shipping companies as the BDI continues to rise, currently at a 5 year high.Could also raise inflation concerns as supply chain delays increase competition for scare resources. Mentions that ‘containers were waiting outside the port of Los Angeles for up to 16 days before they could be offloaded.’Also good news for container makers!
See also Deutsche Post DHL boosts projections again

Investors pour $14bn into delivery app challengers
Incumbents like Just Eat, Deliveroo and Delivery Hero among big groups put on alert after investors fill war chests of a new generation of grocery delivery apps (GoPuff, Getir, Gorillas, Weezy and Dija, among many others). There is a feeling of envy and alarm.Much of the money is being spent on discounts, coupons and other promotions; raising concerns that the real potential has been exaggerated by the pandemic.
It mentions the use of ‘dark stores’ across urban centres to be able to deliver groceries in as little as 10 minutes.
Nice quote ‘The economics will be tough. Consumers will be happy, but someone will have to pay for the party’

Personally I doubt the model and the rush of cash into it is very reminiscent of the Dotcom bubble. There will be a few winners at the end of the day but with low entry barriers it will be tough. It mentioned that regarding ‘dark stores’ Deliveroo is testing a similar distribution deal with Dija, a dark-store start-up founded by two former executives at the London-based food delivery service.

Strong first quarter shows GM is weathering chip shortage
An interesting read. It’s diverting chips to more profitable models and it is improving communication with the dealers. Lower inventories is making for higher prices. 'The group is delivering more vehicles that are popular at a particular location and has launched tools so that dealers can see what products are headed to them, allowing them to sell the vehicles before they arrive.’“We will run at a lower level of inventory [in the future],” Barra said. “I’m not going to say it’s going to be this low . . . but we can be much more efficient.”
Interesting because I think its another sign of inflation building. Plus the fact that they are going to run lower inventories suggests that the associated inflation will not be temporary.
Also Lex GM/electric cars: truck driver. 'Like other traditional carmakers, GM lacks first-mover advantage. But it has scale and mass production expertise. It is as well-placed as any business to challenge Tesla’s dominance.'

Soaring US shares push risk premium to 10-year low
Sky-high valuations sound an alarm as the reward for owning stocks over Treasuries plunges
'Morgan Stanley analysts wrote in a recent note to clients, arguing that investors were not compensated sufficiently for the risk of owning equities rather than Treasuries.’
An interesting read and along the lines of yesterdays 'High valuations signal time is right to diversify’
The problem with the risk premium in my view is that the Fed has interfered and it no longer reflects market pricing but Fed policy. The interesting issues is whether the Fed is looking engineer high nominal growth in order to allow higher inflation to inflate its debts away.
The other key issue is whether bonds deserve their position within portfolios are they no longer provide their historical hedge.

Regulator stands firm in Binance stock tokens tussle
The saga continues as Germany’s markets regulator has rejected a request from crypto exchange Binance to remove a warning on possible securities rules violations, in a deepening dispute over trading in “tokens” linked to stocks.
As I wrote before it is a grey area and Binance is pushing the boundaries. I still think there a has to be greater integration between the regulators as crypto and blockchain become more mainstream.Worth a read

Jabre scion launches ESG fund to tap into demand for ‘conscious capitalism’
'seeking to capitalise on demand for sustainable and environmentally-focused strategies, investing in areas such as renewable energy, electric vehicles and online education that he thinks will thrive and benefit society as a whole.’
Worth a read

High metal prices and low investment in mines pose risk to clean energy, says IEA
Focuses on the lack of investment into new mines which can take 16 years from discovery to production and even expanding existing mines can take years; 'Reaching the goals of the Paris climate accord would result in a quadrupling of mineral demand by 2040, the IEA said. Yet a lack of investment in new mines risks greatly raising the costs of clean energy technologies, it said yesterday.’
It suggests 'stockpiling some of the critical minerals to hedge themselves against supply shortfall’A good read and another example of inflation into the system.

Markets Insight. Large dividends show the value in unloved miners By Neil Hume
A good read and following the previous article notes that the Anglo American, BHP, Glencore and Rio Tinto are seeing record profits in part due to cutting back in spending on new mines but as much as 50% since the 2011cycle. But their valuations are low largely because of ESG concerns. Last time copper was at these levels was the top of the last cycle which is also raising concerns.
But as UBS analyst Daniel Major says “Looking at history does not necessarily help to predict the future, but it is a reminder that commodities/miners are cyclical and at some point the cycle will turn,”
But the current differences are last time China’s industrialisation was well underway this time the world is less dependant on China as 'global recovery programmes that governments are putting in place today are more commodity-intensive than was the case after the financial crisis.’
Another key difference is that the miners are more disciplined and focused on shareholder returns than before. The crash in 2014 has made then more cautious with their debt levels and balance sheets. There is also the difficulty in finding new projects.
It concludes 'All of which should help keep a lid on supply and prevent the sector from shooting itself in the foot and repeating the worst mistakes of the past.’
A good read and for investors like Buffett and others who are less dogmatic on ESG a good opportunity.

Stitching London back together again
Companies, retailers and residents want a coherent vision for the UK capital’s recovery after the pandemic, but no return to ‘business as usual’. Can this leading global city reinvent itself?An interesting read and would imagine the issues are similar in many other global cities.

A tale of two airline markets. By Brooke Masters
Compares the outlook for US and European airlines.Worth a read, the US looks set to recover faster. Concludes 'Having missed the US rebound, Buffett says he “still wouldn’t want to buy the airline business international[ly]”. But the slowdown will not last, even in Europe. Watch for the strongest carriers to expand organically. Why buy a failing competitor when landing slots, planes and crew are already going cheap?’
As I wrote yesterday I do think that Business Travel will return quickly but what is still not clear is how the airlines will price their tickets; that is likely to be key.

Western companies in China succumb to Stockholm syndrome. By Jamil Anderlini
'It is a condition that afflicts much of the corporate world and some governments when it comes to their dealings with the Chinese Communist party.’
A very good read. Looks at the issues confronting companies operating in China and China’s increasing pressure on companies to not only accept China’s ways but to endorse and promote them in their home countries.
'In a speech last year, President Xi Jinping made clear he wants to increase this leverage, saying the party “must tighten the dependence of international production chains on China” in order to form a “powerful countermeasure and deterrent capability”.’
Looks also at the ESG implications and asks 'What exactly is the ESG policy of these companies when it comes to “genocide”,’
He compares Australia’s stance of calling on China for an investigation into the source of Covid with New Zealand going out of its way not to offend China.
He concludes 'This prompted horror in other western capitals and outpourings of delight from Chinese state media. What the government of New Zealand and many others seem to forget is that acquiescing to the demands of kidnappers only encourages them to take more prisoners.'

Also if you have sign-up to the FT Global Boardroom there was an excellent session China’s Strategy in Asia-Pacific: Striving to change the regional order Moderated by Jamil with Bert Hofman, Susan Shirk and Minxin Pei If you have access to it I would recommend it.

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