May 11 FT Iron Ore Prices boom, European recovery +VE, Japan's Keidaran change, Meituan and more

11 May

MARKETs @ 2.30pm Hong Kong time
Asian markets sold down heavily following the US selloff in tech on inflation concerns.
ASX200 sold down through the morning hitting support at 7,078 around 12.30pm and then trading slightly higher in the afternoon; to close -76pts (-1%)@ 7,097
Tomorrow we get New Home Sales and Building Permits
Nikkei opened lower despite the good Household Spending number which was ignored and it trended lower though the day finding support at 28,535 around 2pm and then traded sideways to close -910pts (-3.1%) @ 28,609
Topix traded in a similar pattern with support at 1,902 and closed -46pts (-2.4%) @1,906
Household Spending Mar +7.2% YoY vs -6.6% Feb (F/cast was +1%)
Kospi opened lower and sold down to 3,192 in the first hours and then worked slightly better for the rest of the day. Closed -40pts (-1.2%) @ 3,211
Kosdaq sold down in the first hour to 976 and then traded sideways, dipped lower around 2pm but then bounced to close -15pts (-1.5%) @ 978
Opened lower the trended lower to 16,460 before a small bounce into the close -653pts (-3.8%) @ 16,583
CSI300 opened lower as inflation came in slightly weaker that forecast and PPI slightly stronger. China also released its census data showing the slowest growth in 10yrs.
Market dipped to 4,926 before revising and trending higher into lunch. PM the market rallied into the green to 5,033 but now easing back currently +25pts (+0.5%) @ 5,018. Looks like Team China supporting the market.
Inflation Rate Apr +0.9% YoY vs +0.4% Mar (F/cast was +1.1%)
Inflation Rate Apr -0.3% MoM vs -0.5% Mar (F/cast ws -0.1%)
PPI Apr +6.8% YoY vs +4.4% March (F/cast was +6.5%)
Could also get Vehicle Sales, New Yuan Loans, Outstanding Loan Growth, Total Social Financing, M2 Money Supply.
Pre market opened 28,287 -309pts vs -127pts ADR’s. But sold down to 28,000 in the opening minutes and then found support 27,900 level and traded sideways into lunch. PM traded higher but only to 28,150 level and currently falling -562pts (-2%)@ 28,041
Expect markets to open lower; FTSE -91 points at 7,035, DAX -200 points at 15,210, CAC 40 -74 points at 6,308 according to IG. Concerns about inflation have seen Asia sell down heavily. German wholesale prices came in higher than expected adding the inflation concerns
Wholesale Prices Apr +1.1% YoY vs +1.7% Mar (F/cast was +0.8%)
Wholesale Prices Apr +7.2% MoM vs +4.4% Mar (F/cast was +6.8%)
Data due
EUROZONE ZEW Economic Sentiment Index
GERMANY ZEW Economic Sentiment Index & Current Conditions,
US Futures Opened in Asian time Dow flat, S&P -0.1% and NDX -0.25% but have eased with the Dow now -70pts, S&P -0.4% and NDX -0.7%
AHEAD Redbook, JOLT’s Job Openings, API Crude Oil Stock Change.   But the focus will be inflation data on Wednesday

Earnings: Electronic Arts, Chesapeake Energy, Hanesbrands, Aramark, International Game Technology, Palantir Technologies, Perrigo, Unity Software, Opendoor Technologies, Kinross Gold, Lemonade, Vizio

Clashes rock Jerusalem

Record iron ore price signals raw material boom as economies surge
• Chinese steelmakers fuel demand • Copper, oil, timber and foodstuffs follow trendA broad surge in the demand for many resources; Iron ore, copper, lumber and a number of soft commodities in part due to a drought in Brazil. Boosted by USD weakness and as an inflation hedge.
Key beneficiaries being the miners with Rio Tinto and BHP being mentioned as the largest corporate dividend payers.
Whether this is the start of a cycle or super cycle is probably too early to call but there seems to be very solid demand and in some areas a supply shortage from earlier under investment. But with a lot of them bring supply back will take time.

US pipeline hackers regret ‘creating problems’ as Texas cuts oil production
Darkside identified as the the group responsible. Apologised for ‘creating problems for society’. It appears that they offer their product for others to use and say they are only interested in making money. They are believed to be from Russia and only operate against non Russian firms. The article notes that Darkside operates its own ‘press office’.
It will be interesting to see how the FBI and other Western Governments react to this criminal attack and whether it becomes part of government policy as this would appear to be a national security issue.

Eurozone investor sentiment bounces back
'The rise in the German-based Sentix survey of investors from 13.1 last month to 21 in May was above the level expected by most economists surveyed by Reuters.’
A continued improvement and now back to its March 2018 level. The findings are in line with other surveys and today we get the ZEW data which is also expected to be positive.
But with markets already at highs it will be interesting to see where they actually invest

Recovery fund forecast to propel EU rebound
Most experts predict growth will be greater than either bloc or its nations have estimated.The boost from the expected €800bn of EU funding over the next five years will further drive the already seen recovery. The focus of many will be on green and digital projects but the effect will be a significant boost to existing forecasts.
It looks at the multiplier effect that these projects are expected to have and there is a range of forecasts but most appear confident that the current estimates have more upside. It does caution that results will depend on how effectively the money is spend and how much of it too. As ever with these projects getting from the planning stage to implementation can be fraught.

Taking the two articles together it certainly seems as if there is a very positive outlook for Europe and that should be positive for Asian exporters and especially China into Germany.

Biden faces fight to revive long march of women back into the workforce
Policies accepted in other wealthy nations have been criticised by Republicans as threat to family.
An interesting read about the views held, both for and against Biden’s policies. It would appear that a lot of the people are actually supportive of the objectives but that a number of politicians are sticking to the party rhetoric Worth a read.

UK offered hope of end to social distancing
Prime minister announces next stage of easing as Covid threat downgraded.Re-opening is positive but it highlights that a new variant B.1.617.2 is raising concerns. Key will be remaining vigilant as other countries have found out to their cost.

Facebook to go ahead with Instagram for children in face of protest
Despite 40 state attorneys-general raising concerns Facebook says it will proceed and work with the legislators to address their concerns. Facebook makes the point that children are on-line all the time so they hope to improve the situation and give parents more visibility and control.
The problem I would image is that a lot of kids will not want a ‘kids version’. Kids aspire to be grown up. What is probably required is better policing of the existing platforms. China took the step of limiting the number of hours that children could play certain games. The article mentions the concerns 'that their platforms are deliberately designed to get young users hooked early, track children online and expose them to toxic content and potentially predators.’
Those are clearly a concern for everyone but it is evident that you cannot legislate for everything and that there should be potentially more parental involvement. As parents we cannot absolve ourselves from the responsibility of looking after our kids. The internet is full of great things and great dangers too, just like the world. Guiding and preparing our children for it is a large part of parenting.

Japan business lobby reformer steps down
Hiroaki Nakanishi is stepping down due to a recurrence of cancer. A strong voice for reform in Japan. He will be replaced by Masakazu Tokura, the chair of Sumitomo Chemical; who is expected to be more conservative. Nakanishi was a strong advocate of corporate governance reform. It quotes Masatoshi Kikuchi, chief equity strategist at Mizuho Securities in Tokyo who says "I have the impression that Sumitomo Chemical’s reform has been much slower. I have concerns that governance reform in Japan will slow under the new leadership of Keidanren.”
An interesting read and it cites examples of the changes that Nakanishi has made. Many feel that Japan still needs to keep its reforms moving so it will be interesting to see whether under the new leadership the Keidanren can remain relevant.

Companies & Markets
Worry lines Shares in Meituan slide after investors link chief ’s ancient poem to Xi
Looks at the sell off yesterday in Meituan which has continued today; going into lunch the shares were -7.5%. An interesting read underlines how fragile the relationship between companies and government is in China. It is little surprising coming so soon after Jack Ma’s downfall that Wang would risk making a post that could be interpreted in more than one way. But maybe it is a sign of the frustrations within business in China.
Meituan has come under a lot of criticism recently not least for its use of third party contractors to supply its delivery riders and how little money those riders make.

Doubts raised on StanChart commitment to Paris deal
Banks are increasingly in the sights of climate change activists. Yesterday a group took out a full page advert against MUFJ. None of the banks will be exempt scrutiny which will probably mean that such projects in the future are financed from other less public sources which are likely to be able to change higher rates.For bank shareholders it is a slight -VE as activists increasingly reduce the size of the market in which the banks can operate and the products they can offer.

Read also Investors should block out the noise of short-termism
Looks at the forthcoming publication on how to make companies worry less about quick profits and more about the social benefits they bring, or at least how to be seen to be doing so. An interesting read because the results are never clear cut, whilst companies can be doing well in places there does appear to be a lack of consistency; most obviously when it comes to senior management pay

Support for US bonus deals at nadir
Critics target packages designed to hand out big awards in pandemic
An interesting read because obviously most shareholders returns were hurt during the pandemic and they are not happy at seeing executives being either insulated from the downside or positively rewarded when they as shareholders have not. Whilst these votes are advisory it makes the point that failing to get shareholder approval on pay usually increases the potential for more shareholder activism because activist have seen that shareholders are already upset.
Interestingly 'From 2017 to 2019, most companies that failed pay votes underperformed the S&P 500 and their sector peers, Morgan Stanley said.’
An interesting read because I think it shows that many boards are losing touch with the reality of what impacts their shareholders

Wind knocked out of rally at Orsted and Vestas
Unexpected cable damage and missed profits have made for a difficult quarter
A good read about how the darlings of the renewable energy sector have seen a sell off recently. It mentions Orsted, the renewable energy generator along with Vestas and Siemens Gamesa; turbine makers.
Coming after steep gains last year many see it as a normal correction but the prospect of higher interest rates is also a risk to them as it impacts their cost of capital. There are also concerns about increased competition for projects which impacts margins.
It mentions how Orsted was hit with the unexpected cost of damage to some underwater cables scrapping on rocks. Which I guess is a teething problem but it also supports the case for investing in aluminium and copper because these projects need a lot of cabling to get their projects connect to the grid.
ESG is going to mean that these companies remain popular but margins are coming under increased pressure both from competition and the prospect of increased financing costs couple with higher costs for cabling and other materials.

SocGen steers away from volatile trading flows
A significant change for the bank that name its name in trading derivatives. Instead it will 'push “a client-centric strategy”, allocating capital “in favour of financing, advisory and transaction banking” to cut its reliance on more volatile trading flows.’
Having cut risk in the equity divisions it has cut its cost base and whilst it has lost some revenue the performance of the division has improved.
LEX Société Générale: promises, promises Thinks the improvement seen in the bank is similar to that seen in other European banks.  'SocGen shares were oversold last year. But hindsight does not pay the bills, profits do. Holders should lock them in.'

Star contends with Blackstone for Crown
Looks at the bidding war for the Crown Resorts Key at the moment seems to be that the initial bids seem opportunistic and most expect the bidding rise. It also seems that more potential bidders are coming to the table which again would suggest that there is scope for the offers to rise. Crown Resort shares were trading lower today having rallied 7% on Monday.

Amazon takes grocery battle with Walmart to online and store arenas
Stage set for $1.3tn contest that will shape how US consumers shop for food
Worth read because it is likely that the concepts being rolled out will work their way into the broader retail arena and what is clear is that there isn’t a proven concept of what works yet.
The costs are huge but interestingly they are also seeing competition from new 'entrants like Instacart, DoorDash and emerging operators in the booming rapid delivery app sector'
Interesting quote from 'Doug McMillon, Walmart chief executive, said at a recent investor day. The scale of the digital transformation was such, he added, that Walmart was “in an early stage of building a new business model”.’

India’s biggest steelmaker slashes production as oxygen shortage takes toll
Juggling oxygen shortages, vaccinating staff and shrinking industrial demand.Notes that investors have remained bullish in JSW as it is likely to benefit from the current strong global demand. Underlines the problems in India but also how the demand for resources and iron ore is likely remain high as countries like India get the pandemic under control.

Former SEC official regrets ‘breakdown of civility’
'Alex Oh, who quit a top role at the US Securities and Exchange Commission last month after only six days in the job, has acknowledged contributing to a “breakdown of civility” during a hearing in which she represented Exxon-Mobil, the oil company.’
Worth a read about the aggressive tactics that she had used to defend Exxon. I would imagine that quite a few people in the financial sector are grateful that such tactics will not now be used against them.
An interesting read makes you wonder about how lawyers decide what is right.

Global passive assets hit $15tn as ETFs steal march on traditional trackers
Looks at how they have changed the nature of investing by effecting allowing a cheap way to invest and the flexibility to change strategies quickly. That does lead to concerns that holders could overtrade but the same could be said of some active fund managers. It also mentioned increased volatility which I think could be risk.
It doesn’t mention the increased volatility from the fact that ETF’s have to invest or sell depending on the end of the day flow; that I think could be a big danger especially in specialised ETF’s where the constituents are not as liquid as may be assumed.
The US has seen a more pronounced shift in part because of the tax advantages andI would also guess Warren Buffett’s comments supporting them.
Worth a read audit underlines why active managers need to be at the top of their game to outperform; especially as EFT’s can be created quickly to replicate certain situations and no longer just track broad indexes.

Investors line up bets against German bonds amid recovery
Shorting Bunds has proven costly in the past but some see trouble for Europe’s safe asset.
Worth a read. 'Investor bets on further pain for Bunds are at “extreme” levels, said Peter Chatwell, head of multi-asset strategy at Mizuho. “The market firmly believes that yields are going higher,” he said.’But others have said that in the past and suffered however a lot of things are changing in Europe and Germany. The election later this year without Merkel standing could itself mean significant changes.

The academic who advocates a shot at the moon
Looks at the work of Hendrik Bessembinder, a finance professor at Arizona State University, who has influenced the likes of Ballie Gifford, Cathie Woods and Chase Coleman’s Tiger Global. “I think I have provided some ammunition for the people who say it’s their business to chase moonshots,” Bessembinder said. “The skewness shows just how big the pay-offs can be if you’re good at this.”
Well worth a read it concludes 'Of course, as every investment prospectus points out, past performance is no guarantee of returns. The truth is that the investment industry has demonstrated that it is bad at divining stock market starlets. For every fund manager that chances upon one that makes their career, there are hundreds that fizzle out unnoticed. For most, buying the haystack makes sense. But gung-ho growth investors now have compelling quantitative data to back their beliefs.’

A very different kind of supercycle is in prospect
Green revolution, not China’s industrial one, will drive commodities
Worth a read, the current boom is in part due to the pandemic and a switch in spending from services to goods. Once the pandemic fades the boom could continue not least because China’s population is growing richer and hence will consume more goods. Also the switch to more electric cars and the fact that countries like the US are committing to renewing infrastructure.
It concludes 'China’s role as the world’s workshop in the 2000s lifted all boats. If the supercycle is to be repeated, with prices rising beyond their long-term trend, it will not be an exact replica. This time there are likely to be very different stories for different commodities.’

US-China rivalry drives market retreat. By Gideon Rachman
Looks at how increased protectionism is bad news. It was the practice of the 1960’s and 70’s and it didn’t work them and resulted in costly failures so why should we expect it to work now?
He ocnlcudes; 'As tensions rise between China, the US and other major powers, it is understandable that these countries will look at the security implications of key technologies. But claims by politicians that industrial policy will also produce better-paying jobs and a more productive economy deserve to be treated with deep scepticism. Sometimes ideas go out of fashion for a reason.’

Biden’s best bet is to close the federal tax gap By Charles Ellis
Suggests that a better way for Biden to get the money he needs would be to get people to pay what they really owe. Suggests Biden adopts a plan 'mapped out by Charles Rossotti, former head of the Internal Revenue Service.’Also suggests that the IRS should be given more resources rather than as has happened over the past 25 years seen its number of agents decline whilst its workload has increased.
'One might think IRS staff reductions are offset by big investments in information technology. But this is not the case. By comparison, large commercial banks invest 15 times as much each year in IT as does the IRS, which has to gather and manage far larger quantities of complex information. Simply put, the IRS is understaffed, overwhelmed and outgunned.'
The Rossitti model is 'modest, fair and practical’ and focuses on; information, technology and resources.
1. ‘Collecting more information about the income of taxpayers in the top quartile of income would result in taxpayers filing more accurate returns and allow the IRS to better identify those who do not.’
2. 'IRS technology should be upgraded to make full use of all the information it has, improving the efficiency and speed of the compliance process.’
3. 'expanding and reforming the IRS audit process would make it better targeted and more efficient. It would also be faster and easier for taxpayers to deal with.’
He says 'I am also a conscientious taxpayer and believe it is high time that those who fail to pay what they legally owe are held accountable. The essence of a democracy is that we all pay our fair share.’ That would be in line with what Biden was saying when he outlined his plan.
He concludes 'By obliging non-payers to fulfil their lawful responsibilities, Biden would have a triple win. First, he would have no need to struggle with a divided Congress to change tax levels or rates. Second, he would collect a large proportion of the money needed to support his major reform programmes. And third, he would be able to remind voters that his administration takes seriously what most Americans want most to see in government: fair play.’
Makes a number of very good points; having a plan designed by someone with first hand experience of the IRS would seem to be ideal. For Biden running with his current plan and overhauling the IRS might be the ultimate prize.

LEX Panasonic: charging ahead. Its battery business has turned profitable but it notes 'Panasonic shares have gained 57 per cent in the past year. Sadly this is less to do with restructuring to exit low-margin business and more to do with Tesla sales. For Panasonic, holding on to gains means holding on to Tesla.’That at a time when the car makers are keen to make their own batteries.

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