May 13 FT Thoughts Inflation, Softbank, China; the main themes


13 May

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Asian Markets @ 1:15pm HK time
Malaysia, Philippines and Singapore closed for holidays
Australia
ASX sold down in early trading to 7,000 level and then traded in a band 7,000/ 7,026 until around 2:30pm when they started to trend lower. Currently -50pts (-0.7%) @ 6,995

Japan
Nikkei opened lower and sold down to 27,645 before bouncing and then trended lower into lunch (27,623).  PM opened higher but still trending lower; currently -541pts (-1.9%) @ 27,606
Topix opened lower and tested down to 1,853 in early trades then bounced to 1,866 (the opening level)and traded sideways into lunch.
PM opened higher but trending lower; currently -17pts (-0.9%) @ 1,861
Softbank -6% after results disappointment at no share buyback plan

Data
Pre market
Current Account Mar $2650.1b vs 2916.9b Feb (F/cast was 3110b)
Stock Investments by Foreigners ¥+144.8B vs ¥+58.9B prior
Bond Investments by Foreigners  ¥-73.6B vs ¥-1423B prior
At noon Eco Watchers Survey;
Outlook Apr 41.7 vs 49.8 Mar (F/cast was 49)
Current Apr 39.1 vs 49 Mar (F/cast was 48.2)

S Korea 
Kospi opened lower and tested to 3,120 in early trades but then bounced to 3,146 the opening level and then work better to flat around midday but then trended lower; currently -27pts (-0.9%) @ 3,135
Kosdaq traded in a similar pattern; tested 948 in early trades, worked to 965 around noon and now -11pts (-1.1%) @ 956

Taiwan 
Open lower 15,668 and tested 15,368 in early trades but then worked better and briefly +VE around 11:30am before reversing to close -208pts (-1.3%) @ 15,694

China 
CSI 300 open lower at 4,992 initially bounced to 5,014 before testing down to 4,980. It then worked back to 5,022 before selling down into lunch. PM opened lower ; currently -57pts (-1.1%) @ 4,988

HK Pre market opened @ 27,920 -311pts vs -189pts ADR’s T/O was $28bn (around HK$15.4bn the block of Mengniu Dairy)
Initally tested to 28k but failed and sold down to 27,822 before rebounding to test 28,035 level but failed after a number of attempts and sold down to 27,940 before an uptick into lunch. PM opened lower with more selling as Europe comes in currently -353pts (-1.3%)@ 27,890
Mengniu Dairy (2319 HK +3.5% ) as share placement removes overhang.
Ecommerce weak; Alibaba -1.7% results due after market.
Galaxy (27 HK -3%) announced that the first-quarter net revenue was $5.1 billion, up 1% yearly and flattish quarterly; adjusted EBITDA was $859 million, up 204% yearly and down 15% quarterly.
HUA HONG SEMI (1347.HK) -3.5%) announced first quarter results ended March 2021. Net profit amounted to US$33.059 million, up 62.7% yearly  EPS equaled US$0.025.

Europe
No data due but earnings remain in focus. I would expect markets to open slightly lower following the US markets closing at their lows but downside limited by the US Futures indicating a +VE Dow.

US Futures 
Opened Dow +35pts S&P and NDX flat but moved higher in early trades and continued to rise Dow +100pts, S&P +0.1% and NDX slighty +VE

Data due PPI, Core PPI Initial Claims, 4 week Average Claims, Continuing Claims, EIA Natural Gas Report.Earnings: Walt Disney, Airbnb, Plantronics, Burberry, Casper Sleep, Brookfield Asset Management, Door Dash, Petrobras, Aurora Cannabis, Print Front Page

More than 50 killed in Gaza and Israel
Flaring up of troubles.
See Editorial
The risk of a new war in the Middle East
Hamas and Israel must de-escalate the latest tensions


Stocks retreat after US inflation surge sparks fears economy is overheating
• April rise of 4.2% on previous year • Biggest jump since 2008 • Challenge for policymakers
Key now is whether the Fed sticks to its declared policy and allows inflation to run hot. I think it will, believing that much of the current inflation is ‘transitory’.

It quotes ‘Richard Clarida, the Fed’s vice-chair, said he was “surprised” by the higher inflation reading, but he still expected inflation “to return to, or perhaps run somewhat above, our 2 per cent longer-run goal in 2022 and 2023”.’

I still think the Fed is watching wage inflation and employment levels as being the key.


SoftBank breaks Japanese record with $46bn net profit after turbulent year

Looks at the amazing profit. Masayoshi Son said '“We can’t be too proud since a series of coincidences led to this result. There were many failed investments such as WeWork, Greensill and Katerra,” Son said yesterday. “But once we have achieved it once, I’m not going to let this end as a one-off.”'

The big driver seems to be the Coupang IPO which resulted in a $28bn stake from an investment of $2.7bn.

It will be interesting to watch the next couple of months as inflation concerns are likely to put further pressure on a number of its investments especially those that have yet to IPO. They mentioned that they expected ‘Chinese car-hailing group Didi Chuxing, Chinese start-up Full Truck Alliance and TikTok owner ByteDance to float soon.’

Read also SoftBank dealmaker leads foray into London

Former Deutsche trader Naheta negotiates Japanese group’s $730m bet on THG

Worth a read because Neheta is behind some of Softbanks more controversial deals (Nasdaq whale and one tied to Wirecard; generally structured around derivatives).

Mixed opinions on the deal.

Also LEX SoftBank: sharper Vision Worth a read. Concludes

‘This is why SoftBank share moves in the past year have closely tracked announcements of its buyback schedule instead of being focused on earnings. Shares doubled in the past year after it started a ¥2.5tn buyback programme that has now ended.Replicating the past year’s results depends on continued strength in US tech markets, which have dipped in recent weeks, though the moves may not be sustained. Returns from other parts need a boost, too. Despite a rally in stock prices, the SB Northstar trading arm and the broader group booked a $233bn loss on investments in listed stocks and derivatives.Money is just a tool, says Son. He believes his vision is the most important part of SoftBank. For investors, a further round of buybacks would prove more convincing.’

Market Thinking has its own take on the deal

https://market-thinking.com/2021/05/no-profit-no-bid/?utm_source=mailpoet&utm_medium=email&utm_campaign=market-thinking-latest-updates_1INSIDE


Covid report criticises global response

Expert review lashes out at WHO and governments in call for urgent reform.

Key seems to be having the power to do ‘more surveillance power for the WHO to investigate and publish information about disease outbreaks without the approval of governments, and funding for an International Pandemic Financing Facility that could spend $5bn-$10bn a year on preparedness and call on $50bn-$100bn at short notice in a health emergency.’

It doesn’t looks at the source but is critical of China and the WHO ‘for being too slow to recognise the virus was spreading between people in Wuhan and then to warn the world about human-to-human transmission.’

It was critical of the ‘International Health Regulations, the only legally binding instrument on disease outbreaks. “With respect to travel, it is hard to see that the IHR’s discouragement of restrictions is realistic for pandemics in our highly interconnected age,” the report said.’

It also singles out wealthy nations ‘of Europe and North America for “wasting February 2020” through inaction, leading to “a lost month when many more countries could have taken steps to contain the spread of Sars-Cov-2 and forestall the global health, social and economic catastrophe that continues its grip”.’

An interesting read, obviously with the benefit of hindsight much more could have been done. The question now is how many of its proposals will be adopted.


Jump in China factory prices hints at inflation rise

Policymakers are watching closely to see if the increase feeds through to CPI figures.

Yesterday’s data showed the biggest jump in more than 3 years; even allowing for the low YoY base comparison. But the data shows that inflation is being seen in the system as a result of the rapid recovery in China and to an extent globally and is likely to increase as more countries exit lockdown’s.

'China’s PPI is made up of prices of producer goods, such as wardrobes or washing machines, that factories sell to shops before they are sold on to consumers. It also includes the prices of raw materials and commodities, such as coal, when extraction companies sell them to businesses that use them to make goods.’

It adds to the expectation of a new commodities cycle as China engineered a construction boom to drive its economy in the face of falling global demand. Now the question is whether China can engineer a soft landing. China’s last CPI data was +0.9% in April but having seen the rise in the US data there will be concerns.

I think China has had those concerns for a while. CPI was driven higher by food prices last year as it reacted not only to the pandemic but also Swine Flu. Droughts and floods have also had their impact as seen in the recent demand for corn and soya.

Furthermore the recent moves by the PBoC would also suggest that it is fully aware of the inflation threat and the impact of asset bubbles; like property. Whilst the PBoC is not likey to increase interest rates and has committed to keeping enough liquidity in the system; it is likely to use more targeted measures aimed at certain sectors.

Yesterday’s loans data shows that the notice it sent to the banks about wanting to see 2021’s no higher that 2020 is obviously being acted on by the banks. They typically front load their lending so to see a significant this early shows a change.

The article also mentions the impact of other shortages that could lead to inflation; like semiconductors which are increasing used in white goods from toasters up.

Another key element is export demand. China has been a big beneficiary of the global demand for electronics and PPE products. Many chinese companies re-tooled for that. With inoculations being rolled out the demand for PPE is dropping along with prices. A key, in my view for China, is whether its other historical markets recovery quickly enough to take up the slack as the demand for PPE eases. It is at that stage also that the changes in supply chains might also become evident.


That could lead to a further increase in the number of company defaults in China which are already running at record levels. Whilst I remain overall positive on China I do think that investors are going to have to become increasing stock specific.


Spending talks present test of Biden talent for bipartisan deals
Democrats doubt Republicans will take up invitation to work together.
Worth a read because he needs agreement to get his plans done.


Scientists concerned by impact of variant on vaccine efficacy
‘Reports that fully vaccinated people have become infected with Covid-19 in India have concerned some scientists, reigniting the debate over the threat the mutating virus poses to global vaccination campaigns.’
A worrying development if found to be the case.


Nissan feared losing ‘talented’ Ghosn after pay cut, court told
Looks at recent evidence from the on-going court case.
Little impact at present but raises as ever questions over honesty.


Companies & Markets

BlackRock’s China launch to target vast pool of savers

• Bank-dominated market worth $19tn
• Temasek and CCB in joint venture but Blackrock owns 50.1%

A huge market and Blackrock is a first mover amongst foreign companies taking a majority stake. Fund management is being opened up at present just the domestic market but they are all hoping that in due course China will lift restrictions and allow outbound investments too. That is the real goal. Short term it is a very crowded market with a lot of well established local players.


Covid alarm takes toll on tech-heavy Taiwan index

Looks at yesterday’s surprising sell off in Taiwan as the government raised its pandemic alert and then warned it might raise it further after announcing 16 new cases.

'‘The Taiex fell as much as 8.55 per cent yesterday, the index’s worst intraday fall since 1969, according to Bloomberg. It finished down 4.1 per cent.

Construction, rubber, automotive and financials — sectors retail investors had been shifting into from technology in recent months — were the worst hit in the sell-off.'

Worth noting that good companies were sold off but most recovered by the close; TSMC was at one point -9.3% but closed -1.9%, Hon Hai -9.85 closed -4.7%.
The sell off reflects more on how nervous investors currently are, inflation and covid are difficult to handle. Today the market opened lower but has worked back to flat. Helping is the fact that the government said the stablisation board might meet an intervene as it has in the past. Although with the Taiex just 8.5% off its highs it is difficult to justify. Especially having said, after three down days, that consolidation was normal.

Worth noting also that yesterday Chinese markets were alone in Asia in that they closed higher but are lower today. As I call them ‘Team China’; government linked funds (having mandates from SAFE) actively supporting the Chinese markets. China will not want to see any major moves ahead of the party celebrations.


Glencore warns cobalt supply chains give China upper hand in electric cars

Worth a read cobalt is up 50% in the past 6months (more inflation). ‘Glasenberg said Chinese companies had been quick to realise the vulnerability of their supply chains and “tied up” lots of cobalt from the Democratic Republic of Congo.

“The western companies have not done it. They either don’t believe this is an issue or they believe they are definitely going to get the batteries from China,” Glasenberg said.

“But what happens if that doesn’t occur and the Chinese say we are not going to export batteries, we are going to export electric vehicles. Where are the batteries going to come from?”’

An element of self interest as Glencore says it is open to selling a stake in one of its DRC mines to a western car maker if approached, which hasn’t happened so far.

Interesting that it is talking about that as it considers expanding and developing a new ore body at Mutanda which could increase production from this years’ estimate of 35,000 tonnes of cobalt by 25,000 to 30,000 tonnes in the next 18 months.

But he is right and has earlier said that it would make sense for Tesla, currently tied up with Panasonic.  It would probably make even more sense for Panasonic as a way of keeping Tesla locked in.Innovative China shapes future of shopping

Country’s largest ecommerce apps have developed mobile retail in a way that is starting to spread.

Talks about how the model first promoted in China is now beginning to catch on in the US and Europe.

Not really much insight into what is happening in China.


Rapid rise of stablecoins leaves watchdogs straggling behind

Issuers of the collateralised assets provide varying levels of disclosure and protection.

More on the issue of how regulators are struggling to come to grips with crypto and blockchain in general.

Worth a read because there are consultative papers out there from the EU, UK and others; so legislation or regulation will be coming.

Also interesting because as the article makes clear there is a current court case over Tether which is ‘pegged’ to the USD 100% which is being questioned.

I think what it highlights most of all is that there needs to be a clean sheet approach to the sector. Existing regulation and laws do not fit well enough to be adapted. If a new body was set up it is likely to be better for everyone.

As central bank digital currencies also become more established the role for stablecoins may be diminished, hence the need to regulate them properly now.

Read also the Editorial

Crypto’s prime time prompts watchdog’s glare

International co-ordination will be vital as an asset class comes of age

'A similar balance must be sought by lawmakers weighing new markets rules. Investors do not want the stability of the graveyard, but neither do they deserve a “hustle”.'


Blockbuster earnings push US groups to prepare share buyback bonanza

Research from GS & Soc Gen suggest we are going to get a new record wave of share buybacks. Expects companies to use their cash piles to buy back shares.

Liked because, I think they help boost earnings per share which is often taken as a sign of improved performance. They also usually boost the share price which benefits executives with options.


Investors fret as inflation adds to wall of worry by Katie Martin.

Makes the good point that US rates are going to have to rise. The sell off after Yellen’s remarks was a sign that some people are not living in the real world. It could be a sign of tapering tantrums to come.

Nice quote ‘“Markets seem determined to live in the past,” wrote Paul Donovan, chief economist at UBS Wealth Management. “Consumer price inflation in every economy is telling us about the oil price a year ago. This is not a concern but markets want to worry about something.”

The key for Gregory Perdon, co-chief investment officer at private bank Arbuthnot Latham is not what could go wrong but how the re-opening is going ‘“And it’s going OK. And Europe is pulling it together.” '

At the end of the day, the last few years have been unusual, the last one especially but there will be a return to more normal circumstances.

She concludes

'The volatility is centred in whizz-bang tech stocks, which feels like the right place. This is bad news if you are, for example, Ark’s Cathie Wood. Her flagship Innovation fund tracking technology stocks has dropped by more than one-third from its peak in February.

Stocks closely tied to bitcoin and newly listed US stocks are also suffering a rough run. This is all a catch-up with the bond market shock of the first quarter. Fixed income specialists, a dour bunch at the best of times, moved to price in a pick-up in inflation earlier in the year. Notably, while 10-year US yields did rise after the inflation data release, they did not hit new highs.

Investors in companies that are not yet turning a profit are on shaky ground after a spectacular run.

For everyone else, aside from those who truly believe the inflation pick-up will get out of hand, now is the time to brace for frequent tests of nerve.'


Roche says patent waiver will not solve jab shortages
Another player that says the real problems are about the lack of or bottleneck in supplying the raw materials

See also OPINION Intellectual property must not be an obstacle to fair vaccine supply By Pedro Sánchez PM of Spain


Rich remain sceptical about changing the world with their money 

An interesting read about the fact that attitudes are changing but slowly.


Cocktail hour Moët Hennessy says customers are ready to splash out in ‘revenge of pleasure’
Is expecting people to go out and spend as social distancing is eased.  I would expect an initial surge but whether it is sustainable I doubt but short term it should give the high end drink makers a boost which they may well need as we see how many restaurants and bars survive.


Delivery Hero rejoins battle in Germany
Worth a read, returning to its home market  2 years after selling out, as the non compete clause expired.  I  still doubt the model really works.


OPINION

An uphill race for Peloton as gyms reopen
An interesting read, I think it will be tough for Peloton; personally I think a balance regime and good diet. I still love Isagenix as a healthy food supplement system.


FT BIG READ. TECHNOLOGY

The AI tools that try to read your mind
Emotion recognition systems aim to assess an individual’s mood through the analysis of facial expressions. The market is growing rapidly despite scientists’ doubts that the algorithms work.

An interesting read I doubt the ability of AI to be able to do this, you just have to look at poker players.

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