May 21 FT thoughts Inflation not if but is it transitory ? China miscalculations?


21 May

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

Australia
Market opened slightly higher and rallied to test 7,056  in early trades but failed to hold and dropped top 7,040 level for a while before selling off to test 7,000 support which held after several tests.  Market then rebounded to trade around flat. Currently  +9pts (+0.1%) @ 7,029
PMI data pre market missed f/casts but Retail Spending out after the open was better than expected. Resources the major drag on the market but CSL leading healthcare stocks higher.
Japan
Pre market data showed inflation remained subdued.
Nikkei opened higher and tested higher to trade 28,300/400 for the first couple of hours but sold down into lunch (28,222).  PM opened higher and currently +217 pts (+0.8%) @ 28,315
Topix traded a similar pattern, high was 1,910. Currently +8pts (+0.4%) @ 1,904
S Korea 
Pre market PPI was stronger than expected
Export data for the first 20 day as +53.3% Imports were +36%
Kospi opened higher and tested to 3,198 after the first hour but then sold down over the next 90 mins to 3,155 and then traded sideway. Currently -5pts (-0.2%) @ 3,158
Kosdaq traded in a similar pattern, high was 979; currently -2pts (-0.2%) @ 970
Taiwan 
Taiex opened higher and tested to 16,400 in the first 15 minutes. Then trended lower for the next 90 minutes to 16,145 and then worked slowly better currently +237pts (+1.5%) @ 16,281
Domestic covid concerns remain. Some bargain hunting in Tech as a US house cut target prices on valuation concerns. Shipping +VE momentun contineud
China 
CSI 300 opened higher and hit 5,216 in the first 5 minutes but then sold down to 5,120 level in the next 50 minutes. It traded arond that level into lunch. PM opened higher currently -33pts (-0.6%) @ 5,153
HK 
Pre market opened @ 28,584 +134pts vs +9pts ADR’s
But market sold down, saw a brief bounce around Thursdays closing level before selling down to 28,285 level at 10:30am. Then trended slightly higher into lunch. PM opened higher currently trading around flat
Tencent -3.4% post results on regulatory concerns going forward. The internet watchdog said on Friday that companies including ByteDance, Baidu and Kuaishou had improperly collected user data, Reuters reports; promting more selling.
JD Logistics Inc has indicated it will price shares at HK$40.36 (US$5.20), towards the lower end of its flagged range,
Europe
Expect a flat open based on the trading in Asia but PMI data due pre market will influence the open.
Ahead
US
Futures
Opened flat Dow +18pts S&P +0.03% and NDX +0.07% but have worked slightly better in Asian hours.
AHEAD Existing Home Sales,Baker Hughes Rig Count.
Earnings Deere, Foot Locker, Buckle, VF Corp, Booz Allen Hamilton


FT Print Front Page
Biden targets cryptocurrency transfers to rein in tax evasion
• Push to close forecast $7tn gap • Bitcoin drops further 5% • IRS to gain tougher powers
Comes as China and Europe look to tighten policy for crypto currencies.
For the US it is part of Biden’s policy to tighten up on the difference between taxes owed and paid; which will include investing ‘nearly $80bn in the IRS and expanding the revenue service’s capacity to identify wealthy individuals who avoid paying taxes owed.’ To try an recoup the estimated $600bn that didnt get paid last year.
An interesting read; collecting taxes already due will be a good first step in paying the administrations reforms and spending plans.

WeWork loses $2bn and 25% of its members as remote working takes toll
‘WeWork’s losses almost quadrupled to $2.1bn in the first quarter of this year, as the co-working company haemorrhaged more than a quarter of its members and shelled out hundreds of millions of dollars to restructure its property portfolio.’

Hopes rise for ceasefire

Inside
ECB plays down producer price increases

Chief economist says rises due to supply constraints are not an inflation risk.  
‘“There are shortages, for example in semiconductors, and there are   constraints in some shipping routes, and of course when you have an   unplanned bottleneck there is going to be some price action, but that is  not inflation,” Philip Lane said in a webinar yesterday.’
I guess it all comes down to how you define inflation. To me prices going up for whatever reason is inflation. The real question is whether they are temporary or permanent. I think more towards the later.

But the key for investors is that behind his words is a commitment to maintaining the current loose monetary policy despite the indications of inflation as the EU focuses on recovery. That means interest rates to remain low and policies expansionary for the foreseeable future.
German PPI hit the highest in almost a decade with double digit increases in prices for metals, wood and energy. Companies are reporting raw material price increases in both manufacturing and to a lesser degree the service sector too. But within the service sector some areas are still suffering like tourism and recreation.

Investors should be looking to increase exposure to companies that can benefit; the cyclicals and those with brand pricing power.

Read also US grapples with signs of an overheating economy
Corporations braced for post-pandemic summer of inflation and staff shortages.
Companies are expecting more uncertainty as the year progresses. Key is they like everyone are unsure if we will see the elevated savings translate into more spending. I doubt it, those with money have been able to spend. Others have used the money to pay down debt.
The flip side is that we are seeing shortages lead to rising prices; such as airfares as travelling resumes, secondhand car prices as chip shortages impact the primary. At the same time last weeks job report indicated that job creation was not progressing as had been expected.
Nice quote ‘“The pandemic . . . sliced through the market and picked certain industries and demolished them like a hurricane [but] skipped over other industries and left them intact,” said Nela Richardson, chief economist of ADP.’
I think increasingly its not and ‘if’ about inflation but a how much and for how long. That is a far more complexed question becuase different sectors face different issues.
‘A sharp increase in lumber prices has hurt home builders and DIY retailers, while clothing chains such as TJX have warned that driver shortages might keep freight costs “stubbornly high” all year.’
I actually think the lumber price increase is good for the DIY chains; easier to pass costs onto the public who want the products; as seen in this weeks results from HomeDepot, Lowes etc.
Labour availabilty and cost is I think more crucial because that is what the Fed is focused on. It notes ‘But a tighter labour market is concerning some employers as a combination of factors make it harder to find staff, including higher unemployment benefits, a childcare shortage and the fact that some workers remain worried about taking a job while the virus is still spreading.’ The last point is interesting and should ease as vaccinations continue to roll out. But key is that the pandemic has eradicated some jobs permanently.
‘Ellen Zentner, chief US economist at Morgan Stanley, agreed that a short-term surge in prices was always foreseen, but warned that inflation data was “running even higher than expected”.
She said: “I see a multitude of risks here, the risk of higher inflation that is sustained; the risk that we can’t get enough jobs back as quickly as we would like to; and the risk that some of these supply chain disruptions go on for longer and depress production.”’
So whislt the US T10’s volatility has eased; suggesting that investors largely agree with the Fed that inflation will be transitory, I remain unconvinced and think that there is a mis-match between job skills and the location of job opportunites in the US which is going to take longer to resolve than is currently being forecast.

MEPs freeze ratification of China treaty over sanctions
As expected there was overwhelming support for the motion.
A couple of good quotes ‘Reinhard Bütikofer, a German Green MEP who chairs the EU parliament China delegation and was one of those placed under sanction, said the legislature would “not budge”. He said Beijing’s efforts to police the global conversation on China were “as ridiculous as they are arrogant, and they will fail”.
He added: “With its sanctions, China has miscalculated. They should learn from their mistakes and rethink.”’
That last quote is in the style that Chinese officials so like to use when talking to the west, the irony.
Of more concern to China should be the fact that the action has highlighted to many in Europe the need to a more co-ordinated approach from the EU institutions and I would say countries towards China. With Merkel standing down they should now assume that her replacement will be as pro China as she has been.
This motion to an extent undermines her determination to get the agreement signed whislt holding the EU Chair.
Read also Candidates to succeed Merkel clash in first televised debate The Greens are on the rise.

New Delhi blames China for 2020 clashes
Foreign minister says ties will suffer until calm is restored in Himalayas
Basically saying that China’s actions is disturbing the fragile peace that existed makes the future much more difficult.
Worth remembering that many think the initial skirmishes were intended to give India, in China’s view, a dressing down over regional issues. As with the EU sanctions it appears that China is increasingly underestimating the international response to its actions. That could reflect President Xi not getting honest information or just over confidence; both are -VE and China’s international image is suffering.
For India the latest wave of covid has undermined its ability to supply vaccines to the world which would have greatly enhanced its standing as a regional leader. Instead the opposite has happened its international standing has been hurt and the surge in cases could do further damage as this wave hits the rising middle class hardest.
Interestingly it concludes ‘Jaishankar rebuffed suggestions that New Delhi would join any formal alliance with the US to contain China, and played down suggestions that the Quad — an informal group consisting of the US, Japan, India and Australia — was an incipient Asian Nato.
“It is not cold war 2.0. You don’t have that kind of sharp military confrontation that cold war 1.0 did.”’
It would appear that India values its independence above almost everything and that could be a hinderence to it co-operating with others to balance China’s power in the region.

Japanese pensioners cash in on US stimulus blunder
Seems that the US system for sending out stimulus cheques still has issues and has been sending them to some Japanese pensioners and probably therefore people elsewhere in the world. It was identified at the time Trump’s adminstraion sent out cheques but obviously not resolved.
Some people seem to have been able to cash the cheques whilst others have been refused. Most it would appear are not eligible for the money and should return it but some banks are cashing the cheques where people can show they are eligble.
An interesting read but underlines why Biden needs to invest in the US IRS which has gone underfunded for so many years. It will be interesting to see how many cheques are returned!

US companies lobby Seoul to release jailed Samsung chair
‘The American Chamber of Commerce in Korea told Moon Jae-in that South Korea’s status as a strategic partner to the US was at risk if Samsung was not more fully engaged in supporting Joe Biden’s efforts to boost domestic chip production, according to a letter seen by the Financial Times.’
You really have to ask what the US chamber of commerce is doing and who is behind it. Effectively they are trying to interfer with the S Korean judical system.
Lee Jae-yong, Samsung’s chair is in prison because a court of law found that he had broken the law. It also raises the question of whether Samsung’s interaction with the US is down to just Lee Jae-yong?
The point of punishment such as jail time is to deter people from breaking the law. Samsung may currently be disadvantaged that was the risk Lee Jae-yong took when he decided to break the law.
The matter is very divisive in S Korean and I cannot help thinking that the American Chamber of Commerce has gone beyond the expected remit of a chamber on this.
The article also looks at Moon’s visit to the US. With the focus on what language will be used in the post meeting statement. PM Suga recently came out strongly but the expectation is that President Moon will not want sucj strong language for fear of upsetting China. It will not want a re-run of the 2017 boycotts but equally it also has a list of ‘wants’ from the US.
So for investors that wording will be important.

Pandemic. Overmedication
Black fungus outbreak adds to India’s suffering
Covid patients on high doses of steroids over long periods become prone to fatal infection
An interesting read on the dangers of not usingdrugs as they are intended.
Here the results is Black Fungus or mucormycosis, that is raging because of the misuse of steriods in connection with covid. Those at high risk are diabetics or those with weakened immune systems.
The interesting point it that China has the highest number of diabetics in the world but as yet not reports of it being a problem.

COMPANIES  & MARKETS
ByteDance chief stands down to dwell on ‘daydreams’

• Zhang quits during China crackdown
• Co-founder will lead TikTok owner
An interesting move and said to effectively be for personal reasons.
Lex ByteDance/Zhang: daydream believer
‘The elevation of the little-known Liang should help ByteDance at home amid the crackdown on tech giants. That reality does not disprove the official line on Zhang. Political controversies can impose crushing stresses on chief executives. Both explanations may be equally true.’

Tencent’s first-quarter revenues rise to $21bn
‘The social and gaming group Tencent reported strong first-quarter revenue growth ahead of analysts’ expectations, as it works to appease Chinese regulators over antitrust concerns.’
The ADR was weak and the stock is trading lower today. Which would suggest that whilst the results were generally better than forecasts there remains a lot of concern over future regulation and how that will impact business.

Diamond industry takes on lab-grown threat
Looks at news yesterday that HK listed Chow Tai Fook was teaming up with ‘the Natural Diamond Council, to promote mined diamonds in China.’
In contrast to Pandora which ‘said this month it would only sell lab-grown diamonds,’
Interestingly ‘More than half of lab-grown diamonds are made in China, according to Bain. China is the world’s largest market for diamond jewellery after the US.’
An interesting read and likely to a re-rating of diamonds going forward.

Lex D Telekom/SoftBank: sprint finish
‘All this might explain why yesterday, to kick off its capital markets day, the German group chose to delay an earlier target of lowering its leverage ratio to 2.75 times ebitda by one year to 2024.
Son and SoftBank shareholders should be happy to get their capital back. Bets that have so far performed much better, such as South Korean ecommerce group Coupang, are already erasing their embarrassment.’

Equities. Sector consolidation
A little more action in bank M&A but no big rainmaking
US dealmaking has expanded slightly but it remains easier to talk than clinch agreements.
Interestingly mentions that, in talking about the regional US banks ‘the transition of most activities from branches to mobile phones has highlighted deficiencies in many banks’ digital customer experience, pushing executives to look to deals to bring in modern technology.’
A good read about how the landscape of banking is changing and how fintech banks are now more likely to want to build their own business than be shackled to a brick and morter bank. A point of contention is valuation; traditional banks valued on multiples of book value vs fintech on growth multiples.
It illustrates the change that is taking place and the fact that people seemingly are less attached to the traditional banks and more willing to embrace fintechs. That I think is not only an issue for the regional US banks but increasingly for even larger banks globaly. China’s recent clamp down on Ant illustrates how quickly the Fintechs can grow by being more able to offer the services that customers want and value over those they dont.

Chinese province sets up hotline to inform on digital currency miners
‘The Inner Mongolia Development and Reform Commission said that it would set up a telephone hotline through which people could report suspected mining outfits as part of an effort to “comprehensively clean up and shut down” these operations.’
Follows the PBOC’s comments earlier in the week. Key really I think is wanting to have complete control of the money supply. I would have thought considering the amount of power that is required that just watching the power bills would have enabled authorities to identify possible culprits.

Markets Insight
Opportunities exist for active investors but skills are vital By Hendrik Bessembinder professor of finance at the WP Carey School of Business of Arizona State University and also a consultant to Baillie Gifford since 2018.
Explains what he did say in his paper that was recently reviewed by the FT.
He concludes ‘I remain comfortable with the sentences that concluded my 2017 study: “The results in this paper imply that the returns to active stock selection can be very large, if the investor is either fortunate or skilled enough to select a concentrated portfolio containing stocks that go on to earn extreme positive returns. Of course, the key question of whether an investor can reliably identify in advance such ‘home run’ stocks, or can identify a manager with the skill to do so, remains.”

FT BIG READ. CRYPTOCURRENCIES
Bitcoin’s growing energy problem
Tesla chief executive Elon Musk has highlighted the environmental impact of cryptocurrencies. Amid calls from climate activists for tighter rules, governments and central banks are starting to take notice.
A good overview of the energy issues

Supercomputer advances poised to reshape the tech landscape
Looks at the development and uses of exascale computing.
‘Building computers that can reach an exaflop, or a quintillion operations, a second has been a dream in the supercomputing world for some time. The world’s fastest supercomputer, Japan’s Fugaku, achieves only half that raw performance. The US Department of Energy is still waiting for delivery of the first full exaflop supercomputer, one of three it plans to use.’
An interesting read about what might be possible and how to moentise it.
Worth a read.

Tokio Marine defends its conduct over Greensill
More on the saga and does raise the question about whether it and ‘other Japanese insurers have installed adequate controls at their subsidiaries after years of expansion.’
OPINION
When the economic tribes go to war  By Gillian Tett
An interesting look at the current changes taking place in economic thought.

Comments
* The email will not be published on the website.