May 25 FT Thought Weaponising the sky and South China Sea? Global Taxes, Resources & Clean Energy Bubbles.


25 May

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

At 1:50pm HK time
Australia
Market opened higher and rallied to 7,080 and then tested 7,100 around 11:15am and then traded in that range funilt around 3:30pm when it just broke above. Currently +53pts (+0.75%) @ 7.098 Tech +VE led by Technology One on good earnings. Oil stocks also +VE. Gold miners +VE but Resource miners lagging.  
Japan
Nikkei opened higher but initially eased back to 28,450 before testing 28,576 but then eased back and traded sideways into lunch. PM tested 28,550 but failed to break above and trened lower with support at  28,500. Currently +159pts (+0.6%) @ 18,524
Topix traded in the similar pattern initial low was 1,914 and the high 1,921. Currently +5pts (+0.2%) @ 1,918
S Korea
Good Consumer Confidence data pre market.  KDCA announced only 516 new covid cases; dropping for a third day +VE for sentiment. Inflation concerns also seem to be easing. Tech rebounding. Auto’s seeing some weakness
Kospi opened higher and traded up to 3,173 around 12.20pm and since then has drifted lower; currently +20pts (+0.6%) @ 3,163
Kosdaq opened higher, rallied to 958 and then worked slowly higher, currently +13pts (+1.4%) @ 961
Business confidence data pre market Wednesday
Taiwan 
Taiex opened higher and worked higher; initial resistance 16,600 but broker above that around 11:00 to test 16,660 but failed to break above. Eased back to 16,565 and traded sideways to close +257pts (+1.6%) @ 16,596
Sentiment helped by GS raising their index target to 19k. But concerns that the Level 3 alert will be extended. Tech +VE following the US and a +VE forecast from the Institute for Information Industry's Market Intelligence & Consulting Institute (MIC).
China 
CSI 300 opened slightly higher and has worked higher all day currently +149pts (+2.9%) @ 5,303 Team China back in charge and despite resources being weak.
HK 
Pre market opened @ 28,462 +49pts vs +43pts ADR’s
But quickly rallied to 28,660 as recent shorts covered before working higher to test 28,800 ahead of lunch. PM working higher, currently +437pts (+1.5%) @28,845 E Commerce and Chinese financials strong, along with Pharma and Tech
Rumoured no reported covid cases again today.
Europe
Futures indicate a mainly +VE open; FTSE +7 points higher at 7,060, DAX -1 point at 15,563, France’s CAC 40 +9 points at 6,412 and Italy’s FTSE MIB +58 points at 24,921, according to IG.
German GDP growth data slightly weaker that F/cast but key will be the Ifo data due later. Caution as EU to set out sanctions on Belarus and possibly Russia. German in an awkward position wants a tough response but will not want to jeopardise the Nord 2 pipeline
Earnings due from Aviva
Ahead
EUROZONE No data due ECB’s Lane Speech  
GERMANY GDP Growth Rate, Ifo (Business Climate, Expectations and Current Conditions),
FRANCE No data due
UK  CBI Distibutive Trades. BoE’s Tenreyro Speech 
US Futures
Opened flat Dow +30pts, S&P and NDX +0.1% but have strengthened slightly to Dow +56pts.
AHEAD Redbook, Case-Shiller Home Price Index, House Price Index, Consumer Confidence, New Home Sales, Richmond Fed Manufacturing Index, 2 yr Note Auction, API Crude Oil Stock Change (after market).
Fed Speakers Fed Vice Chairman Quarles 3:30pm
Earnings: Nordstrom, Toll Brothers, Intuit, Agilent, Autozone, Cracker Barrel, Pershing Square Holdings, Urban Outfitters, Zscaler

ON LINE
EU agrees sanctions on Belarus for forcing down flight
Brussels bans state airline as White House demands inquiry into dissident’s detention.
The Federal Reserve is no longer markets’ best friend
Central bank and markets face tricky pivots to avoid damage from a policy mistake
US steel lobby mobilises to preserve Donald Trump’s tariffs
EU has delayed higher levies on bourbon and Harley-Davidsons as Joe Biden pursues agreement
World’s biggest rapid Covid test maker to start producing in UK
California-based Innova to manufacture millions of tests each day in Wales from summer

FRONT PAGE
Belarus faces threat of western sanctions after ‘aviation piracy’

• ‘Outraged’ US demands inquiry • Russia warned of concerns • Merkel calls for captive’s release
A shocking event and one that other countries have little sway over. Sanctions need to targeted to hurt those that support the president rather that the people in general. The fact that President Lukashenko was prepared to issue a false bomb scare too gives one doubt about the honesty of the recent elections.
Editorial Lukashenko’s air piracy must be punished
Sanctions over Belarus’s hijacking are a credibility test for the west. Notes that several Russian nationals left the flight in Minsk and suggests that if Russia was involved it too should be sanctioned.
Opinion Belarus kidnap sets dangerous precedent By Gideon Rachman; goes further and suggests that if action is not taken then other larger countries like Russia (which is Belarus’s closest ally), China and Iran are likely to follow suit. Hence why its important to reject China’s claim to the South China Sea. Moreover with the National Security Laws of some countries it could mean that those countries take action against people they just don’t like.
He notes that the US is not free from criticism on this and has with reasonable justification reached out into other countries, but when one party states use them the cause for alarm is greater. He cites a number of cases; well known in Asia was ‘Gui Minhai, a Chinese-born Swedish citizen, who had published books on the private lives of prominent members of the Chinese Communist party. He was kidnapped in Thailand in 2015 and later sent to prison in China.’
He concludes
‘The action taken by Belarus represents a flagrant escalation of this trend. But this dangerous moment also represents an opportunity to arrest the slide into international lawlessness.
The EU, the US, the UK and others should now act together to ensure that Belarus’s move is seen to have consequences — for example by announcing that Belarusian airspace is unsafe and then banning international flights in or out of the country. If Lukashenko behaves like an international outlaw, he should be treated as one. It is time to defend international law and order, before it is too late.’


G7 nears global tax deal that aims to curb profit shifting by multinationals News that a deal could be signed in the very near future (June 4/5 meeting of ministers being targeted) will be good news for the Biden administrations hopes of further tax reform in the US. It also has some large implications for the US companies that it covers with regards to the amount of tax they actually pay.

INSIDE
Defiant Aung San Suu Kyi appears in court
Looks at the situation in Myanmar, reports that the 75 year old elected leader said the National League for Democracy would exist for as long as people supported it. The generals show no sign of compromise or of standing down despite the civil disobedience and international condemnation.
China to tighten rules after death of athletes
Authorities accuse organisers and local government officials of putting profits before safety.
It quotes one organiser ‘“There has been a great demand for events but the supply of people who are competent to run them has not kept up,” one veteran race organiser said. “Everyone wants to do the most extreme race with the most elevation. It’s ridiculous. People don’t have the training for it.”’
Most of the blame seems to be leveled at the lack staffing and facilities at the checkpoints. I would have thought the lack of appreciation about the weather would have been a more important consideration?
It also mentions how the sport has become popular ‘fuelled by a growing number of sporty urbanites’ another sign of the growing wealth of the Chinese middle class?

Companies & Markets.
Gupta seeks to sell three UK steel plants and settle debt

• GFG restructuring picks up pace
• Talks over Credit Suisse’s exposure
The saga continues. Read also Italian bank fails over Greensill exposure  Aigis Banca bought invoice-backed notes linked to Gupta’s GFG. It notes that ‘While the investment products Aigis bought from Greensill were covered by insurance, this is yet to pay out, according to people familiar with the matter.’

Airbnb uses AI to tackle shortage of properties
Using technology to make is easier to list properties and even to help make the listing look more appealing to potential guests.
Beneath the headline is the fact that the group is facing more competition from other travel groups and hotels which has meant that growth had been slowing, even before covid. Work from home as a result of covid may also have an impact on the availability of potential listings.

‘Buy now pay later’ trend carries risks for users and investors
An interesting read about how making unregulated credit available, Buy now pay later (BNPL) even for very small items such as socks £2.10, could be a bad thing. Starts with ‘If wokeness is seen by Generation Z as one of its virtues, instant gratification may be its vice.’ It seems to have taken the place of Payday Loans which faded as regulation protected customers from exorbitant charges and questionable practices.
The point now is the government, post Brexit is trying to promote itself as ‘a deregulator, freed of shackling EU bureaucracy, and a champion of go-ahead fintechs.’ So regulating this new sector presents issues.
A good read, points out that the sector is largely unproven at present and tech savvy in appealing to online users.
I would think that with the prospect of inflation transitory or permanent, plus the withdrawal/reduction of stimulus would be significant risks to the sector.

KKR rides infrastructure boom with Laing deal
Buyout group hopes UK investor will reap rewards of post-Covid spending splurge.
With increased infrastructure spending expected from the US government and others this deal makes a lot of sense. It is expected that the public-private partnership model will be relied upon to get public works done; something that John Laing has a lot of experience in. Its problem in the past was access to capital without having to sell completed projects. So the use by KKK of a perpetual funding pool means that the relationship could be a long and profitable one. A good read and looks like John Laing is a good deal.

Iron ore falls after Beijing warning on speculation
China’s ‘National Development and Reform Commission’ (NDRC) its economic planning agency, said yesterday ‘that it would crack down on monopolies in commodities markets, the spread of false information and hoarding.’
Prompting a sell off in futures contracts for iron ore and for steel products along with aluminium contracts.
Demand has been driven by China’s recovery from the pandemic, the fact that effectively the NDRC has banned speculation and hedging shows one of the difficulties of operating in China.
LEX China steel: consumers will pay
Notes that China is worried about inflation, but part of the problem is because its demanding big steel makers stop polluting by cutting production. Key being that Chinese steel makers have very thin margins so cutting volume hurts. Concludes ‘Beijing cannot backtrack on its carbon neutral goals without embarrassment. Chinese steelmakers lack the profitability to absorb higher costs. China could square the circle another way: support foundries financially with proceeds from charging higher prices for manufactured goods. Consumers of the world, you have nothing to lose but your purchase discounts.’
Leaves you wondering though would you pay more for Chinese goods or would you look more closely at the alternatives. That I think is part of the problem some manufacturers in China face.

Equities. Bubble worries
Alarm sounded over crowded house for clean energy stocks
Concentration of holdings is being compared with dotcom boom, prompting sell-off fears.
Looks at how investors are piling into the sector. It doesn’t give a breakdown between direct investment and ETFs or Indexes which would be both interesting and more helpful. That notwithstanding it is crowded and that in itself is pushing valuations higher. It should also raise concerns about liquidity as well as what the article focuses on; the bubble nature.
Key is the fact that clean energy is going to be more important as emission controls become more widespread. However short term current valuations may being stretched for the wrong reasons.
Worth a read.

Cash pours into Swedish ‘green steel’ start-up
What looks like another good deal; emission free steel. Interesting to see the backers ‘The Agnelli, Wallenberg and Maersk families, as well as Mercedes-Benz, Scania, an Ikea foundation and the chief executive of Spotify, have helped H2 Green Steel raise $105m in its first round of venture capital financing.’
The key being that in an emissions free world we will still need steel.
Worth a read.

Cimarex and Cabot ‘merger of equals’ creates $17bn energy group
The latest with more expected from the sector as it seeks to focus on shareholder returns and profitability over supply increases.
LEX Cabot/Cimarex: drilling without thrilling. Takes a different view and concludes ‘A bigger question is whether the deal will help the pair survive secular changes rocking the shale industry. The shift to green energy and electric vehicles is unstoppable. This transaction will not be the end of the consolidation story for Cabot and other small and mid-tier shale producers.’

ExxonMobil faces ‘winds of change’ as climate battle reaches boardroom
Activist scents victory in campaign to appoint directors who will beef up oil major’s carbon policies. Key is tomorrows board meeting and whether Engine 1 will be successful in their nomination of four new directors to Exxons board.
Whilst a number of large funds have made their intentions clear some have not; ‘The vote will hinge on BlackRock, Vanguard, and State Street — the big three funds together hold more than 20 per cent of Exxon’s stock — and the supermajor’s huge retail investor base, accounting for almost half of its outstanding shares.’
Interesting Larry Fink of Blackrock warned companies about the need to move to cleaner fuels. Increasingly I think that the large ETF providers will have to be aware of the impact to their brand image from how they vote at AGM’s on environmental issues.

EY declines to sign off IT outsourcer Solutions 30’s accounts
Loooks at Solutions 30, the French-listed IT outsourcing company based in Luxembourg, has taken the unusual step of publishing its annual report without a sign-off from its auditors, because EY refused to give an opinion on the accounts on the grounds that it lacked the necessary information from the company.
The company is at loggerheads with its auditors who it rightly points out ‘“EY’s position is unusual in that it does not constitute an unqualified, a qualified or an adverse opinion,” Solutions 30 said.’
Shares plunged as much as 77% yesterday and it closed -70.6%. The company says its considering privatisation. An interesting read and raises questions about how auditors should at the end of the day be required to give explanations.

FirstGroup investor vows to sue over ‘terrible deal’
Another interesting read about board actions. Here the board is intending to sell a prized asset; its First Student and First Transit US operations. As the largest shareholder says ‘“It’s a terrible deal,” he said. “They were working to sell the most important public transport company in North America during a pandemic when there was no vaccine and no visibility on school reopenings.”’
I do think they have a point, delaying such a sale now that vaccinations are underway is likely to garner better interest but LEX FirstGroup/Coast: keep rollin’
‘Trains were a target for those seeking easy money in America’s Wild West. Coast Capital’s accusations that there is a risk of daylight robbery focus on buses this time. The US activist has again urged fellow shareholders in FirstGroup to vote against the sale of US bus assets to EQT. The support of corporate governance sheriff Glass Lewis adds weight to Coast’s position.’ Lex thinks timing and avoiding a rating downgrade is a good option and concludes that shareholders should back the deal.

US hedge fund Schonfeld enters macro trading by hiring ex-Citadel strategist.
Macro trading (betting on moves in global bonds, currencies and stocks) is back profit and infashion. Looks at the move by Colin Lancaster and his team to Citadel.
Citadel was probably a good place for taking large strategic positions, which raises the question as to why leave?

It quotes Lancaster ‘“The Fed has set the stage for tapering [of quantitative easing] and more volatility…… The size of the central bank experiment and the need to normalise policy is going to lead to more challenging markets”, which will be good for macro.’
‘Investor concerns that huge quantities of central bank and government stimulus could stoke inflation are also starting to steer investors back to macro funds. Such funds received $900m of net inflows in the first quarter, according to data group HFR, after three years of outflows.
While Schonfeld already has a small allocation to computer-driven macro trading in its large quantitative business, the hiring of Lancaster and his team represents a new step into macro trading by human fund managers.’

Worth watching to see what happens.

Ex-Lloyd’s duo devise proxy share index for specialist insurance sector.
Worth a read if you are following the insurance sector. If you are let me know if you would be interested in investing in an insurance litigation fund.

Volmageddon fine hints at stricter era of index regulation
By Robin Wigglesworth
Looks at the fact that most index providers are not regulated despite the fact that their actions and in some cases inaction has a huge impact on markets and investors. A recent incident prompted the SEC to fine S&P US$9m and brought the matter of regulation to the attention of the commission which might now be prompted to take more action. It notes the EU does regulate the business and concludes ‘Whether this is the right approach is hard to say. Simply making index providers fiduciaries will certainly not solve the trickiest issues and could introduce new ones. Yet rule books undoubtedly need to be updated to reflect this modern reality.’
An interesting read and important considering that currently there is US$15tn in passive funds that track indices.

The Big Read
EUROPEAN DEFENCE
EU risks ‘hard power’ play in conflict zones
Critics argue the EU’s €5bn plan to boost its influence and arm friendly governments in Africa and elsewhere is reckless and ignores the lessons of military intervention in places like Iraq and Afghanistan.

OPINION
Social media tipping is a recipe for trouble
Looks are how tipping can be abused both in the real world and gig economy. Equally on line it means that the platform providers don’t have to pay for content.
Worth a read

How to build global resilience after the pandemic
By Bill Emmott a former editor of The Economist, is co-director of the Global Commission for Post-Pandemic Policy.
Sets out 6 messages/lessons that should be learnt and remembered.
A good read.

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