May 26 FT Thoughts USD vs Rmb and reserve status under threat? Creditors in HK to get help? and more


26 May

This and previous notes can be found on Substack
Check out ERI-C.com  for your research needs

Asia At 1:15pm HK time 

Indonesia, Singapore and Thailand are closed for a holiday on Wednesday.
Australia
Market opened lower to 7,090 in early trades but worked back flat before rallying to 7,136 around noon with Commonwealth Bank shares hitting$100, ALS strong on good results and good interest in Tech.  Since lunch it has trended back to flat.  
Data
Leading Index Apr +0.2% MoM vs +0.5% Mar (F/cast was +0.2%)
Construction Work Done Q1 +2.4% QoQ vs -0.9% Q4 (F/cast was +1%)
Japan
Nikkei opened lower @ 28,400 but worked higher to flat in the opening trades before spiking to 28,710 @ 9:45am after a  speech by  BoJ’s Suzuki but unable to hold and trended back to flat just before lunch. Lunchtime data was short of forecasts but still an improvement MoM. PM opened higher and trading sideways  28,640/670 currently +105pts (+0.4%) @ 28,658.  Sentiment helped by news the  Govt is considering another cash handout program of up to 100,000 yen each for needy households.
Topix Traded in a similar pattern, high was 1,926. Currently +3pts (+0.1%)@ 1,922
Data
Leading Economic Index Final Mar 102.5 vs 98.9 Feb (F/cast was 103.2)
Coincident Index Final Mar 93.0 vs 89.9 Feb (F/cast was 93.1)
S Korea
Out pre market Business Confidence May 96 vs 96 Apr (F/cast was 98)
Kospi opened slightly higher and worked better to 3,184 in the first hour but then saw selling pressure from around 10:40am and sold down to 3,165 initially before drifting rebounding to flat and but again sold down around 12:30pm to 3,160; currently -3pts (-0.1%) @ 3,166
Kosdaq Opened higher and worked up to 967 by 10am then trended lower to 964 in the next hour and since traded 967/965
Currently +4pts (+0.4%) @ 966
Taiwan
Taiex opened higher and tested 16,700 but then reversed to Tuesday’s closing level bounced before selling down to 16,523 but rebounded and then traded around flat with a small rally ahead of the close to finish +44pts (+0.3%)  @ 16,640
China 
CSI 300 opened higher but tested down tested Tuesday’s close before bouncing to 5,344 only to sell down to flat at lunch. PM opened flat but dipped currently -7pts (-0.1%) @ 5,312
Inner Mongolia region has proposed punishments for companies and individuals involved in digital currency mining as it looks to further crack down on the practice.
Telecommunications businesses involved in mining could have their business licenses revoked while cloud computing companies could get blocked from preferential government policies.
HK 
Pre market opened @ 29,056 +145pts vs -17pts ADR’s
After some initial volatility traded sideways around 29,125 level. PM opened higher currently +249pts (+0.9%) @ 29,157
E commerce and Chinese Financials +VE along with Macau names, Ali Health and JDHealth weak,
Europe
Futures indicate FTSE -3 points lower at 7,033, DAX +56 points  at 15,529, CAC 40 +18 points at 6,416 and Italy’s FTSE MIB  +79 points at 24,932, according to IG.
Earnings due from Marks and Spencer and British Land while HelloFresh holds an AGM.
Data due FRANCE Business & Consumer Confidence, Business Climate Indicator.
US Futures
Opened slightly higher Dow +53pts S&P +0.19% and NDX +0.26%
AHEAD MBA Mortgage Applications and 30 yr Mortgage Rate, EIA Oil Report, 2 yr FRN Auction, 5yr Note Auction
Fed Speakers None
Earnings:
NVIDIA, Snowflake, Bank of Montreal, Capri Holdings, Abercrombie and Fitch, Dick’s Sporting Goods, American Eagle Outfitters, Workday, Pure Storage, Designer Brands.

On-Line
US renews calls for investigation into origins of Covid-19  Biden administration says ‘completely transparent process from China’ is a priority
Australia shrugs off China trade dispute and opens new markets
Farmers and miners discover customers across globe after Beijing imposes steep tariffs
US bank chiefs express caution over cryptocurrency
Remarks from Citigroup, Wells Fargo and BofA CEOs come ahead of congressional grilling


FRONT PAGE
Mali coup
Army seizes back control  
Colonel Assimi Goita, the military officer who has served as interim vice-president since the junta he led handed power to the transitional government in September, said he had ordered the arrest because the officials had not consulted him on a cabinet reshuffle that excluded leading junta members.

Biden to meet Putin in Geneva as Belarus arrest tests ties with west
• First summit next month • Bilateral relations at low ebb • Moscow rails at ‘Russophobia’

Goldman to tap into China’s big savings pool with wealth management venture
Taking a 51% stake in a joint venture with ICBC Wealth Management; following a number of others seeking to tap into the growing wealth management market in China. These products traditionally have been sold through branches hence the need for a local partner. Although looking at the Ant experience it would appear that many Chinese are open to an on-line service too.

INSIDE
The Belarus situation gets a whole page of coverage;
Activist falls foul of Lukashenko’s refusal to loosen grip on power   Looks at Roman Protasevich
Kremlin rejects collusion claim as Russophobia
Exports block urged as part of sanctions
and  EU leaders cannot afford to fail test set by autocrat in Minsk


Asia lags behind in race for vaccine rollout
Region’s initial success in controlling Covid-19 led to less political pressure for jabs.
A big problem is the lack of vaccine production in many Asian countries making them reliant on overseas suppliers and their initial success in controlling the spread with social distancing methods has reduced the incentive to get inoculated for many people.
It notes that there is no equivalent to Pfizer in Asia. The big surprise is India’s struggle especially as the Serum Institute is the worlds largest vaccine manufacturer but again initial success at controlling the virus led to complacency in order more vaccine doses.
A key lesson seems to be that you need the combination of ‘cutting-edge science, the organisational clout of big pharma and a cost-is-no-object attitude from the government.’
Asia has been more focused on contract manufacturing than actual development.
A interesting read. I suspect that post covid many Asian counties will remain reluctant to get involved directly in vaccine development because of the costs involved.

Melbourne outbreak spurs virus restrictions
Discovery of a new cluster has led to the reintroduction of social distancing measures.
Low vaccination levels after an initial success in controlling the spread of the virus.
A similar story to that seen in many countries with people being reluctant to be vaccinated; people focus more on the rare cases of blood clots or other side effects rather than the positives of the vaccination.
Companies & Markets

Shares in TikTok rival Kuaishou fall as users spend less on streaming.
‘Shares in ByteDance’s main competitor in China tumbled after the company’s losses widened on growing signs that users in the country are spending less on its live-streaming services.’
Increased competition and now regulation too. The revenue from users showering gifts on live streaming hosts also dropped. Advertising increased but the quarterly operating loss expanded. A number of brokers cut their target prices for the stock and it closed lower Tuesday and it was weak in early trading Wednesday.
The outlook looks tough.

Beijing clears foreigners to pursue China debtors to mainland
‘Foreign investors in Chinese groups that have gone bankrupt could be given powers to liquidate assets on the mainland in a deal with Hong Kong that aims to boost business confidence in the country’s legal system.
The mechanism will oblige courts in Shanghai, Shenzhen and Xiamen to recognise insolvency orders filed by company creditors in Hong Kong, a conduit for Chinese companies raising money from global investors. It means investors can more easily seek to wind up Chinese businesses’ assets on the mainland to recover money. The scheme could be expanded to more Chinese cities.’
Historically Chinese mainland courts have not recognised rulings made outside of China. Last November a Hong Kong court declined a petition to wind up Huiyuan Juice Group, one of China’s biggest juice makers, because it believed it unlikely the Hong Kong-appointed liquidators would be recognised in mainland China. Which left investors without options.
It would appear that Beijing is trying to bolster Hong Kong’s status which was damaged by the imposition of the National Security Law last year.
As yet the scheme has not been tested an there are still concerns that the Mainland courts could still refuse to recognise the Hong Kong court action if ‘they deem it would “offend public order or good morals” or if “mainland creditors are unfairly treated”,’
So what is needed is some cases to see how it will actually work.
An interesting step but as with so much the key will be how it actually works.

Renminbi hits three-year high against US dollar
‘China’s currency has hit its strongest level against the dollar in three years, posing a challenge for Beijing as it seeks to balance demand for the country’s exports with surging commodity prices.’
Comes as the covid rebound has attracted foreign capital along with the government opening up the country to more investment. But at the same time the government/PBoC has to deal with surging commodity prices, potential asset bubbles, a possible slowing in the recovery and possible defaults.
It notes that the PBoC recently sent out a couple of mixed messages, one of which was subsequently deleted; to let the renminbi rise to combat surging commodity prices. But then ‘Liu Guoqiang, PBoC vice-governor, followed that up by saying he expected the exchange rate to be “stable” and driven by supply and demand, as well as international market conditions, according to comments posted to the bank’s website on Sunday.’
An interesting read and made more complicated I think by the fact that part of the reason is the US dollar weakness something over which the PBoC has no control.

FT BIG READ GLOBAL ECONOMY
Threats to the dollar’s hegemony
Central banks are becoming more comfortable with multiple reserve currencies. The huge stimulus in the US could further undermine confidence in the greenback’s role if inflation becomes a problem.
A very good read about what is expected from a reserve currency, how the US achieved the role initial and how its dominance has been declining but it has still enjoyed the benefits of the role.
But with the recent change in stance on inflation its credibility could be questioned along with the potential to erode the savings of those that hold it.
It looks into what happened March 2020 when the liquidity in US treasuries came under pressure and why and the implications again for the US dollars status as the reserve currency.
It notes how Trump’s policies undermined some trust in the dollar but that Biden’s more stable policies mean that at the moment he is being given the benefit of the doubt.
Partly no doubt because at present there are no clearly viable alternatives but it does look at the pro’s and con’s of the Euro, renminbi, along with digital and crypto.
It concludes ‘History tells us that it took just 10 years for the dollar to remove sterling from its reserve currency role. That reflected the devastation wrought on British economic and financial might by the first world war. In the light of the extraordinary fiscal and monetary response to the pandemic, it seems unlikely that the coronavirus will prove as economically potent as that military conflagration. But the threats to the dollar to watch are US fiscal profligacy and monetary debasement.’
A very good read. Especially with investors current focus on inflation and worth remembering that we get the Fed preferred measure for inflation in the US PCE data on Thursday.

South Korea crackdown pushes smaller exchanges closer to ‘existential crisis’. 
In order to stay in business they need a business licence to get that they need to ‘join with local banks to open real-name bank accounts for customers. But banks are concerned this could leave them liable for any money laundering in digital currencies.’
The deadline is 24 Sept, the big crypto exchanges have already teamed up with the big banks leaving the smaller exchanges with few options. S Korea has a large number of small exchanges and there have been concerns about their security and hence the need for regulation to both protect investors and prevent illegal activities.
It will be interesting to see if the requirement sparks M&A in the smaller exchanges. Equally whether the requirement for named accounts results in less trading.

High-stakes Epic vs Apple case too close to call
Testimony of iPhone maker’s chief may prove pivotal in court fight over App Store fees.
An interesting read the case seems to be pretty evenly balanced. It puts forward 5 points from the case.
1. Margins App Store operates on a 78% profit margin Epic says that reflects a monopolistic control. Apple disagreed but didn’t rebut the number. Apple ‘argued that it could not calculate a margin figure for the App Store as it does not calculate costs and revenues that way. That allowed Epic to argue that Apple’s reluctance to discuss the details was itself evidence that the iPhone maker is aware of the anti-competitive optics at play.’
2. Cook’s testimony; he tried to avoid the issue of profit margins and other items by saying he didn’t know. He couldn’t answer ‘why Google pays Apple about $10bn a year to be the default search engine on the iPhone.’ So Cook and Apple lacked credibility.
3. Defining the market. Cook said whilst Apple controlled access to iPhones people could switch to another maker. I think everyone knows that is true but in reality with years of data linked with ones phone and other appliances that is not really an easy option. Apple has spent years weaving us into its network.
4 The Macbook precedent Epic said its request was not all that revolutionary, it just wanted the iPhone to act more like MacBooks and iMacs. Macs allow users to download apps beyond what is available in the Mac Store, it said, so why can’t the iPhone be the same way? Apple’s defence was unexpected: the Mac isn’t safe.’
5. Parsing the judge. ‘González Rogers probed both parties on Monday to try to find a middle ground, but neither side wants that. The judge looked reluctant to make what she said would be sweeping changes to Apple’s business model.’
But she said “The 30 per cent number has been there since the inception,” she said. “And if there was real competition, that number would move. And it hasn’t.”
The ruling is not expected for weeks but it will be interesting.

Vale vows to regain crown as largest iron ore producer from Rio Tinto
Boss of $109bn Brazil miner insists moves since 2019 dam disaster make it ‘totally investible’
An interesting read as the company seeks to make itself ‘investible’ but many large investors remain unconvinced that it has made satisfactory progress. ESG issues remain. For investors the surge in ore prices means it is generating excess cash which it is using to buy back shares which makes it attractive. It also has capacity to increase production. It also says that despite the high ore prices it is not looking to make acquisitions. All in all an attractive option depending on your ESG stance.

Crypto. Maturing sector
Digital currency firms poach top bankers amid price boom
Talent attracted from leading names such as Goldman Sachs and hedge fund Bridgewater.
An interesting read and another illustration of how crypto is becoming more established as an asset class and being seen as an acceptable career.

Quant managers can still shine after dark winter
By Jane Buchan chief executive of Martlet Asset Management, an adviser to the FDP Institute and retired co-founder of PAAMCO
Explains about the different type of Quant fund managers and their strategies and concludes by noting that ‘Quantitative managers and their techniques are not broken. For every quantitative manager that struggles (and most do at some point), there is likely to be another taking advantage of it.’
A good read there are lots of strategies out there the key is really picking the right one for the right time and not being too attached to any of them.

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