May 3 FT Spacs lose steam, Yellen backs Biden's taxes, EU+ to counter BRI, the rebound and more

03 May

Opened higher on good pre market manufacturing data but them sold down to flat and traded sideways on disappointing inflation and job adverts. Closed +3pts (unch) @ 7,029
Manufacturing Index Apr 61.7 vs 59.9 Mar (F/cast was 60)
Manufacturing PMI Final Apr 59.7 vs 56.8 Mar (F/cast was 59.6)
Inflation Gauge Apr +0.4% MoM vs +7.8% Mar revised (F/cast was +0.6%)
Job Ads Apr +4.7% MoM vs +7.8% Mar revised
Markets closed re-open Thursday
Kospi dipped initially but then worked higher to 3,174 before selling down to flat after a disappointing PMI number (but still solid growth). Traded sideways for a couple of hours before selling down in theist two hours to 3,120 before a small bounce in the final minutes of trading. Closed -21pts (-0.7%) @3,127
Kosdaq dipped initially to 975 in the first 30 minutes but then worked back to flat briefly; before trending lower for the rest of the day to close around the day lows -22pts (-2.2%) @ 962
Data after market opened
Manufacturing PMI Apr 54.6 vs 55.3 Mar (F/cast was 55)
Opened lower despite good trade data after market Friday and a strong Manufacturing PMI pre market driven by strong export sale, although supply chain bottlenecks remain. Sold down to around 17,350 in the first 45 minutes and then traded sideways for most of the day below dipping lower to close -344pts (-2%) @ 17,222
Manufacturing PMI Apr 62.4 vs 60.8 Mar (F/cast was 61)
Market closed reopens Wednesday
Pre mareket opened @ 28,660 -65pts vs -91pts ADR’s
But market sold down further 120pts in the opening minutes with margin call selling after Friday’s sell off. Saw a brief bounce before selling down to 28,280 level and then traded sideways for the rest of the day with a slight uptrend in the last hour. But with China, Japan and UK closed volumes were light. Chinese financials remain under pressure along with E-commerce names. Pharma and shippers +VE
After Market GDP Growth rate was stronger than expected
Markets trading higher with German retail sales stronger than expected and US futures indicating higher. UK closed.
Lufthansa strong said it will offer flights to more than 100 holiday destinations. Siemens Healthineers rising after it raised its full-year sales and profit forecast.
Retail Sales Mar +7.7% MoM vs +2.7% Feb revised (F/cast was +2.9%)
Retail Sales Mar +11% YoY vs -6.6% Feb revised (F/cast was -3.2%)
To come Manufacturing PMI for Eurozone, France and Germany
US Futures 
Opened in Asian time Dow +85pts, S&P +0.34% and NDX +0.28% and rose through the day currently Dow +125pts S&P +0.45% and NDX +0.33%.  Another key week for earnings and the Jobs report on Friday.  Lowe’s, Estee Lauder and ON Semiconductor report before the bell on Monday.  
Data due Manufacturing PMI, Construction Spending, ISM Manufacturing Data (PMI, Prices, Orders and Employment)

Front Page
Blank-cheque groups’ shares fall as investor caution rises
• Spac tie-ups see average dip of 39%
• Red-hot sector hit by abrupt coolingSeems the sector is running out of steam or investors are turning more cautious ahead of the regulators taking a closer look. Gary Shilling was saying that Spacs were a sign of speculative behaviour; so if investors are becoming more cautious it could be sign that they are becoming more worried about inflation.Buffett mentioned on Saturday how Spac’s had disrupted the M&A market but also cautioned that since they have a limited life they almost ‘have to’ find a company to buy.

India’s vaccine shortage will last for months, biggest manufacturer warns.
Places the blame on Modi’s government. Modi has been accused of pushing ahead with his regional election campaign despite being warned that it would increase the risk of spreading the virus. The 'Bharatiya Janata party failed to win power in the state yesterday, amid growing anger over the government’s handling of the pandemic.’
See also BJP beaten in West Bengal as public turns on Modi over Covid

Light on Putin HarperCollins sued by oligarchs over book on president’s rise
Four Russian billionaires and state energy giant Rosneft have filed lawsuits over references in the book.

 Yellen urges Congress to back higher taxes
Treasury secretary supports bigger levies to fund Biden plansKey is that she said it was an important part in offsetting the cost and ensured the. US’s fiscal position did not get worse.
That is interesting because previously it looked as if the consensus in Washington was following Modern Monetary Theory; that the Govt could borrow indefinitely without crowding out the private sector or yields being impacted. She said “I think we’re in a good fiscal position,” Yellen told NBC yesterday. “Interest rates are historically low. They’ve been that way for a long time, and it’s likely they’ll stay that way . . . But we do need fiscal space to be able to address emergencies, like the one that we’ve been in with respect to the pandemic.”
She also maintained that she did not think inflation would be a issue; partly because the spending will be spread over eight to 10 years. But if it was an issue the Fed had the tools to deal with it.It is good to see an element of prudence in the financial accountability.

EU and allies renew push to counter China influence
Effort to offer alternatives to Belt and Road Initiative (BRI) expected to feature strongly at G7 and bloc summits this year.
Cites the case of a new undersea fibre optic data cable spanning the ocean between southern Europe and Latin America but quotes a senior EU diplomat '“So far we are trying to counter Belt and Road mostly with buzzwords and lofty policy papers But unfortunately there is no real geopolitical strategy or plan which is consistent and coherent. There’s a real need to work together on infrastructure projects and avoid countries becoming over-reliant on China.”
The EU and others have been slow to realise the impact of President Xi’s Belt and Road Initiative.
Quotes Lindsay Gorman, a fellow at the Alliance for Securing Democracy, an advocacy group, said the effort could succeed as long as it was more focused and imaginative than simply trying to “counter every road China builds”. Instead the EU and its allies should focus on critical sectors such as digital to curb China’s authoritarian reach into regions including Africa, central Asia and Latin America, as well as Europe.
It mentions that there are various initiatives from the EU, Japan, US; what seems apparent is the need for co-ordination. China has the advantage of being the sole driver of the BRI with the sole aim of increasing China’s presence and influence whereas the other countries can have different agenda’s.
To be able to offer something better than China they will need to work closely together.It note that the West is behind the curve as China started the initiative in 2013 and had a lot of initial success. But since projects got built and had to be paid for, it has run into problems; often with the projects not generating the expected revenues. There have also been criticism of the use of Chinese contractors and staff significantly reducing any multiplier effect for the local economy.
This could give the West an opportunity.Nice quote “We now understand that it’s not just about infrastructure but . . . a chance to set standards,” said one EU diplomat. “[Whoever] writes the rules rules the world.”
That is what China wants to do.
It also raises the issue of how the West can persuade countries not to sign up to bad projects, that China is prepared to back. That is difficult but with some high profile examples now evident that should be easier; (Ports in Sri Lanka and Greece, Montenegro’s $1bn highway; Rail projects in Malaysia; which also impacted surrounding countries). Moreover the West could or maybe should offer to under take a proper feasibility study of each project; highlighting the impact of using Chinese vs local contractors and staff.
Ultimately it high lights that supporting the needs and aspirations of developing nations is in the West’s best interests.

US and Europe on track for swift rebound
Latest data suggest output will hit pre-pandemic levels by end of the year.Significantly faster than a lot of people were expecting.Mentions about the boost to US spending from Biden’s stimulus cheques but listening the an inflation / deflation debate last week; spending always goes up when the cheques arrive but worryingly more of the money each time is being saved. No doubt we will see an initial increase in service sector spending (restaurants, bars, holidays etc) but the upside from that is limited; so can only eat out so many days of the week. Other data from the Fed showing consumer spending never really stopped as seen in the record Amazon numbers. So the upside might not be as great as some are expecting but there will be a boost.The question then is how will the Central banks react with regards to tapering stimulus. At this stage the both the Fed and ECB seem committed to allowing the economies to overshoot and sure that growth is in place before tapering. Some are expecting the Fed to raise the issue at its June or July meeting; if the strong data continues.For stocks a lot of the good news seems to be already priced in with markets already back to or above pre pandemic levels. The question now is do we see more consolidation in the Tech names and rotation into value?

Healthcare. Private companies. Biden vaccine policy puts America first
Use of wartime powers has led to claims of an export ban, but the truth is more nuanced.Looks at the Defense Production Act and its implications on production along with a number of other issues that have been affecting production.Makes the good point that there is so much covid vaccine production taking place that there just are not enough basic ingredients to go around. That will impact other medicines and medical equipment.
An interesting read.

Brazil urged to issue green bonds to rescue the Amazon
'“If done well, they will hit a wall of money. It is probably the first thing I would do if I were responsible for funding Brazil,” said Thede Rüst, head of emerging markets debt at Nordea Asset Management, which has €250bn of assets under management.’
It notes however that 'Sovereign green bonds in Brazil face regulatory barriers, notably a congressional resolution almost two decades old that prevents the country from earmarking funds for projects when issuing sovereign debt. But changing this would not be impossible if the government deemed it a priority, said Gasparotto.’
The other big issue is how the many will actually be used and whether the government is sincere in trying to stop deforestation. Previous calls have been met with doubts and of course with lumber prices currently so high both legal and illegal loggers will be reluctant to halt operations.

Companies & Markets 
Buffett warns on inflation amid ‘red hot’ US recovery
• Berkshire chair expresses surprise
• Lack of acquisitions defendedThey were surprised but the speed of the recovery and seeing inflationary pressures in some of the companies they own. Buffett expects more inflation “People have money in their pocket and they’ll pay the higher prices.”.
Negative on bitcoin and crypto, worried about tax changes but would adapt and defended their buybacks as being good for existing shareholders. Buffet doubted the Spac craze would last. Munger worried that unchecked Federal spending would be disastrous and that Modern Portfolio Theory was not the answer; (see my note on the ERIC Shilling/Napier deflation debate).
Buffet said selling some Apple was probably wrong but owning Cheveron was OK as it will adapt to renewable energy; it was a matter of being reasonable. Doesn’t want to own airlines still not confident about the outlook.
Interestingly started with a list of today’s 20 largest companies; asking how may would be around in 30 years; in the list were; Apple, Saudi Aramco, Microsoft, Amazon, Alphabet and Facebook. He then said that none of the top 20 companies from 1989 was on the list; which then had over 50% Japanese banks and industrials with the only US firms being Exxon, GE, Merck, IBM, American Tel & Tel and Philip Morris. So capitalism had worked, the world would change and he still thought the best way to invest was investment funds.

US mutual fund numbers drop as ETFs gain ground
Shrinking at the fastest pace in at least two decades. ETF’s preferred for ease and lower fees. Mutual funds also under threat from collective investment trusts, now 25% of the investment options offered in 401k plans, vs 6% in 2000, according to ICI. Again they can be cheaper and they operate under a lighter regulatory regime.
Notes that “There is still a place for mutual funds,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “Some investors prefer the structure and they remain the default option in retirement accounts until 401k plans are allowed to hold ETFs.”
Longer term this could have a significant impact on the banks research platforms with less mutual funds to sell their research to and EFT funds not really consumers of equity research. Currently their are still 9,000 potential clients but it is obvious that costs are increasingly an issue. I would imagine research and staff being the largest. It will be increasingly important to be able to show out performance if the mutual funds want to remain in operation. They may also need to become more nimble in the funds they offer. Setting up an ETF is relatively simple and quick and so can adopt trends that is more difficult for a mutual fund. So it may require a re-invention on their part.

Falling spread Collapsing yields on debt of low-rated US companies test investor limits
The premium investors are paid for buying the debt of the worst-rated companies in the US has fallen to its lowest level in seven years, raising warnings that the brightening outlook for the economy is leading to excessive risk taking.
This as I have said before is because the Fed has pushed interest rates to zero meaning that investors have to look for riskier opportunities and because they are all in the same boat trades are crowded and hence they are forced to take additional risk.What will be interesting is which companies default as the recovery gains momentum and how that impacts supply chains.
Certainly the pace of recovery is not the same in all sectors. It concludes 'However, analysts and investors fear that the potential for catastrophe is masked by accommodative monetary and fiscal policy.’ That is true governments have targeted a lot of money at companies to keep them all going but as the recovery takes hold they will be looking to focus on the financially viable ones and allowing the ‘Zoombie’ ones to fold.
Investor had better be doing the same.

Commodity traders in regulators’ sights
US increases scrutiny of how groups win business in resource-rich countriesLooks at the use of bribes to gain contracts.

Pastrami and pickle shop beefs up to $100m
New Jersey deli cited as evidence of market ‘anarchy’, with small town store set to host blank cheque investment vehicle
Looks at the case that hedge fund manager David Einhorn cited as an example of the “quasi-anarchy” taking hold in markets” “The pastrami must be amazing,” Einhorn quipped. Key is that this is not being driven but retail but by institutional investors including Duke and Vanderbilt universities. Its backers include a 'Hong Kong firm set up by veterans of Och-Ziff Capital Management, which sees its investment as a potentially lucrative variation on the special purpose acquisition companies that have helped drive corporate dealmaking to 40-year highs.’
An interesting read.

KPN rejects two private equity buyouts
Dutch group says offers from EQT/Stonepeak and KKR were firmly rebuffed
KPN has rejected two separate unsolicited takeover offers from private equity bidders, putting the Dutch telecoms company at the centre of a potential €18bn bidding war.

Week ahead. Market questions
Economists optimistic on further growth in US jobs.
Expected growth in the travel, leisure and other previously curtailed activities as pandemic restrictions have eased.The point here is that these are low paid jobs, typically paying about a third of the wage of a manufacturing job. Also watch the participation rate; with additional benefits for staying at home it will be interesting to see how strong the report is.
Will an upbeat Bank of England lift the pound?
Looks at the potential for the BoE meeting this week. The expectation is that it will announce changes to the its bond buying programme, notably scaling them back.
How long can the palladium rally last?Tightening emissions standards have driven the price to record highs key to further gains will be the take up rate in Electric vehicles. Key is that out side of catalytic converters the metal currently doesn’t have a lot of applications. '“Substitution in autos away from palladium to platinum, the threat of EV and greater supply will probably result in lower prices later this decade,” Jim Steele, an analyst at HSBC, said.Analysts at Jefferies were more sanguine, pointing out that traditional car-makers are using a growing amount of palladium per vehicle to meet stringent environmental rules. “We see runway for palladium demand growth in [internal combustion engines] through 2030 and possibly beyond.”

Biden’s battles have only just begun. By Rana ForooharAn interesting read.  The dilemma between visible and quick brownie points and longer   term less visible but added value investments at home.Along with the rebuilding of international political and business relationships.
US Republicans no longer understand business. By Roger Altman founder and executive chair of Evercore and was deputy US Treasury secretary under President Bill ClintonA good read and the essence of it is that companies’ employees and consumers have changed whereas politicians, specifically republican ones seem not to.
He concludes
'The split between Republicans and business has been brewing for years as Donald Trump and his followers have changed the party. Only four months ago, most Republican lawmakers stated their belief that the 2020 election was stolen. Apparently, they were unwilling to contradict those Trump supporters who believed this falsehood. They are also the most reliable Republican voters and want these new voter restrictions.However, modern corporations operate in an empirical world and cannot endorse such illusions. Moreover, their employees and customers would not allow them to accept new voting restrictions in order to combat imaginary electoral fraud. Unless the Republican party can return to fact-based priorities like inclusion, its separation from the business community will only grow.'

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