May 5 FT Yellen says rates may rise. China's E-commerce on tax, Blinken says no Cold War


05 May


MARKETs @ 1pm Hong Kong time
AUSTRALIA opened flat as pre market data was mixed but worked higher in strong Building Permits.  Hit resistance at 7,120 but continued to test there for a few hours before drifting slightly lower, currently +43pts (+0.6%) @ 7,111
Data pre market
Construction Index Apr 59.1 vs 61.8 Mar (F/cast 61.6)
Services PMI Apr 58.8 vs 55.5 Mar (F/cast was 58.6)
Composite PMI Apr 58.9 vs 55.5 Mar (F/cast was 58.8)
After the open
Building Permits Mar +17.4% vs 20.1% (F/cast was +2%)RBA Chart Pack released.
JAPAN
Markets closed Children’s Day re-opens Thursday
S KOREA  
Markets closed Children’s Day re-opens Thursday
TAIWAN 
Opened higher, initially tested down to 16,860 but the rebounded and trading in a range 16,950/17,050 through the session currently +82pts (+0.5%) 2 17,017Comes after the Government called for calm after three days of consolidation; so cannot rule out government firms acting to stabilise the market.
CHINA 
Remains closed re-opens Thursday.
HONG KONG 
Pre market opened 28,428 -129pts vs -185pts ADR’s
After weak PMI data but rallied back to 28,650 in the first 30 minutes and then traded in tight range around Tuesday’s close and close flat at lunchtime.
E-commerce remains weak, with concerns over the tax issues. Chinese Financials seeing a rebound. Chinese Developers +VE on good sales numbers. Shippers still seeing good interest. Singapore may review travel bubble due to its latest outbreak -VE CATHAY PAC
Data Pre Market
PMI Apr 50.3 vs 50.5 Mar (F/cast was 51)
EUROPE 
Key for the open will be the pre-market PMI data. Reaction from Asia would suggust a flat open.
Data due
EUROZONE Services and Composite PMI, PPI
GERMANY 
Services and Composite PMI
FRANCE 
Services and Composite PMI
UK 
New Car Registrations
US Futures 
Opened flat DOW +12pts S&P +0.05% and NDX -0.05% they have gained slightly DOW +30pts S&P +0.15% and NDX +0.05%
Data out Total Vehicle Sales Apr 18.5m vs 17.7m Mar
Data tonight ADP Employment Change, Services and Composite PMI, ISM New York, ISM Non Manufacturing Data (PMI, Prices, New Orders and Employment), EIA Oil Report
Earnings  General Motors, Hilton Worldwide, Booking Holdings, Fox Corp., Uber Technologies, Etsy, PayPal, Allstate, Accolade, Cognizant Technology, MetLife, Marriott Vacations, CF Industries, Marathon Oil, CyberArk Software, Emerson Electric, Amerisourcebergen, BorgWarner, Zynga, Tanger Factory Outlet, Twilio

ON LINE
BlackRock accused of ESG inconsistency over Indonesia palm oil
Fund giant invested in group facing allegations of land grabs and poor environmental standards
Washington shies away from open declaration to defend Taiwan
White House official says shift to ‘strategic clarity’ would carry ‘downsides’ in face of China’s belligerence
Food delivery sector leaders braced for cut-throat rivalry from new apps Just Eat, Deliveroo and Delivery Hero among big groups put on alert after investors fill war chests of a new generation of grocery delivery apps

FRONT PAGE
Yellen fuels tech sell-off by raising prospect of interest rate increases
• Warning on US ‘overheating’ • Backing for $4tn stimulus • Nasdaq hit hard in early trade.
She made the comment in the context of Biden’s infrastructure and welfare spending plans, implicitly acknowledging the inflation threat; albeit small in her view. Interestingly the markets had sold off prior to her speech and markets started to recover after. That would imply that the acknowledgement was welcomed by the market. It will certainly make it easier for Powell to now raise the subject for discussion. The T10 was little changed by the statement.Historically Treasury secretaries have refrained from commenting on specific monetary options so it may be that that too is going to change.

Modi under fire over slow dispatch of medical relief aid as Covid cases soar
As the aid arrives he is again under fire for as the distribution is slow and seemingly uncoordinated. 'Many hard-hit states said they had not received any assistance, while some said supplies were still sitting in warehouses.’Whilst I am sure the whole thing is a logistical nightmare the fact that we have not heard of a special unit being set up to deal with issue is a concern.
'In a statement yesterday, the central government said the authorities were working “24 x 7 to fast-track and clear the goods on arrival”.
It listed 38 institutions in India that it said had received equipment. “All possible efforts are done to unpack, repack and dispatch these [goods] with the least possible turn-around time.”
It notes that the distribution may be being hampered by the high number of officials in India suffering with covid hence in my view the need for a special dedicated unit; with transparency 'the government should provide further clarity on which emergency supplies went where, something it did not specify. “It’s a very important issue for donors, recipients and public confidence.”

With my ERIC hat on; there is a free webinar, Mifid II compliant, on India today 'Regime Change, Debt Restructuring & India: David Mulford in conversation with Russell Napier’.  David Mulford is a former US Ambassador to India and Vice Chairman International of Credit Suisse.  Starts at 4pm BST or 11am EST and will be recorded.  Let me know if you are interested or just sign up at  ERI-C.com 

INSIDE
G7 meeting. Blinken rejects China cold war concern
Biden’s top diplomat says countries should not have to pick sides
He said he didn’t want to put a label on the situation because it was complex. He said it was about
‘..doing our part to make sure that democracy is strong, resilient, and meeting the needs of its people,” he said, also referencing to US plans for a “democracy summit” this year.’' Joe Biden has promised to “win” the 21st century in what he has portrayed as a “battle” between democracies and autocracies and has pointed to Chinese activities that the US says are damaging the international order.’
I think it is good to see an awareness that the issue is not black or white and that different countries have different agenda’s. What the US appears to be doing is seeking the consensus and 'basic rules governing commerce, the environment, intellectual property and technology.’
It will not be easy; Germany has a lot at stake because of its trading relationship with China but with Merkel not standing for re-election it will be interesting to see if the current stance continues.

GLOBAL INSIGHT EUROPE.
EU recovery funds will flow at last and look set to change the game.
Whilst the EU recovery package has been a long time in coming, that may be a good thing because it is probably more focused now on the longer term issues and hopefully the money will be applied as the economies begin to re-open.
An interesting read. It concludes 'It seems inevitable that there will be bumps on the road from planning to implementation. “A key question is how the milestones” — the concrete deliverables to be included in the final plans — “will be defined”, said Rubio. Again, the commission will have a central role in agreeing acceptable milestones and assessing whether they have been met.The “Next Generation EU” package will fund good investments and trigger useful reforms. But just as significant as the plans themselves may be the jolt they are giving to economic governance before a cent has been spent.’

Telenor writes off Myanmar investment but plans to stay
Norway’s Telenor has written off its $782m investment in Myanmar but said it would stay on despite deteriorating conditions since February’s coup.Negative for the company and the country. It would appear that the Junta is becoming increasingly isolated from many Western countries although Russia and China remain key backers.

Covid second wave fears rise in Africa as inoculation programmes lose pace
Officials say India is ‘horrifying warning’ for region facing vaccine hesitancy and logistical issues.
A worrying read. On the negative side is the lack of vaccine doses on the positive side is the relatively young population which may be more resistant; although they can still transmit the virus. The bigger fear is that without effective inoculation the virus could mutant and cause a much greater threat to the rest of the world.
Martin Wolf wrote a while ago that ‘ The pandemic will not be over until it is over everywhere. We must co-operate to achieve that outcome. We have to heal scars at home, but we also need to heal them globally. Can our divided world achieve this? If it fails, it will not be because we lack the means, but rather because we lack the will.’From Hopes and fears of the global recovery March 24

Indian Premier League cricket suspended after positive tests
Despite being bubbled players and staff got infected. Underlines the fact that the virus is seriously difficult to contain. Suspending the league will probably not suspend the criticism of the government for allowing it to continue.

Fauci warns against discarding trade rules on jabs
To do so he says 'risks backfiring if it leads to long legal disputes.’
Some countries want to be able to produce their own but it seems that even if the IP rules were waived the real problem is the lack of base ingredients.
'Drugmakers have warned there were not enough vaccine materials to open up manufacturing globally and that doing so would hinder innovation in the long run. They added a waiver could set the stage for conflicts based on national laws and bilateral arrangements.’
There is no simple solution so hopefully rather than a knee jerk reaction we get a thought out one. US is expected to explain its stance at the WTO talks this week

Chinese banks accused of funding worldwide deforestation
It casts doubt on Beijing’s ambitions to be a global leader in fighting climate change.
Data from Forests & Finance, a global coalition of non-governmental organisations, showed that from January 2016 to April 2020, Chinese institutions offered $15bn in loans and underwriting services to companies that traded in commodities linked to deforestation in south-east Asia, Brazil and Africa.
It was to 'Chinese companies involved in trading pulp and paper, palm oil, soy, rubber and timber largely operate overseas and are often funded by Chinese banks, highlighting the international footprint of its financial sector. Brazil accounted for the largest amount of funding linked to deforestation, but most of the loans were made within the country.’
'Industrial and Commercial Bank of China was the largest provider of loans and underwriting services in the database, at a total value of $2.2bn. Sinochem, a Chinese state-owned chemicals group, was the largest recipient, collecting $4.6bn, most of it for its rubber business.’
It concludes 'Research by the Bank for International Settlements last year found that Chinese banks have become the biggest cross-border creditors for about half of emerging and developing economies globally. The paper added that their lending activity “strongly correlates with trade”.’
It will be interesting to see is activist, funds and the ESG lobby can bring pressure to bear on the Chinese banks to change. I would doubt it, as they are primarily directed by the party.

Flight checks Lufthansa banks on Germany’s Mittelstand to lift business traveller numbers
Expects the SME’s to quickly return to business trade to acquire new clients and business
'“They don’t have a global infrastructure to live without corporate travel,” Spohr said of such businesses. “They don’t even sometimes have people on the ground in markets in Asia or the US, so people need to go there themselves.”’
Last month the FT reported that 'Europe’s largest banks are planning to slash business travel permanently by as much as half from pre-Covid levels.’
Whilst banks have said that, which I noted was a blanket statement and probably unhelpful. But overnight Jamie Dimon has said he is cancelling his Zoom calls, going back to the office and out to meet clients because he has been told that JP Morgan lost business to competitors because JPM Zoomed but the others visited.
I believe that the European banks and other industries will quickly return to business flights once they have been inoculated.
The bigger question will be how the airlines price their seats going forward. There is certainly a lot of capacity out there so it will be key to their profitability. The other issue may be that if there is a bounce back then airlines that have laid off pilots and cabin crew have spend addition money on hiring.
See also Goldman set for US and UK return to office. As inoculations gather momentum firms are expecting staff back in the office.  In Asia it notes that the bank’s offices are already nearly full.

INSIDE BUSINESS ASIA
Macau casino empire emerges from shadow of late patriarch
Looks at the new management at SJM now that Daisy Ho is now heading the board. It looks at the conservative way Stanley Ho used to operates and how Daisy is likely to be more active. It notes the forthcoming opening of SJM’s Grand Lisboa Palace integrated resort on Cotai. A move out from its home turf of the Macau peninsula.
Another change is the appointment of Frank McFadden as operating chief. He was originally poached by Ho from Adelson's Las Vegas Sands in 2006 to oversee the SJM’s current flagship casino, the Grand Lisboa. Giving him a larger role in the hope is this will result in more change ahead.
Stock trading lower today.

Cash-rich banks seek to cut deposits
JPMorgan and Citi take the unusual step of telling clients to move deposits into money market funds so the banks can avoid having to hold more capital which has a negative impact on returns on equity.
The article mentions the last years temporarily change in rules for calculating SLR’s which have now expired and have added further pressure on the banks. Pushing the money into money market funds may also generate some fees for their asset management arms too.
It notes that banks do expect the SLR to be changed as the Fed is currently reviewing the issue. But in the meantime JPM is tinkering with its capital structure to try and maximise that to cope with the situation.
Interestingly 'Pandemic-era deposits were initially expected to come out of the system as the economy normalised. But bankers are beginning to think that the unprecedented stimulus could leave them with excess deposits for years.“Even if consumers do draw down to go on trips to Disney World, and companies draw down to build out new warehouse facilities and buy new equipment, they’re just not spending fast enough relative to what’s coming in,” said Gerard Cassidy, analyst at RBC.’
This supports what I have been writing about the increased amount of saving by US consumers as stimulus cheques arrive, rather than increased spending which supports the case for longer term deflation as outlines by Gary Shilling (See EPIC recorded webinar debate between Shilling and Napier; let me know if you you like free access, it’s Mifid II compliant.)

Technology. Chip drought sets scene for supply chain tug of war
Expects there to be a 'power struggle between manufacturers and their customers about how the industry’s supply chain works and who pays the costs of carrying inventory.’'Jean-Marc Chéry, chief executive of STMicroelectronics, said customers, whether carmakers or car parts suppliers, would need to hold more inventory or agree to more non-cancellable contracts to make supply more predictable and reduce the risk of shortages.’
A big change to the just in time supply chain model. It will also increase costs to the customers and should mean more profit for the makers.
It does note that 'The suppliers that stand between car-makers and chipmakers would be central in the fight.’
An interesting read key is that the Auto sector will have to adopt the strategy that the likes of Apple and others have; in committing to higher binding order volumes.
It concludes 'But in March, Jacques Aschenbroich, chief executive of Valeo, a French tier-one parts supplier, defended the existing model, saying throwing it out after one crisis would be unwise.“You have the equivalent of a 100-year flood hitting the sector . . . Does that have to call into question the whole supply chain?”’
I think the key is that chips are just the tip of the iceberg of the auto sector. The current situation reflects the change from combustion to electric and a lot is issues with the supply chain will change. For example needing battery makers close to production lines due to their weight, whereas engines, gearboxes etc. could be shipped hundreds of miles. This is an area where the Chinese have a big advantage; specifically in finding green field sites; just look at the Tesla plant in Shanghai.

Tiger Global aims to raise $10bn for technology venture fundWorth a read bearing in mind the recent rotation into value stocks due to the threat of inflation.In addition to Tiger it mentions Softbank, Insight Partners. An interesting read.

Pandora to sell only lab-made diamonds. Worth a read the Danish group says its synthetic gems will be carbon neutral

Apollo bets on finance and sports content to unlock Yahoo’s potential
Buyout group hopes online pioneer’s 900m users hold secret to ending reliance on advertising.An interesting read. It will be interesting to see if it can make its plans work.

Brighter UK economy proves shot in the arm for small caps
Investors spot opportunity of nimbler, lower-cost businesses able to manage rapid tech shift
Interesting read 'Among the factors that had helped raise their share prices were significant numbers of share buybacks and the sectors that they include — such as industrials, discretionary spending and financials — often being beneficiaries of the early stage of the economic uplift, said Kleintop.
Galpin said that globally, stocks in a number of Covid-hit sectors, such as travel, leisure and gyms, could be strengthened by the gruelling year.
“Competitors have dropped away. There’s a tremendous chance for some of them to gain market share,” he said. “Investors should have a mixture of both. You want Covid-19 ‘winners’ but equally there are some ‘losers’ which are good companies.”’

Derivatives Trio of sector veterans delivers vote of confidence in green futures platform
Worth a read. Looks at environmental derivatives platform 'IncubEx in the latest sign of the growth of trading in instruments such as carbon contracts that let companies offset their pollution.’
Notes that historically they have had a patchy history but now the sector is seeing a revival as companies and countries commit to cutting emissions.

Markets Insight High valuations signal time is right to diversify. By Karen Ward chief market strategist for Emea at JPMorgan Asset Management
Looks at valuations and notes that the cyclically adjusted price-to-earnings ratio which for US stocks, has only ever been at this level once before;  just before the dot.com bust.
She prefers to use the one-year ahead forward earnings method to value stocks and that too is at a high level.
The question she poses is whether this time is different? 'I’ve heard two arguments for why high valuations will not hinder long-term returns. One I find convincing. The other I do not.’
1 Doesn’t believe the valuations are permanently supported by low interest rates. If that were true then we are facing a 'low nominal growth, earnings and interest rate environment.’ 'It cannot be right that we will come out of the crisis with sustainably higher earnings growth and sustainably lower bond yields. Central banks may be distorting bond prices with asset purchases and other monetary tricks. But, at some point, in the face of rising growth and inflation, bondholders will eventually tire of negative real returns and sell those bonds, pushing yields higher.’ Or of course interest rates rise.
2 What she does think likely is that valuation will not be a problem because the recovery in nominal activity will be higher than most analysts are predicting. Thinks the potential spending by US consumers could be the driver to trigger a short-term boost that leads to lasting growth; 'if it creates a virtuous cycle of rising investment, employment and, in turn, more consumption.’
Notes that the current high valuations are distorted by a few technology and consumer discretionary stocks; without those the forward PE is below 20x.Many of those names reported recently and have shown resilience as earnings seems to justify their valuation.
There are also sectors where the markets may be underestimating potential; especially the financial sector which is currently on 14x and being helped because the provisions taken last year seem to have been excessive; writing them back will help along with hopes for rate rises and maybe even loan growth.
Although I would say loan growth is currently questionable.
She concludes 'The implication is that while we should not ignore valuations, nor should we rely on low interest rates as their justification, there are still opportunities in stocks. In particular, investors should focus on areas of the market where analysts might yet be underestimating earnings growth. For much of the past decade, investors would have done perfectly well to have held a narrow portfolio dominated by US tech stocks. Now, however, is the time to diversify.’

I would agree that now is the time to diversify whilst remaining some selective exposure to those tech/consumer names. I am not convinced the US consumer is going to drive a significant boom in demand. Data suggests people have an increasing propensity to save for various reasons. But there are definitely good value names to invest in.

FT BIG READ. INVESTMENT. Spacs fear a regulatory reckoning
The SEC is concerned about the optimistic projections of ‘blank-cheque’ groups and their merger targets. The threat of lawsuits and attention of short sellers are also contributing to a slowdown in the sector.

OPINION
Economics. Action must replace talk on climate change. By Martin Wolf
If the COP26 summit is to be the decisive moment it should be, three things are necessary
1. Incentives.
2. Disincentives
3. Asssitance
Worth a read, sounds easy but will be controversial.

Germany’s post-Merkel future raises foreign policy concerns for allies  By Constanze Stelzenmüller
Looks at the possible combinations of an alliance post German elections in September, especially as Merkel is not standing. That could have a significant impact on Germany’s and the EU’s attitude to China.
An interesting read.

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