Apr 13 FT Taiwan $; diplomacy. Ant, more to do, Alibaba implications, China & Steel and more

13 Apr

MARKETs @ 2:45pm Hong Kong time

opened higher and tested to 7,000 late morning but failed to break out and then consolidated back flat. Traded sideways from around midday to 3pm but then sold off to 6,960 level before working slightly better into the close
Business Confidence Mar 15 vs 18 Feb revised (F/cast was 18)
Nikkei opened higher and worked higher through the morning to 29,900 level but then eased back in the pm session To close +213pts (+0.7%) @ 29,752
Topix traded in a similar pattern to close +4pts (+0.2%) @ 1,959
Tomorrow pre market Machinery Orders
Kospi trended higher though the morning driven by hopes of more earnings hikes and peaked at 3,173 around 12:30 before easing slightly in the PM currently +30pts (+0.9%) @ 3,165
Kosdaq Traded in a similar pattern but with some exaggerate moves currently +9pts (+0.9%) @ 1,010 building on yesterday’s ten year high.
Tomorrow pre market Export/Import prices and Unemployment
Press reports Korea's crypto investors appear to be shifting toward minor virtual coins
Opened higher and worked higher to 17,041 around 10:30am but the trended lower with selling accelerating in the last hour to close -35pts (-0.2%) @ 16,825
CSI300 opened higher and worked higher through the morning to 4,995 but failed to regain the 5,000 level and eased slightly into lunch. PM saw a sharp selloff to 4,930 and then traded sideways Currently -19pts (-0.4%)@ 4,929
Trade data was mixed and there were concerns following the New Loans data with expectations of further tightening ahead.
Balance of Trade Mar $13.8bn vs $103.25bn Feb (F/cast was $51bn)Exports Mar +30.6% YoY vs +60.6% Feb (Consensus is 35.5%)Imports Mar +38.1% YoY vs 22.2% Feb (Consensus is 23.3%)
Pre mareket opened @ 28,578 +105 pts vs +95pts ADR’s
Market worked higher to 28,880 level late morning but sold down into lunch. Selling continued in the PM to 28,460 around yesterdays close before bouncing; currently +108pts (+0.4%) @ 28,562
Expect a muted open ahead of US inflation data and some European earnings.
Futures FTSE 100 -4 points at 6,885,DAX +21 points to 15,236 and CAC 40 +7 points to 6,169, according to IG data.
Pre market UK GDP slightly better than f/cast
Earnings LVMH reporting after the bell while, the U.K.’s JD Sports and French Connection and Switzerland’s Givaudan all report in the morning.
Data out
Wholesale Prices Mar +4.4% MoM vs +2.3% Feb (F/cast was +3.3%)
Wholesale Prices Mar +1.7% YoY vs +1.4% Feb (F/cast was +0.6%)
Balance of Trade Feb £-7.1B vs -3.4b Jan (F/cast was -2.2b)
GDP 3 mth Ave Feb -1.6% vs -1.7 Jan (F/cast was -2%)
GDP Feb -7.8% YoY vs -9.2% Jan (F/cast was -8.6%)
GDP Feb +0.4% MoM vs -2.9% Jan (F/cast was +0.4%)
Industrial Production Feb +1% MoM vs -1.5% Jan (F/cast was +0.4%)
Manufacturing Production Feb -4.2% YoY vs -5% Jan (F/cast was -5.4%)
Manufacturing Production Feb +1.3% MoM vs -2.3% Jan (F/cast was +0.4%)
Construction Output Feb -4.3% YoY vs -3% Jan (F/cast was -2.3%)
Goods Trade Balance Feb £-16.442b vs -9.826b Jan (F/cast was -11.6b)
Data due
EUROZONE ZEW Economic Sentiment
GERMANY ZEW Economic Sentiment & Current Conditions FRANCE No data due
UK NIESR Monthly GDP Tracker
US Futures Opened flat in Asian time and are little changed Dow +21pts, S&P and NDX flat.Data ahead  NFIB Business Optimism, Core Inflation and Inflation, Redbook, API Crude Oil Stock Change.  Fed Webinar event on race and economy.

Ramadan starts today and runs until May 12.

Taiwan dollar drops with US set to apply currency manipulator tag
Biden administration expected to add country to name-and-shame list despite strengthening ties. Another delicate position for Biden to use his skills to resolve with the minimum of damage to their mutual interests.Concludes ‘ Taiwan’s central bank declined to comment on the country’s foreign exchange policy. Even if the US does brand Taiwan a currency manipulator, some analysts believed Washington was unlikely to follow through with tariffs given the delicate nature of regional geopolitics. “It’s not just economics when it comes to Taiwan, it’s always politics,” said ING’s Pang.'
An interesting read

German rivals divide alliance
As expected most of the CDU (the larger party in the alliance) backed Armin Laschet as leader and he called on the alliance to 'stop spending “all our time dealing with internal party issues”.’ But Markus Söder of the CSU also has strong support. For investors it means that the past stability seem in German politics may be ending and a new era beginning which would have implications for the EU too.
See also page 2 Centre-right splits over Merkel succession

Beijing orders Ant to sever links between payments and products
• Total overhaul demanded • ‘Improper connections’ targeted • ‘Huge’ impact expected
The aim seems to be to turn it back into a payment platform only. It will lose a lot of the synergies that had made it so successful and profitable.It seems to me that the ‘old guard’ is extracting their ‘pound of flesh’ for Jack Ma’s criticism of the established system. The breaking up of Ant will be retrograde step for the economy; the fact that it arranged 10% of China’s consumer lending in 2020 shows that it was serving a public need.
China’s fintech had been leading edge because of the freedom it has from the established ways of doing things. This to me looks like a step in the wrong direction.
I saw elsewhere that Pan Gongsheng, Vice President of the PBOC, said the financial regulatory bodies had pushed Ant Group to formulate a comprehensive and feasible rectification plan, primarily touching five areas:
1) correcting improper competition behaviour in payment business;
2) ceasing information monopoly;
3) applying to the government to form a financial holding company;
4) implementing prudential supervision requirements;
5) controlling the liquidity risk of key fund products.
As the article mentioned the fact there was a second meeting suggests they were not happy with what Ant originally put forward. We don’t know the details but I would expect that Ant wanted to try and keep was has been a very successful model relatively intact. The fact that the PBOC wants to dismantle it reeks of spite rather than remodelling to make it a better company better able to help the citizens of China.

Credit Suisse bankers to lose bonuses over $4.7bn losses in Archegos crash
Tough decisions will need to be made by the management it notes that 'The investment bank and Asia-Pacific divisions performed particularly strongly, with bankers outside the prime brokerage unit frustrated that their efforts have been overshadowed by the two crises.’So it faces the dilemma of paying bonuses and upsetting shareholders or not paying bonuses and upsetting staff. With shares down 25% since 1March the management is in an awkward position. UBS’s share price (CHF 14.82) is slightly up from its March 1 level CHF 14.41

Page 3 Covid frustrates China’s efforts to cut steel output
Pressure to clean up the sector is raising efficiency, and with it the lure of greater profits.Beijing is getting more serious about emissions; notes the environment minister made a surprise visit to Tangshan, about 150km east of Beijing and 'scolded managers of four steel mills for what he deemed to be faked production records to dodge emissions targets.’'
But the battle to control steel output also reflects how Beijing’s response to the pandemic has undermined its plans to shift from heavy industry towards less carbon-intensive sources of growth.’Steel is in demand as China used infrastructure spending to drive the recovery but the emissions are an issue.
'In Tangshan, the city government in March told most mills to cut production by 30 per cent until the end of the year and seven steelmakers to keep output at half of full capacity until July.’ It has now gone further an stopped the use of older furnaces unless they are modernised and to demonstrate it was serious it fined 48 companies in 3 days for a total of Rmb 1.92bn ($293m).
Reducing capacity is a twin edged sword; replacing old equipment with new tech tends to mean increased efficiency. A lot of the large producers have been doing that and so there is more ‘cleaner’ capacity coming on stream. But also there are the smaller unregulated player too.
Another factor which could come into play is the tightening of credit. Companies last year could access funds to upgrade plant and machinery and property companies to construct (33% of steel goes into the property sector). Tightening means; not so much credit for upgrades and a reduction in demand. So that could force some capacity out of the system along with some of the demand but it's not an exact science.
“It’s a big challenge because as soon as you start cutting production you just see prices soaring,” he said. “When people are making money it’s hard to get on top of things.”
The fact that a lot of property is from the large SOE banks could help it quotes Lauri Myllyvirta, an analyst at the Centre for Research on Energy and Clean Air '“As soon as the central government says, ‘We’re not going to underwrite all of this construction any more, and we’re prepared to accept that means a short slowdown in GDP growth’,” he said, “then that incentive to circumvent the controls . . . and try every trick in the book to produce more steel just won’t be there.”’
As ever the key is Beijing’s resolve for change and willingness to accept slower better quality growth; which is its stated aim. But if a slowdown in GDP means less jobs and leads to other pressures that resolve will be tested. In the meantime the Steel makers are still a key part of the Chinese economy; steel makers have been trading higher since May when the government stimulated infrastructure spending. Angang (898 HK) and Maanshan (323 HK) are trading back to 2019 levels and yesterday got a boost as Premier Li said government would strengthen controls on the raw materials market to help limit costs for companies that have been pressured by a surge in commodity prices.
But with tightening credit the outlook looks tougher. Exports might offer some relief, especially if the Gupta steel empire folds after the Greensill scandal.

Ecuador millionaire beats poll favourite to become leader
Key interest being that the new president 'Lasso has promised a clean break with the legacy of Correa, who poured money into social programmes during his decade in power from 2007 but who left the country divided and indebted to China.’
He has committed to a balance budget in 4 years; which will be challenging, to fret 2m jobs and double oil output. He says he’ll abide by the IMF programme agreed last year but not implement some of the tax rises but discuss some minor adjustments. He will also respect the deal reached with bondholders last year on sovereign debt.
Markets reacted favourably.It will be interesting the see how the relationship with China goes.

Page 4 China defends efficacy of its vaccines
Health official backtracks after raising questions over low protection rates
Looks at Gao Fu’s,(head of the Chinese Centre for Disease Control and Prevention) comments on the efficacy of Chinese vaccines 'not high efficacy’ and how he then said the comments had been mis-understood; after they had been removed from Chinese media.
Key is that Chinese makers have been slow or haven’t realised their phase 3 trial data results.
Studies suggest the Chinese vaccines efficacy is below the western mRNA vaccines.The article mentions Chile which has used Chinese vaccines from Sinovac but the country is still seeing a resurgence of the virus despite one of the highest vaccination rates in the world.
'The Global Times, a Chinese state-run publication, denied that Sinovac’s efficacy rates were to blame for infections in Chile. It quoted an unnamed source as saying that a study by the University of Chile — it found that effectiveness after the first of two shots for Sinovac’s CoronaVac was just 3 per cent — was based on “very limited” data.’
It quotes Jin Dong-yan, a virologist at the University of Hong Kong, 'Chinese vaccines’ efficacy rates were among the lowest in the world. “Chinese vaccines can provide a certain level of protection, especially for reducing severe disease and deaths, but it’s hard to reach herd immunity,” he said. “Even if everyone in China takes the vaccines, it can only slow down the spread.”’
But 'David Hui, an adviser to the Hong Kong government, said there was no evidence yet to suggest that patients who had taken Sinovac shots would need a third shot or a different vaccine.’
China has it says just published, for the first time, a phase 3 trial results and analysis, being from Sinovac’s Brazilian partners. It hasn’t been independently reviewed but gives a efficacy of 50.7% just above the WHO recommended cut off. 'The researchers added that the vaccine was “highly protective” against moderate and severe Covid-19 and that its efficacy rate climbed to 62.3 per cent if there was an interval of more than 21 days between doses.’
This could be a major embarrassment to China is its vaccines are found to be deficient. The fact that Gao Fu admitted they were looking at a ‘mix and match’ approach suggests that his original comments were not misunderstood. It seems like the pressures on Xi just keep growing as the party’s hundredth anniversary approaches.

Biden tax plans have potential to resolve problems with trade
Looks at Biden tax plans from the point of view of collateral benefits for trade. He concludes 'Addressing trade problems is not what the proposed Biden tax reforms are mainly about. But if they go even some way to de-escalating conflict over digital services taxes and giving American operations more credit and opportunities for exports, they will have done a pretty good job. ‘
Worth a read.

Companies & Markets 
Hyundai faces insider trading probe linked to Apple talksThe regulator is examining the allegations. 'After Hyundai announced the initial discussions, 12 Hyundai executives sold about 3,400 shares, worth about Won833m ($753,000), according to Reuters calculations based on the company’s regulatory filings.’The probe could hurt the company’s reputation and impact talks with other potential external partners.  The article mentions the ESG implications too.The probe could take months add lead to legal action if they find there is a case to answer which will be a cloud hanging over the company as it seeks tie up with foreign companies regarding autonomous cars.
A slight -VE for investors but it really depends in the short term whether the stock falls significantly. At this stage I would doubt it. It closed -1.1% yesterday and is +1.3% to day.

Deutsche Bank dodges bullets and goes mainstream
Looks at the improving status of the bank and whilst there are still a number of issues the outlook appears to be improving for CEO Christian Sewing, who has been in the job for 3 years.
A good read and worth considering.

Banks are back US lenders set for robust results as economy improves
Looks at the US banks and the prospects for their earnings which start being released on Wednesday. Nice quote from Mike Mayo at Wells Fargo '“[JPMorgan Chase chief executive] Jamie Dimon has changed the narrative from if and when the economy recovers to how many years will the expansion last,” 'A years-long expansion could mean lower credit costs, sustained strength in capital markets activity and a steepening yield curve that boosts traditional banking revenue, he added.’
Notes 5 things to watch
1. Bad loan provisions
2. Outlook for loan growth in the 2H, as existing loan balances have shrunk.
3. Deposit levels 'In the absence of loan growth, deposits are costly and require banks to hold more capital.’ So without good loan growth prospects or regulatory change (seems currently unlikely) the banks, especially Citi and JP Morgan face challenges.
4. M&A activity and Spac’s
5. Fees, especially from Trading and whether clients are still looking to Capital markets for funding.
It concludes “The concern now is, have we already seen the best days of the cycle?” said Harte. “It all comes down to corporates’ demand for capital.”
Also worth noting that data wise we get Inflation data today in the US and Retail Sales on Thursday both important to the banks.

US delayed swaps rules for a decade before Archegos crash
Regulation of the swaps used by Hwang family office pushed back once again by Covid crisis.
An embarrassing revelation for the regulators this time.
In focus the 'rules that would have governed the disclosure of Archegos’ derivatives trades are still not in force and neither are requirements for players like Hwang to post initial margin, payments meant to cover potential trading losses.’ 'Hwang was able to place more than $50bn of bets on the share prices of a handful of US and Chinese companies, and could not pay his counterparties when they started going against him.’
It also reveals that 'SEC rules are due to finally come into force on November 1. Had they already done so, the SEC would have had access to data on Archegos’s trades, including the size of each transaction and who the family office had traded with — rules already established in other parts of the derivatives market regulated by the CFTC.’
It mentions other rules that wold probably have flagged Archegos as a significant risk or made it make declarations that could have allowed the banks a clearer insight.
But here is the rub, the banks knew about the proposed changes, because they asked for them to be delayed. With the knowledge they were coming you would have thought the compliance and risk departments would have been pushing departments to start getting ready, start asking the right questions etc etc. They didn’t, which as an earlier FT article suggested is because the front line, money making staff are too often allowed to overrule.
Now I know for myself that compliance can be a pain, and certainly in some firms it has appeared that the compliance staff thought they were paid by the local regulator, but the point is front line staff are tasked with making money but must too learn to protect the firm and in this case the client too. Had the right questions been asked the banks would not have suffered and Archegos would probably still be functioning.

Alibaba stock rebounds after $2.8bn antitrust fine
Despite the fine the stock rallied, many think that the fine puts a line under the Jack Ma speech affair and the company can now focus on the future. Alibaba had held a pre market conference call to investors a brief them.It was interesting to note however that the other Ecommerce names in HK were weak as investors try and work out if they will be fined too and if so by how much?
Lex Alibaba: fine lines.  Notes that 'the full repercussions are not yet clear. Regulators have voiced concerns about Alibaba’s non-core businesses. Previous acquisitions are still being scrutinised. To remain in Beijing’s good books, Alibaba will have to boost spending on good deeds and services that support small businesses in rural regions, such as Taobao Deals. Profit growth, already slowing, will fall back.’'
For China’s tech sector, Alibaba’s fine marks a new era of expensive supervision. Tencent and Baidu are likely to be the next targets. Equivalent fines would be harder for the pair to cover. Tencent’s 2019 revenues were similar to Alibaba’s but it has half the cash and equivalents, Baidu a tenth.
’'The central bank is considering a plan to set up ventures with local groups to oversee consumer data.
Tech leaders will suffer if Beijing continues to support small rivals.’

FT BIG READ. RETAIL Catch me if you can
Despite Deliveroo’s disappointing IPO, investors have ploughed $14bn into a new generation of rapid grocery delivery services during the pandemic. But will soaring demand continue after lockdown?An informative read about the sector. I believe that much of the demand for essentials will remain but for the treats and things like fresh cuts; shops still have a role to play.
It focuses on Europe and the US but the services are growing internationally. Hong Kong has had delivery services for over 15 years, where the lack of car ownership makes delivery particularly attractive. Something that is common in many emerging countries.

For interest The rush for NFTs — El Dorado or fool’s gold?
Non fungible tokens are disrupting the art world — but there are risks as well as rewards, writes Georgina AdamExplains what they are, how they work and what is their future.It concludes 'My belief is that NFTs do offer advantages, notably passing of royalties to creators, and the creation of a secure record of ownership for intangible artworks. But I also think they are colossally overvalued at the very top end, due to the link with cryptocurrencies, and anyone buying into the hype must fasten their seat belts — it will be a bumpy ride ahead.Many would struggle to define the majority of cartoonish and juvenile works on offer as ‘art’’
I would add that NFT’s are not just for the art world, they encompass fashion too and could extend to others areas in due course. The article makes the point that currently the market participants are mainly millennials or Gen X; in fact 91% of the recent Christies auction. They are the generation that is prepared to spend money buying a skin for their avatar in a video game for them and NFT is just a natural progression.

Opinion Europe will confound its critics yet again By Gideon Rachman
Starts 'Every time a crisis hits Europe — whether it is debt, refugees or Covid-19 — the prophets of doom predict the worst for the EU. ‘Concludes 'None of this means that the EU can be complacent about its future, any more than China, the US or the UK can assume that their political stability is guaranteed. The mistake is to believe that the EU’s unique and often baffling political structures make it particularly vulnerable to collapse. In reality, the EU is a careful and evolving balance between national and supranational power, and between technocracy and democracy. That is a source of stability and strength, not of weakness or frailty.'

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