MARKETs @ 1:45pm Hong Kong time
opened flat but sold down to 6,965 in the first hour, then traded sideways in 6,965/6,990 currently -8pts (-0.1%) @ 6,990
Services Index Mar 58.7 vs 55.8 Feb (F/cast was 57)
Building Permits Feb +21.6% MoM vs -19.4% Jan (F/cast was +21.6%)
RBA Financial Stability report released
Nikkei opened higher and worked higher to 30,064 in the first 30 minutes but then reversed and sold down to 29,800 at lunch. PM has worked higher Currently +214pts (+0.7%) @ 29,923
Topix traded in a similar pattern high of 1,979 with support at 1,958. Currently +16pts (+0.8%) @1,968
Monday pre market Bank Lending and PPI, later Machine Tool Orders
Kospi opened higher and spiked to 3,156 in early trades but then trended lower with initial support at 3,134 but then around 11:10 am sold down to 3,126 before bouncing back and continuing to trade in the previous band.Currently -5pts (-0.2%) @ 3,139
Kosdaq opened higher and initially spiked to 987 and then trended higher currently +9pts (+0.9%) @ 991
opened higher but trended lower for the first hour to 16,815, then saw a bounce before trading sideways 16,850/900 currently -51pts (-0.3%) @16,869
CSI300 opened lower and sold down to 5,036, concerns over new US sanctions and inflation higher than expected and PPI accelerating, Currently -69pts (-1.4%) @ 5,043
Inflation Mar +0.4% YoY vs -0.2% Feb (F/cast was +0.2%)
Inflation Mar -0.5% MoM vs +0.6% Feb (F/cast was -0.3%)
PPI Mar +4.4% YoY vs +1.7% Feb (F/cast was +2%)
Inflation The highest reading since October 2020, amid a sharp rebound in cost of for non-food goods (0.7% vs -0.2% in February), driven by transportation & communication (2.7% vs -1.9%); clothing (0.1% vs -0.5%); rent, fuel & utilities (0.2% vs -0.3%); healthcare (0.2% vs 0.3%); and education (0.4% vs 0.6%). At the same time, cost of household goods and services was flat after falling 0.2% in February, while prices of other goods and services fell further (-1.5% vs -0.8%). Food prices dropped 0.7%, the second straight fall, with prices of pork declining faster (-18.4% vs -14.9%). On a monthly basis, consumer prices fell by 0.5% in March, the first decline in four months, following a 0.6% rise in February.
PPI accelerating from a 1.7 percent gain in the prior month and well above market expectations of a 3.5 percent rise. This was the third straight month of increase in factory gate prices and the steepest pace since July 2018, as growth in the economy continued to gather momentum. Prices of means of production rose much faster (5.8% vs 2.3% in February), boosted by extraction (12.3% vs 6.8%, processing (3.4% vs 1.7%), and raw materials (10.1% vs 2.9%). At the same time, prices of consumer goods went up 0.1% after declining 0.2% in February, led by food (2% vs 1.6%), while both clothing (-0.8% vs -1.3%) and consumer durables (-1.4% vs -1.8%) fell less, and prices of daily use goods were flat (vs-0.1% in February). On a monthly basis, producer prices went up 0.8 percent.
Pre mareket opened @29,152 +144pts vs -44pts ADR’s. Ecommerce names were strong Tencent was +1.5%, Meituan +1.1%.
But market sold down to 28,860 in first 30 minutes, on new US sanctions on China and concerns the US International tax proposals could hurt HK too. Financials and Ecommerce weak
Then HSI continued to trend lower but saw an uptick into lunch. PM initially sold down Currently -254pts (-0.9%) @ 28,756
IPO Linklogis surged more than 9% from their issue price; Tencent now flat despite being a backer.
Expect markets to open slightly higher after mixed handover from Asia. German Trade balance up MoM but missed forecasts. May see some caution ahead of the weekend but sentiment in UK +VE ahead of easing of lockdown on Monday
Balance of Trade Feb Euro 18.1b vs 14.3b Jan (F/cast was 21.5b)
Exports sa Feb +0.9% MoM vs +1.4% Jan (Consensus was +1%)
Imports sa Feb +3.6% vs -4.7% Jan (Consensus was +2.4%)
Current Account Feb Euro 18.8b vs 16.9b Jan (F/cast was 22.5b)
Industrial Production Feb -1.6% MoM vs -2% Jan revised (F/cast was +1.9%)
Halifax House Price Index
Opened in Asian time higher Dow +50pts, S&P +0.2% and NDX +0.2% and have risen slightly; Dow +65pts, S&P +0.25% and NDX +0.35%
Ahead. PPI, Core PPI, Wholesale Inventories, WASDE report, Baker Hughes Oil Rig Count
Print Front Page
Biden’s global tax plan calls on big multinationals to pay local levies
• Proposal laid out at Paris talks • Bid to halt wave of digital taxes • Battle looms in CongressA factor being that if the US can get an agreement at the OECD that would give Biden confidence that in raising US taxes he was not going to be under cut by other countries.'Biden hopes the promise of a more stable international tax system would stop the proliferation of national digital taxes and break the mould of tax avoidance and profit-shifting.’
It notes that Ireland which has a headline corporate tax rate of 12.5% is engaging in the discussions along with counties like the Netherlands which has also benefitted its attractive tax rules.
It seems to have support and be the best opportunity that we have seen for a comprehensive global plan.
A slight -VE to current tax havens, which includes Hong Kong and for the large multinationals that have benefited from off-shoring but better overall.
London and Dublin appeal for calm in Northern Ireland after surge of violence
Increased rioting in mainly unionist areas is concerning after years of peace. The reason behind the violence seems to be the implementation of the Brexit agreement.
'Under the terms of the Northern Ireland protocol all goods entering Northern Ireland from Great Britain must follow EU customs rules, leading to a trade border in the Irish Sea. Unionists have rejected that as an unacceptable barrier to their place in the UK.’
Another reason is claimed to be 'unionist anger at a decision not to prosecute members of nationalist party Sinn Féin who allegedly breached Covid-19 lockdown rules to join mourners at the funeral of a former IRA leader last June.’
US outlines end of race to the bottom with radical tax plan
White House initiative seeks a grand bargain with business and to break OECD deadlock
Looks in more detail at the background and the US plan.
Headline taxes have been declining for 30 years, with countries seeking to attract multinational’s with low taxes creating a downward spiral in tax rates. Biden’s proposal would negate a lot of the attractions.
A key element is 'US recognition that other countries’ concerns about the lack of tax paid by US-based tech groups’. The US is now offering that about 100 of the worlds top companies would pay taxes based on their sales in each country; many of those companies are US. That compares with another OECD proposal that would have covered 2,300 companies.In exchange the US asks for countries to drop their proposed digital taxes and 'specified that the regime would focus not only on digital businesses or US companies.’
It is expected that Apple and Microsoft would be hit harder by this plan than some of the alternatives.The OECD thinks the plan would generate as much as other proposals but has more chance of support and success. But a number of people are disappointed that it falls short of the 'root-and-branch overhaul of the global corporate tax system which many campaigners have called for.’ As they still see the majority of the new tax. Revenue going to US and Europe.
I think the plan is a step forward but more needs to be done. Many smaller countries are in more need of the revenues. Importantly it is better than the existing.
See also Editorial A step forward on global corporation tax reform
US proposal to break deadlock should be embraced by Europe
Concludes 'There are, nonetheless, gains to be made from a new international agreement. Clear rules can reduce wasteful efforts to game the system. While corporate taxes are inherently distortionary, businesses do need a social licence to operate; contributing to the government-provided services they depend on is part of that. A global minimum corporation tax must reflect a compromise on these principles too.’
See also LEX Global tax policy: the American revolution
Starts 'Attempting to fix the broken international corporate tax system is a Sisyphean task. But a new model for taxing multinationals put forward by the Biden administration could put the brakes on decades of plummeting tax rates and aggressive planning.’
Concludes 'The decision to concentrate tax rises on a relatively small group is a recognition of the winner-takes-all nature of the global economy. Governments have struggled to assert themselves against the might of multinationals. These measures, if adopted, would signal a shift in the balance of power.'
US blacklists Chinese supercomputing groups
Accusing them of helping the Chinese military make weapons. Biden has placed them on the US commerce departments ‘entity list’ thus making it harder for them to obtain US technology without a licence.
'The Chinese entities are Tianjin Phytium Information Technology, Shanghai High-Performance Integrated Circuit Design Center, Sunway Microelectronics and the National Supercomputing Center branches.’'
The Washington Post this week reported that Phytium designed semiconductors using US technology to power a supercomputer being employed to develop hypersonic missiles, which are hard to detect because of their speed.’This is the first action by Biden and comes as his administration is reviewing the Trump related actions together with talking to friends and allies about other possible export controls.
Chinese and Hong Kong markets are trading lower today in part on the news. For all its bravado and posturing the reality is that China is still heavily dependent on US technology. China is trying to become self reliant but it is a long process and its ‘wolf warrior’ diplomacy is currently not helping.
Fed chief seeks months of strong jobs growth
Looks at Fed Chairman Powells comments to a virtual panel at the IMF and World Bank Spring meeting.The thing that stands out is his focus on jobs and especially job creation at this stage. In talking about the recovery he said “The recovery . . . remains uneven and incomplete. The burden is still falling on lower income workers, the unemployment rate in the bottom quartile is still 20 per cent. There’s still eight-and-a-half million people out of work, and this unevenness that we’re talking about is a very serious issue.”He went on “We got a taste of what faster progress will look like with the March employment report: close to a million jobs, particularly if you add in the revisions for January and February. And we want to see a string of ones like that so we can really begin to show progress toward our goals,”
The focus is clearly jobs and hence the inflation measure that they are likely to monitor closely is wage inflation, which obviously is strongest as you have lower levels of unemployment.
South Korea polls cast doubt on closer ties with North
Looks at the mayoral by-elections in Seoul and Busan where President Moon’s party saw substantial defeat and raises questions about his policies between now and next years general election. Whilst they were fought on mainly domestic issues they will raise question over foreign policy.
It notes 'South Korea progressives favour engagement with North Korea and closer ties with China, but the US ally, at the heart of Asia’s technology supply chain, is under pressure from Washington to join its regional and multilateral initiatives to curb China’s rise, say analysts.’
S Korea has been treading careful ever since purchase of a US missile defence system cause a spat with China. Recently the atmosphere have improved with the S Korea Foreign minister visiting China for the first time in 4 years last weekend. So the regional politics will be increasing more important as the general election approaches.
Companies & Markets
Bain nears $8bn deal for Hitachi Metals
Which was in the online edition yesterday
Potential sale is latest sign of rising global private equity interest in Japanese groups.
The deal could also help Hitachi with its acquisition of US software engineering group GlobalLogic.
'The Bain-led consortium includes Japan Industrial Partners (JIP) and Japan Industrial Solutions (JIS). JIP was set up almost 20 years ago with investments from lender Mizuho and Bain. It has been involved in the acquisition of a range of Japanese industrial gems, including Sony’s Vaio laptop business and the defence equipment subsidiary of NEC. JIS is a private equity asset manager set up in 2010 with capital from Japan’s largest megabanks.'
In the vain of the CVC bid for Toshiba; Japan is seen as an acquisition rich environment.
See Lex Bain/Hitachi: testing their metals. 'Hitachi wants to be high-tech again. Selling Hitachi Metals to a Bain Capital-led consortium is one of final steps in that process.''Expect the deal to go ahead. The consortium includes Tokyo-based private equity firm Japan Industrial Partners and Japan Industrial Solutions, a local investment management firm.
Foreign buyers would have faced government approval concerns around defence equipment material contracts. Domestic participants should be able to clear those hurdles with ease.'
For Interest App Store security like ‘butter knife in a gun fight’
• Epic takes aim at screening system
• Apple defends 30% fee on purchases
Looks at the on-going case between Apple and Epic. It would appear that Apple’s reputation is coming under intense pressure with Epic noting that inspite of Apple trying to justify its 30% in order to ‘fund curation and protect consumers from malware.’ That there is '“no evidence” its app review process “screens for security issues better than other methods of app distribution”.’
In fact there are a lot of apps that get approved and are scams. It would appear that Apple is likely to suffer more reputational damage from this court case as it progresses. So win or lose Apple suffers and if it does lose then it will have to look for another way to monetise the Apple systems.
Inflation offers escape route from debt crisis. By Pascal Blanqué group chief investment officer at Amundi.
Says inflation forces should be taken seriously because 'The key ones include a hostile environment for trade and globalisation, business and labour support public programmes and the extraordinary debt burden fuelled by the pandemic. These are set to create a turning point in the market regime before long.’
He points out the inflation is a desirable way out of a debt crisis as it reduces the value of debt over time. But there is a requirement for growth too. He says 'As its vaccine programme accelerates, the US economy will most likely head towards full reopening by the summer. The 2008 financial crisis depressed aggregate demand for a long time. In this crisis, we may see the opposite.’
In part because the US personal saving rate is at highs not seen since the mid 1970’s plus large cash balances on corporate balance sheets; suggesting increased spending post pandemic. Add to that the stimulus packages and potential infrastructure spending; then the system is primed for inflation.
Because the Fed was bold initially he says 'Now it is hard not to see it will lead to a de-anchoring of inflation expectations and a revival of the spectre of a 1970s-style growth in prices.’
That means the rise in bond yields may not be over but the rate of rising may slow; he notes 'Take the 2013 taper tantrum in bond markets that followed signals of reduced Fed support. More than two-thirds of the correction happened in the first three months.’
He expects history to repeat itself . Says the first stage of rotation into value stocks was in November on positive vaccine news and resulted in a re-rating for them from depressed levels; similar to the uptick in inflation. Suggests 'investors should pay attention to cyclical names in Europe or companies in the US that can benefit from technological transformation and the energy transition.’
He concludes 'The return of inflation could help ease the debt burden. But it will be hard to swallow since it arbitrarily transfers wealth from savers to borrowers.Investors need to prepare themselves for this shift by seeking value stocks rather than chasing new fads. ‘
LEX Offices/cost savings: homeworking windfall Looks at the impact of work from home on office demand.'Note, finally, that mid-career professionals are keener on flexible working than trainees in bedsits. A finance director’s home is a far more comfortable place from which to lead the revolution.'
Substack success shows publishers the value of good journalists
The key being 'The not-so-surprising headline is that the subscription news model depends on persuading people to pay for good journalism rather than selling an audience to advertisers. Talent and quality matter.’
It goes on 'The harder-to-grasp consequence is that the model elevates newsrooms into being the news company’s main investment, scaled up or down to fit its ambition, rather than a cost centre to be managed in the context of dwindling ad revenue.'
A good read an insight into modern journalism and it also has interesting parallels for the broking industry about quality of product available to clients and under Mifid how for European fund managers it is paid for. On-line subscriptions for specific products rather than omnibus agreements could result in better more cost effective research departments.
Carney’s stumble at Brookfield puts focus on loose definition of net zero
Critics say use of ‘avoided emissions’ exemplifies complexities thrown up by creative accounting.Looks at the problems of determining what is admissible and what is not; 'The backlash illustrates the complexity of climate accounting, which lacks standardisation and is open to manipulation, and the ease with which even experienced climate ambassadors can fall foul of the still emerging rules.’An interesting read.
Read also Borrowers tap ESG demand to sell green debt at premium
Some investors worry the ‘greenium’ signals mispriced credit risksIt concludes 'Bondholders have already started rebalancing portfolios and selling highly rated debt, sending prices lower, as the global economy recovers from the pandemic. But green bonds are likely to be “stickier” than vanilla bonds and not among the first assets to be sold, given their relative scarcity, he said. “We will see this greenium become more structural in the secondary market.”’
Europe has a lot to learn from Biden’s audacity. By Philip Stephens
Starts with 'Politics throws up two sorts of leader. There are those forever reaching for an umbrella and others, far fewer in number, who set out to change the weather. Western democracies have lately boasted a superabundance of politicians sheltering from the storm.’
He concludes 'Liberals never cease fretting about how to meet the threat from the world’s autocrats. Whatever the eventual fate of his experiment, Biden has come up with the answer. Democracy flourishes when the system works for everyone.’
An interesting read but Biden has certainly made a significant impression and he has not completed his first 100 days yet!
Blockchain may change equities trading for good
Builds on the article from Wednesday this week Clearing system faces rivalry from blockchain technology.
Today it notes that 'Paxos is now applying for a permanent SEC licence to compete with the DTCC. It is unclear whether the SEC will agree, or if Paxos could even scale up to snip at the heels of the DTCC behemoth, which handled $2,150tn worth of trades last year. As Emmanuel Aidoo, digital markets head at Credit Suisse, observes tactfully: “Innovation in blockchain technology is [still] incremental.”’
1. More to blockchain than cryptocurrencies
2. Blockchain in settlement should enhance the security of the system, which is the key of the system and why the DTCC has had a near 40 year monopoly. But it is also likely to result in a number of job losses but also should reduce the fees involved too.
3. Potential for Paxos and DTCC to work in unison although it does raise the question of why DTCC didn’t lead in this area. Another case of monopolies believing that they don’t need to change?
It notes 'the DTCC has recently issued a thoughtful white paper that proposes to use existing technology to cut settlement times to one day by 2023, if all its members approve. Silicon Valley entrepreneurs may scoff that this is still too timid — especially as the DTCC now admits it can shrink settlement times if it wants. Crypto-enthusiasts also carp that incumbents have little incentive to innovate rapidly, given they can reap fat fees. As Dan Schulman, PayPal’s chief executive, told me: “Across the world, the financials’ take rate [on payments] has been 2.8 per cent for 10 years in a row, which is ridiculous.”’
4 A negative point is that financial players could no longer net off trades, forcing them to fund deals in advance which could mean larger capital commitments but for shorter periods.
It concludes 'Even so, the deal is another example of how societal ideas about what looks “normal” in a digitised world have been questioned during the pandemic, and so can change. The two-day settlement system is one such shibboleth.
The prospect of that process changing is something we can all applaud. It shows how competition, or just the threat of it, can introduce greater efficiency and hopefully less risk too.’
Artificial intelligence bias can be countered, if not erased
'The promise of artificial intelligence systems is that they are faster, cheaper and more accurate than dimwitted humans. The danger is they become an unaccountable and uncontestable form of power that only reinforces existing hierarchies and human biases.’
Sets out the problems as highlighted in the Netflix documentary film Coded Bias under six headings and concludes
'Even so, we will never be able to solve the issue of algorithmic bias in isolation, especially when there is no societal consensus about the uses of AI, says Rashida Richardson, a visiting scholar at Rutgers Law School. “The problem with algorithmic bias is that it is not just a technical error that has a technical solution. Many of the problems that we see stem from systemic inequality and partial data,” she says.
One hope is that AI-enabled tools can themselves help interrogate such systemic inequality by highlighting patterns of socio-economic deprivation or judicial injustice, for example. No black box computer system compares with the unfathomable mysteries of the human mind. Yet, if used wisely, machines can help counter human bias, too.’
An interesting read.
The man who helped make ordinary voices heard
The first time you read about a life well lived is often in the obituary pages. Here is the story of an exceptional person still very much alive.
Emmanuel Gyimah-Boadi, who retired this month as head of Afrobarometer, made the voices of ordinary Africans heard.Worth a read, it illustrates how many ordinary people have views they want expressed but are so ignored. Lovely quote 'Leaders have become adept at gaming democratic systems and tweaking constitutions to hang on to power, practising what Gyimah calls “you can have your say, but you can’t have your way”.'