Mar 24 FT No apology for Cheung, China sanctions pressure, Chips & bitcoin, Stockpicker last chance?

24 Mar

MARKETs as at 2pm HK time
Asian markets for the most part trending lower again after weakness in the US and concerns over China as sanctions on Europe could threaten trade deal.
Saw a choppy open after good flash PMI data pre market. Floods worsen -VE for sentiment but markets trended higher through the day and tested 6,800 mid afternoon but failed to break out and eased down at the end to close +33pts (+0.5%) @ 6,779
Nikkei 225 opened lower at 28,765 initial ticked up to test 28,870 but failed and trended lower through the morning to 28,465 at lunch. PMI data missed a slight -VE. PM opened higher but trended lower to low of 28,380 before seeing a small bounce at the end to close -534pts (-1.8%) @ 28,468
Topix traded in a similar pattern although day low was at lunch (1,925). Opened higher and traded sideways in the PM to close -36pts (-1.9%) @ 1,935
BoJ Policy Meeting Minutes
PMI Flash
Manufacturing Mar 52 vs 52.4 Feb (F/cast was 52.2)
Services Mar 46.5 vs 46.3 Feb (F/cast was 48.5)
Composite Mar 48.3 vs 48.2 Feb (F/cast was 49.8)
Pre market PPI higher than forecast.
Kosdaq opened flat and dipped to 939 initially but then rebounded and traded higher to 954 by mid morning. Then pulled back before trading sideways currently +6pts (+0.7%) @ 953
Kospi dipped on the open to 2,971 before rebounding but resistance at yesterday’s closing level. It tested a couple of time before retrenching to trade around the 2,990 level currently -13pts (-0.4%) @ 2,992
Data out pre market
PPI Feb +0.8% MoM vs +0.9% Jan (F/cast was +0.4%)
PPI Feb +2% YoY vs +0.8% Jan (F/cast was +1.5%).
Opened lower initially rallied to 16,125 after good retail sales and industrial production data out after market Tuesday. Then retrenched to trade sideways around the 16,040 level and closed -146pts (-0.9%) @ 16,032
After Market due to get M2 Money supply data.
Opened lower and initial saw an spike into the green (5,024) but reversed and then continued selling down until it found support at 4,943. It bounced but then again resumed the lower trend. Concerns that the sanctions row could threaten the trade deal.
HONG KONG Pre market opened @ 28,438 -59pts vs -69pts ADR’s and sold down through the morning, it saw brief support at 28,000 but then broke below; was 27 954 at lunch.  PM opened lower and currently -635pts (-2.2%) @ 27,863.   Concerns over China and results which continue to be mixed.  Broad weakness today, with all sectors in the red
Expect markets to open lower following Asia and the US weakness. PMI data will be closely watched.
Data due.
EUROZONE PMI Flash (Manufacturing, Services, Composite), Consumer Confidence.
GERMANY PMI Flash (Manufacturing, Services, Composite)
FRANCE PMI Flash (Manufacturing, Services, Composite)
UK Inflation Rate, Core Inflation Rate, PPI Core, PPI Input, PPI Output, Retail Price Index, PMI Flash (Manufacturing, Services, Composite)
US Futures
Opened flat and have eased slightly Dow +10pts (from +20pts), S&P +0.04% (from +0.1%) and NDX +0.15%(from +0.3%)
Data dueMBA Mortgage Applications, 30 yr Mortgage Rate, Durable Goods, EIA Oil Report, PMI Flash (Manufacturing, Services, Composite) Powell Testimony

Worth noting that the FT has not issued and apology or amendment regarding it interview with Michael Cheung HK Chief Secretary despite a HK spokesman referring to Chief Sec Micheal Cheung comments in the FT Monday confirmed the tax position, didn’t mentioned the judges but said Cheung did not say that the HKSAR Government was "instructed" by Chinese Central People's Government to focus on such areas as wrongly stated in the article, the spokesman stressed.  He also mentioned ' On Chinese National People's Congress' decision on improving the electoral system of the Hong Kong Special Administrative Region (HKSAR), the spokesman reiterated that the HKSAR Government will fully and resolutely implement "One Country, Two Systems. Under the "One Country, Two Systems" principle, issues such as housing, land and the wealth gap that concern the wellbeing of many sectors of the Hong Kong community are squarely within the HKSAR's high degree of autonomy.’I presume no apology because it stands by its reporting but I wonder why no outcry in the local press. Maybe that is the true impact of the National Security Law?

Front Page
Floods worsen in Australia.  The disaster is impacting thousands of people Fuller story page 3 Thousands more braced to flee flood waters

Wirecard fraud started more than decade ago, former executive says
• Chief witness admits creating shell companies • Group collapsed amid €1.9bn scandal

AstraZeneca to publish more Covid-19 vaccine data after monitors raise alarm'AstraZeneca yesterday said it would publish more data on its US clinical trial “within 48 hours” after the independent monitoring board that oversaw the study warned that results released by the company were misleading.’It notes 'According to interim results released by AstraZeneca, the trial showed the vaccine was 79 per cent effective at stopping symptomatic Covid-19 and 100 per cent effective at preventing people from falling seriously ill. The UK has also given the jab to millions of people, with real-world evidence suggesting a significant effect in cutting deaths and hospitalisation rates related to Covid-19.’The key would seem to be that now it is being used widely amongst the public with positive results.

Page 2 OECD incoming chief confident of tax deal
Cormann seeks global approach to taxing multinationals and carbon border levies.
It’s aiming to 'curb a “proliferation of different unilateral measures” by countries to ensure US tech companies pay more tax.’ It is also looking to do the same over global warming and says that the failure to get international agreement on those two areas could undermine growth and recovery from covid. Biden has already shown a willingness to drop the previous US stance that 'participation of US companies in a global corporate tax framework should be voluntary.’ Any deal is likely to see US companies pay more tax overseas but also non US companies pay more tax in the US.
Many think that if the OECD can formulate an agreement that could form the basis of wider reforms too.
It concludes 'Cormann will have the backing of the EU in seeking to drive through a tax deal, but his criticism of European plans for a carbon border levy on imports will be less welcome, reinforcing views that he is not serious about combating climate change.Brussels will in June unveil detailed plans for a carbon border adjustment mechanism, which is designed to increase the cost of imports from non-EU countries that have not signed up to the Paris climate goals or committed to net-zero emissions.’
For investors it underlines it is likely to hurt the big tech companies putting their valuations under further pressure. For carbon emissions it shows we have a long way to go.

US and EU revive effort to tackle assertive China
Top diplomat’s visit to Brussels will renew dialogue, focusing on human rights and security.Increased co-operation is likely to be bad news for China and by starting with the common ground of human rights it is likely to garner good support. The Chinese stance at the Alaskan talks has also prompted more support in Europe.
'One senior US official stressed that Blinken’s sparring with Yang Jiechi, China’s top foreign policy official, did not mean Washington would not co-operate with Beijing. “The theatrics . . . did not reflect the civil, candid and substantive discussions that followed,” she said. “We’re clear with other nations that they shouldn’t feel the need to choose between the US and China.”’
By not making it a binary choice the new joint effort will see wider support.
It could present some difficulties to some in the EU having just signed a trade deal with China but it is worth noting that many MEPs did not support the deal that was arranged by the bureaucrats and it has not been ratified. Many of them citing human right concerns. It is also likely to put China in a bind as it wants that deal and so that may temper its response to the EU. Although its willingness to sanction some key European figures shows that at present the wolf warrior diplomacy is at the forefront.
The article acknowledges that which there is agreement on human rights the views of trade are more divergent.
I think that many in Europe still put trade above all else and hope that in kowtowing to Beijing and overlooking or not commenting on Chinese actions they can have the best of both worlds. That I think it becoming less and less possible as China seeks to dominate.

Eurozone keen to avoid mistake of turning off fiscal taps too soon
‘Americans are from Mars and Europeans are from Venus” has long been a mantra in strategic affairs. One could be forgiven for thinking that the same is true in fiscal policy.'
Whilst the US focuses on stimulus the EU leaders summit next week does not mention stimulus at all. That could be because it broke new ground on that issue last year ‘with unprecedented consensus on monetary support and common fiscal spending.’
But the finance ministers meeting last week 'committed itself to avoiding a “premature withdrawal of fiscal support” and to a “supportive [fiscal] stance” not just this year, but in 2022 as well. Participants in the discussions note strong agreement over the need to avoid repeating the mistake made during the previous crisis of turning off the fiscal taps too soon.’
That is good news, some worry about the slow progress in actually spending the money whilst others hope that will give Europe a chance to see how successful the US option is and be encouraged to 'go large’ too.
It also notes that 'the path to greater fiscal action is not straightforward. Ensuring that budget discipline is not allowed to kill the recovery depends on a politics of multiple omertà, in which discussion of issues where consensus is lacking is quietly set aside. These include the risk of renewed market concern about high-debt countries’ finances, whether national governments will spend EU grants wisely and how to reform the fiscal rules before they are reinstated.’
I think key to the recovery is that central banks don’t back out of their commitment when the recovery starts and signs of inflation appear. The Fed seems well aware of the mistakes post GFC in tightening too quickly and hence its willingness to accept some inflation in certain areas if it is accompanied by real growth in the economy. For the Fed wage inflation seems to be the only real concern with other areas seem as merely temporary. As demonstrated by its willingness to allow bond yields to surge. Which I think also means it will be stronger in the face of market taper tantrums when it does decided to taper.

Yellen defends tax increases for infrastructure projects. Page 3
In the face of questioning/criticism from Republican lawmakers. Key points she made were that the proposals were part of the next stage of the Biden economic agenda and that they would not “hurt” small businesses or lower- and middle-income Americans.
She said “We do need to raise revenues in a fair way to support the spending that this economy needs to be competitive and productive,” Yellen said in response to questions from Ann Wagner, a Republican representative from Missouri.“A package that consists of investments in people [and] investments in infrastructure will help to create good jobs in the American economy and changes to the tax structure will help to pay for those programmes.”
Areas in focus are raising corporate income tax from 21 per cent to 28 per cent, an increase in the top tax rate for the wealthiest income bracket, and higher capital gains tax rates for millionaires.
She also to rebut worries that excessive spending could backfire on the economy. Yellen said because of the stimulus, the US economy “may return” to full employment next year, completing the recovery from the pandemic. Again underlining the focus on employment over inflation.

Companies & Markets 
Banks’ $750bn for fossil fuels conflicts with green pledges
• BNP financing biggest in Europe
• Net-zero plans ‘dangerously weak’Activist, noteably the Rainforest Action Network are researching banks actions to see if they are in line with the green pledges being made and coming up with some embarrassing results. An interesting read and it will make financing some projects a lot more difficult going forward but it is likely that those engaged in such projects will still find funds but have to pay more for them.

Levitating Music industry revenue reaches 18-year high after streaming-led recovery
'Revenue in the global music industry reached its highest level since 2002 last year as paid-for streaming subscriptions and strong growth in Latin America and Africa continued to drive the sector.’
Worth a read, it doesn’t mention China but Tencent Music’s deal yesterday with Warner whch also underlines how streaming music in China has changed the market.

Chip demand from bitcoin miners is stoking the surge in prices
Also makes the point that the electricity consumption is huge too but the current rally in bitcoin and other crypto’s mean they are able to pay more for the high end chips needed to make the complicated computations. With currently fat margins they are willing to pay for more computers with better chips.Interestingly 'A shortage of gaming chips has persuaded chip-maker Nvidia to programme a new chip to slow mining efficiency by half when it detects it is being used to mine cryptocurrency.’
TSMC and Samsung are the largest source of chips for crypto mining and with a view to being profitable it says they have diverted production capacity to crypto from industries that need a continuous supply. Crypto miners are also buying 'computers and servers, which is pushing up demand for traditional Dram chips used in PCs. It does not help that the second quarter is traditionally the peak season for chips used in servers, crucial to the businesses of big tech groups such as Google and Facebook.’
It also notes in addition to the crypto demand surge other industries like game consoles and smartphones have looked to stockpile. It mentions 'An engineer shortage cannot be ruled out either. Taiwanese prosecutors have accused Beijing-based Bitmain Technologies, the world’s largest crypto-mining equipment maker, of allegedly poaching more than 100 local engineers.’
It concludes 'Critically, chips are one of the most expensive components of consumer electronics devices, such as smart-phones and PCs. Increased supply to bring down prices will not be fast in coming. The process of sourcing raw materials and producing chips, which used to take at least three months, is getting longer. Building capacity takes years. There are few other suppliers that can produce at scale. Experience suggests that mining stops being profitable for most when the price of bitcoin falls below $3,800. That is a long way away.’
It doesn’t mention also the fact that the US action against Huawei meant that it tried to stockpile as many chips as possible before the US ban became effective. No doubt China is aware of the potential for more sanctions and trying to ensure it doesn’t face the same problem again. But as noted building a domestic supply business is not easy and it lacks many of the key skills.
For investors it underlines that the hardware suppliers remain a good investment for the foreseeable future.

Geely launches premium electric car brand
Seeking to compete with Tesla in the high end EV market under the Zeekr brand alongside its parent company, with deliveries expected to start in Q3.Geely has weathered the pandemic relatively well and China is key auto market. But the luxury EV marketing China is as competitive as the rest of the auto market in China.
It concludes 'Geely hopes the shift into China’s premium electric vehicle market will help renew the brand’s sales momentum. But it will face fierce competition, not only from Tesla but also Chinese groups Nio, Xpeng and Li Auto, as well as global premium automakers set to launch electric models in China this year. Tesla’s Model 3 was the top-selling electric vehicle model in China in any segment last year.’
Lex Geely/luxury electrics: brand of hope. Key 'the Chinese group should have a home team advantage. Local electric car makers have long been favoured by China’s government. Electric car subsidies have been extended to 2022.Geely shares have more than doubled over 12 months, reflecting expectations of further growth potential in local markets. Zeekr may not topple Tesla from its place in the sales ranking. But a premium electric brand should boost Geely’s margins, as Lexus has for Toyota. ‘  +VE

Bilibili, China’s version of YouTube, set to raise $2.6bn in Hong Kong listing
The IPO priced at HK$808 (US$104) yesterday. Worth noting that Baidu, 'widely viewed as China’s answer to Google, finished their first day of trading in Hong Kong flat’.
Underlines the concerns about sanctions on China and businesses there. Many long term investors are keen on the names as alternates to the FAANG names but China, whilst it has many attractions is not the same market as the FAANG’s benefited from for their growth. Worth a read.

Downtrodden stock pickers see opportunity in rebound
Recovering US economy brings chance to beat passive rivals by identifying winners. An interesting read about the changing focus for portfolio’s as the US emerges out of the pandemic.
Key being the rotation out of momentum stocks into more value stocks that can benefit from operational leverage and strong valuations. Something that should benefit stock pickers and conviction investors says Tony DeSpirito, CIO of US fundamental equities at BlackRock. “This business cycle will be faster and there is a lot of pent-up demand. The dynamics of the cycle will play to the strengths of stock pickers.”
That could also mean a move out of passive funds.
It notes that regarding companies they 'are likely to perform very differently from each other in the economic upswing. Some have done a stronger job of cutting costs, setting them up for a strong rebound in earnings. Others have done a better job of latching on to technology shifts, especially in retail. Some stocks, however, are cheap for a reason. Struggling companies, loaded with debt, are unlikely to prosper after the pandemic ends.'
Interestingly Cit strategists say 'The broader equity rally has also attracted net inflows in to actively managed global equity funds so far this year, for the first time since 2013. The biggest beneficiaries have been in global equities, emerging markets, and funds with a sustainable investing focus, the bank said.’ That is interesting because it probably reflects how US equities have rerated to the change in position with regard to bonds whilst the rest of the world has not… yet.
It concludes 'But expectations of a significant rebound in economic activity are building, and are likely to push corporate profits sharply higher in the next 12 months. That is likely to support stocks of smaller and midsized companies, which typically prosper during a sharp economic upswing. Although these sectors have rallied strongly in the past six months, they still remain cheap compared with larger companies.“Small companies retain a significant valuation discount to large-cap stocks,” said Jill Carey Hall, head of US small and mid-cap strategy at Bank of America.’
It will be interesting to see if this is the stock pickers moment in the limelight.
For me I still like companies related to Auto’s although not the likes of Tesla where the valuation seems out of kilter. I like the stocks associated with Home Builders and Home improvements (Techtronics has been a long favourite); a year of people being stuck at home has made them realise the benefit of better home layout. I also think that infrastructure plays will do well as stimulus for the recovery along with green power projects.Last year I was a fan of gold and still like it but I think is in ahead zone for a while, probably until mid 2022, when we see real inflation taking hold.

Banks stand firm on prediction for oil supercycle despite drop in price
Banks calling for an oil “supercycle” have said the 14 per cent tumble in the price of crude in recent weeks marks a pause rather than the end of what they see as a sustained move higher.Worth a read the outlook is one of improving demand as inoculations get underway but the potential for hiccups along the way remains high as seen in the renewed lock downs in Europe and the ability of the virus to mutate. Plus the availability of supply. But as we get more informed about the virus and able to cope the outlook is improving.

WeWork tells investors of $3.2bn loss in pitch to raise funding
Company looking now to list via a Spac 'The “Project Windmill” documents show that WeWork is aiming to go public at a valuation of $9bn including debt, through a merger with a special purpose acquisition company, or Spac.’
The eventual deal will still have implications for Softbank its largest backer.
An interesting read about the business see also LEX WeWork: Spac community effort
Concludes 'WeWork expects occupancy to recover to rise to 90 per cent in 2022. That looks like typical ebullience. But it would make sense if more companies opted for flexible work space contracts and used lower occupancy, short-term leases for hybrid working models.Still, that does not mean, as WeWork claims, that revenues will more than double from last year to $7bn by 2024. WeWork’s model of packing lots of workers into shared offices may not appeal if the pandemic lingers. Plenty of landlords and flexible office space providers will court tenants if it ends. Neumann has left the building but WeWork’s lofty ambitions have not.'

For Interest 
Dispute over $12bn Spac deal deepens
Dyal squeezed by Golub as it plans to create big US investment group. Whilst Spac’s are talk of the town deals are not always easy.Key being 'A contentious three-way merger to create one of the biggest investment groups in the US has hit new turbulence after a Wall Street lending company cut off payments to one of the businesses.
Dyal Capital, which specialises in buying minority stakes in privately held investment managers, is planning to merge with one of its portfolio companies and then to list the combined group via a deal with a special purpose acquisition company, or Spac.
The $12.5bn plan has proved controversial since it amounts to Dyal going into competition with the some of the investment managers in its portfolio. Two of them are suing to halt the deal.’
First court round starts today.

Kraft Heinz bets on old favourites to satisfy hunger for comfort food
Drive to expand market share marks shift from focus on M&A espoused by key investor 3G.
An interesting read about turning around a company that was once a market darling.

Opinion Hopes and fears for the global recovery
Growth is accelerating but significant economic, health and social risks remain. By Martin WolfOutlines the what has happened so far and how the pandemic has had very different impacts globally and individually.Concludes'Yet we limit our success by our difficulties in co-operating, even when vital interests are threatened. The pandemic and the bigger challenge of climate change show us how much we depend on working together successfully on shared challenges. But the reality remains one of deep division, and the suspicions that inevitably follow.
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 lacks the means, but rather because we lack the will.’
An interesting read.

LEX Facebook: billion-dollar botsFacebook has a problem with fake accounts, which exaggerate its advertising reach.Concludes'There are two potential repercussions from inauthentic accounts. Advertisers could use these to argue for lower rates, slowing revenue growth. Facebook could also decide to increase spending on fake-busting measures. That would hold back operating margins that have climbed from 34 per cent in 2019 to 38 per cent in 2020.
Pervasive fakery is just another aspect of big tech that undermines its credibility with politicians, regulators and the public.’I wrote recently in the ineffectiveness of targeted on line advertising, the addition of fake accounts just compounds the issue.

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