Mar 30 FT Arch Ego's, Suez, China loans to Africa drop, Inflation, Xinjiang and Cold Wars

30 Mar

MARKETs at 2:45pm HK time 
Initially traded higher to 6,836 in the first 20 minutes then trended lower for the rest of the day to close just off the lows at -61pts (-0.9%)@ 6,738
Pre market Unemployment data was in-line and retail sales beat. Markets saw choppy trading throughout the day. Nomura closed -0.7% @ Y 599 off the initial lows (Y 580)
Nikkei opened lower but initial traded higher in choppy trading but then sold down totes 29,280 support before bouncing into lunch but still in the red. PM opened higher in the green and effective traded sideways to close +48pts (+0.2%) @ 29,433
Topix opened lower and trended lower with support around 1,970 level. PM opened higher but still in the red and traded sideways to close -16pts (-0.8%) @ 1,978
Data Unemployment Rate Feb 2.9% vs 2.9% Jan (F/cast was 2.9%)
Jobs/application Ratio Feb 1.09 vs 1.1 Jan (F/cast was 1.1)
Retail Sales Feb -1.5% YoY vs -2.4% Jan (F/cast was -2.4%)
Retail Sales Feb +3.1% MoM vs -0.5% Jan (F/cast was +0.2% MoM)Tomorrow we get Industrial Production, Housing Starts, Construction Orders
Kosdaq opened slightly higher and worked higher through the morning to test 960 around 11:20am and then again over the following 90 mins but unable to break above, so retrenched to 957.5 before working slightly higher to close +4pts (+0.4%) @ 958Kospi opened higher and world up to 3,075 by early afternoon and then traded sideways to close +34 pts (+1.2%) @ 3,071Tomorrow pre market Business Confidence, Construction Output, Industrial Production, Manufacturing Production, Retail Sales.
Opened higher and tested 16,520 in early trades but failed to break about and sold down to 16,440 level. Rebounded to earlier high but failed to break above and sold back down to 16,440 level before working higher to close +79pts (+0.5%) @ 16,555 Still seeing good company earnings and good local sentiment.
CSI 300 opened slightly lower but worked steadily higher through the morning to 5,106 just before lunch. PM opened flat but trended lower to 5,080 level and then traded sideways Currently +40pts (+0.8%) @ 5,087Tomorrow we get Official Manufacturing and Non Manufacturing PMI
Pre market opened @ 28,553 +215pts vs +83pts ADR’s @28,421 but initially sold down to 28,400 level which is about where the ADR’s were indicating. Then rebounded and worked higher for the most part, to 28,672 at lunch. PM opened lower and traded sideways in choppy trading currently +269pts (+1%) @ 28,610
At lunch Tencent and Chinese Banks weak but broader market in the green
After market we get Feb Retail Sales (Jan was -14.5% YoY, f/cast is -7% YoY)
Expect markets to open higher following the US rebound although covid concerns remain.Pre market data +VE so far.
London’s FTSE is seen opening 22 points higher at 6,765, Germany’s DAX up 51 points at 14,883, France’s CAC 40 up 14 points at 6,036 and Italy’s FTSE MIB up 137 points at 24,256, according to IG.
Data OUT
Import Prices Feb +1.7% MoM vs +1.7% Jan revised (F/cast was +1.2%)
Import Prices Feb +1.4% YoY vs -1.2% Jan (F/cast was +0.9%)
Due later Inflation Rate
Consumer Confidence Mar 94 vs 91 Feb (F/cast was 91)
Due later EUROZONE Economic Sentiment, Consumer Confidence, Consumer Inflation Expectations, Industrial Sentiment, Services Sentiment

US Futures 
Opened opened Dow +58pts and has advanced to +65pts,  S&P opened +0.2% now just above flat and NDX was +0.26% but now slightly -VE
Data Redbook, Case-Shiller Home Price, House Price Index, CB Consumer Confidence, API Crude Oil Stock Change
Earnings: Lululemon Athletica, Chewy, McCormick, BioNtech, FactSet, Blackberry, PVH

Nomura and Credit Suisse hit as Archegos sparks sell-off
• Hedge fund client in $20bn fire sale
• Banks warn significant losses likely
There are a number of articles looking at how Bill Hwang’s Arch Ego’s managed to amass significant leveraged position which then turned sour and prompted the selling that started last week.
Key at the moment is the losses with the primary banks involved which seem to be; Nomura, Credit Suisse, Morgan Stanley and Goldman Sachs. With the major impact being at Nomura and Credit Suisse. Further collateral damage seems at this stage to be limited.Going forward I would expect more regulation of family offices. There will be a lot of examination but the key seems to be draw of trading revenues for the banks and the potential profits for the Prime Brokers from lending.
Hwang returned to the banks’ good books — then blew them up
Prime brokers shook off concerns about Archegos as they set sights on lucrative lending
Also Markets Insight Archegos blow-up exposes Wall Street to some hard questions by Robin Wigglesworth.
Lex Archegos/ViacomCBS: bump in the night and also Nomura/Credit Suisse: mauled by a Tiger cub

Open water Suez Canal gets back to business as container ship floats again. A number of articles on the events in the Suez Canal and the implications for supply chains, shippers and insurers.

Cameron faces probe into links with Greensill at heart of UK government. The previous scandal remains in the news as the former UK PM now faces an inquiry into his actions with regards to Greensill

Lab leak ‘unlikely’ to have led to pandemic (Page 2)
Virus probably jumped from animals to humans in late 2019, finds WHOYou can find a summary of the report here
I think the key aspect is that a lot of questions remain unanswered, the limited scope and the delay in getting access to ground zero is appalling but it illustrates that China can be a helpful or unhelpful when it comes to global affairs.

US infections bring sense of doom, admits top health official (Page 2)
Looks at the rising cases in the US despite the ramp up in vaccinations new cases are starting to accelerate again. I wrote last week about the start of ’Spring break’ and the fact that some were ignoring the threat. That seems to be what is happening. As inoculations increase more people let their guard down and the virus’s spread increases. That will have implications on the prospects for the recovery. The larger worry for now is that will the approach of Easter and increased travel we may see a further increase in the coming weeks.
See also India. Virus cases at 5-month high. Illustrates that other countries in addition to the US are facing the same issue.  Again in India’s case the fact that people want to celebrate festival’s and no doubt return to a semblance of normality carried huge risks.

Suez Canal ship finally free in boost for global trade (Page 3)
Heavy duty tugboats and dredging operation re-float the Ever Given container giant, allowing critical artery to reopen.The immediate reaction was the fall in oil prices. The canal’s management have said they will now allow 150 ships to pass per day to ease the backlog. That could put further strain not only on the pilots who guide the ships but also on destination port operators who are likely to see deluge of ships arriving putting pressure on already strained logistics.For the shippers it is likely to mean a slight reduction in rates and negates the need to re-route ships.
Maritime crisis stirs too-big-to-sail debate (Page 3)
Larger vessels have brought economies of scale but also infrastructure problems.To me the key is scalability, modern ships are designed to be as efficient as possible. The article says 'The chief executives of AP Moller-Maersk and Hapag-Lloyd, two of the world’s largest container groups, have both said the latest container ships are the right size to handle the demand for global freight.’ Also 'Ships of this size are both more efficient and environmentally friendly, he said. The sheer scale of modern container vessels means they are estimated to be two-and-a-half times more energy-efficient than rail and seven times more than road, according to the World Shipping Council.’
It is worth remembering that this ship had a qualified pilot on board button he was caught off-guard by strong winds. Admittedly these huge vessels are prone to wind due to stacking of containers but they also have weight to compensate so, if wind was the issue it just goes to show that you can’t beat nature.
It does mention ‘the largest container ships have reached the material limits of length: stacking containers higher makes such ships more susceptible to high winds, while stacking them wider can increase hydrodynamic forces that make them harder to steer in tight spaces, such as ports and canals.’
Their current size reflects the lean years of the past decade when even smaller ships struggled to be profitable often sailing half empty. The new large vessels operate on a hub basis; serving large ports and allowing smaller ships and land logistics to complete the last mile. Shipping has followed the same path as airlines.
The article mentions Marc Levinson, a historian specialising in containers, who says shipowners bare a significant responsibility for the mess in global supply chains because of their pursuit of ever-larger vessels. I would disagree. They are meeting the development of global supply chains in the best, more cost efficient way they can. There is a range of vessel sizes each with a role in the chain.
I was on the largest refrigerated container vessel a couple of years ago, the size is amazing but they are crewed by relatively few crew and are largely at sea. The fact that they are involved in relatively few instances that make the press illustrates how good they are a their job which as the end of the day is servicing the global economy.
The article concludes by saying 'Still, the industry does seem to have taken at least some notice. The order book shows evidence of shipowners starting to downsize their workhorses of global trade towards vessels of about 15,000 containers.’
I think that just reflects the need for smaller vessel to access some ports; just like aircraft.
The bigger question for the shipping industry at present and a reason for orders being low is emissions and trying to work out what type of engines ships will run on in the future to meet emission standards.
Another article in the Companies & Market section
Suez Canal salvage costs set to push insurance claims into hundreds of millions of dollars looks at the insurance costs with the expectation that it will be another large loss event for the reinsurance industry following US winter storms, Australian floods and coronavirus-related losses.   Notes the Salvage costs will typically flow to the hull and machinery insurer.  Shoei Kisen Kaisha, the Japanese owner of the Ever Given, told the Financial Times last week that this cover was provided by Tokyo-based MS&AD Insurance Group.
'Other claims could flow to the ship’s protection and indemnity insurance, provided by the UK P&I Club, a mutual insurer owned by shipowners.’
The UK P&I Club is one of 13 mutual insurers under the International Group of P&I Clubs, that share their large exposures. 'Under this arrangement, UK P&I would pay the first $10m of any claim. Further losses up to the $100m level are shared with the pool. Beyond that, the group has $3bn worth of reinsurance cover.’
The real cost is likely to be to the consumer with the expectations that shortages due to the delays could push prices up.

China lending to Africa falls as fears rise over high levels of debt (Page 4)
'China’s lending to African countries fell substantially before the pandemic hit, according to new research, suggesting lenders became concerned about the sustainability of rising debt levels on the continent.'
The drop is from $28bn five years ago to $9.9bn in 2018 and $7bn in 2019 (Figures from the China Africa Research Initiative (Cari) at Johns Hopkins University). Which is in line with data from Boston University.
Key being that China reduced lending to countries that had recently restructured or reprofiled their debt. 'Banks cut lending to Angola, Cameroon, Djibouti, Ethiopia and the Republic of Congo. Top borrowers were Ghana, South Africa, Egypt, Ivory Coast and Nigeria.’
It mentions that 'Zambia, which has borrowed heavily from China as well as from commercial lenders, this year became the first African country to default on its eurobond loans.
Ethiopia, another big borrower from China, last month asked for debt relief under a G20 programme designed for countries whose economies are suffering because of the pandemic.
“The Ethiopian government stopped borrowing” commercial loans, said a Chinese official in Addis Ababa, because “they have too many loans”.’
Notes that some feel that China is trying to ensnare African countries in a debt trap in order to seize assets or ensure compliance with Chinese wishes, such as at the UN. Other doubt that; quotes Deborah Brautigam, director of Cari, who says 'China’s lending strategy aims to create new markets for Chinese companies, she said. Chinese lending from banks and institutions was increasingly commercially driven, rather than engaged in a joined-up strategy directed from Beijing, she added.’

I think it's a combination. Key for me is that these projects are not aid. They are commercial projects. They usually involve Chinese companies being given contracts, so for the banks it is akin to lending to SOE’s. But the Chinese banks are under pressure due to demands for finance within China and last year President Xi was criticised for lending to Africa when there was need in China.
Also many African countries have seen how the deals are far more beneficial to Chinese companies and workers than domestic ones and hence they do not have local multiplier effect for the domestic economy. You get a new railway which may result in more commerce but it was built by Chinese companies with Chinese labour. African countries are increasingly aware they need to fund projects where the contracts go to local companies and local workers.
They are also aware that Chinese loans usually come with non disclosure clauses which means when they approach western lenders, who ask about their existing loans they are unable to declare the numbers, which can result in not getting loans and in some cases not getting aid packages.
As the Chinese point out, many African countries already have too many loans.

Biden turns to offshore wind in green push (Page 4)
White House sets power generation target in bid to hit decarbonisation goals.He kicked off with a target of 'generating 30 gigawatts of electricity — enough to power about 10m homes for a year — from turbines operating in coastal waters by 2030.’
It is also expected to generate jobs and capital investment. Under Trump such projects were delayed and frustrated but Biden’s administration has changed that. It is likely the his infrastructure spending plan will also include renewables.
Worth remembering that off-shore wind farms require a lot of copper and aluminium in order to link them into the grid, so gives support for the continued commodity cycle.

South Korea leader fires chief economic aide (Page 4)
President Moon Jae-in on Monday fired his top economic policy adviser for raising the rent on an apartment he owns in Seoul’s affluent Gangnam district by 14% two days before the 5% rent cap was introduced. Comes amid a public furore over skyrocketing home prices. It has also damaged President Moon’s approval ratings to record lows just ahead of important mayoral elections which many will view as a referendum on President Moon. Comes after the scandal involving claims that officials at Korea Land and Housing Corp (LH), the state-run developer, used insider information to buy farmland in areas designated for public housing. That is currently the subject of a Police investigation which has been expanded to other state agencies and the presidential Blue House.
Another case of property prices impacting politics. New Zealand has put the onus on the Central Bank to address the issue. I am sure China has told the HK administration to sort out the issue too, despite Michael Cheung denying his FT interview. Property prices seem to be a universal Achilles heel for governments.

Companies & Markets
Crossing continents Facebook to lay two submarine cables linking US and Indonesia
'Facebook will lay two submarine cables connecting the US with Indonesia for the first time as the Silicon Valley group boosts its focus on the world’s fastest-growing population of smartphone users.’ Facebook and Alphabet are funding the Pacific Light Cable network, it was going to land in Hong Kong and link Taiwan and the Philippines too but Washington was worried about the exposure of data to China. A second Facebook project, it notes, to link Hong Kong-Americas via another submarine fibre-optic cable to California was also abandoned following US government concerns.
Interestingly it quotes Claude Achcar managing partner of Asia-focused consultancy Actel Consulting, who said countries in the region other than China were more important to tech companies in terms of users and growth.“Submarine cables go hand-in-hand with the exponential growth of cloud [computing] services,” Achcar said. “Markets such as Indonesia, Malaysia and the Philippines are now being developed by hyperscale providers including Facebook, Google, Alibaba and others.”
It does raise the question of how not being connected to the US will impact Hong Kong’s future, data capacity will be important in the future.

Cross-asset. Inflation. USA Inc lumbered with growing costs burden
Supply chain strains together with rising outlay on materials and labour are starting to bite
People can see inflation happening. 'The 3M conglomerate has flagged rising air and freight costs, while Walmart has warned on congestion in US ports. Mobile home manufacturer Legacy Homes and Williams-Sonoma, purveyor of Breville espresso machines and Wüsthof knife sets, have seen an uptick in wage costs. Barbie maker Mattel has warned on the rise in plastics prices, exacerbated by a Texas storm that took petrochemicals plants offline.’
Prices are rising the question is whether it is permanent or not and we don’t know whether it stays a trickle or starts to roar.The Fed has indicated it believed it is manageable and I think they are less concerned about price inflation but focusing on wage inflation as being the key indicator.
The article says 'One measure of inflation expectations, the 10-year break-even rate, climbed to its highest level since 2013 last week, at 2.36 per cent. Officials with the Federal Reserve have also lifted their inflation forecasts. The Fed’s preferred gauge, the core personal consumption expenditures index, is expected to reach 2.2 per cent by the end of the year from 1.4 per cent now, according to Fed projections. Three months ago, the central bank’s officials had been pencilling in a 1.8 per cent increase.’
It is also expecting GDP growth of 6.5%, other put it higher. But prices for Aluminium, copper, oil and lumber have already surged. Quotes Curtis Drew Hodgson, co-founder of Legacy Homes “Every commodity that we buy, or many of the commodities we buy, we’re having price increases, We’ve even had to give labour increases because just to get people to come to work, we pay them now $1 an hour more if they just come to work, in addition to their wage.”
I think that is important, whilst the Fed thinks many of these rises will be temporary as the recovery gets underway and will diminish as supply chains re-connect; that is not certain.
The key is that no one knows. The Fed doesn’t want a re-run of the mistakes after the GFC and hence is focusing on wage inflation. But this isn’t a re-run of the GFC. But as long as there is growth then some inflation can be accommodated, the trouble we don’t know how much.

Growth in ETF activity heightens fears about funds with illiquid holdings
Worth a read. 'The surge in ETF investment is beginning to spark concerns that retail investors will not be able to differentiate between exchange traded funds that own securities which are easy to trade and those with illiquid holdings.’
Makes the point that the more specialised the ETF the more likely it is to hold illiquid shares; based on data from FactSet.
Concludes 'The solution is to do more homework, said Anita Rausch, head of capital markets at WisdomTree, a provider of exchange traded funds.“What I think retail investors, or any investor for that matter, needs to understand is the price/value of what they are buying relative to the fundamental value of the underlying constituents,” she said.’
Highlights how ETF’s are not always a simple solution and that some due diligence is required.

LEX Fashion brands/Xinjiang: losing their thread
Basically acknowledges that China is an important market but so area human rights. The clash of ethics and profit.Says 'First came the splinternet: a worldwide web bifurcated by China’s firewall. Now T-shirts and trenchcoats look set to follow suit.’
Concludes 'Staying neutral is not an option, although some appear to be giving it a shot. Inditex made a statement condemning “highly concerning” allegations of labour malpractice — which has now gone from its website.
For tech, the choice was out of their hands: Facebook and Google’s search operations are banned in China. Fashion, facing a backlash on both sides, must make its own decision. But there is a price to pay for staying friends with China by using garments forced labour may have produced. It is the much-vaunted ethical status prized by western fashion brands.’
With the growth of ESG I think the issue is going to take on more prominence ahead.

Opinion GLOBAL AFFAIRS. A second cold war is tracking the first  by Gideon RachmanLooks at the similarities between US/Russia and US/China
A good read. It concludes 'Technological rivalries are once again at the heart of superpower rivalry. In the first cold war, it was nuclear technology and the space race. Today’s superpower rivalries are focused on 5G telecoms and artificial intelligence.But the technological clash is taking place in a different context. Forty years of globalisation have ensured the deep integration of the economies of China and the west. Whether that integration can survive the intensification of great-power rivalries is the biggest open question about the new cold war.’
I think the next couple of months will be key as the Communist party approaches it 100th anniversary and Biden approaches his first 100 days. The lines for future engagement will be set.

For Interest BoE orders lenders to get approval for EU relocation
The BoE has reasonable concerns that EU regulators are asking UK financial institutions to move more jobs to the continent than is necessary. 'UK politicians and regulators have long been concerned that their European counterparts are trying to poach as much financial services business as possible under the guise of repatriating robust oversight of all euro-related financial activities. They fear the loss of associated jobs, taxes and prestige.’
A key issue between the UK and Brussels is the granting of ‘equivalence’ to British regulations. Just goes to show whilst Brexit happened there is still a lot of sorting out to do.
It also suggest that Brussel is still vary of being seen to be too easy on the UK in case other EU countries decide they too want to leave.An interesting read.

FT BIG READ. US EMPLOYMENT. ‘The ultimate David and Goliath story’
Amazon has become the focus of an intense debate about pay, race and inequality. Victory in a campaign to open a union at one of its facilities in Alabama would be a coup for the American labour movement.

Editorial Leasehold contracts have had their day
Britain can improve situation of tenants while pursuing deeper changeWorth a read; change is needed. It concludes 'Reducing the potential for freeholders and property managers to take advantage of tenants will hurt many good operators too: the shift in power that results from making it cheaper to usefully extend the leasehold contract may reduce the resale value of existing freeholds. But appropriate and affordable redress for that could no doubt be easily fashioned. Leasehold has become an inappropriate contract for modern Britain. Landlords can, however, reassure themselves that, historically, the end of feudal arrangements has been far less favourable to those at the top.'

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