MARKETs at 3:15pm HK time
Asian markets sold down despite good data with concerns about rising US rates and new Chinese policy.
FT online China focuses on booming post-Covid economy at annual meeting
National People’s Congress set to be dominated by concerns over stability and rising debtThe NPC kicks off in earnest Friday and the expectation is that it will focus on monetary and fiscal policy will the aim of stabilising the economy and dealing with the growing risks of asset bubbles and debt defaults, making further stimulus unlikely. The question is then about tightening when the economy had clearly not fully recovered; with domestic consumption still lagging.The other key topic will be Hong Kong electoral changes and the impact that could have. The article notes that last year the pro-democracy elements overestimated their power. One wonder is this year Beijing might fall into the same trap.
Announced Trade surplus of A$10.142 billion (about US$7.88 billion) vs 6.5 billion F/Cast
January retail sales +0.5% MoM on a seasonally adjusted basis, vs +0.6% F/cast
Nikkei opened lower at 29,200 level and traded sideways for the first hour before trending lower into lunch at 29,000. PM after the Consumer Confidence came out better than forecast the selling continued down to 28,700 level which was tested a few times before reversing and working back to the lunchtime level but found resistance and eased back to close -629pts (-2.1%) @ 28,939
Topix traded in a similar way to close -20pts (-1%) @ 1,885
Foreign Stock Investment Y-454.6b vs Y+93.5b prior revised from 94.1b
Foreign Bond investmentsY-1718b vs -1888.7bn prior revised from -1893b Midday
Consumer Confidence Feb 33.8 vs 29.6 Jan (F/cast is 30.8)
Pre market data; inflation rose more than forecast and Growth was slightly better but markets following the US sell off with Tech under pressure along with large caps.
Kosdaq opened lower and sold down to 920 level in the first 5 minutes then effectivel traded sideways dipping to 917 level around 1pm but then working better from there to close -5pts (-0.5%) @ 926
Kospi traded in a similar pattern to close -40pts (-1.3%) @ 3,044.
Foreign Exchange Reserves Feb $447.56b vs 442.73b ( F/cast was 449b)
Inflation Rate Feb +1.1% YoY vs +0.6% Jan (F/cast was +0.9%)
Inflation Rate Feb +0.5% MoM vs +0.8% Jan (F/cast was +0.3%)
GDP Growth Rate Final Q4 -1.2 YoY vs -1.1% Q3 (F/cast was -1.4%)
GDP Growth Rate Final Q4 +1.2 QoQ vs +2.1% Q3 (F/cast was +1.1%)
Opened lower following the lead from the US the trended lower through the morning to 15,840 around 12:30 before working higher to close -305pts (-19%) @ 15,906. Closing below 16k for the first time in a month and despite good local data and earnings as investors react to rising US yields.
CSI 300 opened lower and trended lower through the morning to 5,284 before a small uptick into lunch. PM opened sligthly higher but continued the downward trend to a low of 5,255 then saw an uptick to close -172pt (-3.2%) @ 5,281
Pre market opened @ 29,525 -354pts vs -280pts ADR’s
Ecommerce weak along with most Chinese Financials but BoC HK +4% on GS TP upgrade. Market traded sideways for the first 30 minutes but then followed China and trended lower hitting 29,102 at lunch. PM opened higher and traded sideways around 29,200 level. Caution ahead of the NPC and CPPCC meetings seen in broad based weakness; E Commence leading the declines along with Chinese Financials.
Reported at lunch
Wharf Underlying NP -24%; CITIC Telecom NP +2.1%,
Prosperity REIT 2H20 DPU 8.92 cents
Expect markets to open lower following Asia and the US.
FTSE 100 is seen around 67 points lower at 6,608, DAX is set to fall by around 118 points to 13,662 and CAC 40 is expected to open around 41 points lower at 5,789, according to IG data.
Lufthansa posted a smaller-than-expected net loss in the fourth quarter but saw a full-year loss of 6.7 billion-euro ($8.1 billion) in 2020. +VE
Earnings from Thales, Merck, ProSiebenSat.1 and Aviva among those reporting before the bell.
EUROZONE Retail Sales, Unemployment Rate, Construction PMI
GERMANY Construction PMI
FRANCE Construction PMI, Retail Sales
UK New Car Sales, Construction PMI
Opened in Asia Dow -62pts but now -95pts S&P -0.3% and NDX -0.5% with caution ahead in initial claims data and Friday payrolls data.
AHEAD Challenger Job Cuts, Initial Claims, 4 week Average Claims, Continuing Claims, Factory Orders, EIA Natural Gas Stocks Change,
Earnings: Broadcom, Costco, BJ’s Wholesale, Gap, Burlington Stores, Ciena, Michael’s Cos, IMAX, Kroger, Cooper Cos
Earnings After market Wednesday
American Eagle Outfitters +7.2% (was 1.3% normal hours) on better-than-expected Q4 results. The retailer also said overall comparable sales declined just 1% as strong online sales mitigated mall closures.
Snowflake -0.8% (was -8.7% normal hours) after lackluster full-year revenue guidance.
Okta -10.6% (was -6.9% in normal hours) on news it's spending $6.5 billion to acquire rival Auth0. The deal is expected to close by July. News of the deal overshadowed Okta reporting better-than-expected earnings and revenue for the previous quarter.
Vroom -11.6% (was -8.3% in normal hours) as reported revenue missed
Pre market Thursday BJ’s Wholesale and Kroger are among the names reporting
After market expected Broadcom, Costco and Gap
FT On line
Evergrande courts Hong Kong tycoons to rev up electric vehicle push
Poker-playing billionaire’s wife pumps cash into indebted Chinese property group’s car projectLooks the what could be another disaster waiting to happen; China Evergrande has managed to use its connections in Hong Kong and elsewhere to stay afloat but many think it’s a bubble and obviously then could burst with disastrous results. An interesting read; its facing increasing difficulties in raising finance along the normal means. The risk is that it becomes too big to fail. China has put in place tighter finance/debt requirements recently but the amount of debt it already carries is a worry.
Jack Ma’s Ant forced into arms of banks he once dubbed ‘pawnshops’
Fintech will have to rely on state-owned behemoths under online lending reforms.
Looks at the changes that will impact Ant which reveals how much Ant was changing the established situation. The aim being to slow Ant but that will also hurt a lot of regional banks and its other partner financial institutions. It increases costs of banks will have to complete their own financials assessments of clients rather than relying on Ant’s data and assessment. F
or banks more used secured lending and business loans that will be difficult to replicate with the same degree of certainty. A running theme is that Ant has to share more of its consumer data; which has been a key part of its success, collecting the data and analysing it well.
A big success of Ant’s model was laying off risk and still earning fees; this is being curtailed.
The article notes 'But an expansive application of the rule would turn Ant from an asset-light tech company into a capital-heavy business more akin to a bank. Bernstein noted a shift to on-balance sheet lending would actually improve Ant’s profitability, as the company would earn the interest income, but would also lower its return on capital.’It concludes '
Even though Ant reached a restructuring deal with Chinese regulators, the reorganisation of its business as a financial holding company will bring it directly under the thumb of the central bank.
The People’s Bank of China in January also took the unusual step of issuing draft rules that would allow it to push for the break-up of payments companies such as Ant on antitrust grounds.’
It would appear that China is more concerned with curtailing Ant rather that advancing its state of the art application of tech to lending. It will also hurt the smaller regional banks and at the end of the day; many Chinese consumers. It also highlights the party’s fear of anything that might hold more power that it does over peoples lives.
Sunak flags up UK tax rises. The UK Budget, corporate tax rises but ahead of that a 'super deduction’ of 130% of their investment from taxable income.See also UK chancellor unveils spend now, tax later plan to boost recovery (Page 2) Spend now tax later and Lex UK Budget/corporate tax: Sunak raises it up
Greensill Bank accounts review triggers criminal complaint
• BaFin cites Bremen lender • UK parent to file for insolvency • €500m hit for institutional depositors (retail depositors covered by Germany’s public deposit insurance scheme).Key being that a rescue deal with Apollo is likely to wipe out shareholders -VE for Softbank
German intelligence puts Af D under surveillance amid extremism fearsThe party to be formally spied upon which could impact its chances at the September Bundestag elections.
US ditches regime change foreign policy (Page 2)
Secretary of state lays out new administration’s approach to diplomacyKey is the acknowledgement that past ‘well intentioned’ actions have not worked. In future looking to work with countries to solve problems they can solve on their own. Noted the threat from China’s authoritarian model. He said the world does not organise itself without the US influence things happen that can be harmful to US interests.'China was the only country that could “seriously challenge the stable and open international system”, he said, adding: “Where we have pulled back, China has filled in.”Blinken pledged to stand up for human rights in Xinjiang and Hong Kong, warning: “If we don’t, China will act with even greater impunity.”
Blinken has adopted a Trump-era assessment that the treatment of Muslim Uighurs in China’s Xinjiang region constitutes “genocide”, and has led global efforts to impose sanctions on leaders of the coup in Myanmar.’But Biden is facing criticism from failing to take 'sufficient punitive actions despite its pledges to prioritise human rights.’ As in the case of Saudi Arabia’s Mohammed bin Sal-man and Russian oligarchs in the case of Russian opposition leader Alexei Navalny.
For investors it seem to indicate a willingness to get involved but with reservations which should help bolster many countries view of the US as helpful and supportive. But it also reveals that China is going to be under constant pressure.
LEX China/commodities: blue steel. Expects coal fired steel and aluminium plant emissions to be in the firing line as the NPC sets out new policies. They currently account to 59% of crude steel and over 50% of aluminium globally. Prices are rising ahead of the NPC. Falling supply will push up prices which were already rising on the back of improved quality. Other options in the equation include using better quality iron ore would reduce pollution. Stock prices are rising and that looks to continue. Another key from the NPC will commitment to stimulus and building of infrastructure.
EU data protection laws need overhaul, says policy architect (Page 2)
Key being that “We have to be aware that GDPR is not made for blockchain, facial or voice recognition, text and data mining . . . artificial intelligence,” said the German MEP. “The digital world is about innovation. We cannot stick with principles established in the 80s that do not reflect the new situation we are living in.”
The article also quotes 'Sophie in’t Veld, a Dutch MEP involved in drafting GDPR, said it remained fit for purpose. “Is a law ever perfect for every individual and union? No, of course not,” she added. “But we worked on this piece of legislation for five years and we have prepared it better than any other legislation. The idea that we have overlooked something is not plausible. GDPR is also a very general piece of legislation that leaves lots of flexibility for implementation.”’
The key would seem to be that 'While GDPR has been seen as a template for the rest of the world, it has been hard to implement, and the European Commission has recently suggested that small businesses in particular are struggling with the rules.’
As often with EU legislation there are a lot of rules as it tries to address every issue rather than broad principles that are easy to understand and comply with.
That said id the architect says things are not working then, were it a building, you’d listen carefully.
Recovered patients and vaccinated more resistant to variants (Page 3)
New research yet to be peer reviewed suggests. Good news if substantiated for the population but a slight -VE to the drug companies whose vaccine might see diminished requirements.
Obesity strongly linked to coronavirus deaths (Page 3)It comes a close second after age. Key being that Obesity is increasingly an issue and many food manufacturers are still looking at easy to improve their products to cut out sugars and other dangerous elements. For investors it is likely to become theme of health investing along the ESG theme I think. The problem is that healthy eating can be expensive and lower income brackets then suffer more.
Quad allies to counter China with jab plan (Page 4)
Four countries in talks over vaccine rollout and Beijing influence in region
'The US is working with Japan, India and Australia to develop a plan to distribute Covid-19 vaccines to countries in Asia as part of a broader strategy to counter China’s influence.’
Aiming to make it part of the core Asia policy which is likely to go beyond just vaccines over time. This is probably one of China’s biggest fears a co-ordinated unified presence on its door step, hampering its ambition to grow its power base locally. The use of the vaccine would dilute fears that it was just about containing China and help the members of the Quad to demonstrate an aim to add value to the region.
Companies and Markets
Global standards are needed for vaccine passports to succeed
Looks at how Iata and the Commons Project are arguing about whose pass is more effective rather than working together to create a pass that would not only be useful for travel but could have widerer implications too. The fact that the two parties decided early on not to work in co-operation illustrates the vested interests that so often destroy a good opportunity before it has the chance to get going.
Hong Kong renewables fund battles Tokyo over subsidy cuts
An interesting read. 'According to people with knowledge of the dispute, which will be arbitrated under the UN Commission on International Trade Law rules, the case centres on a subsidy programme introduced by Japan in the wake of the 2011 Tohoku earthquake and tsunami, which prompted the long-term closure of the country’s nuclear generation capacity.’The Japanese Government fear is that the success of the claim could lead to further claims from others who have lost money investing in solar farms in Japan; says that over 250 solar companies have gone bankrupt in Japan since 2018 due to the Government’s policy change.Notes the fact that the fund (Shift Energy) resisted efforts to settle without formal arbitration could illustrate the amount of money and precedent involved.
Pandemic shakes up Prudential sales methods
Notes that agents have had to switch to video calls to sell products; with almost 30% of sales being agreed on Zoom; even in Asian markets.
Notes that 'Sales to mainland Chinese customers in Hong Kong, a significant and high-margin market, were “severely curtailed” by the closure of the border last year, the company said.New business profits in Hong Kong, where the group sells a range of protection, savings and medical insurance products, dropped 62 per cent year on year. Gross premiums earned across the group fell from $45bn to $42.5bn.’
A big driver for the company will be the easing of border controls between Hong Kong and China; unlikely before Q3. Shows the reliance of Hong Kong sales people to travel into China to sell these products and the preference for many mainland clients to have Hong Kong; rather than Chinese based products. Maintaining that preference could be difficult as China seeks to exert greater control over the administration of Hong Kong.
Investors troubled by UK listings revamp
Funds say proposal to lure Spacs and lift City’s profile poses threat to standards
Underlines the importance of investor protection but follows the past arguments wheeled out in other jurisdictions when change is proposed.
But it is true that in seeking to lure tech and Spac’s the risk profile will change. It was for that reason the US set up the Nasdaq because new tech companies could not meet the stricter requirements of the main board.
With Spac’s it is a similar issue that some of the companies that use that method may do so because they meet the normal IPO requirement and in which case more investor protection is likely to be required. It is also worth remembering that companies like to list in domains where their sector is well represented. It makes investor due diligence easier and ensures that the investor base is already familiar with the concept of the stock as well as the local investment requirements.
For example in HK we have Rusal (486 HK) its the only Russian based stock on the exchange and has never seen huge take-up because people need to understand first the HK market, then the aluminium market (we have Chalco too) but then they need to understand the Russian risk too. Investors are reluctant to go that extra mile for one stock in their portfolio. It would be different if there 20 Russian resource stocks listed then it might be worth while but for one, unless its exceptional, it is unlikely.
Same too with Tech and Spac’s. The US has the lead, European valuations for tech tend to trail the US so a Spac being able to acquire a European Tech company and list in NY makes good sense.
Resource names do well in London because of the range of them listed there. Nice quotes to end on 'Makram Azar, chief executive of Golden Falcon, the European technology blank cheque company that opted to list in New York, said: “The recommendations will no doubt spur investors to look at listings on the LSE in the future . . . this is the start of the sea change that’s needed.”
However, Russ Mould, investment director at stockbroker AJ Bell, said: “Spac deals may be booming in the USA right now, but fear of missing out is just about the worst possible reason for making any investment decision.” ‘
Activists tap deep well of vexation over Exxon
Heat grows for shake-up amid perceived rigidity, offhand treatment of investors and ‘destruction of corporate value’
Worth a read
'The message is similar from other big investors. Resentment at Exxon’s perceived offhand treatment of shareholders and hostility to change, coupled with the impression that it is not taking climate risks as seriously as investors do, is breeding discontent. “They haven’t played the environmental game very well, and ticked off that crowd,” said an executive at an asset manager with a large position in the company. “And their returns are terrible. They’ve kind of spun cash away and pissed off the pure-play financial investors.”’
Key is that after so many year of paying lip services to change but lobbying for a maintenance of the status quo the big oil companies are finally being forced to change but whether they actually can remains to be seen.
Redemptions of lesser quality eased trading turmoil, says BIS
Authorised participants were discouraged from redeeming shares, claims Basel institution
Looks at the liquidity problem the Exchange traded bond funds had last year. It puts forward the mechanism failed because ETF sponsors sought to off load lower quality bonds when it came to raising money for redemptions. Unlike equity ETF’s where units have set constituents the bond ETFs are more messy.
But some say that was not their experience that they offered a balanced selection but as John Hollyer, global head of fixed income at Vanguard, says; disputing the paper’s findings, “the presence of bond ETF discounts during this period was primarily a reflection of the higher costs and uncertainty in bond markets and was not a barrier to the arbitrage mechanism that underlies creation and redemption”.
An interesting read and highlights that in times of stress markets can experience unforeseen stresses .
Polymetal seeks to offset gold exposure with search for Russian copper deposits
Another fan of the longer term outlook for copper on the basis of transition to green energy from fossil fuels.
Copycat economics serves some EMs but is risky for others by David Lubin head of emerging markets economics at Citi.
In the past, at times, this has served EM’s well. But not every EM country will be able to adapt to the current 'low-inflation world, fiscal policy has the upper hand and central banks are accommodative’ world. Because they don’t have the monetary credibility; like Brazil and S Africa; in part because of their debt burdens.
A key feature being that they can’t lower long term interest rates to far because investors will feel unrewarded for the risks being taken.
Looks at India and notes that so far its credibility; despite the size of its debt has remained intact because of its future growth prospects.
He concludes 'Good luck to India — and to Brazil and South Africa should they follow. For investors looking at EMs, finding places where copycat economics still works may become a valuable skill.’As ever its the due diligence that risky to successful investing.
FT BIG READ. REAL ESTATE The reckoning that never arrives
Distressed US property debt is piling up during the pandemic. However, many creditors have taken a lenient approach to calling in loans because they do not want to be saddled with undesirable assets.
So far non-performing loans have not burst onto the market, borrowers so far have seen tremendous forbearance in the commercial real estate world. Part of the reason being that there 'is the enormous amount of capital chasing real estate investments at a time when bond yields are so low.’ Expecting a rebound when the pandemic ends, which is now expected to be sooner as inoculations are rolled out faster than expected. The Fed’s supportive action has helped too; especial in the residential world 'Governments have placed restrictions on evictions and foreclosures during the pandemic. Many courts are either closed or backed up. It has also helped that banks have entered the crisis with far less leverage than they did in 2008.’
There is also the element of not wanting to hold a undesirable assets or those with huge competition like vacant condo’s in New York.The flip side is that some real estate is in demand; warehouses by ecommerce for distribution. For offices it seems there is a dilemma; it seems very unlikely that the US will return to the old levels of occupancy but how much will be needed is still a debate.
As for the future the key seems to be that no one knows; there are some similarities to parts of past crisis but no trusted road map. Distress buyers remain cautious, lenders continue to be forbearing in hope that inoculations provide a swift recovery. The fact that the banks are not highly exposed and that a lot of the lenders are long term players or have long term funding coupled with low interest rates reduces the pressure on the sector.
I don’t know how it will pan out but I do think there will be some great opportunities. Personally I think the return to office life will be higher than many are predicting but the growth of remote office space in local venues is also likely. I think there could be a lot of repurposing of land in the future too. I still worry about there residential sector which has seen government embargo’s on evictions and foreclosures and what will happen when they cease.