March 3 FT Chip leadership, Ant resists PBoC demands, Rare Earth, Gold, Inflation target


03 Mar

MARKETs At 1:45pm HK time 
JAPAN 
Nikkei opened higher and tested higher on good PMI data but then sold down into the red mid morning and traded around Tuesday’s closing level before rebounding into the green after 11am. PM traded sideways between 29,500/450 before rallying just after 2pm to the day high 29,520 before easing back. Currently +124pts (+0.4%) @ 29,532
Topix Opened higher but has spend most of the day trading around yesterday’s closing level. Around 2pm rallied to 1,900 level but has eased back currently +6pts (+0.3%)@ 1,900
Data
Services PMI Feb 46.3 vs 46.1 Jan (F/cast was 45.8)
Composite PMI Feb 48.2 vs 47.1 Jan (F/cast was 47.6)
S KOREA  
Kosdaq opened lower but initially rallied to 928 and then tested higher before reversing to 922 after which it worked higher in choppy trading Currently +7pts (+0.7%) @ 930
Kospi traded in a similar patten currently +30pts (+1%) @ 3,075.
TAIWAN 
Opened slightly higher dipped into the red in early trading but the worked higher for the rest of the session; currently +265pts (+1.7%) @ 16,211.Positive data after good data and local earnings.
CHINA 
CSI 300 opened lower but worked higher helped bu in-line Caixin data, although again showing the growth is slowing. Hit 5,415 going into lunch. PM has traded sideways around that level Currently +84pts (+1.6%) @ 5,434
Data
Caixin Services PMI Feb 51.5 vs 52 Jan (F/cast was 51.7)
Caixin Composite PMI Feb 51.7 vs 52.2 Jan (F/cast was 51.9)
HONG KONG 
Opened @ 29,249 +154pts vs + 124pts ADR’s. Some initial margin call selling again but then worked higher with resistance around 29,685 in the morning and then trading sideways. Currently +586pts (+2%) @ 29,687. Banks seeing interest after the Bank regulators comments yesterday; suggests that Govt will seek to resolve the countries debt issues.
Data
Pre Market Feb PMI 50 vs 47.8 Jan (F/cast 48)
Due after market Retail Sales Jan (Dec was -14% F/cast is -6%)
EUROPE 
Expect markets to open higher following the trend in Asia. UK budget will be watched carefully
London’s FTSE is seen opening 26 points higher at 6,651, Germany’s DAX 31 points higher at 14,076, France’s CAC 40 up 19 points at 5,830 and Italy’s FTSE MIB 93 points higher at 23,164, according to IG.
Data due
EUROZONE Services and Composite PMI, PPI
GERMANY Services and Composite PMI
FRANCE Services and Composite PMI
UK Services and Composite PMI, Budget Speech
Earnings from Vivendi, Stellantis, Prudential and Persimmon
US Futures 
Opened higher in Asia and have risen Dow +122pts, S&P and NDX both positive.
AHEAD MBA Mortgage Applications and 30 yr Mortgage Rate, ADP Employment Change, Services and Composite PMI, ISM Non Manufacturing Data (PMI, New Orders, Business Activity, Prices, Employment), EIA Gasoline and Crude Stocks changes
Earnings: Wendy’s, Dollar Tree, Brown-Forman, Vivendi, Splunk, Marvell Tech, Snowflake, Vroom, American Eagle Outfitters


FT Front Page
Ghosn suspects arrive in Japan. Could face up to three years in jail and have already claimed they will not get a fair trail. The spotlight has been off the Japanese legal system for a while, so they might be right.  
See also Japan arrests father and son accused of helping Ghosn flee (page 4)
Greensill Bank in hands of German watchdog as parent seeks rescue
BaFin oversees day-to-day activities • Sales of assets explored • $4.6bn of loans in play. For some background see Market Thinking’s piece from yesterday.https://market-thinking.com/2021/03/fools-and-their-money/Key is that CS has suspended $10bn of funds linked to the supply chain finance firm.It had tried to get an injection to prevent its insurers from pulling coverage of the loans and it trying to invoke ’safe harbour’ protection in Australia; which would shield the directors from personal liability.  At the same time its talking to Appolo Global Management about a rescue deal.Critics of the supply chain finance say it can be used to disguise mounting corporate borrowings.  Fans say it helps small companies get paid quicker.
More detail in the Company & Markets section Greensill crisis lifts lid on danger and controversy in supply chain finance. Also LEX Greensill/Credit Suisse: finance dance

UK urged to use post-Brexit flexibility to liberalise IPO rules and court Spacs Looks at potential changes to financial services to allow more liberal rules for better international competitiveness. Nice quote from Lord Hill; The proposals, Hill added, were “not about opening a gap between us and other centres by proposing radical new departures to try to seize a competitive advantage . . . they are about closing a gap which has already opened up”.I was talking on Bloomberg this morning about this; key is that companies want to list on exchanges with other similar companies.  For investors it means doing due diligence is easier because the listing rules and political risks are the same.  So New York has done well with Tech because of the vibrant Nasdaq market.  London will need to find its niche.  But also needs to note that Spac’s are not the answer for every company and the rules need to be carefully considered to protect all investors.

Inside
US and EU impose sanctions over Navalny (Page 2)
Washington targets head of spy agency and two senior Putin advisers
Key is the co-ordinated measures and although falling short of the some of the more prominent oligarchs that Navalny’s team had identified, the unified action is likely to raise concerns in China too. As similarly co-ordinate actions could have a big impact on exports; which is still a key driver of the Chinese economy despite President Xi’s desire to see more domestic consumption.

Semiconductors China on track to surpass US as AI superpower, Congress told
(Page 4)
Summary 'The US risks losing its speriority in semiconductors that are critical for commercial and military success because of its reliance on Taiwanese chip manufacturers, a congressionally mandated commission has concluded.’
The commission chaired by Eric Schmidt former Goggle CEO found that the US needs to a ‘resilient domestic base’ for the design and making of semiconductors.
It noted that China is already an AI peer and more advanced in some area’s. Schmidt worries that the US will lose its edge. It notes 'Bob Work, a former deputy defence secretary and commission co-chairman, said the reliance on Taiwan was dangerous because of the threat China posed to the country, which Beijing views as a renegade province.’ He went on '“We’re 110 miles away from going from two generations ahead to maybe two generations behind,” Work said, in a reference to the distance from Taiwan to China. “If China absorbed Taiwan . . . that would really be a competitive problem for us.”’
Not just for the US but the world and something world leaders need to wake-up too in their recognition of Taiwan, even in the face of threats from China.Biden has already ordered a review and TSMC is building a facility in Arizona.It is interesting that the report says “Despite our private sector and university leadership in AI, the US remains unprepared for the coming era,” it said. “China is a competitor possessing the might, talent and ambition to challenge America’s technological leadership, military superiority and its broader position in the world.”
The commission said China wanted to offset US conventional military superiority by “leapfrogging” to new technologies and was already “training AI algorithms in military games designed around real-world scenarios”.
The US government needed to dramatically boost funding for AI research, said the commission, and recommended the White House create a “technology competitiveness council”, mirroring the move to create the National Security Council after the second world war.’

Many think that China whilst advanced in some areas of AI is still reliant on US machinery and supplies. It does not yet have the domestic facilities and despite prioritising the sector is yet to see significant process in chip design and manufacturing. That is why its overtures on Taiwan would be worrying western leaders. The report no doubt is skewed to worry and the getting of funding.
To me the key thing is that the likes of TSMC keep their best and brightest in Taiwan to design the next generations of chips. TSMC simply outspends everyone on Capex which is why its the leader. Neither the US nor China can just step in, as Morris Chang likes to say they are leader and continue to do so and will not wait for others to catch up.
Whilst acknowledging the report findings and seeking to shore up in part its domestic design and production the US and others would spend their time better acknowledging Taiwan for the free country it is and ensuring that China recognises and accepts that Taiwan is not a renegade state but an independent country that the rest of the world will defend.

IEA head warns over rise in carbon emissions (Page 4)  
Evidently emission rose in December was the global economy recovered from the covid pandemic. The rest of 2020 saw drop and covid prompted lockdowns. The 2H saw rising emission due to recovery and the lack of clean energy policies.A clear call to action.
It does note that in 2020 China was the only country to produce more emissions in 2020 YoY.Key is that as the global comes out from the pandemic the IEA heads wants countries to put better policies in place. The reality is that is unlikely, most governments have been too focused on covid and other domestic issues to pay much attention to new practices and policies over emissions.

Review of market fees pledged in wake of GameStop turmoil ( Page 4)
The regulator to look at the fees being paid by large Wall Street firms to retail platforms for their customers flow. The prospective Securities and Exchange Commission head said he was concerned that a handful of firms were buying most of the retail flow. For retail clients that means their trades are done at better than current prices. Gensler is worried about concentration of orders flow which would allow dominance. The SEC is also to investigate to what happens when a group gets together to drive a stock higher, especially if there broker suspends trading at a crucial point.
Gensler said “The story is about this new technology and technology changing constantly,”
It should be more than that. Firstly just as brokers have KYC maybe investor need ‘know your broker’ where practices and polices are clearly set out. Specifically why clients are not being charged a commission.
Also this is primarily about market orders, orders placed for immediate execution. So price comes down to the moment the order was transmitted. The price a retail client sees on his screen when they press send is not necessarily the same price the broker sees or can find. Sometimes the broker will give that price but hold the order knowing or being aware of a price movement somewhere in the system, or another exchange that is better or just a proprietary position for a few minutes and then execute, giving the client the ‘current’ price they saw and pocketing the upside.
Gensler is right its about technology, better algo’s, use of AI, better wiring, anything to get an edge.
So what the SEC should be doing is making sure that everyone is aware how much money is being made by not charging retail clients for execution. Citadel, Virtu Financial, Susquehanna and others are buying this business because they can make money from the other side of the trade. It is the same with institutional programmes and baskets that brokers bid for, (paying the client) rather than charging a commission; it's because they can make money from the other side. Maybe the question the SEC should be asking is about the risk being taken by those firms and the certainty of making money. That’s before they start looking at the clearing issues and the suspension of trading if the platform you are using hasn’t got enough capital.
At the end of the day unless you pay regulators very well, the street will pay better and spend more to find ways to benefit from the current system. The regulator has to always play catch-up and often because they are outside the system looking in they are not aware of the latest practices. When you the last time your regulator suggested having a chat?
The system has become so adversarial that it harms investors. When I started in Hong Kong you could have an off the record chat, over a grey area, no names. Often it would result in you stop doing it, we’ll change the rules, no lasting harm done. Regulators used to come from the industry and knew how it worked.
Not today, most are lawyers who have never been on a trading floor. No friendly chats, if you find a loop hole exploit it until the regulator spots it and closes it. If it's a grey area today firms are more likely to take an opinion, and if favourable, trade it and hope they make more money than the fine is if its subsequently deemed to be wrong.

Democrats demand tougher capital buffers for US banks (Page 4)
Actually its not tougher barriers but just a reversion to the pre pandemic capital requirements that were loosened. Those relief measures to the supplementary leverage ratio are due to expire at the end of March. There have been talk of extending them from Republicans and obviously the banks. Some banks didn’t use the facility but like most things if you give the banks anything they don’t subsequently want to give it up.
The banks line, according to the article is 'a failure to extend the relief could make it more difficult for them to absorb the deluge of cash the Fed is pumping into the financial system.'
The reality is that the system is in better shape than had been feared and hence a revision to the previous rules makes sense in order to protect the system. Worth noting they only say it will be more difficult for them … not impossible.

Companies & Markets
Ant resists Beijing’s demands for data
Central bank dissatisfied with lack of detail in filings about customers
Reports says it has only handed over a fraction of what the PBoC was requesting. I think that illustrates its awareness of how sensitive that information is to its business and how if it hands it over its relationship with its clients will be lost along with its business. Which at the same time would mean that whilst the PBoC got a snap shot it would not be getting on-going data; which is what it really needs.
The article notes 'The People’s Bank of China has long wanted to create a pool of credit data to help big state-owned banks assess creditworthiness as consumer loan defaults have risen. The PBoC has also flagged concerns on the size of private groups such as Ant, hitting out at the “inappropriate collection and control of data” by “leading internet platforms that have abused their market monopoly”.’
The truth is that the PBoC’s access to data is limited as is the amount it can spend on collecting and analysing the data. Also that firms like Ant have collected data that enables them to make informed decision without compromising their clients privacy.
China does have rules on data; so Ant can only supply data that its clients say it can. The PBoC is trying to force companies to sign data sharing agreements are part of being able the use the services they supply, something firms are reluctant to do as they know it will hurt their business.
I suspect that a lot if it is about finding out whether people’s spending matches their official income. Whether the loans they have taken out are for a washing machine or have been invested in the market etc etc.
I would guess that a lot more people would be prepared to share their data with the PBoC on a no names basis the fact that it wants names I am sure worries people in a country where travel can be restricted if you are deemed to be a bad citizen!

Basic resources
North America suppliers in rare earths push
Outlines how 'Neo Performance Materials of Canada and Energy Fuels of the US have found an efficient way to produce rare earths safely from radioactive monazite sands. The sands, a mining byproduct, will be supplied by US-based chemicals group Chemours.’
A timely discovery as the US and others seek to reduce their dependance on China which currently controls 80% of the global supply and has been considering restricting exports.
Key is the previously monazite was avoided because its radioactive but Energy Fuels has a process to extract the radioactive element and leave the residue with the rare earths as a by product.; which it will sent to Neo for processing at its plant in Europe.
China has cornered the market in Rare Earths largely because of its tolerance of the pollution that is associated with the process of extraction but as demand rise and pushes prices higher more acceptable extraction processes should be possible.

Automobiles
Infineon urges carmakers to strengthen chips supply chain
Makes the point that I wrote on last week the Auto sector needs closer co-operation with the chip suppliers. Toyota informs its supplied up to three years in advance. Hyundai engaged in stock building but many others haven’t.
“The auto industry cannot say, ‘OK, fine, we don’t need [any more chips]’ and then come back later and say ‘now we need them’,” chief executive Reinhard Ploss said. “They have to consider the long lead times [in the semiconductor sector] of about half a year.”
I suspect that the sector has now learnt from its mistake and going froward things will improve. Infineon’s CEO rightly says he can’t hold inventory for the sector , it too high risk; especially as semiconductors have limited shelf live due to the risk of contamination. It is also worth noting that the auto sector demand is only 10% of the whole market and so easily squeezed out by other large more important clients. Again something the sector needs to learn.

Volvo to go all-electric by 2030 as sales move online. 
It will effectively cut out all dealerships; 'Showrooms representing the group will be used to service cars, provide pick-up points for vehicles and offer in-store advice, as well as displaying some available models.’It underlines the desire to have the direct knowledge of the customer.
The move to all electric so quickly is remarkable but its CEO says “The customer is always right, but I’m totally convinced [by the end of the decade], there will be no customers who really want to stay with the petrol engine.”

Cross asset
China’s bank regulator warns of bubble risks
Remarks which yesterday worried Asian markets. He warned of bubbles in international markets and in the Chinese domestic real estate sector. Warning of a crisis as 'Financial markets in Europe and the US are out of sync with their economies and fuelled by monetary and fiscal policy’.
Which has lead to large inflows into China as it recovered from the pandemic. Whilst he says those flow are manageable he is worried about what happens when the bubble bursts either in China or in the West.
Comes as China has increasingly tightened credit to developers but there are still concerns about defaults; Evergrande has been much in the news and China Fortune Land Development, an industrial park developer, defaulted on a $530m bond over the weekend.
Recently, in the lead up to the NPC and CPPCC investors have been trying to work out if China would focus on more stimulus or reducing the current amount of debt and it would appear that debt control for the short term is more likely.

Treasuries wobble heightens worries over bond investing
Latest liquidity shock piles pressure on US regulators to address trading stress issues.
Looks at the recent events in the bond market and the concerns about the potential for liquidity drying up in what is supposed to be the most liquid and safest of markets.
Notes that even the regulators are trying to work out why the market is not working as expected all the time. An interesting read but no real answers. When the liquidity dried up in a market is it usually because the prices being offered don’t correlate with the value of what is being sold.

Gold hits eight-month low as recovery and higher debt yields dent its appeal
Pulling back from the highs seen last August but the recent technical chart shows that its testing the support at the bottom of the channel and its interesting to note that both Marc Faber and Jim Rogers are turning more bullish on sector; largely due to the large amounts of cash that are being printed. At the same time that bonds are so expensive.
The article notes the outflows from Gold ETF’s and stocks and also how Gold is facing competition from crypto’s too.
I do think that inflation is going to rise short term and than Gold should see another rally but some investors are also likely to look to cryptos as a hedge along with other resources.

OPINION
Economics What central banks ought to target
Inflation targeting remains the simplest and least bad of a wide range of options
By Martin Wolf
He looks at why inflation is the best and what the alternatives are.
It is an interesting read but I think many people are increasingly becoming worried that the Fed’s insistence that it can deal with inflation, should it arise, is misplaced. Equally that CPI inflation may not be a good indicator of a looming crisis; just as it wasn’t ahead of the Sub Prime crisis or the Asian crisis

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