Feb 12 FT US/CHINA call, Banning the BBC in China, Corn demand, Fed needs to end cheap money


12 Feb

MARKETs 
JAPAN opened higher but trended lower though the morning to 29,417 before a bounce into lunch.  PM the market traded sideways 29,450/500 to close -43pts (-0.1%) @ 29,520.  Off Wednesday’s 30 year high.  Volumes light with the rest of Asia closed.  Tokyo reported 307 new covid cases Friday (vs 434 Thursday) The nationwide number was 701.
Topix Opened higher but initially sold down and traded around flat for most of the morning before a rally into lunch. PM opened just below flat and worked higher to close +3pts (+0.2%) @ 1,934 another new high.
Data
Foreign Bond Investment Yen 1027.58b vs 729.6b prior
Foreign Stock Investment Yen 462.5b vs -187.5b prior
News
Japan’s economy will suffer a much bigger contraction than initially expected in the January-March quarter, as an extended state of emergency to contain the coronavirus pandemic hurt corporate and household spending, a Reuters poll found.
The first batch of Pfizer Inc’s COVID-19 vaccine arrived in Japan on Friday, local media reported, with official approval for the shots expected within days as the country races to control a third wave of infections ahead of the Olympic Games.
Mori officially announced his resignation as Tokyo games chief
Saburo Kawabuchi, the 84-year-old former Japan Football Association president that Tokyo Olympic organising committee chief Yoshiro Mori hand-picked to replace him, has decided to decline the job, the Asahi newspaper reported on Friday.
S KOREA Closed re-opens Monday
TAIWAN Closed re-opens 17 February
CHINA Closed re-opens 18 February
HONG KONG Closed re-opens 16 February

EUROPE 
Expect markets to open lower on weak UK pre market data, with the economy contracting by 9.9% in 2020 (vs -8% F/cast), its largest annual contraction since records began, as the coronavirus pandemic ravaged economic activity and still under lockdown.
Data
UK  
Balance of Trade Dec GBP -6.2b vs -6.6b Nov (F/cast was -4.1b)
Construction Output Dec -3.9% YoY vs -1.4% Nov (F/cast was -0.6%)
Construction Orders Dec -12.9% vs +0.6% Nov (F/cast was +4.5%)
GDP Dec +1.2% MoM vs -2.3% Nov revised (F/cast was +1.1%)
GDP Growth Rate Prel Q4 +1% QoQ  vs +16.1% Q3 revised (F/cast was +0.5%)
GDP Growth Rate Prel Q4 -7.8% YoY  vs -8.7% Q3 revised (F/cast was -8%)
GDP 3 Month Average Dec +1% vs +4.5% Nov revised (F/cast was +0.5%)
Industrial Production Dec +0.2% MoM vs -0.1% Nov (F/cast was +0.6%)
Industrial Production Dec -3.3% YoY vs -4.7% Nov (F/cast was -4.2%)
Manufacturing Production  Dec -2.5% YoY vs -3.8% Nov (F/cast was -3%)
Manufacturing Production  Dec +0.3% MoM vs +0.7% Nov (F/cast was +0.4%)
Business Investment Prel Q4 +1.3% QoQ vs +9.4% Q3 (F/cast was +2.6%)
Business Investment Prel Q4 -10.3% YoY  vs -19.2% Q3 (F/cast was -12%)
Goods Trade Balance GBP Dec -14.315b vs -16.012b (F/cast was -14.3b)
Due later
NIESR Monthly GDP Tracker for Jan (Dec was +0.9% (F/cast is -2.8%). 

US Futures 
Opened in Asian time Dow -20pts, S&P and NDX both -0.1% and slipped slightly currently Dow -39pts, S&P -0.2% and NDX -0.14%
AHEAD Michigan Prelim Data (Current Conditions, Inflation Expectations, Consumer Sentiment, 5 yr Inflation Expectations, Consumer Expectations) Baker Hughes Rigs Data.
Earnings Moody’s, Newell Brands, ING Grope

FT Front Page 
New beginning. China and US lay down lines Noted the first call between President Xi and President Biden with Xi telling Biden co-operation was the only choice. TEH call came after Biden had announced setting up a Pentagon task force to form a comprehensive strategy on dealing with China.
Microsoft sounded out Pinterest on $51bn deal for social media site  But talks no longer active.
German accounting watchdog said it did ‘not want’ to investigate Wirecard. 

Inside
China bars BBC world news channel amid media dispute (Page 3)
Saying that the BBC’s reporting had “violated requirements that news should be truthful and fair”, undermining national unity. Comes after accusations from China that the BBC reported ‘fake news’ regarding the pandemic and its treatment of Muslim Uighurs in Xinjiang province. Comes after the UK regulator revoked the licence of China Global Television Network’s licence to broadcast in the UK after determining it was editorially controlled by the Chinese Communist party, in contradiction to the regulator’s rules.
The impact on the BBC will be limited as it has never been able to broadcast directly into Chinese homes and only a few international hotel groups include it in their selection.The BBC statement said it was disappointed; “The BBC is the world’s most trusted international news broadcaster and reports on stories from around the world fairly, impartially and without fear or favour,”
The UK Foreign Secretary said the decision was “an unacceptable curtailing of media freedom”.
Another example of the actions of China being out of step with the statement that President Xi gave to world leaders at Davos about co-operation and respect. The fact that it didn’t block the BBC’s news items at the time highlights that this is purely a ’tit for tat’ response.

Washington-Beijing ties Biden tackles Xi on rights in first call (Page 5)
US leader raises concerns regarding Hong Kong crackdown and Uighurs.
The Whitehouse statement said “President Biden underscored his fundamental concerns about Beijing’s coercive and unfair economic practices, crackdown in Hong Kong, human rights abuses in Xinjiang, and increasingly assertive actions in the region, including toward Taiwan,”
It also said “President Biden affirmed his priorities of protecting the American people’s security, prosperity, health and way of life, and preserving a free and open Indo-Pacific,”
Prior to the call a senior US official had said that Biden would " “indicate this is not just about American values, it’s about universal values”.
Chinese media report that President Xi told Biden "China-US confrontation will hurt both sides — co-operation is the only choice” and that regarding Hong Kong, Taiwan and Xinjiang there were “internal affairs related to China’s sovereignty and territorial integrity” and so the US should “respect China’s core interests and act cautiously”.

Obviously even from the way the two parties have reported events shows that the way forward will not be easy and that President Xi is taking a much harder line than that he indicated in his speech to leaders at Davos.
Not reported in the article but in the Taiwanese press was a The State Department photo of a meeting between Hsiao and a senior US State Dept official and the accompanying tweet described Taiwan as a vital security and economic partner. It is also notable that Biden spent his first two weeks in office talking to allies and partners of the US before speaking with President Xi, a significant change from Trump’s approach.  He is trying to build a consensus against China’s economic attacks on certain countries and its approach to Taiwan.  That is likely to leave China in a more difficult negotiating position going forward.  

The most worry issue I think remains Taiwan because President Xi has made that such a personal goal. It has the potential to end badly for everyone. Whist Biden is building consensus other countries must also make it very clear to China that Taiwan and the South China Sea are not China’s internal matters regardless of how much it would like them to be.

For investors there is little they can do to hedge the Taiwan issue. The dominance of its Tech companies means they cannot be avoided as part of a diversified portfolio.

China’s record purchase of corn a ‘watershed moment’  (Companies & markets section) Traders taken by surprise as demand for livestock feed drives surge in grain prices.  
Key China bought a record 11.3m tonnes of corn last year with just over a third from the US. In January 2021 the US Dept agriculture announced China bought a further 2.1m tonnes; push corn prices to an 8 year high. It notes that China is expected to be a big corn buyer this year too and could remain ahead of other big corn buyers; Japan and S Korea. China is also a big soyabean buyer.
The corn buying comes after China reversed its corn stockpiling programme with minimum state purchase prices after it resulted in a ballooning in state inventories and the associated problems. Since then the Chinese corn industry has been in decline and inventories have dropped significantly.
Some think it is just a temporary event as China rebuilds its inventories. Key being that the weather pattern in China has not been good over the past year after typhoons caused flooding with some estimating that the actual corn crop could be as much as 25% lower than the official figure. Quotes one farmer who estimated his crop was 20% lower YoY.
Mentions that there could be an element of hoarding by Chinese growers and traders in the hope of achieving a better price as state shortages push prices higher. Although they take the risk that the large imports push prices lower.
The article notes that estimating the actual levels in China is a guessing game but there is clearly a rising demand for meat and livestock feed with limited ability to increase domestic supply. Beijing is considering subsides to encourage planting but it takes time and could result in oversupply again.
For investors it is another indicator that the commodity cycle looks to continue as China restocks. That should be good news for US farmers and their suppliers; not least the likes of J Deere which continues to trade higher, currently at an all time high.

Opinion The Fed needs to call time on cheap money. By Gillian Tett
Looks at the risks of giving forward guidance. Notes that in the past Powell was against such a practice and equally that he is aware of the markets ability to throw a taper tantrum. It quotes the transcript of him saying back in 2013 “We find ourselves in a situation here where we’re on the roof, and there is no risk-free path. We’ve got to jump.”
Suggests he heeds his own advice and whilst there is no immediate need to jump he does need to find another way off the roof.
'He should puncture assumptions that cheap money is here indefinitely, or that Fed policy is a one-way bet. Otherwise his attempts to ward off the ghosts of 2013 will eventually unleash a new monster in the form of a bigger market tantrum, far more damaging than last time — especially if investors have been lulled into thinking the Fed will never jump.'

For investors I think the risk is an over reliance that the Fed will remain on its current course and not be as data dependent as it has previously said it would be. Also that inflation comes back sooner and stronger that the markets are currently anticipating.
On the positive side with Powell and Yellen working on the same team there is a very experiences and knowledgable team in place. The question is whether they will have the resolve and nerve to make the tough decision when needed in the face of the markets throwing their taper tantrums?

Brussels lifts forecasts for recovery (Page 3)  
Output expected to hit pre-pandemic levels by the middle of next year. Reduces the expectations for 2021 but raising them for 2022 when it sees the real benefits of the mass vaccinations and an end to look downs having effect. It also estimates the pandemic ending earlier than it previously estimated which was 2023 but is now 2022. It does also acknowledge the the recovery would be uneven across the various EU countries and assumes supportive monetary and fiscal policies during lockdowns.
Obviously in broad terms encouraging for investors but the it may be over optimistic is some regards and not bold enough in others. It does not take full account of the EU’s Euro 750bn recovery fund and it assumes that the vaccination roll out goes smoothly. That is currently doubtful due to initial problems with the joint vaccine buying programme.
Does indicate how governments are trying to switch the narrative to being more optimistic about dealing with covid.
See Market Thinking’s 'A Switch to Half Full’
https://market-thinking.com/2021/01/a-switch-to-half-full/

Read also Mixed advice on Oxford/AstraZeneca jab causes confusion (Page 4) and Soriot targets earlier production of variant shot.  Along with FT BIG READ. CORONAVIRUS A race to vaccinate the developing worldThe spread of new strains has made it even more urgent to launch rapid immunisation programmes in poorer countries. The success of the rollout will reflect the ability of global alliances to co-ordinate supply.

For Interest 
Wall Street pins hopes on tech rivals drawing Biden’s regulatory fire (Companies  & Markets)
Bankers say even application of rules will level playing field with Facebook, Google and fintechs. Key being that they want Fintechs who provide services that compete with those provided by Banks to be subject to the same rules. Not unlike what we are seeing in China and Ant Group and others.
Where tech companies can operate with less regulation and less capital requirements than the established finance companies.
An interesting read and suggests that tech executives are now viewed as worse than the historic evil bankers.

For investors it may give another reason to doubt the valuations currently being applied to Facebook and Google along with a number of other fin-tech start ups. It is also interesting to note that JP Morgan is now trading where it was before the pandemic, Bank of America is close too although Citi has only seen a 50% recovery. Key is that consumers want cheaper services whereas fin-techs and banks want to improve their margins by using tech.
As noted yesterday in Early digital foray gives Norway’s top bank an edge. DNB move into digital has seen it reap significant gains.  US banks still have a long way to go in that respect and are facing the threat from new entrants that do not carry the burden of branch networks and consequently high staffing levels.I think it reasonable that the new entrants should be subject to the same conditions that ensure customer and system protection.

Read also Lenders press Fed to extend pandemic capital relief concessions (same page).
US banks are saying the financial markets are at risk if the Fed goes back to the pre-pandemic capital requirements.
Another example of banks not wanting any easing measures that could give them an advantage taken away. In this case the supplementary leverage ratio (SLO) which means the large banks to have capital equal to at least 3 per cent of their assets, or 5 per cent for the largest. Under the reprieve, lenders were allowed to temporarily exclude holdings of US Treasuries and cash kept in reserve at the central bank from their assets when calculating the ratio.
Effectively it will remove some liquidity from the market and that could make markets more volatile. But the move was to 'facilitate trading in US Treasuries; take in extra deposits from customers who cut spending during the lockdown; and extend credit to companies facing a cash crunch.’ The markets have changed, the expectation is that customers will increase spending as mass vaccinations take place and an element of normality comes back. Few companies are looking for increased credit with many wondering how to deal with the cash they have raised.
JPMorgan wants the concession to remain. Bank of America said it was a concession it didn’t really use and Citi said removing it would have little impact.

‘Stonk’ bubble’s threat to stability must be tackled by Carson Block the founder of Muddy Waters Capital
Says GameStop’s rise shows the market is not being driven by fundamentals and that the primary cause is passive funds.
Draws on research from Michael Green of Logica Funds who estimates that whilst active managers can select when to buy and sell passive funds run on auto pilot as long as money comes in, they buy. The research estimates that the whilst an active mangers incremental dollar has an average effect on aggregate market capitalisation of $2:50 But a passive one has $17.00. Passive funds have more impact because they buy in line with weightings.
Add to that Balanced Funds buying because their binds have risen in value.
Pension Funds/Endowments buying equities to make up for lost yield and you have the perfect recipe for another bubble. All of which is fine until passive funds turn sellers as they are hit by withdrawals.
Whilst he is clear in setting out the problem he doesn’t proved any solutions except to say 'The way to fix the markets’ contributions to instability is to address the distortions arising from passive investing’s growth, including looking at funds through the lens of antitrust issues and as systemically important financial institutions.
We must find a way to deleverage our economies and markets. We live in a time when governments seem to lack the will and competence to do hard things; but the results of delay are not pretty. Let’s choose wisely.’
What he writes makes a lot of sense but finding a way to change or limit the leverage of passive funds on the system would appear impossible. It also highlights the fact that the growth of passive investing makes the active investing more difficult and hence the need to use structured products in order to leverage events in your favour.

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