Feb 16 FT Economic bounceback +VE, Apple/Nissan off, Unizo back in the news, Commodities +VE

16 Feb

MARKETs at 2:20pm. 
Nikkei opened higher and worked higher into lunch. The Tertiary Industry Index missed but the market trended higher in the PM hitting resistance at 30,715 level and having tested twice has seen a sell down Currently +275pts (+0.9%) @ 30,357
Topix followed a similar pattern, resistance at 1,975 but has seen a steeper sell off; currently +3pts (+0.1%) @ 1,956
Tertiary Industry Index Dec -0.4% vs +0.7% Nov (F/cast was +0.3%).
Pre market data was weak
Kosdaq opened flat dipped initial and then spiked to 988 but then sold down to 975 level and traded sideways currently -5pts (-0.5%) @ 977
Kospi opened flat and rallied to 3,180 then trended lower to test yesterdays close around 12:30pm and then traded sideways. Currently +6pt (+0.2%) @ 3153
Export Prices Jan -6.7% YoY vs -5.4% Dec (Consensus -5.1%)
Import Prices Jan -2.3% YoY vs -10.2% Dec (Consensus -11.2%)
Closed re-opens Wednesday 17
Closed re-opens Thursday 18
Re Opened pre market @ 30,675 (+1.7%) +502pts vs 279pts ADR’s Friday
Ecommerce mixed, Financials, Petrochems strong but a broad based recovery.
Market then trade sideways around 30,600.
Expect markets to open higher following the strength in Asia and with US Futures +VE Earnings still in focus and covid encouragement as vaccination roll-outs continue. Expect continued strength in resources. AHEAD
EUROZONE Employment Change, GDP Growth Rate, ZEW Economic Sentiment Index
GERMANY ZEW Economic Sentiment Index & Current Conditions
FRANCE Unemployment rate
UK No data due
US Futures 
Opened Dow +180pts, S&P +20pts (+0.5%) and NDX +68pts (+0.5%) and trended higher in Asian time now Dow +250pts, S&P +27pts (+0.7%) and NDX +95pts (+0.7%).
AHEAD NY Empire State Manufacturing Index, Overall Net Capital Flows, Net Long Term TIC flows, Foreign Bond Investment.
Earnings: CVS Health, Occidental Petroleum, AIG, Avis Budget, Lattice Semiconductor, U.S. Foods, Advance Auto Parts, Vulcan Materials, Palantir, Agilent, La-Z-Boy

FRONT page
Riskiest US groups’ share of junk bond sales surges
• Triple C deals at highest since 2007
• Weakest borrowers tap hot marketsReflecting a mixture of hunt for yield and confidence that the recovery is on track and will be buoyed by Biden’s stimulus package
LVMH’s Arnault and former UniCredit chief Mustier join $100bn Spac boom.  Interesting since Mustier only stepped down from UniCredit last week.  Shows that Spac’s really are the flavour of the moment.  (See also Lex Arnault/Mustier Spac: winging it  says 'The new breed of Spac specialists needs to dispel that memory with deals that do better.'

Biden takes stimulus pitch to the people in bid to seal Congress deal (Page 3) Comes as he has struggled to get Republican support.  By appealing directly to the public he is hoping to put pressure on some Republicans.  A CNBC polls showed '64 per cent of Americans believe the cost of the bill is “about right” or “too little”, with 36 per cent saying it is “too much”.’  

States prepare to have their day in court with Trump (Page 3)
Senate acquittal offers brief respite with former president on Georgia’s mind. Looks at how Trump is likely to face a number of legal actions in addition to the on-going Manhatten case but without Presidential privilege. From watching his defence at the Senate trial one would think that he had a lot to worry about. It will also be interesting to see how he funds himself.

Economic bounceback beats growth forecasts (Page 4)
Looks at the data out of Japan yesterday which was stronger than expected and suggests that the impact of the pandemic might not be as bad as some had thought. Not mentioned but there was good data from Singapore and Thailand too.
The roll out of vaccinations to start this week should further encourage investor along with the fact that the Nikkei broke above 30,000 for the first time in 30 years.
I think the banks and brokers are the best play for the current move. I have liked the automation/robotic plays for sometime along the Tech and Daikin the air com maker.Worth noting the last the Nikkei was at this level the BoJ policy rate was 5.25% -6% vs -0.1% today; which supports the current valuations. Furthermore if the BoJ were to allow the yield curve to steepen then would be very good news for the Financials.

Olympic chief falls foul of Japanese backlash against sexism (Page 4)
Departure over remarks is unusual in a country where politicians often survive gaffes. Another look at Mori’s resignation.
A lot has been written on this only time will tell whether it marks a watershed in terms of gender and other wider issues linked to the established 'Japan Inc’. Unfortunately I suspect that this might be a one off and the status quo is resumed and another opportunity for real change in Japan is missed.

Companies & Markets Apple’s tie-up approach to Nissan stalls on brand issue
• Carmaker wary of supplier status
• Contact also made with Hyundai
Key here is that the auto makers have spent years building their brands and do not want to be reduced to another link in the Apple supply chain. It is also likely that Apple is seeking extremely advantageous terms as they do in the assembly of their other products. The difference is that those same margins and scalability are not likely to be available in the auto sector and the process are a lot more complicated.

Systemic risks lie in Gen Z’s race to embrace leveraged trading 
Looks at the dangers of excessive leverage that some day traders can get access to whilst having very little idea of what they are actually doing. Looks at what happened at GameStop and relates that to the suicide last year of Alex Kearns; who mistakenly thought he was $730,000 in the red (he wasn’t) and in whose suicide note he claims to have had “no clue what I was doing”, adding: “I only thought that I was risking the money that I actually owned.”
Highlights that margin and the use of calls has increased dramatically and whilst its all good in a rising market, markets don’t rise forever. He concludes. 'Warning of the risks is not about trying to stop younger investors from grabbing their share of wealth, as some angry young traders allege. It is about trying to avert the kind of personal disaster that befell the Kearns family.If the current rate of small investor leverage growth continues, it may also be about heading off the next incarnation of systemic crash.’

We in the financial community are lucky we gain training and experience within teams that have a wealth of experience and are subject to guidelines and trading limits. We are taught about risk and reward and how too use leverage. We still make mistakes but have the benefit of infrastructure and options to mitigate the downside. The financial services sometimes even design products which are good at the time but can come back to bite; think of the ‘Accumulator scandal' in Hong Kong that ended up causing problems for even some very experienced investors.
New day traders working from home don’t have that background. They largely have the hype from advertisements saying how easy it is!
From a lot of the adverts I’ve seen its not clear that you could lose money; let along additional margin or leveraged amounts. The small print and warnings are small or quickly glossed over.
The platform operators should be under more responsibility for better KYC and explaining they risks; just as the larger banks and brokers are.
I liken it to two things:
1. Driving. Most people can drive and understand driving. But few can drive F1
2. Mechanics they spend all day working on cars, they get sent on manufacturers courses to learn about new engines, or more likely these days computer systems and we pay them to service our car's.
Day traders seem to expect to be able to work on car’s successfully to the professional mechanics standard without having to go on any courses. They just want the profit.The regulator tries to protect investors; as finance professionals we have to go through a lot of training and follow regulations to protect our clients.
It will be difficult to protect clients when they just want to do it themselves.

Amundi and BlackRock rivalry heats up in Europe. 
Leadership changes at French and US groups herald renewed battle to boost market share.An interesting read that underlines the importance of ETF’s to both organisations. Notes that Amundi built its EFT business from scratch but now needs to catch up with Blackrock and that acquisition of an additional EFT manager could accelerate growth. The purchase of Soc Gen’s Luxor is raised in the article but it notes Lyxor’s ETF business has stalled badly over the past two years with disappointing inflows of $548m in 2020 after seeing outflows in 2019. Talk that Soc Gen wanted to sell Lyxor have been circulating for over a year and others could be interested too. Many think that acquiring Lyxor could be key for Amundi and it has the capital to do it. So people will be watching careful what Valérie Baudson does.
ETF’s continue to dominate and have done well as markets rise the concern at the back of my mind is what would happen when the equity markets turn. Just as they support the markets on the up they can undermine the markets on the way down. They buy in line with weightings are the markets go up and will have to do the same if investors want to take their money out. Hopefully we do not see that anytime soon.

Japan’s Unizo urged to consider bankruptcy. 
Another example of activism in Japan 'Asia Research and Capital Management, (ARCM) a $3bn hedge fund based in Hong Kong, said it had reason to believe that the company was probably insolvent, even accounting for the assets it still owns after it sold most of its prime real estate portfolio.’
Lone Star helped an employee buyout, but the event made headlines back in 2019 because of the way the bids were handled and the fact it triggered a hostile takeover.
Other creditors include a number of fragile regional Japanese banks that had ties to Mizuho (Unizo is the property offshoot of Mizuhio).
ARCM alleges that Unizo does not have the capital to repay bondholders because money was used to pay Lone Star for financing and preferred shares in October.
It notes 'Lone Star, which stepped down from Chitocea’s board in mid-January, also declined to comment.
ARCM has demanded that Unizo provide evidence of Chitocea’s ability to pay back the loans. If the loans cannot be recovered, the hedge fund said Unizo should consider entering court insolvency proceedings.
This would be a very unusual step by an activist bondholder in Japan and could set legal precedent, said people directly involved in the matter.’
This could be another example of private equity firms advantaging themselves to the cost of other investors. There have been a number of calls for more regulation of private equity so it will be an interesting case to watch.

Bullish supercycle forecasts divide veteran oil traders
Wall Street banks expect crude to climb as high as $100 but sceptics point to many hurdles
Another article on the expectation that commodities are going to enter a new ’supercycle’ this time in oil.
A key element is the US stimulus aimed at middle and lower income households who don’t drive electric cars but SUV’s
Others are less optimistic and see a number of hurdles but key as ever is demand.An interesting read but I doubt we will see a dramatic rise in US demand in the short term.I do think that a number of commodities are entering new bull cycles but more linked to metals like platinum, palladium, copper, nickel that are linked to EV’s and tech and it was interesting to see tin seeing a surge yesterday.

Read Buying frenzy pushes tin to 7-year high as global electronics demand climbs
Increased demand as production hurt by the pandemic closed mines and smelters. Added to which the shortage of shipping containers has disrupted the flow of refined tin.

FT BIG READ. MANUFACTURING The race for ‘green’ steel
Climate change activists and investors have put intense pressure on oil and other energy groups to lower their emissions. Now it is the turn of heavy industry to face calls to develop low-carbon products. But its not going to be cheap and customers will face higher prices. There is a real price to pay.
For China the costs will be even more significant because “China today generates about 2 tonnes of CO2 for each tonne of steel it produces, while in Europe you usually only generate one tonne,” says Michele Della Vigna, an investment analyst at Goldman Sachs. “Longer term, it becomes important for China to show that its exports are not more carbon intensive than the goods produced in other countries.”
Goes onto to look at the potential for new tech but at the end of the day it is going to be costly and complicated.

Editorial The risks from a dash to chip nationalism
Global shortage has deepened anxieties about national security.
Key 'The political divergence taking place between the world’s three key trading blocs — the US, China and the EU — means that some re-regionalisation of supply chains and manufacture of chips is inevitable. But a rush to protectionism ending in deglobalisation is not the answer.'

LEX Japanese utilities: faultlines. The weekends earthquake brought reminders of 2011 Fukushima but the industry has changed and standards have been tightened.  Opinion to nuclear has softened as electricity bill rose and they had outages due to cold weather.  Power company share have rallied too but costs remain steep.  Nuclear has a role in world power but in areas with less seismic activity! Japan has 20% of the worlds earthquakes above 6 richter scale.
Concludes 'Most Japanese energy utilities with nuclear operations trade at a steep price-earnings discount to the Nikkei 225. That gap will persist.’

For Interest 
Texas faces test of freewheeling power model after freeze leads to blackouts. Exceptionally cold weather hits the State.  
The freewheeling power model is where 'Generators are paid only for the energy that they sell, not for keeping capacity in reserve for times of stress.’ Which means retailers compete for customers rather than it being a utility model.The cold weather has 'hit natural gas supplies and wind power generation, as wellheads and turbines seize up in temperatures rarely seen in a state that is the heartland of the US energy industry.Texas, the largest US oil and gas producer, is also the country’s top electricity consumer. Buildings that heat with natural gas compete for supplies with power plants that burn gas.’

The consensus view is wrong on European stocks by Karen Ward chief market strategist for Emea at JPMorgan Asset Management
She says only 3% of respondents think Europe would be a top performing market this year despite the S&P 500 valuation being 23X forward earnings vs 18x for MSCI Europe Ex UK.
But thinks that is wrong for 4 reasons
1. Covid roll outs likely to stimulate strong recovery in export dependant economies. They have accumulated sizeable household savings and so consumer demand is likely to rise significantly.
'This global demand recovery is likely to benefit Europe disproportionately, since it is expected to be dominated by spending on luxury items and capital goods — two sectors that are well represented in European benchmarks.’
Plus the impact of the EU Recovery Fund.
2. European companies to benefit from policies on climate change and the use of renewables where Europe is already ahead of the curve.
3. The Feb at some point will taper and the yield curve will steepen. So the current good conditions for tech will recede and financials will benefit alone with value stocks; which again should help Europe.
4. Improved European institutional architecture. With the EU Recovery Fund meaning the risk premium attached to European assets should be lower heading out of this crisis.
She concludes 'In short, I am not arguing that the European economy will outperform the US this year, particularly given delays to vaccine rollout and the sizeable stimulus package that Biden looks set to pass. But two basic rules of investment apply: the stock market is not the economy and it is not just what you buy but what you pay for it. While certain segments of the global stock market look incredibly frothy, Europe still seems to be suffering from a case of excess pessimism.’

Much of what she says makes sense. I am still wary of assuming that consumers significantly increase their spending once vaccinations and lockdowns are complete. I think a lot of people will remain conservative until they are sure the recovery is established and that inflation is not going to be problem.
For many their sending pattern under covid will now have become habit presenting retailers with another problem.
I also think that there will be significant regional differences which could undermine the overall performance of the MSCI Europe Ex UK. The fact that its EX UK also means that it will not benefit tot the same extent from the strength in resources.Still a good read.

Electric vehicles may not be the climate solution after all. By Andy Palmer a former chief executive of Aston Martin and chief operating officer of Nissan, is chairman of Switch Mobility.
He notes that in the early 2000’s diesel car were thought to be better but it turned out to be otherwise.
'The crux of the diesel saga was that politicians overstepped their mark. Instead of identifying the problem, writing the cheques and leaving much of the rest to scientists and engineers — as they have done with vaccines — they fatefully dictated what they believed to be the solution.’
Today he thinks the same it true and that hydrogen might be better than batteries; there cold be synthetic fuels that could deliver.
He concludes 'And there will no doubt be engineers and scientists whose research will see them stumble upon the application of an environmentally friendly fuel that no one previously thought possible. In other words, politicians must avoid putting all of their eggs into one glovebox.If there is one good thing to have come out of this pandemic, it’s the setting of a new precedent for a much healthier and fruitful relationship between politicians and scientists and engineers. Let’s not stop here.'

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