Feb 18 FT Digital RMB, China blocks Taiwan vaccine deal, Inflation threat


18 Feb

MARKETs at 1:30pm HK time
JAPAN 
Nikkei 225 opened slightly higher and initially rallied to 30,560 but then sold back down to the opening level in the space of 25minutes. It then traded sideways into lunch. PM opened lower sank to 30,140 but now trading sideways slightly higher Currently -33pts (-0.1%) @ 30,260
Topix similar open but then trended lower through the session; currently -17pts (-0.9%) @1,944
Pre Market Data
Foreigners Bond Investment Yen 477.1b vs 1027.5b prior
Foreigners Stock Investment Yen 330.1b vs 462.5b prior
Tomorrow pre market we get inflation data and later PPI
S KOREA  
US Inflation concerns continue to impact sentiment, Tech saw weakness.
Kosdaq opened flat and was trading sideways (982/975) until around 12.30pm when it sold down to 969 level. Then ticked back to 971. Currently -9pts (-1%) @ 970
Kospi opened slightly lower but followed a similar patter selling down to 3,090 leve before a bounce. Currently -32pts (-1%) @ 3,102
Data
Foreign currency deposits at banks in South Korea fell in January on a decline in corporate holdings of the US dollar deposits, central bank data showed Thursday as companies repaid their US dollar-denominated debts last month, the BOK said.
Tomorrow pre market we get PPI data
TAIWAN 
Opened flat and traded sideways until about 10:30 when the market rallied to test 16,500 but unable to break out an consolidated back to the opening level, before working higher again; currently +62pts (+0.4%) @ 16,425
CHINA 
Market re-opened higher at 5,922 (vs 5,808 previous close) but then sold down through the session. Saw some support at 5,800 level but then sold down 5,750 going into lunch. PM market looks to be working higher Currently -14pts (-0.2%) @ 5,794
HONG KONG 
Pre market opened at 31,183 +98pts vs -50pts ADR’s but then sold down, initially seeing support at 30,840 level and trading sideways for 90minutes but then sold down to 30,605 before a small bounce into lunch. PM opened higher. T/O showing a significant increase with Connect flows resuming.
Data after market Jan Unemployment Rate (Dec was +6.6% and F/cast is +6.5%)
EUROPE 
Expect markets to open lower following the weakness is Asia as investors remain concerned about the potential threat of rising inflation in the US and tonights initial claims data. Earnings focus with CS, Airbus and Daimler amongst those due.
Data due
EUROZONE New Car Registrations, Monetary Policy Meeting Accounts, Consumer Confidence Flash,
US Futures 
Opened Dow +10pts, S&P and NDX flat but have ticked lower; Dow -24pts S&P and NDX but slightly -VE. Inflation concerns and caution ahead of tonights initial claims data.
Data due Import Prices, Export Prices, Initial Claims, 4 week average Claims, Continuing Claims, Housing Starts, Building Permits, Philadelphia Fed Manufacturing Index, EIA oil report, 30 year TIPS auction.
Earnings: Walmart, Applied Materials, Cabot Oil & Gas, Barrick Gold, Southern Co., Waste Management, Marriott, Dropbox, Trip Advisor, Consolidated Edison, Credit Suisse, Barclays, Airbus, Daimler.

Front Page
Google agrees deal to pay for News Corp journalism Completing a deal as the Australian parliament began debating a new bill that could set a global standard for a bargaining code.  Google is obviously hoping that by agreeing deals the new legislation will be less onerous. Facebook has announced an alternative course saying that it will drop all Australian news. It will be interesting to see how much impact that has on Facebook.
Brussels triples Moderna vaccine order to head off variants and quash critics.As part of its push to prepare for new variants of the virus and the possible need for booster shots.
Italy’s reformation Draghi outlines path for regaining economic health. Looks at his maiden speech as PM
Inside 
Taiwan accuses China of vaccine blocking (Page 4)
BioNTech faced ‘political pressure’ after Taipei tried to buy, claims Taiwan's Health minister. Says the Taiwanese Government had got as far as drafting press releases when the deal was pulled. The article notes how Taiwan also claims that the WHO failed to act quickly enough on covid despite Taiwanese warnings again due to pressure from China.
Key here is that BioNTech had a general licensed agreement with Fosun Pharmaceutical as its general agent for Greater China and Taiwan had beenincluded in that, on the basis of China’s claim that Taiwan is actually part of China, which the Taiwanese do not agree with.
The Taiwanese government wanted to deal directly with BioNTech “We thought it more prudent to speak to the Germans directly, rather than go through a Chinese company that has to comply with Beijing’s policies,” he said. “Our understanding is that when the contract was ready to be signed in December, Fosun Pharmaceutical intervened.”
The direct talks had been underway since June and BioNTech had never demanded that Taiwan go through Fosun Pharmaceutical. It also notes that Taiwanese officials believe Forun Pharmaceutical had been in contact with Taiwanese counterparts about vaccine sales admitting that there was nothing against Fosun Pharmaceutical protecting its business interests.
It is not clear whether it was Fosun Pharmaceutical or the Chinese Government that scuppered the agreement but it does put the Chinese government in a poor light and also highlights how China’s unjustified claims on Taiwan could impact the vaccination effort in Taiwan. It also makes clear that going forward companies should respect Taiwan’s sovereignty and not include it in distribution agreements without consulting it.
Bond sell-off stirs warnings over strength of US stocks
Investors say a further sharp rise in yields would threaten Wall Street’s record run. The recent move in yields has many investors trying to work out where the tipping point for equities is.
Quotes Kiran Ganesh, a multi-asset strategist at UBS Global Wealth Management.
“If we see a gradual increase in yields over the course of this year and next year, that is something the equity market is happy to digest. If things happen a bit more quickly . . . that could lead to more substantial problems.”
The key is inflation expectations. Yesterdays strong retail sales and PPI data suggest that there is pent up demand. But the Fed’s preferred indicator the Core personal consumption expenditure price index remains at 1.5% below the Fed’s long term target. It notes that for stocks moderate inflation (low but rising) is usually good. Furthermore the retail sales data could reflect a return to a more normal way of life which would again be a good indicator that the broad economy is recovering.
It thinks that stocks maybe more resilient that in previous inflationary cycles because yields are low and the Fed is happy to allow the economy to run hot before raising rates. But even so some shares and sectors are likely to come under pressure, especially those with stretched valuations as investors review the rates used to value future cashflows and access the impact on input costs that could squeeze profits squeeze profits.
Working out that tipping point is very subjective but there is broad agreement that high growth tech is less attractive and financials and energy become more attractive; with investors looking for companies that are cyclically exposed. With the latest US stimulus plan making progress many think the tipping point could be reached by this summer.
Another quote from UBS’s Ganesh “There is going to be a moment in the summer where we have above target and rising inflation, a strong GDP print, interest rates close to zero and monetary policy being pumped in. The Fed is telling us it is going to be fine, and we think it is going to be fine . . . but that is likely to lead to nervousness.”
The key is timing by the Fed how the market reacts; if we see a taper tantrum from the market and the Fed backing down then the risk of run away inflation will rise significantly and that will be very bad as the likes of Larry Summers was recently warning.
I think a number of investors have already started to rotate and have started putting inflation hedges in place. I view the move in Bitcoin as maybe reflecting peoples preference for that over Gold as a hedge; it's cheaper to store and easier to trade.

Yellen must tell Asian central banks to stop currency manipulation By David Waddill FX strategist at Moore CapitalManagement.
Basically saying that Asian central banks including or maybe especially Japan and China have intervened to suppress the value of their currencies. He wants to see the excess savings of Asian nations being drawn down and used to stimulate global growth.
He says 'Stronger currencies would boost Asian imports and, instead of intervention monies going into our overpriced bond market, capital investment at the margin would tend to flow to the US, not Asia.’
He accepts that the semi-annual report on foreign exchange partners has tempered intervention but not stopped it. Says China just better at hiding it and whilst Japan’s Ministry of Finance is not intervening the Government Pension Fund is.
Suggests that Janet Yellen should start with private conversations but if that didn’t work then to use sanctions to effect change. He says that markets should determine the price of the currency.
Concludes by saying 'President Joe Biden has called for unity with domestic partners to deal with fallout from the virus and inequality in the economy. Shouldn’t the Treasury secretary, who is the spokesperson for foreign partnership in economic affairs, ask for the same unity of purpose in the international sphere?’
I always find it difficult to justify that the US holds monthly Fed meetings to set its interest rate which impacts the value of the US dollar for the globe but then complains if other countries do anything that would impact the value of their currency.

FT BIG READ. CHINA. Currency control
The rollout of the ‘e-yuan’ central bank digital currency will create competition for fintech systems run by private groups such as Ant Group and Tencent. But it will also boost Beijing’s surveillance state.
Looks at the roll out of a digital currency which if fully adopted one banker said would mean the PBoC could see every transaction.The first stage is adoption nationally but down the line the hope would be for it to be adopted internationally too.Unlike crypto currencies the digital renminbi would be issued and regulated by the PBoC and means China will be able to see transaction real time and that will allow it to 'combat money laundering, corruption and the financing of “terrorism” at home by strengthening the already formidable surveillance powers of the ruling Communist party.’
It will also mean the PBoC will be able to see if people’s spending matches their declared income. If the digital currency is successful it could undermine Ant and Tencent’s payment systems because the digital renminbi is distributed direct to e-wallets of individuals, who can then spend via smartphone wallets. The government has already indicated that it would promote the use of the digital currency in an effort to undermine the monopoly that Alipay and WeChat have on consumer data. Data that the PBoC has been trying to get them to share but without much success. The advantage of the digital Renminbi over the other two is that as legal tender no merchant can refuse to accept it. It is also looking at a system to allow for payments to be made even when there is no internet.
The article labours the point that it will undermine Alipay and WeChat Pay but it may not, as some people may view their privacy as more important. Also the ability of Alipay and WeChat Pay to provide loans etc may mean they still retain some advantages.
But the article does stress how much control it will give the government to see transactions and even block transactions. China it says wants to balance anonymity with anti-money laundering, CTF [counter-terrorist financing] and tax issues, online gambling and electronic criminal activities.
The article also mentions how the promotion of its own digital currency is seen as a bulwark against the threat of foreign digital currencies such as the Facebook led Diem.
In the longer term it is hoped that the move with also help the internationalisation of the renminbi. It notes that recent JV with Swift for cross border payments
'The new entity, called Finance Gateway Information Services Co, is charged with integrating information systems to facilitate the rollout of the digital currency, according to people familiar with the venture. Swift said the venture was not related to the digital renminbi but was “compliance focused”.’
The big problem China has in trying to internationalise its currency is that access to Chinese markets is limited and moving money out of China is problematic again reducing the appeal.

SEC urged to treat index providers as fund managers with tighter regulation.A new academic study that calls for action by US regulators; making the point that the index providers provide benchmarks but are not regulated. They are treated as data publishers. But their decisions about which stocks to include or exclude carry great weight; especially for tracker funds and its a role that goes beyond just publishing data.  So they are effectively similar to active fund managers; who are regulated.Obviously the index providers don’t want to be regulated as it would increase their costs.  The paper also recommended that licence fees should be disclosed in a fund prospectus so that investors are aware and can make more informed comparisons.

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