Feb 23 FT China tells US to stop meddling, Chinese Stocks drop, Johnson covid exit plan, Apple +VE

23 Feb

MARKETs at 2:30pm HK time
Closed for Emperors Birthday
Pre market Consumer Confidence reading beat expectations and covid cases below 400 for a second day but US inflation concerns outweighed the data with tech under pressure.
Kosdaq opened lower and initially sold down to 940 before working lower to find support around the 935 level. From there it bounced and traded sideways currently -15pts (-1.6%) at 939
Kospi opened lower and sold down initally to 3,035 level before rebounding and working better, late afternoon it peaked at 3,094 before easing back, currently -4pts (-0.1%) @ 3,075.
Consumer Confidence Feb 97.4 vs 95.4 Jan (F/cast was 93)
Opened lower following the US and tested to 16,250 in early trades before working higher to test yesterday’s closing level but failed to hold above and eased back to 16,350 before then working higher to close at the day high +33pts (+0.2%) @ 16,443
CSI 300 opened lower but rallied 100pts in the first 30 minutes after the House Price Index came out stronger MoM and the forecast. Market then traded eased back to flat and traded around there into lunch. PM the market opened her and tested to 5,640 but unable to hold and sold down, Currently -6pt (-0.1%) @ 5,589
House Price Index Jan +3.9% vs +3.8% Dec (F/cast was +3.5%)
Pre market opened @ 30,190 -130pts vs -226pts ADR’s. With weakness in Ecommerce continuing but Petrochems and resources firm. Market initially dipped (probable margin call selling) before rallying back into the green on the China House Price Index data. It then worked higher through the morning to approach 30,800. PM opened at 30,948 after HSBC results were inline, dividend at upper end, no script and no buybacks. HSI is drifting lower (as is HSBC), HSI currently +345pts (+1.1%) @ 30,660
Expect markets to open higher; IG data shows FTSE +6pts higher at 6,625, Germany’s DAX +12pts at 13,977, France’s CAC 40 +9pts @ 5,780 and Italy’s FTSE MIB +36pts at 23,027. HSBC earnings may be a dampener with no buybacks. Other earnings include Manchester United and IHG Hotels & Resorts
Expect caution ahead of Powells testimony to the Senate Banking Committee, with investors looking for clues as to the Fed’s take on inflation. I except Powell to maintain the ‘watching’ approach.
Data due 
EUROZONE Core Inflation Rate, Inflation
UK Unemployment Rate, Claimant Count Change, Average Earnings, Employment Change, Labour Productivity, CBI Distributive Trades
US Futures 
Opened in Asian time Dow +50pts, S&P +0.2% and NDX +0.1% and have worked higher Dow +103pts, S&P and NDX both +VE
Data due Redbook, Case-Shiller Home Price, House Price Index, Consumer Confidence, Richmond Fed Manufacturing Index,  API Crude Oil IndexFed Chairman Powell semi-annual economic testimony Senate Banking Committee
Earnings Home Depot, Macy’s, Intuit, Thomson Reuters, Square, Toll Brothers, Jazz Pharmaceuticals, McAfee, Medtronic, Pioneer Natural Resources, Bank of Montreal

Front Page
Putin bolsters Lukashenko. Both men have attempted to ride out pro-democracy protests in their countries in recent months.
Brazil rocked by Bolsonaro move to ditch oil chief for army general
President Bolsonaro defiant on intervention. Petrobras and currency hit tumbled over the dispute over fuel prices which is unpopular. Many think the government will take an interventionist approach to affairs ahead of next years presidential polls.
Ex-Cosmo editor and ice hockey owner tap Spacs craze for $4.7bn Apex deal'Apex serves about 200 financial institutions (handling their clearing), controlling more than 13m customer accounts, 3.2m of which have opened this year with more than 1m being crypto accounts.’  Highlights how investors are looking for opportunities that cater to the fast growing amateur investment industry.

Ruling allows seizure of Trump tax records (Page 2)
Manhattan district attorney free to enforce subpoena in probe into former president.Without presidential immunity Trump is now under pressure from a number of criminal investigations. It notes the tax records are unlikely to be made public.
Biden pick for White House budget director in jeopardy (Page 2). The opposition coming because she has in the past ' issued a thousand mean tweets,’ In response she said  “I recognise the concern. I deeply regret and apologise for my language, and some of my past language,” Just goes to show that one should be careful about how you express yourself on social  media.  For the Biden administration the delay in confirmation could in turn delay the drawing up of budget plans -VE
Johnson unveils plan to axe all restrictions by end of June. (Page 2)
He set out a detailed plan to remove lockdown restrictions in England. The plan outlines four tests for moving along the path. Scotland, Wales and Northern Ireland are due to set out their easing plans soon.
Not in the article but the plan is Based on four conditions that must be met at each phase of lockdown easing.
1. the vaccine roll out continues to go to plan
2. vaccines show that they are reducing death and hospital treatment,
3. infection rates are not showing a risk of a new surge in a resurgence in hospital admissions,
4. new variants do not fundamentally change the situation and risks.

First key date 8 March; all schools will open with after-school outdoor sports and activities allowed.
Recreation in parks and other public places like parks, will be initially allowed for two people.
29 March, outdoor gatherings of up to six people (the rule of six again) or two households will be allowed. Outdoor sports facilities will reopen and organised sports activities will restart.
12 April Non-essential shops are expected to be allowed to open; with pubs and restaurants being allowed to serve people outdoors only.
17 May phase 3; pubs and restaurants will be allowed to serve indoors again. Cinemas, sporting venues and hotels will reopen, with up to 10,000 people allowed in the largest stadiums for pro sports to return on a modified basis.
21 June Final phase, it is hoped “all legal limits on social contact can be removed.”
It’s not quick but at least there is a timetable.

EU foreign ministers agree new sanctions on Russian officials (Page 4)
This is in response to the jailing of opposition activist Alexei NavalnyKey for investors is that this shows deteriorating relations between the EU and Russia. Since 2014 the Russia annexed Crimea sanctions have been in place. This is the first time they have been increased.
Read also Navalny case testifies to Putin’s grip on pliant courtsActivists say Russia’s rubber-stamp legal system is used by the Kremlin to scare off protesters and silence dissidents.  Many feel that Chinese courts are similar to Russian ones and so the interference with the Hong Kong judicial system is a concern to investors.  

China calls on Biden to end sanctions and stop meddling (Page 4)
Looks at the speech by China’s foreign minister setting out China’s requirements for normal relations; that the US 'lift sanctions and to stop interfering in the country’s internal affairs and suppressing its tech sector,’
It would appear that at present the 'Wolf diplomacy’ is continuing.
The response from the US was that Beijing was trying to avert blame for its for its "predatory economic practices, its lack of transparency, its failure to honour its international agreements, and its repression of universal human rights.”
For investors it is clear that relations are going remain fraught for the foreseeable future. Janet Yellen has said that tariffs will be reviewed but made no mention of removing them. On other policies the administration has made it clear that it wants to form a co-ordinated approach with allies and friends to deal with the long term strategic competition from China.
In that light it is unlikely that the Biden administration would remove tariff, sanctions or restrictions without securing some other ‘gains’.
What is also interesting but not in the article is that a number of countries are now raising concerns about Uighurs and other Chinese policies. It would appear that China is losing the edge. In the past it would use the threat of its economic clout to get countries to at least remain quiet on its activities. But yesterday there were calls from Canada, UK, European Minister and Turkey.

Companies and Markets 
Chinese stocks drop 3% in retreat from record highs on policy tightening fears
Looks at Monday’s fall the biggest for 6 months. Cites data that shows offshore sellers were net sellers for the first time since the Chinese markets reopened last Thursday.
Key being the PBoC draining liquidity either directly or by not issuing liquidity to make up for the expiring notes. Another signal was leaving the Loan Prime Rate unchanged as it has for the past 11 months. It notes the Shanghai 3 month interbank rate has risen to 2.85% (and did rise above 3% in November) having been below 1.5% in May 2020.
China has seen a strong recovery from covid and the PBoC is cautious about creating bubbles in the economy. Parts of the economy have done very well; exports of PPE related to covid and electronics but for other parts it is less clear. Credit concerns are also a big worry for the banking system, so the PBoC doesn’t want to add to the problem. With the stock markets back to 2018 levels but off the 2015 peaks so the government wants to be cautious.
The article notes 'The CSI 300’s price-to-earnings ratio, a common measure of valuation, remains just shy of its 2015 high of about 22.5, according to Bloomberg data.’ The difference is in 2015 profits were poor, for a lot of companies they are in a better position, although not all of them as recent defaults have shown.
So the PBoC is aware that if there is too much money around it ends up in the markets (or property) and if they then crash there will be a lot of public resentment. So its trying to walk a fine line, withdrawing monetary support as the middle classes increasingly invest in mutual funds and other savings programmes, which helps support the markets. It doesn’t want to undermine the market but it certainly doesn’t want to overstimulate.
If you look at the policy on lending to property, it's brought in new rules on debt and leverage but given companies plenty of time to adapt.
The other issue worrying investors is relations with the US (and other countries) which are not getting any better.  The Biden administration is seeking to enter new negotiations with allies and friends against China, who is being seen as increasingly as a competitor. That is likely to mean more pressure on some Chinese companies, especially those in the tech sector; which as in other markets is seeing its valuations being questioned.  The result is that investors are looking to rotate to resources and financials but property is still a question mark, I think you have to be very selective.  Overall there are good opportunities but as always good due diligence is required.

Dozens of Boeing’s 777 jets grounded
FAA orders checks after engine failure prompts emergency landing. Probably not as much of a headache for the airlines as it might have been under more normal circumstances. Interesting to see the the stock opened lower and rallied in the morning before selling off in the afternoon. But it is another issue for the company already reeling from the 737 Max jet issue.
Theses engines and planes have been around for years, the 777 is now out of production so there is now direct impact for Boeing. The concern will be that it is a manufacturing defect which would mean widespread changes for the operators. It could be a maintenance issue, which I am sure they would prefer, which might lead to more limited changes.

Apple seizes phone sales crown from Samsung. The launch of the 5G iPhone has been good news for Apple and its supply chain; selling almost 80m phones in the last 3 months of 2020.  (Worth noting that Largan Precision in Taiwan has proposed a record cash dividend per share of NT$91.5 based on last year’s earnings.)
Samsung was second. Huawei suffered most due to the US sanctions and dropped to fifth place below its Chinese rivals Xiaomi and Oppo for the first time since 2013.
Many expect Apple to continue to benefit from the 5G upgrade cycle in Q1; on the expectation that many Chinese will upgrade around Chinese New Year.
It notes that Samsung was seeing its market share eaten into by the cheaper Chinese rivals.
Not mentioned but Huawei just launched the Mate X2 foldable smartphone. It will be one of the first Huawei phones able to run its own HarmonyOS mobile operating system. The 256GB version will be priced at 17,999 yuan ($2,785) while the 512GB model will start at 18,999 yuan. The brand remains popular in China but internationally without access to key US software it is unlikely to be successful.
Whilst the Apple 5G supply chain will benefit; overall smartphone sales were -12% in 2020 but the decline the last quarter was only 5% QoQ. I would guess that under lockdown conditions the chances of losing or breaking your smartphone reduce significantly. There is also a lack of peer pressure to upgrade and being at home you have your other electronic devices available to use. I would expect that as lockdowns ease we will see an increase in sales, especially those looking to renew and move to 5G phones. That should be good news for the smartphone supply chain names too.

M&T agrees $7.6bn deal for People’s United (a smaller rival)
It is the latest in a series of regional US banking mergers but underlines the need for consolidation in the sector.

Cable makers wired into clean power boom as demand for undersea lines grows
Suppliers reel in investors with boost from EU green deal and Biden’s low-carbon drive.
An interesting read and whilst the article focuses on the cable makers for me the key here it that this will add to the demand for resources, especially copper and aluminium. As I wrote at the weekend a lot of renewable energy is located remotely, especially off-shore wind farms and solar panel fields in deserts. Cables are required to link them into grids etc. It estimates that 25% of an off-shore wind farm cost is spent on cabling (vs 37% on the wind turbine and 23% on the turbine foundation). The article estimates that back orders for cables are now between two and five years.
For me that underlines the fact that Commodities are going to see significant demand for the next few years; especially copper and aluminium.

FT Series. Runaway Markets. Green bubble warnings grow as money pours into renewables Investors pile into clean energy stocks with group valuations hitting dizzying heights.  An interesting read; again a case of too much money chasing too few opportunities; illustrated by the quote
“I think we’re 100 per cent in a green bubble,” said Gordon Johnson, chief executive of GLJ Research. “Pretty much every solar company I cover, their numbers got worse and the stock, like, tripled . . . This is not normal.”
A key factor seems to be having a good brand name and hence garner retail interest too. Key names mentioned Sunrun, Tesla, SunPower, Orsted (leader in off shore), Plug Power (hydrogen fuel).It is likely that a number of the supply chain names will also see increased interest over time too like the bade makers, gearbox makers etc.

Bond trading is finally dragged into digital age.   
Covid has accelerated a trend that was already happening. A lot of bonds have very unique characteristics which makes trading them electronically difficult but the rise of bond ETF’s has helped to move to electronic trading; although areas of the corporate bond market remain more bespoke. That is similar to equities most can be easily traded but sometimes a phone call is required; it is not all electronic.
He concludes ‘Nonetheless, the longer term implications are legion. Setting aside what it means for the career prospects of bond traders and salespeople who still think Python is a snake, the dawning of a more digital fixed income era raises opportunities and challenges for investors, banks, borrowers and policymakers.’
Just as it did when equites went electronic and the use of FIX became the norm, changes occur and new opportunities arise.

FT BIG READ. EUROPE In fear of a crackdown
Poland’s broadcasters and publishers see a proposed tax as the latest in a series of steps by the ruling party to curb independent journalism. The moves could yet pose another test of relations with Brussels.
An interesting read and one which may have many parallels with what is happening in Hong Kong; as RTHK sees a political appointee to run it which brings into question whether its there for the people or government. Jimmy Lai owner of Next Digital the publisher of Apple Daily being tried under the new National Security law and the speech by Xia Baolong, head of Hong Kong and Macau Affairs Office, who said only “true patriots” should head the SAR's administrative, legislative and judicial institutions.

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