Feb 24 FT Inflation, Chips, Powell, HSBC, Sony, Geeks bearing gifts and HK's budget


24 Feb

MARKETs @ 2:30pm HK time
JAPAN 
Nikkei re opened lower an initally sold off but found support around 29,850 which it tested a couple of times before working back to the opening level. But failed to break above and sold down into lunch. PM opened lower and drifted lower to close -462pts (-1.6%) @ 29,686 the day low
Topix opened lower and sold down 12pts in the first 10 minutes to 1,922 and then trended lower for the rest of the day, found support at 1,904 going into the close. Closed -33pts (-1.7%) @ 1,905
S KOREA  
Pre market Business Confidence missed, down MoM. Inflation concerns still overhang the markets
Kosdaq opened flat but initially sold down to 928 before reversing and worked higher to 944 around midday but then trended lower for the rest of the session to close -23pts (-2.5%) @ 914
Kospi traded in a similar pattern to close -58pts (-2%) @ 3,010.
Data
Business Confidence Deb 82 vs 85 Jan (F/cast was 83)
Tomorrow we get the BoK rate decision no change expected
TAIWAN 
Opened lower but worked higher to test yesterday’s close but having tested to a couple of times reversed and trended lower for the rest of the session to close -231pts (-1.4%) @ 16,213
After Market data due 
Industrial Production, Retail Sales, Export Orders and M2 Money Supply
CHINA 
CSI 300 opened slightly higher but trend lower through the session Currently -161pts (-2.9%) @ 5,418. Concerns remain about PBoC tightening despite assurances from that it will maintain stable policies.
HONG KONG Pre market opened @ 30,703 +70pts vs -73 ADR’s
Market traded sideways for the first 30 minute but then trended lower as the HK budget was announced. Selling accelerated around 11:15am on news that the govt would increase stamp duty on share transactions from the current 0.1% to 0.13%. Market found support in the morning at 29,860 level and bounced ahead of lunch. PM opened lower and trending lower, Currently -953pts (-3.1%) @ 29,689
The provision of E coupons expected to help retailers.
After market we get GDP Growth Rate Q4 (Q3 was +2.7% QoQ or -3.6% YoY)
Link to the Full HK Budget statement
 https://www.budget.gov.hk/2021/eng/index.html
Link to Budget highlights pdf
https://www.budget.gov.hk/2021/eng/pdf/Budget2021_eng.pdf

EUROPE 
Expect markets to open lower following the lead from Asia as Investors react to Powell’s testimony Currently London’s FTSE is seen opening 17 points lower at 6,600, Germany’s DAX up 6 points at 13,862, France’s CAC 40 1 point higher at 5,773 and Italy’s FTSE MIB 21 points higher at 22,912, according to IG.
Data due 
GERMANY GDP Growth Rate
FRANCE Business Confidence, Business Climate Indicator
Earnings from Accor, Wolters Kluwer, Lloyds, William Hill, Metro Bank, Reckitt Benckiser and Iberdrola.
US Futures 
Opened in Asia with the Dow hovering around flat, S&P -0.1% and NDX -0.2% but have risen Dow +40pts S&P and NDX +0.1%
Data
MBA Mortgage Applications and 30 yr Mortgage Rate, New Home Sales, EIA Oil Report Fed Chairman Powell semi-annual economic testimony at House Financial Services Committee
Earnings: Lowe’s, NVIDIA, Viacom, Public Storage, Booking Holdings, TJX, Brookdale, Royal Bank of Canada, Apache, Petrobras, Pure Storage, L Brands, Casper Sleep

Online 
Europe’s factories raise goods prices as supply bottlenecks bite
Manufacturers are passing rising cost on to clients, fuelling inflation in the eurozone.
'Economists, however, said higher prices at the factory gate will not be long-lasting and are being partly offset by more sluggish demand for many services hit by the pandemic, such as package holidays and travel, limiting the overall impact on inflation. “Supply disruptions — ‘cost push’ — are largely a result of the pandemic and are likely to be only a temporary phenomenon,” said Andreas Rees, an economist at UniCredit. “Output gaps will remain negative for the time being, especially in the services sector, and therefore limit the scope of demand-pull inflation.” Central bankers are also less concerned about the supply-side driven inflation than if it reflected a recovery in overall demand. Christine Lagarde, president of the European Central Bank, said this month: “It is going to be a while before we are worrying about inflation,” forecasting eurozone price growth will remain below its 2 per cent target for years. Allianz’s Utermöhl said the ECB should not be worried about rises in the prices of goods: “If anything it is a positive story of restarting the engine and things moving in the right direction.”’
Car chip shortage shines light on fragility of US supply chain
Semiconductor crunch becomes domestic political crisis after lay-off of assembly workers. An interesting read which notes the US action against China and SMIC has impacted the availability of chips. Whilst there is an argument for more production in the US but the costs make it unrealistic.'Others make the distinction between the US having the most sophisticated technology and intellectual property versus manufacturing, arguing semiconductors do not necessarily have to be made on US soil to secure supplies.’'“It’s not as much of a question of reliance as it is a question of maintaining an innovation edge over time,” said Willems, referring to US competition with China. He argued that building strong relationships with allies like Taiwan, South Korea and Japan, where many chips are manufactured, would be more effective than the US “trying to do everything”.’
Turkey’s Uighurs fear betrayal over Chinese vaccines and trade
Erdogan accused of toning down rhetoric about oppressed Muslims to avoid upsetting Beijing.

FRONT Page
Arrest stirs fear for democracy
A man holds a Georgia-shaped placard that reads “the space of freedom” in a protest after the arrest of the Georgian opposition leader.
Powell’s cautious ‘return to normal’ outlook steadies jittery markets
Vaccine offer hope of a more normal year but still a lot of uncertainty and that there was no change to the Fed’s current policy. Any spike in prices the Fed considers unlikely to be sustained; especially with the unused labour capacity in the employment market. He re-itereated that the Fed would not raise rates until full employment was achieved and inflation has hit 2% and was on track to exceed its target.
Key for the markets was him saying 'Expect us to move carefully, patiently, and with a lot of advance warning, before any changes are made.’
He was also asked about the merits of Biden’s stimulus plan but declined to give an opinion.
Larry Summers said a while ago that the Fed’s purpose was to arrive at the party and take the punch bowl away, that certainly is not going to happen this time.
See also Liquidity flood will create short-term hitch for investors by Mohamed El-Erian and The US rescue plan is a risky experiment It might be no bad thing if the fiscal stimulus ended up somewhat smaller than now proposed by Martin Wolf in the For Interest below
Oatly taps into frothy thirst for vegan milks with plans for $10bn flotation
Proceeds to fund growth and allow an exit for some early investors

INSIDE
Greece urges EU to ‘move more quickly’ on vaccine passports (Page 2)
In a bid to support its travel industry, comes ahead of a EU summit on Thursday regarding the introduction of vaccination passports. Some are resisting the move on the basis it would introduce a two tiers of citizens travel rights. Many other EU nations with a large reliance on tourism are supportive but Germany and France remain unconvinced. Interestingly Greece provides a digital certificate to show vaccination, the UK does not but it would be on ones medical record. Greece also stressed vaccinations would not be mandatory for travel but would also the who had been inoculated not have to take a Covid-19 test to enter the country.
Now that the UK has set out an exit plan for the pandemic I think more countries will be under pressure to follow suit. But judging from the situation in Israel the way forward is not straightforward.
Read also Central Europe braced for third Covid wave. (Page 3) Czech Republic, with EU’s highest infection rate per capita, warns health system is stretched and country may need foreign help. It is not the only one, Slovakia, Poland and Hungary are also reporting increases.

Facebook restores news in Australia truce (page 4)
Canberra agrees to amend draft law forcing platforms to pay for journalism. Effectively 'the changes would provide clarity for digital platforms and media businesses about how the code would operate. It features an arbitration system that would decide on the fees platforms would have to pay news providers if commercial negotiations failed.
The changes could give Facebook and Google more flexibility to escape the most stringent aspects of the code.’
The final law is likely to be the model for a number of countries in their approach to media platforms which is why Facebook is taking such extreme actions. But the key I think is the amount of backlash it got from users and investors when it imposed the ban.
See also LEX Facebook: Aussie rules A victory for Australia which believes Facebook and Google benefit more from news journalism than vice versa. But says Do not see this as a complete capitulation by the tech group. It has extracted concessions that may influence copycat legislation in other jurisdictions.  
Going forward 'Other authorities including Canada, the UK and the EU that are considering Australia-style laws should take note. The Australian government describes its conflict as a proxy battle for the world. Lawmakers elsewhere should not feel limited by Australia’s precedent.’

Myanmar coup fails to deter Japanese business (Page 4)
Kirin ended venture with links to armed forces but other groups opt to stay in country.
In Kirin’s case its business had direct links with the military. Many other companies don’t have those links and are keen to show support for ordinary workers in time of national crisis.
Japan is one of the biggest investors in Myanmar which is one of Asia’s poorest countries. Official loans from Tokyo to Naypyidaw reaching ¥1tn ($9.5bn) over the past decade. Japan has also been one of the longest supports of Myanmar despite previous US pressure and sees its presence in the country as a counter to the China’s.
Kirin says it is not pulling out of Myanmar but seeking a local, non military partner to buy the MEHL stake. But whether the military will allow that remains to be seen.
Companies that are currently remaining include: 'Sumitomo, which is involved in power, logistics and telecoms; carmakers Toyota and Suzuki, which have built local factories; property developers, food producers and clothes makers. Daiwa Securities played a key role in creating the Yangon Stock Exchange.’
It is unlikely that Japanese companies will just leave the article says because they have invested too much time and money. There is also the fact that Myanmar needs their presence. What makes the situation especially fraught is the large Chinese presence in the country (its neighbour and largest trading partner).
Prior to the coup the leading Generals visited China and so it some think that they may have China’s support which may have been what gave them the confidence to mount the action. China has denied such claims but it did block the use of stronger language in the UN condemnation statement. The reality is that as with North Korea the truth of the relationship will not be publicly disclosed, but as with North Korea it will be a matter of watching the actions.
Companies & Markets
HSBC woos investors with plan to base ‘heart’ in Asia
• Pledge to invest $6bn across region
• Payout to resume despite profit fall
The focus will be on Hong Kong, China and Singapore, and it confirmed its intention to sell its US retail arm and exit its French consumer bank.
CEO Noel Quinn announced some senior staff moves to Hong Kong but not his own.
Still a focus on cost cutting (seeks to cut 40% of HQ costs) but also the expansion of the wealth management business , where it is seeking to hire 5,000 advisers.
I think a key point was that there was no radical overhaul plan or targets. So often in the past is has made such statements only to find itself unable to achieve them. This time it is, I think, aiming to win back sceptical investors by its actions. Sustainable dividends was one. It mentioned potential buybacks but not in the short term and I think that disappointed many investors, especially after a number of US banks have.
HSBC’s also has the added backdrop of increased tensions between the UK and China over the handover agreement. Yesterday’s announcements indicate that in many ways it will focus on its roots but I think it will be a hard slog because the competition in many ways has stolen the march what should have been the banks advantage.
It was also interesting to see them talk about cutting property and travel costs; saying it will cut some of its more expensive properties. That raises the question of why it has it not done that before?
But key is that the new competitors, the on-line and virtual banks have minimal property costs. It will be interesting to see if they cut the number of branches in HK? Unlike many places the branch network in HK see’s high daily use but again that is probably due to historic norms, whether the banks and its existing clients can change remains to be seen.
Another interesting point was the increase in impairment charges for bad loans which climbed $1.2bn in the final quarter, that is in contrast to the US banks which actually saw a reduction.
Editorial HSBC offers lesson in corporate realpolitik. Bank’s pivot to China recognises the country’s decoupling from west.
HSBC is following the money and for the moment that is in China.
Key is 'The decoupling that began with the downward spiral in US-China relations threatens to spread beyond technology. It will inevitably affect all industries, from car manufacturing to luxury goods. Businesses will have to choose between western markets and access to China, and between liberal and authoritarian value systems.’
Lex HSBC: spin off the UK bank. 'Medieval cartographers oriented their maps by putting Jerusalem at the top. HSBC’s drafters have done something similar with Beijing. Europe’s largest bank will shift resources to fast-growing Asia. Chief executive Noel Quinn is on the right track. But he must do more. He should give serious consideration to spinning off a UK unit worth about £13bn.’Concludes 'Shedding the dragging anchor of the UK would appal City traditionalists and many UK politicians. Yet the clue to HSBC’s identity is in its full name — the Hongkong and Shanghai Banking Corporation.'

Long game Sony remains upbeat as chip shortage threatens supply of PlayStation 5
Despite the current chip shortage Sony still thinks it can produce a decent number of its much in demand PS5 consoles in the 2H 2021.
Lockdowns have been good for its gaming division and Sony has already upgraded its forecasts to reflect that. Whilst the chip shortage is expected to improve through the year they still don’t know if they will have enough chips to meet seasonal demand going into holiday sales season.
Its competing with Nintendo and Microsoft. It quotes one analyst who said “While far from weak, both Sony and Microsoft will rue their inability to produce more consoles to cater for strong demand,” whilst another said “For them to catch up, demand has to slow down,” he said. “I don’t see any end in sight.”
Overall positive for Sony but again shows the importance of supply chains and the needs to work closely with suppliers.

Beware of geeks bearing gifts, say Japan car sector insiders. Looks at Apple’s approach to car manufactures; notes 'almost every Japanese car-maker has been asked whether it has been approached by Apple to take part in its car efforts. The responses from Mazda, Subaru, Nissan and Honda have varied from “no comment” to indications of vague readiness to work with tech companies.’
The dilemma of working with Apple seems to come down to the positive of assistance in moving to zero emission vehicles against the negative of losing brand recognition as happened when Sharp and Panasonic moved from consumer facing to parts supplying.
Furthermore if the Auto sector than went along the progression of becoming, like Foxconn, an assembler it could take Japanese manufacturing to a new level.
The key seems to be that Apple knows that Japan has good tech, it currently has 900 Japanese suppliers. It also knows that many of the smaller auto makers do not have the cash to invest to make the move to electric vehicles but they do have currently idle capacity. Many of the Japanese makers already have tie ups but no permanent agreements.
For the car makers negotiating a good deal whilst they have the upper hand will be key, especially as Apple knows the value of it brand and leverages that leaving little margin for the supplier. Hyundai and Kia are said to have baulked at the terms Apple was suggesting and there is certainly a lot more involved in producing cars than assembling phones or other appliances. There is also the fact that it is not assured that Apple can design an vehicle that matches its success in phone and computers; something else the manufacturers need to be aware of going into the deal.

Tesla rival Lucid breaks Spac record
US electric car maker’s $24bn deal marks biggest reverse merger of its kind.An interesting read, apparently a serious competition to Tesla.
See also LEX Lucid Spac: through a glass, darkly
'The biggest winner is Lucid’s largest current shareholder, Saudi Arabia’s Public Investment Fund. It will roll in its stake at $10 a share. In return it will receive two-thirds of a listed company theoretically worth $64bn at a lunchtime trading price yesterday of $40. The Lucid business was valued at just $12bn in deal documents.
At $40 Lucid looks less of steal compared with Tesla. By rolling over inexpensively, PIF and other Lucid backers have profited instantly and handsomely. That value creation has been powered by retail investors some of whom may have been unclear what they are buying. Klein has already raised his fifth and sixth Spacs.'

Mitsubishi Motors set for Europe output U-turn
In July it announced it was going to stop building cars in Europe under a reorganisation of its alliance with Nissan and Renault but now it looks as if it might reversed that decision. There is a board meeting tomorrow to consider a proposal from an alliance meeting on Monday to reverse that decision .
Key seems to be 'The decision to have Renault produce Mitsubishi cars at its French factories in a manufacturing deal, if finalised, would force the Japanese company to justify the U-turn — and face down accusations that it yielded to a Renault campaign to protect French jobs.’
Interesting to note a lot of its previous dealerships have sold operations or changed into repair facilities for the brand. Also worth noting the operations had been loss making and are for combustion engined vehicles which would make the decision to resume a strange one unless something else radical had happened.

WeWork’s co-founder nears SoftBank settlement. 
Key is that settling the outstanding litigation would allow WeWork to be bought by a Spac and achieve the listing it failed to get in 2019. It could also mean that Adam Neumann get almost $500m in cash and a stake in a public company. An interesting read and it notes that WeWork despite a radical downside is continuing to lose money. Whilst costly still +VE for Softbank.

Metal fatigue blamed for 777 engine failure. 
The probable reason and will mean increased inspections of the Pratt & Whitney PW4000-112 engines in service and going forward shortened times between check ups. That should actually be good for Boeing because as the article says 'United Technical Operations, a division of the airline, with Pratt & Whitney working on some engine components. UTO’s website said the unit’s San Francisco facility was the only one in the US equipped to work on the PW4000-112 engine.'

For Interest 
Liquidity flood will create short-term hitch for investors by Mohamed El-Erian president of Queens’ College, Cambridge university, and adviser to Allianz and Gramercy
Looks at what may happen as more fiscal policy is added to the Fed’s monetary policy as the Biden stimulus package becomes reality. 'This raises interesting questions as to whether the beneficial result for markets will compound or, instead, involve volatile contradictions requiring careful active management.’
He notes that from Powell’s testimony yesterday the Fed has no intention of changing its current policy despite the improving outlook.
Investors initial reaction to the Biden package was positive; driving markets higher but recently some are questioning when is so much stimulus too much?
'The argument for never is based on the view that endless liquidity injections guard against most corporate bankruptcies. The counterargument stresses twin liquidity fears. One is the destabilisation of inflationary expectations fuelling too rapid a steepening in the yield curve, disturbing investor conditioning, and increasing the probability of a market accident.’
A second argument is that if the Fed doesn’t taper it faces ‘lose-lose policy options let the risk of financial instability rise and threaten the real economy or intervene further in the functioning of markets, worsen wealth inequality and risk more distortions that undermine efficient financial and economic resource allocations.’
So it could be that what is good for the long run may not be good shot term but currently Fed policy means it could loosen further to help policy if yields continue to rise.
Key he says is for fiscal stimulus to be carefully targeted and the Fed needs to work out how to 'lift its foot off the monetary accelerator slowly.’
He concludes 'This much-needed handoff, from monetary to fiscal, would be a lot smoother if prudential regulations were to catch up more quickly with the migration of risk from banks to non-banks, including “sand in the wheel” measures to moderate excessive risk-taking. The longer this solution evades us, the greater the risk of financial instability undermining economic wellbeing.’

I do think the Fed and Treasury have the potential to work together very well because of Janet Yellen’s knowledge of the working of the Fed. They are very well aware of the inflation risks but I worry that they might under estimate the markets ability to throw a tantrum at the first sign of any tightening.

The US rescue plan is a risky experiment.
It might be no bad thing if the fiscal stimulus ended up somewhat smaller than now proposed by Martin Wolf
Focuses on when is stimulus too much and looks at previous occasion for comparison but emphasises that a pandemic is very different from a financial crisis. The recovery is also different.
Notes 'Some analysts seem to view a big upsurge in inflation as inconceivable, because it has not happened for a long time. This is a bad argument. Many once thought a global financial crisis was inconceivable because it had not happened for a long time. In the 1960s many thought the inflationary upsurge of the 1970s similarly inconceivable.’
He thinks Biden should split the stimulus some now more later but accepts that Biden has taken the view now is the time to go large because of the downside risks of too little too late. He also notes the implications on the Eurozone of the package. He concludes 'If enacted, the $1.9tn package will be a risky experiment. It might be no bad thing if it ended up somewhat smaller than now proposed. Whatever is decided, one point is clear. The success of the package is of immense importance. Proving that an active government can deliver good things to the public is essential for the health of American democracy. I pray that the Biden administration’s gamble succeeds.'

Fixed income. Reflation trade Investors spooked by worst start to year for bonds since 2015  Rising yields reflect nerves that stimulus and vaccine are set to stoke stronger inflation.
A good summary of the current situation.

CureVac spots silver lining after jab delay
German biotech’s Covid shot launch has fallen behind rivals but time spent perfecting the formula brings benefits.
Key being that its perfecting a vaccine that is easy produce and ship, has the lowest active ingredient dosage and uses technology that can be adapted to meet the needs of tackling a mutating virus with regular vaccinations.
'“In two years from now, nobody will care any more [about the delay],” said von Bohlen. “Capacity, quality and price — that is what everyone will care about,” he added, predicting that regular vaccinations would be required to protect against virus mutations and that Cure-Vac’s mRNA technology would be ideally suited to that challenge.
''Unlike vaccines by BioNTech and Pfizer, which have to be kept at an ultra-cold -70C while being shipped, and Moderna’s product, which must be kept at -20C, CureVac’s candidate is able to survive in standard fridge temperatures for at least three months, making it much easier to deliver to the developing world. “That’s not a miracle,” said Hoerr. “That is technology. You have to work on that.”
''Additionally, at 12 micrograms per dose, it requires the smallest amount of active ingredient among the mRNA vaccines, enabling more efficient distribution''
"If successful, the company built by Hoerr could even eclipse Bayer’s €64bn market value, said von Bohlen, and along with BioNTech, reshape the entire sector. “MRNA has the potential to become, by orders of magnitude, the broadest therapeutic class in medicine,” he said. “It’s a bit of a revival of the German strength in the pharmaceutical industry.”’
An interesting read and goes to show whilst the early bird get the worm, the second mouse gets the cheese.

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