Feb 25 FT HKEX results, Hyundai recall, Euro inflation, Vaccine diplomacy, China's BRI


25 Feb

MARKETs at 3pm HK time
JAPAN 
Nikkei 225 opened higher and traded sideways all day in a tight range to close +497pts (+1.7%) @ 30,168
Topix traded in a similar pattern although slightly weaker start and resistance throughout the day around 1,930 level and sold down at the end to close +23pts (+1.3%) @ 1,926
Data 
Leading Economic Index Final Dec 88.3 vs 96.1 Nov (F/cast was 94.9)
Coincident Index Final Dec 95.3 vs 87.8 Nov (F/cast was 87.8)
Tomorrow we get
Tokyo CPI, Industrial Production, Retail Sales, Foreign Bond and Stock investment, Housing Starts and Construction Data.
S KOREA  
BoK kept rate unchanged at 0.5% as expected.
Kosdaq opened higher and rallied to 922 in the first few minutes of trading and then worked steadily higher through the day to close at the day high +30pts (+3.3%) @ 936
Kospi traded in a similar pattern to close +105pts (+3.5%) @ 3,100.
TAIWAN 
After market Wednesday there was strong export data which along with the US working higher encouraged the market.
Opened higher and tested 16,475 in early trades but having failed to break out sold down to 16,350 level and traded sideways for the rest of the morning around that level (low was 16,322). After midday market worked better to close +240pts (+1.5%) @ 16,452
After market data due
Unemployment, Retail Sales, M2 Money Supply
Tomorrow we get Current Account
CHINA 
CSI 300 opened higher at 5,494 but sold down initially 5,450 before rallying into lunch at 5,515 just off the morning high. PM market sold down to close +32pts (+0.6%) @ 5,470
Sentiment remains weak with uncertainty over US relations and PBoC policy.
HONG KONG 
Pre market opened @ 30,174 +456pts vs +327pts ADR’s with Ecommerce names seeing interest.
Market initial sold down to 30,453, partly margin selling after yesterday’s sell off but then rallied to test 30,450 ahead of lunch. PM eased slightly initially and then resets the highs but unable to break out and eased back to 30,200. Currently +465pts (+1.6%) @ 30,185
A broad based rally but HK EX still weak along with Bud apac post results
Results at lunch: Stand Chart results NP -69% YoY announced intention to continue share buyback but still sold off. Results also from Hysan; swung into loss but FY dividend flattish, Galaxy FY 20 loss but better than expected
EUROPE 
Expect markets to open higher,
FTSE is seen opening 25 points higher at 6,687,
DAX up 78 points at 14,059,
CAC 40 up 28 points at 5,825
FTSE MIB up 163 points at 23,244, according to IG.
Earnings out from Standard Chartered results NP -69% YoY announced intention to continue share buyback but still sold off.
Earnings due from Anheuser-Busch InBev, Veolia, AXA, Bayer, Aston Martin, Telefonica and Adecco Group
Data due 
EUROZONE 
Loans to Household and Companies M3 Money Supply, Economic Sentiment, Consumer Confidence, Consumer Inflation Expectations, Industrial Sentiment, Services Sentiments
GERMANY 

Consumer Confidence
FRANCE 

Consumer Confidence
US Futures 
Opened in Asian time Dow +61pts, S&P +0.17% and NDX +0.14% and have risen Dow +100pts S&P +1.1% and NDX +1.3%
AHEAD Durable Goods Data, GDP Data (Price Index, Growth Rate), Initial Claims, 4 week Average Claims, Continuing Claims, PCE Prices, Core PCE Prices, Pending Home Sales, EIA Natural Gas Report.
Earnings: Salesforce.com, Norwegian Cruise Lines, Etsy, Best Buy, HP, Shake Shack, Beyond Meat, Anheuser-Busch Inbev, Dell Technologies, Virgin Galactic, American Tower, Cleveland Cliffs, Airbnb, Carvana, Door Dash

FT ONLINE 
Shares in Hong Kong bourse operator plunge as city increases trading tax.
Government move to raise duty for the first time in almost 30 years threatens core HKEX business.At one stage HK EX (388 HK) was -12.3% but finished -3.5% on the news.
At its press conference after market it noted that it was disappointed by the government decision and said it had not be consulted about the decision in advance. Although if it had it would have probably have to had halted trading in its shares. It did however acknowledge the levy was an important source of government revenue.
Personally I doubt the move will have much impact on trading volumes, as the Lex article points out it is a small rise and unlikely to undermine Hong Kong’s overall attractiveness key being the fact that there is no capital gains tax unlikely number of internationals markets.
It is also worth remembering that HK EX has been widening its services from just trading in HK to buying bourses overseas along with selling data streams.
Trading volumes are more likely to be impacted by any further US sanctions on US investors holding Stocks with associations to the Chinese military or mainland funds being direct by Beijing.

Hyundai Motor rolls out the world’s costliest electric vehicle recall.  
Replacing fire prone batteries is estimated to cost about US$900m.
It will replace 82,000 vehicle batteries and the cost will be reflected in final quarter earnings. The company says its first priory is customer safety. The batteries are those made by LG Chem’s factory in Nanjing China and the two companies are discussing how to split the cost.
It follows an earlier recall back in October when the fires were attributed to software problems; the latest recall was parked by a vehicle fire after the software upgrade.
The article notes that other EV makers has only upgraded the battery software, which can be done relatively cheaply.
The ministry is still investigating the cause and so far has only said that it found some defects with the LG Che Nanjing batteries.
Worth noting that most EV makers have had fire issues with the batteries and there is intense ‘wrangling’ between the EV makers and the battery producers over who is responsible.

US clearing house seeks quicker settlements after GameStop saga
DTCC proposes one-day process following calls from broker Robinhood.
Robinhood is saying the that two day clearing process, to reconcile deals and transfer assets is too long and that was a factor in its having to restrict trading.
Some are saying the process should be instantaneous.
The point of clearing houses is to allow time for the processes to be undertaken and they also ensure the trade is covered in cases where one party is unable to meet its obligation.
It is thought that what caught Robinhood out was the part of the margin calculation for volatility which could be up to 41% of the margin requirement. The real problem for Robinhood I would think was the amount of margin that it extended to its clients.
The call to make settlement instantaneous would require something akin to blockchain technology which is possible but likely to increase the cost as brokers and clients would have to establish new back and middle office systems/technology to facilitate such a move. The article notes that some brokers are exploring that avenue.
Instant settlement would also be more costly as it would mean trades having to be pre funded. Brokers would not be able to net down positions; a process the article says compresses the amount of cash required by 98%.
That means more costs or a a longer time for clients looking to rotate or switch positions either putting up cash for both sides of the trade or waiting for the traded to be complete to enable to second leg to be undertaken. It would also impact share lending and short selling.

The key being at the end of the day the retail clients will lose out. But more importantly is raises the question of whether Robinhood is a broker or just a finance house. It doesn’t charge commissions but gets paid for selling flow. It is looking to disrupt an existing system for its benefit not for its clients; they are just the means to its success.

Furthermore the implications for ETF and mutual funds are even more complicated. A fund managers decision to sell can affect 100’s of sub accounts designing technology that would make instantaneous settlement possible would be mind boggling. Considering even today that some trades fail due to technical problems. I know from my experience at Haitong that a number of the Chinese mutual fund systems are quite basic and whilst they are improving, it will take time.

In Asia where retail clients trading on margin is very common the brokers have very good systems for dealing with margin accounts and knowing when to make margin calls. Usually they know within minutes of the market close which positions they are exposed on and sometimes even before the market closes and can call clients to get extra margin intraday. Key being that they hold the client's assets and can sell any of the clients other stocks to cover the potential loses. They are also adequately financed. In China margin is determined by the authorities as to how much margin each individual stock is afforded.

No doubt over time the systems will become more efficient but it all comes at a cost. Those currently providing blockchain type instant settlement are not doing not for free. Historically it was why brokers charged commission, to pay for the provision of a service. When your broker isn’t charging you, maybe you aren’t actually getting a service but being used?

FRONT PAGE 
McKinsey to ditch Sneader as head after string of crises
Voted to replace Kevin Sneader as global managing partner in a historic rebuke over his handling of a string of crises, say several people with knowledge of the matter. Although some of the crisis arose before his tenure started.
Premier league Modi renames India’s colossal cricket stadium after himselfMore use of symbolism but critics poked fun “World’s largest stadium dedicated to the world’s largest personality!”
Goldman and Blackstone chiefs add to chorus of support for $1.9tn US stimulus. 
'In a letter to congressional leaders from both parties yesterday, more than 150 business leaders based in New York City called for “immediate and large-scale federal legislation” to tackle the fallout from the pandemic. “Previous federal relief measures have been essential, but more must be done to put the country on a trajectory for a strong, durable recovery,” they wrote.

INSIDE
Eurozone inflation hits highest level in a year (Page 2)
Rising prices for many non-energy industrial goods are biggest factor.  Adds to yesterdays on line article that I wrote on yesterday under Europe’s factories raise goods prices as supply bottlenecks biteManufacturers 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.”’
This article adds about input prices rising at the fastest rate for 10 years according to IHS Markit data. 'The impact was felt hardest in the car, chemicals, metal and mining, resources and basic materials sectors.’Notes that shipping times have lengthened as as demand outstripped supply; 'Hapag-Lloyd, said last week all its ships were at sea and idle capacity in the sector was “virtually down to zero”, forecasting this “perfect storm” would last at least a few more months.’  Freight costs have risen from $1,400 in March 2000 to almost $8,000 this month.  'Hapag-Lloyd boss said many of its containers were full of computers, fitness equipment, power tools and games consoles. “As travelling, dining, going out was not possible in lockdown, consumers instead spent money on goods and improving life at home,” he said’ That has been good for the likes of Techrtonics (669 HK) but may also mean that we do not see a surge in retail spending when the lock downs end.Steel shortages have prompted production cuts in manufacturing and increased demand to rebuild inventories.  Along with surging demand for Copper, polymer resins etc. It concludes by noting that 'So far, higher raw material costs are only partially being passed on by manufacturers raising prices to customers and they are not being matched by cost inflation in other sectors.The PMI index for eurozone services input prices was modest compared with those in manufacturing, despite rising in February to the highest since August, while most services businesses continued to report falling output prices.’
For investors it supports the rotation into commodity resources and cyclicals. But I still doubt a huge increase in retail spending post lockdown. I think there is a high probability that may people have formed new habits with regard to leisure time, entertaining and spending. Changing those newly formed habits may be more difficult than many analysts are thinking.

Turkey’s Uighurs fear betrayal over China (Page 2)
Erdogan walks a fine line between defending Muslims and securing vaccines; that really does sum up the situation. An interesting read and also illustrates the power of vaccines and investment in securing good PR.
Read also Israel uses excess virus shots for global diplomacy (Page 4)Honduras and Czech Republic among first to receive doses, as Palestinians await own supply.'The decision to use Israel’s leftover doses of the Moderna vaccine comes after the Jewish state struck a data-sharing deal with Pfizer that resulted in unrestricted supplies, fuelling the world’s fastest vaccination campaign.
The policy could also be extended to help speed up talks with Muslim majority states considering warming their diplomatic ties with Israel, another Israeli official said.’'But it has rejected any suggestions that it is obliged under international law to provide vaccines for the Palestinians that live under its occupation. Israel says the 1993 Oslo Accords, which provided for limited self-rule in heavily populated areas in the West Bank and the Gaza Strip, transferred that responsibility to the Palestinian Authority.
Israel has sent fewer than 5,000 doses to the Palestinian Authority for front-line healthcare workers, and a smaller, unspecified number to the Gaza Strip, according to a defence ministry official.'

Chip shortage shines light on fragility of US supply chain (Page 3)
Lay-offs at carmakers due to a lack of semiconductors spur political crisisWas in the online edition yesterday under 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”.’

Biden to order review of vital trade links (Page 3)
He is expected to sign an executive order in the coming days that lays out a new strategy covering products such as semiconductors, high-capacity batteries, medical supplies and rare earth metals, as part of a larger strategy. It’s expected to focus on a key tenet of Biden’s foreign policy — partnering with allies, including Japan, South Korea, Australia and Taiwan.
Nice quote “We’re going to get out of the business of reacting to supply chain crises as they arise and get into the business of getting ahead of future supply chain problems,” a senior US official said.
It will also 'require separate one-year reviews for six sectors including defence, public health, biological preparedness, IT, transport, and energy and food production.’Whilst stressing its not directed against any country in particular the obvious implication is regarding China Going forward one can expect the US to look at working more closely with its allies to form strong reliant supply chains that benefit mutual co-operation.
A further indication of the pressure that may be brought to bear on Chinese companies.

China focuses on Africa as Belt and Road lending decreases (Page 4)
Looks at Chinese overseas energy financing which is at its lowest since 2008 and increasingly reliant on African projects, thought to represent over 50% with projects in ‘...Nigeria, which drove most of the more than $3bn of financing, and smaller projects in Lesotho, Rwanda and the Ivory Coast.’
Notes that the combination of pandemic and mounting host country political challenges have hampered the roll out of new projects. In some places Chinese money is no longer well received and at the same time the two large state development banks (the China Development Bank and the Export-Import Bank of China) have been obliged to support more projects at home.
Furthermore some of the countries with existing projects (Venezuela, Ecuador and Pakistan) are also facing financial difficulties raising questions over the sustainability of China’s largesse to the developed world.
Plus the fact that a number are asking for the renegotiation of terms and Zambia’s default put everything in question.
I think the fact that the projects where always supposed to be commercial and not aid has seriously impaired them. In many cases they were steeped in China’s favour rather than the host country; with commercial loans from China and contracts going to Chinese companies and then they use predominantly Chinese workers. It could over time seriously backfire on China who will be seen as worst than the western capitalists.

Companies & Markets
Nissan focuses on electric opportunity as precious metals surge. The surge in the price of precious metals is another blow to the recovery of combustion and hybrid vehicles.  They are essential of the catalytic converters and are a further woe after the covid pandemic and chip shortage.  Nissan last quarter reported a profit after three quarters of losses but its profit margin was only 2.5%; giving it little room to shoulder the increased costs it now faces.Logically the company should increase prices and that would be a factor for inflation going forward. The question is will it?

Facebook pledges $1bn to pay for news
Scale of three-year budget revealed as platform seeks to contain Australia fallout. Basically it is matching what Google spends and would suggest that the news is more important to these platforms than they were previously prepared to admit.
Facebook I think now also faces a PR nightmare in what Nick Clegg described as it “erred on the side of over-enforcement. In doing so, some content was blocked inadvertently. Much of this was, thankfully, reversed quickly”.That in itself could result in more regulation of the platforms.
But it has also harmed its image with its users as it clearly demonstrated that it would put its own commercial interests way ahead of its users needs.

Chinese brokerage fuels copper rally after placing $1bn bet on prices
Shanghai Dalu has helped fuel the rally in the price of copper since the end of the Lunar Year Holiday by amassing a $1bn bet in less than a week. It increased its holding of Chinese copper futures to almost 24,000 lots from 2,500, since Thursday, according to data from the Shanghai Futures Exchange. The figure is equivalent to 120,000 tonnes of the metal.
It's not clear if the holding is proprietary or on behalf of clients. It is also unclear if it is a speculative position or a hedge for physical demand
For investors it illustrates that whilst a rotation into resources is prudent, it is fast becoming a crowded trade and speculators and momentum can quickly distort a reasonable trade.

Markets Insight Fed needs to ignore ’taper tantrums’ and let longer rates rise by Richard Bernstein chief executive officer and chief investment officer of Richard Bernstein Advisors
Effectively that the Fed needs to ignore the market tantrums because the yield curve is a simple model of the profitability of lending. The steeper the curve the better margins for banks (the difference between what they pay for deposits and charge for lending) the better the margin the more incentive banks have to lend; as demonstrated by the Fed’s own Survey of Senior Bank Lending Officers surveys. That is the why the Fed looks to use short term rates to control lending. Historically the Fed lowering the banks cost of funding would stimulate lending and by raising them it curtails lending. Short term low rates and the steep yield curve gives banks a big incentive to lend.But the current cycle is unique with short term rates near zero. SO the Fed attempted to stimulate the economy by buying longer dated bonds and flattening the yield curve. But banks willingness to lend has not been stimulated he puts forward because lending margins are thin and risk premiums small. Furthermore the increased regulation subsequent to the GFC has meant they can’t use leverage which before could have been used to enhance the lending margins.
As a result a lot more lending is being done by private lenders that are not subject to the same regulation. This he suggest is a disintermediation of the traditional banking system and means money meant for the real economy has been trapped in the financial economy.
Recently the yield curve has started to steepen and he says the Fed should allow that so that policies to benefit the real economy can work. That would restrain financial speculation and should help bank lending.
For this to happen the Fed needs to ignore the protestations of bond investors. They will need to learn to live with the new circumstances as they have in the past.
It would have the effect of making some of the current popular but risky investments less attractive; like Spac’s and Bitcoin, because investors have alternative and safer potential investments.
So investors and policy makers should be aware the current monetary policy is incentivising speculation rather than support the US’s lending facilities that are needed to rebuild capital stock.
He concludes
‘Like a new parent to a baby, the Fed should not rush to coddle bond investors’ tantrums and should let the financial markets soothe themselves.Short-term financial market volatility might cause some sleepless nights but the Fed could unleash the lending capacity of the traditional banking system by letting the yield curve steepen further.'

I do agree with much of what says, allowing tantrums will strengthen the Fed’s hand over time and investors will realise that the Fed is there to support the long goals of the US rather than investor profits.The bigger problem is whilst the steepening yield curve gives banks good incentive to lend it does not stimulate demand for lending. This pandemic saw companies borrow what they could to keep going; rather than borrowing for capex, to build new facilities to meet increase demand.
Stimulating that real demand is key to the real recovery in the economy. To an extent Biden’s stimulus spending on infrastructure is aiming at that, but key will be building structures that support the wider economy; roads etc are obvious but probably more importantly would be the government building out 5G in the US; that would be forward looking and help to resolve the debate about who should pay for it.

LEX HK stamp duty; hardly taxing. Makes the point that the increase in stamp duty is not a big issue. It amounts to HK$30 per HK$100,000 lot of shares (about US$3.90 per US$12,900 lot of stock).  It’s less than the UK charges at 0.5% and relative to Singapore and the US it makes no difference as they don’t exact a levy. But key is that there is no capital gains tax in Hong Kong.I think the sell off yesterday was a reflection of the wider nervousness and used as an excuse.  More worrying for HK I think is the assertion by Beijing that only patriots as defined by Beijing should be allowed to run Hong Kong, a significant deviation from the original intention of the Handover agreement.

FOR INTEREST
H&M puts its innovation on display at stores
Chief experiments in effort to strengthen customer ties amid threat from Zara owner and online rivals such as Asos.
It is looking at new ways to engage with its customers as well as looking at its stores preforming more than just being sales outlets.
Its testing in store repairs, a hire services and a beauty salon within exiting stores.The article notes that its rivals are seen as being nimbler due to more local manufacturing sites, whereas H&M still relies on Asian manufacturing. It notes that it is trying to speed up the process but I would imagine transportation would still be an issue and with the current demand for space on container vessels Asian sourcing should be under review; especially as its major competitors source closer to home.Overall an interesting read and highlights how most retailers are going to have seriously review their business practices.

FT BIG READ. MYANMAR People power defies the military
In the shadow of rivalry between the US and China, the south-east Asian nation is caught in a growing confrontation between the junta and a pro-democracy campaign that shows no sign of backing down.A good read, it is unfortunately a re-run of previous occasions. But it makes the point that even if the military win again, increasingly the people are becoming harder to control by force.That will be something I think President Xi will be watching with concern. Concern that if Beijing loosens its grip the same could happen in China.

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