MARKETs at4:30pm HK time
Pre market data was overall better than expected but mattered little in the face of a significant sell off on the basis of inflation fears
Nikkei opened 414pts lower and sold down a further 534pts in the first 35 minutes before rebounding to around 29,500 it then traded sideways into lunch. PM opened slightly lower and trended lower co close at the day low -1,202pts (-4%) @ 28,966. Back to the level is was in the first week a February
Topix traded in a similar pattern but saw increase selling in the last 15 minutes asa bounce failed to break above 1,880. Closed -62pts (-3.2%) @ 1,865
Construction orders out after market were much weaker than expected -VE for Monday
Data pre market
Tokyo CPI Feb -0.3% vs -0.5% Jan (F/cast was -0.2% )
Tokyo Core CPI Feb -0.3% vs -0.4% Jan (F/cast was -0.6%)
Retail Sales Jan -2.4% YoY vs -0.2% Dec revised from -0.3% (F/cast was -2.5%),
Retail Sales Jan -0.5% MoM vs -0.7% Dec revised from -0.8% (F/cast was -0.3%),
Industrial Production Prelim Jan +4.2% MoM vs -1% Dec (F/cast was +3%)
Industrial Production Prelim Jan -5.3% YoY vs -2.6% Dec (F/cast was -2%)
Foreign Bond Investment Yen -1,893b vs + 478.2bn revised from +477.1b
Foreign Stock investment Yen 94.1b vs 339.5bn prior revised from +330.1b
During maker hours
Housing Starts Jan -3.1% YoY vs -9% Dec (F/cast was -4%)
Construction Data Jan -14.1% YoY vs -1.3% Dec (F/cast was -0.6%)
Foreign and Institutions sellers turned net sellers with large cap tech stock seeing most pressure.
Kosdaq opened lower at 930 and sold down to 907 in the first 35 minutes before rebounding and trading sideways for the rest of the session to close -22pts (-2.4%) @ 914
Kospi opened only down 11pts but sold down a further 84pts in the first 35 minutes and then traded sideways/slightly lower for most of the day testing the 3,000 support from 1 pm onwards and dipping below in the last hour but then rallied back above at the end to close -87pts (-2.8%) @ 3,013
No data today but on Monday we get Balance of Trade, Exports and Imports
Opened lower at 16,190 (-262pts) and traded down to test 16,000 in the first hour despite good local data and earnings. Saw a bounce to 16,120 and then traded sideways/slightly lower for the rest of the session to close -498pts (-3%) @ 15,954
Data out after market
Current Account Q4 $27.33bn vs 26.65b Q3 (F/cast was 22.5b)
M2 Money Supply Jan +8.84% vs 8.45% Dec (F/cast was 7.9%)
CSI 300 opened @ 5,344 (-125pts) and dipped to 5,319 in early traded but then worked back to 5,416 mid morning before selling back down into lunch. PM tested 5,318 level a few times before bouncing to around 5,377 but then sold down at the end to close -133pts (-2.4%) @ 5,337
No data due but official PMI data due out Sunday and on Monday the Caixin Manufacturing PMI
Pre market opened @ 29,412 or -662pts vs -440pts ADR’s Market initial sold down to 29,200 before a bounce to 29,560 but unable to move higher and sold down into lunch. PM drift lower to end just off the day low; -1,094pts (-3.6%) @ 28,980.
Markets opened lower sharply lower with all sectors in the red, following Asia on inflation fears.
Earnings out from IAG which rallied; despite suffered a full-year operating loss of 7.4 billion euros ($9 billion), its largest in history, as the Covid-19 pandemic grounded aircraft around the world for a substantial portion of 2020.
Earnings due from LafargeHolcim, BASF, Deutsche Telekom, Suez and Engie.
Import Prices Jan -1.2% YoY vs -3.4% Dec (F/cast was -2.6%)
Import Prices Jan +1.9% MoM vs +0.6% Dec (F/cast was +0.5%)
GDP Growth Rate Final Q4 -1.4% QoQ vs +18.7% Q3 (F/cast was -1.3%)
Inflation Rate Prelim Feb +0.4% YoY vs +0.6% Jan (F/cast was +0.5%)
Inflation Rate Prelim Feb -0.1% MoM vs +0.2% Jan (F/cast was -0.1%)
Household Consumption Jan -4.6% vs +22.4% Dec revised (F/cast was -4.6%)
PPI Jan +1.2% vs +1.1% Dec revised
Due later Unemployment Benefit claimsJobseekers Total.
UK Due later Car Production
Opened Dow -100pts but eased back to flat in the first few minutes, S&P unch and NDX -0.1% but seeing volatile trading currently Dow -15pts, S&P & NDX slightly higher.
Personal Income and Spending, PCE Price Index,Wholesale Inventories, Goods Trade Balance, Core PCE Price Index, Chicago PMI, Michigan Data Final (Consumer Sentiment, Consumer Expectations, Current Conditions, 5 year Inflation Expectations, Inflation Expectations), Baker Hughes Rigs Count, US Budget Plan.
Earnings: Fluor, Cinemark, Draft Kings, Foot Locker, AMC Networks, Berkshire Hathaway (Saturday).
Retail Traders’ hold on China’s stock market slips as institutions rise
Increasing influence of professional traders as fee-free trading booms in US.
Notes that professional investors holdings in freely floating shares in Shanghai and Shenzhen climbed to more than 70% between the crash in 2015 and June 2020 according to China Renaissance with amateur traders holders dropping from around 50% to 23% over the same period. A reversal of what is being seen in the US.
The article suggest that the US might be able to learn from China as to how to crimp retail traders capacity.
The article however focuses on the changes the regulator made to the availability of margin finance from brokers. A key part of that was regulators decided which securities could be used as security and the maximum value that could be lent against those stocks. That effectively wiped out around $5tn in margin financing.
But that occurred after the crash not before.
In the months leading up to the crash I remember we used to look at the numbers of new retail accounts being opened daily as an indication of how the market would trade. It was easy to open accounts and mobile apps were becoming available and often retail investors would open accounts with multiple brokers and take margin from each.
There were also a lot of ’star forecasters’ which people would follow and who become self fulfilling as retail piled in behind their calls. Many of them were banned after the market crashed and blamed; especially those that forecast a bounce!
At time, even the Government was active in prompting stocks.
Since the crash brokers and everyone else has been more careful.
The article mentions the rise in mobile app trading in the US as a reason for stocks to become disassociated and that was true for China too. Many of the brokers research was more about rumours and momentum than reports, cashflows, P&L’s and Balance sheets. Even a few years ago, when I was at Haitong a lot of the research out of China was issued without financials because it was targeted at retail. Equally analysts would not say they had dropped coverage... in case a stock become popular again.
The main reasons, in my view that the retail influence has dropped was the market crash which wiped out so many investors who were trading on margin. A number of articles over the past months have noted that some stocks have only recently climbed back to levels last seen around the 2015 crash. That experience left many retail investors scarred and it effectively scared them off trading. It was similar to Black Monday in the UK which was another incident that scarred off a generation of investors.
The crash in China also alerted the regulators to how money from personal loans was been leveraged in the market and hence the need to try and tighten up on bank lending along with the leverage that brokers could offer. But it is still not watertight in China and one of the reasons the PBoC is keen to have access to the data from Baba and Tencent which really shows where the money goes. Banks can issue personal loans against invoices for say a washing machine but its easy to find a retailer who will issue a fake receipt!
The other big change in China has been the rise of mutual funds; which had been growing since the late 1990’s and Governmental quasi institutional funds. The state (for is investment funds) gives out mandates to certain fund mangers to be active in say; IPO’s, Blocks or other mandates. The middle class have seen the growth of wealth advisers and the use of more marketing and sophisticated structured products to help savers. Something the government has been pushing since the removal of the ‘iron rice bowl’.
Today people are responsible for their own retirement not the state; that was what really drove the growth of insurance related selling and products in China. One only has to look at the growth in the pension company's sales forces to realise that. Pushing products that were seen as ‘safer' investments, not 'get rich quick’ but planned savings. A lot of that money went into the equity backed products.
But it also needs to be remembered that a lot of the institutional money is run by quite inexperienced managers and firms. Only a few have centralised dealing desks and often Fund Managers place their own orders. Compliance is improving but there are still cases of fund managers 'arranging trades’ to support portfolio valuations.
Today the government is a lot more aware of the potential implications of a market collapse as far as the standing of the party is concerned and the potential negative backlash from citizens losing money be it in the stock market or property market. Hence the use of what I call 'Team China', those government and quasi government funds that can can be deployed to ’support’ the market when required.
Retail may have less influence but other forces have replace them and it would only take a strong rally for China to see a resurgence of retail players which would create a more volatile market again. President Xi last year called for a controlled bull market and that is no doubt what China will engineer.
The bigger problem is that with so many mutual funds and restrictions on overseas investment that the market becomes too small for the amount of money looking to be invested, as present the HK Connect programme can act as a safety valve but only for so long. It will be interesting to see if and when China recognises the threat from not allowing money to go off-shore.
African price for Russia vaccine blunts attacks on ‘unethical’ west
• Sputnik V is triple cost of rivals • Continent seen as key market • Calls for transparencyA key factor is availability, despite western nations promising equal access the reality is they are trying to secure as many doses as they can.
Pimco warns of misplaced inflation fears as US bond yields keep climbing
The CIO believes the current moves to be temporary and has long said that 'Inflation will remain contained because of long-established trends such as technological innovation cutting costs and the weakness of organised labour,’ “We still see powerful disinflationary trends. After an initial recovery [from the pandemic] there is likely a world of excess capacity,”
The reality is certainly, that whilst this is a knee jerk reaction to the sudden and significant rise in yields in just six weeks, we really don’t know how the recovery will play out. There are signs of inflation as industries look to rebuild inventories. The cost of shipping has risen in reaction to demand. Chip prices are rising in response to demand and there are many other examples too.
So inflation is building it's now is a matter of how high it goes. Powell was trying to sooth markets in saying three years but that is just the Fed’s take on the available data. I think for investors the key is that the Tech/E Commerce plays will not see the same growth as they have over the past year. Value stock and cyclicals provide good opportunities especially if the Fed keeps interest rates low for the next year.
EU jab woes shift from supply to rollout (Page 2)
Nordic ambitions set the pace while Germany and France are slower to administer doses.Looks at the roll out in Europe and highlights that some are doing better than others but the key is that it looks likely that a lot of them will have vaccinated substantial proportions of their population by August. I would imagine that that will have positive implications for the travel and leisure sectors and hence the economies of Greece, Spain etc.
Read also Covid cases fall but scientists warn against relaxing too early (Page 3) Effects of lockdowns, past outbreaks and seasonal change paint complex picture. An interesting read, vaccinations obviously help but also lock downs which limit the spread very effectively. There may also be some seasonal weather factors in some countries. It doesn’t address whether mutations are more likely. It will also be interesting to see the impact on mutations in response to the vaccination roll out. As we know from the annual flu virus despite vaccinations each year there are new varieties and the annual vaccination is a best guess as to the most virulent strains.
For the drug companies that it likely to mean this will become a very good source of recurrent income internationally.
Yellen backs support for low income families. (Page 3)
Reverses the previous US policy and comes ahead of the G20 finance ministers and central bankers meeting this weekend. She says its conditional on countries finding “shared parameters for greater transparency and accountability” regarding its deployment. 'She also urged G20 countries to send their own SDR (special drawing rights) allocations to low-income countries so the benefits would disproportionately accrue to the poorest nations.’
She also addressed the issue of a multilateral deal on digital taxation at the OECD saying “The US is committed to the multilateral discussions on both pillars within the OECD/G20 Inclusive Framework, overcoming existing disagreements, and finding workable solutions in a fair and judicious manner,”
Clearly outlining how the new US administration intends to get more involved in contrast to Trump’s stance.
Myanmar protests imperil economy as banks close. (Page 4)
Civil disobedience has meant that banks lack staff to operate. Which is likely to mean the stand off comes to a critical point as month end approaches and payrolls are not made. That will undermines the junta’s pledge to continue business as usual and increase civil opposition.
Xi takes credit for China anti-poverty success (Page 4)
'Xi Jinping has claimed personal responsibility for eradicating poverty in China in an attempt to assert his position as one of the country’s epoch-defining leaders.’
Comes ahead of the important Communist Party centenary in July and aims to secure Xi’s place alongside Mao and Deng Xiaoping 'in the pantheon of great leaders’.
Worth noting that China’s definition of extreme poverty is 'Rmb4,000 ($620) in annual income for 2020 — or $2.60 per day in purchasing power parity terms — remains below the level recommended by the World Bank for lower middle-income countries at $3.20 per day.'
Worth remember too that is was communism that put so many people into povert and that today members of the communist party (circa 16% of the population) are the elite.
Companies & Markets
StanChart boss hopes for end to Sino-US ‘tit for tat’ Comes as the bank reported results that were at the lower end of consensus and against a backdrop of increasing political tension between China, the US and several other countries.
He warned that covid and low interest rates would hurt its profit for years but it sought to woo shareholders by resuming dividends and continuing its share buyback programme.
The article notes 'the lender slashed its bonus pool by about a fifth. It added that it would seek to save hundreds of millions in costs by restarting job cuts that were paused during the pandemic and by reducing its global office footprint by a third as it shifted to flexible working.’
The clear reason for his hope is 'Hong Kong generated the bulk of the bank’s operating income, followed by Singapore, India, South Korea and China.’
Nice quote from Hugh Young of Standard Life Aberdeen 'the bank was caught between two stools….. Doing as well as they can, but boy what a struggle.’
I think the outlook remains tough whist Hong Kong and investors comes to understand what the implications of Beijing increasing control over Hong Kong means in practical terms.
See also LEX StanChart: bonus onus StandCharts CEO saw his salary drop 29% in 2020; whilst the banks FY annual pre tax profit was -57%. A problem for Stand Chart is that its strength in HK, Singapore, India and China has been noticed but its global peers, especially the wealth management aspect. HSBC mentioned that is was a key area going forward but it is an increasingly crowed trade CS, UBS and most US banks are eying the same trade.
StandChart is relatively small with less leverage than the others and it can’t buy market share which the others can. So any weakness in its Wealth Management arm will be a problem.
It concludes 'Any weakness in Asian wealth management this year would leave it with less profit to offset falling income in its commercial banking unit and in Africa and the Middle East. Deposit margins in its retail banking business are expected to remain compressed. This year, Winters will be running hard just to keep still.’
Rising rates take the tiger out of emerging markets tank
MSCI barometer down 5% from last week’s high as China, Turkey and Brazil take hit
Nice quote “There’s no doubt that yield curve steepening worldwide is starting to spill over into other asset markets, and the last thing we need right now is a full-blown bond and equity market sell-off,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.
It notes the similarities to 2013 when investors fled EM assets as the Fed signalled a tightening in policy.
Notes that the moves are not just about the yield curve, last year other factors included increased protectionism from the US, US/China relations, uncertainty over Brexit and the unknowns of covid. But with Brexit complete, Biden in power and vaccinations being rolled out the landscape has changed too. Add to that the recovery seen in China and it becomes apparent that it is not just about interest rates.
Quotes Paul Korngiebel, emerging markets portfolio manager at Boston Partners, “the massively distorting event that creates winners and losers by [country and] industry sector as policy differs in response”.Korngiebel worries that, 'in some sectors, investors may have brought too much future growth into the present, and that some valuations are becoming stretched. Conversely, he sees opportunities in sectors, such as regional airlines, that have been crushed, as investors have perhaps prematurely written them off.
“We are really dealing with the aftershock of Covid right now,” he says. “It’s not over from an investor point of view. The pig in the python is only half-digested.”’
Opinion TECHNOLOGY Geopolitical supremacy will depend on computer chips
Looks at TSMC and its willingness to out-invest its rivals; increasing capex as it struggles to keep up with demand and at the same time making advances in technology. It notes 'Most other semiconductor companies have dropped out of the race to manufacture 3nm chips due to the stratospheric costs. It will now be hard for any rival to catch up with TSMC because of its vast capital spending, its technological expertise, its network of suppliers and its support from the Taiwanese government. Only Samsung of South Korea is visible in its rear-view mirror.’
It also notes that the company is aware of political tensions and has hedged its bets by having 'two fabrication plants in China, one in the US state of Washington and another planned in Arizona,’ But it is aware the world may be polarising and choices may have to be made.
It quotes 'Shelley Rigger, a professor at Davidson College in North Carolina and author of Why Taiwan Matters, says that US pressure on China is only reinforcing Beijing’s determination to become self-sufficient in semiconductor manufacturing: “China has infinite money to throw at a problem like this and no scruples about doing what needs to be done.”
It concludes 'Taiwan has long feared that the world could divide into Chinese-dominated red supply chains and US-focused blue supply chains, jeopardising relations with either its biggest trading partner or its main strategic ally. The island’s room for manoeuvre is becoming as thin as TSMC’s wafers.’
I think TSMC illustrates why China will not catch up; whilst it may have money to ‘throw at the problem’ it is not just about money but about the skills required to design and manufacture the next wave of chips. Furthermore past experience shows that when China ‘throws money’ at projects a lot of it is at best wasted and worst diverted into property other investments. For me TSMC’s strength is one of the main reason China wants Taiwan; it know the it needs the technology and that it has little hope of buying its own chip industry; especially with the dominance of US IP and machines required. So the best option is to take over Taiwan, that would give the technology and enable it to withhold those all important chips from the west.