Feb 3 FT Thoughts Containing China? China warns the US. Jabs, Helicopters, Silver.


03 Feb

MARKETs at 1:30pm  HK time
JAPAN 
Nikkei 225 opened higher saw an initial dip ahead of PMI data which beat and the market then traded higher to 28,670 before easing back to 28,500 and working higher into lunch. PM opened around the 28,500 level and has worked higher. Currently +225pts (+0.8%) @ 28,592
Topix traded in a similar pattern currently +19pts (+1%) @ 1,866
Data after the open
Services Jan PMI 46.1 vs 47.7 Dec (F/cast was 45.7)
Composite Jan PMI 47.1 vs 48.5 Dec (F/cast was 46.7)
S KOREA  
Kosdaq opened higher and tested to 970 in early trades but then sold down through the morning to 960 level but fore rebounding to 968 but then eased back. Currently +2pts (+0.3%) @ 966
Kospi followed a similar trading pattern currently +25pts (+0.8%) @ 3,121
Data
Foreign Exchange Reserves Jan $442.73b vs 443.1b Dec (F/cast was 453b)
Auto and Tech driving the market higher in early trades. But Pharma seeing some weakness.
S Korea and Cambodia agree free trade deal for broader economic cooperation
TAIWAN 
Opened higher and initially tested to 15,860 but then sold down to 15,745 before working back to 15,850 in choppy trading. Then traded sideways 15,810/15,840 but then sold down from midday; currently -8pts (-0.1%) @ 15,752
CHINA 
CSI 300 opened lower ahead of the Caixin PMI data and traded down to 5,480. Data was weaker than forecast hitting a 9 month low and market traded sideways 5,480 to 5,510 until 11am when it rallied to 5,529 going into lunch. PM opened higher. Currently +26pts (+0.4%) @ 5,523
The PBOC mounted the RMB100 billion seven-day reverse repos today on the open market with a bidding interest rate staying flat at 2.2%. There was RMB180 billion of reverse repos due today, hence the single-day net withdrawal amounted to RMB80 billion.
Data 
Caixin Services PMI Jan 52.0 vs 56.3 Dec (F/cast was 55.8)
Caixin Composite PMI Jan 52.2 vs 55.8 Dec (F/cast was 55.4)
HONG KONG 
Pre market Opened @ 29,305 +57pts vs +85pts ADR’s despite PMI being stronger than expected. E Commerce seeing interest but BABA weak after earnings. Insurers weak ahead of Ping An earnings. Other sectors mixed. Market sold down from the open first to 29,100 level before a bounce and then sold down to 29,000. Bounced again to 29,160 before selling back down to test 29,000. Then worked slightly higher into lunch (29,100 level). PM opened higher currently -5pts (unch) @ 29,237
Data Pre market 
Jan PMI 47.8 vs 43.5 Dec (F/cast was 44)
EUROPE 
Expect markets to open slightly higher but pre market PMI data could influence the direction of trade.
EUROZONE Services and Composite PMI, Core Inflation Rate, Inflation Rate, PPI
GERMANY Services and Composite PMI
FRANCE Services and Composite PMI
UK Services and Composite PMI
US Futures 
Opened slightly higher Dow +30pts, S&P +0.3% and NDX +0.4% in Asian time and have remained around those levels. Earnings still in focus and the retail frenzy seems to have abated for the time being.
AHEAD MBA Mortgage Applications and 30 yr Mortgage Rate, Services and Composite PMI, ISM Non Manufacturing Data (Business Activity, Prices, Employment, PMI, New Orders, EIA Oil Stocks Change Report.
Earnings: Qualcomm, Boston Scientific, GlaxoSmithKline, Abbvie, Biogen, Humana, Apollo Global Management, Allstate, eBay, PayPal, Check Point Software, Aflac, MetLife, Grubhub, KLA Corp



Front Page
Navalny given 3½ years in jail. “The main goal of this trial is to scare a huge number of people. That’s how it works. They jail one person to scare off millions,” said Navalny, an outspoken critic of corruption in Russia.
Big Oil hit by record losses from lockdown and clean fuel activism   Billions blown for ExxonMobil and BP.  Brutal 12 months for industry under-pressure to speed up transition to cleaner fuels.  Shell and Total to report next week expected to see similar losses.  The sector will recover but is unlikely to ever return to the boom years.
Germany to provide finance watchdog ‘with bite’ in wake of Wirecard scandal. Tougher oversight is “good for Germany’s financial markets and for investor protection”.

Inside
Beijing warns US on Hong Kong and Uighurs. Looks at the first speech made by China’s took diplomat since Biden took office and comes as Biden says there is no hurry to engage with China but getting in step with US partners and allies is more important.  Yang Jiechi, China’s top diplomat, basically told the US to back off with regard to Hong Kong, Tibet and Xinjiang.  It is interesting to note he didn’t mention Taiwan.
He referred to four years of misguided policies from Trump and the put the blame for the deterioration squarely on the US. He did not refer to China’s activities in any of those area. The FT quotes a long term China watcher who said 'the speech was “classic Yang: highly doctrinaire, unengaging and totally unpersuasive”.
For investors the fact that both the US and China are laying out their key areas of disagreement would suggest that relations are unlikely to improve in the short term. Trump policies and the Phase 1 Trade Agreement are unlikely to be rolled back. More worryingly the fact that the US will work with partners and allies suggests that China will come under more pressure to compromise.
But as seen in the Phase 1 trade deal China feels that it has already given up enough. So that means that at best we get the current status quo.
There are still good opportunities in China but political risks for some US investors would appear to be rising.
Key I think will be Biden’s approach to the investment ban for setting the tone for investors over the next couple of years. The exclusion of China’s equities from indices hurts the overall long term integration of them into global portfolio’s.

Opinion by Martin Wolf Containing China is not a feasible option. Unlike with the Soviet Union, Washington and its allies have to co-operate and compete with Beijing’s rising power
He notes that containment is the view put forward by The World Turned Upside Down by Clyde Prestowitz and last weeks The Longer Telegram: Toward A New American China Strategy, written by an anonymous “former senior government official”. ( https://www.atlanticcouncil.org/content-series/atlantic-council-strategy-paper-series/the-longer-telegram/ ).
They basically set out that China behaves like a rising power ruled by a man who doesn’t care for the established world order. In the case of the Longer Telegram he thinks the ambition of containing China and at the same time getting co-operation on climate change and other issues will just not happen. For a number of reasons
1. China is very different from the Soviet Union. It is already more successful, has a developed technology sector, a larger population, more competent government and a cohesive polity. It has demonstrated economic successes and has great potential but also faces huge challenges. It is likely to be the worlds largest economy as its output per head grows.
2. China is already highly integrated into the world economy; which is both good and bad. But it means most countries are seeking good relations with both the US and China and do not want to choose one over the other.
3. The US over the past 20 years and especially the last 4 years has destroyed its reputation for 'good sense, decency, reliability and even adherence to basic democratic norms.’ It’s ability to call on China to be a 'responsible stakeholder’ in the light of its own actions is questionable.
So he put forwards what in his view needs to be done.
'First, the US and its allies have to revitalise their democracies and their economies. On the latter, they must indeed protect their technological autonomy. But the most important way to do this is by revitalising their scientific and technological infrastructure, including by refurbishing education and encouraging immigration of talented people.
Second, they have to defend the core values of adherence to truth and freedom of speech against all enemies, domestic and foreign (including China). They must, moreover, unite in doing so. China should not be allowed to pick off and bully smaller countries, one by one.
Third, they need to refurbish the institutions of the global economy they created, and propose new multilateral rules that bind China’s behaviour and by which they too will be bound.
Fourth, the US and its allies need to make clear which core interests they will defend, if necessary by force.
Last and most important, they must focus attention, as Mr Biden has now done, on the shared project of protecting the global commons for us all.
The relationship of the US with China is not like that with the Soviet Union. Yes, there will be much competition, but there must also be deep co-operation. To the extent that there is a war of ideologies, the west’s freedom and democracy remain more attractive. The real challenge they face is not China, but restoring these values at home.’

It seems to me that in fact he is suggesting a form of containment. By building a new rules based system for the global economy China has to abide by or be excluded from. That is similar to what Trump did when he cut off ZTE to US suppliers. President Xi was quickly on the phone to Trump to agree a deal.
All the other things that Martin Wolf lays out are important and would certainly give the West the moral high ground again. Getting them done though is going to tough and whether it can be achieved in the next four year I would say was questionable.

Balkan nations turn to China and Russia for jabs. Aspiring EU members grow frustrated and look east for supplies of scarce shots.  Reinforces a point made in other articles recently about how the European Commission’s decision to centralise the procurement of vaccine for the EU has been beset with problems and could cost the EU President her job.  Serbia has chosen China’s Sinopharm along with the Russian Sputnik vaccine.  
It is summed up in the quote '“We wanted to go for western vaccines to show where we as a country belong, and initially excluded the possibility of negotiating with the Russians and the Chinese,” the official from North Macedonia told the Financial Times.
But he said his government was having an increasingly hard time justifying delays. “Since there are other countries in Europe like Hungary who are getting [the Sinopharm vaccine], it would be difficult to explain to people why we are waiting for Pfizer, Moderna and AstraZeneca,” he said, referring to three companies manufacturing EU-approved vaccines.’
The exception is Albania; who emerged from a dictatorship backed by Beijing and hence is wary of taking vaccines from China or Russia. But they have not received vaccines from the EU but another country.

Yesterday’s article about India seeking to deliver vaccines to the world made the point that in some cases it’s Serum Institute is limited by its distribution agreements with the drug companies as to who it can supply. It seems amazing that the drug companies would maintain those restriction during the pandemic.It also illustrates that the issue is so important to some governments that they are prepared to use vaccines even without seeing the full trial data.

South Korea deal shows why defence groups need strong local ties An interesting read about how Leonardo Helicopters part of the Italian owned defence group last a contract for which they were the only initial bidder.  They lost it to Lockheed Martin who with the support of the US government put in a late bid and won.  With trade organisations and countries speaking out for level playing fields and a clamp down on bribery and incentives it raises the question about how much pressure the folks at Lockheed Martin were able to leverage from Trump and the US administration.  It makes the point that there has been a lack of transparency about the decision process.  It also makes the point that Leonardo Helicopters may have lost out because Boris Johnson was tied up with Covid and Brexit.  It suggests that going forward non US companies need to build up better local connections in order to compete.  It notes that it doesn’t seem fair.  
For the Biden administration coming in and looking to repair allegiances it will be another area that its policy and practiced will come close inspection. Every government wants to see its companies win contracts but as the US champions free trade and level playing fields it better make sure its playing by the same rules.

DHL criticises politicians over lack of foresight in vaccine rollout. Key being the last mile; getting the vaccine to the patient.  More of an issue with the BioNTech/Pfizer jab that needs very low temperature transport.  But again highlights that the mass vaccinations in many countries are not going to be straightforward and especially in developing and poor nations.

Europe grateful for Germany opening up debate on debt brake.
Looks at the debate in Germany about whether to repeal the commitment to public debt limits.  It’s currently suspended due to the pandemic but it had bound Germany and hence Europe to austerity.  That the IMF and OECD have warned could undermine the recovery globally.  An interesting read about the dynamics in Europe and important in the light of yesterday’s weak Eurozone GDP growth data. It is key for investors considering the recent China EU trade deal and the importance of the European markets for Chinese exporters.Worth a read along with Pandemic curbs plunge eurozone into double-dip contraction, which does note the drop was less than many economists had been expecting.

Silver’s fading heat highlights hazards for small investors. Retail traders hoping to repeat last week’s price-lifting gambit find their strategy shortlived.  It was always going to be difficult for retail investors to influence the price of a commodity; especially as market operators knew there were no large short positions.  It does maybe however illustrate the difference between the retail chat rooms and a real, deep understanding of how some markets work.Also read Silver has never been the remedy for disaster for an interesting take.

Sharp declines in GameStop stock inflict pain on Reddit day traders As the momentum ended not doubt a lot of day traders were left holding an expensive baby.  It also notes that an number of funds did put on new short positions and hence were able to make money on the downside, although from previous articles the cost of the borrow would have been expensive.Also notes the House of Representatives’ financial services committee has scheduled a hearing on the GameStop rally and crash for this month and will look into why the Robin-hood app suspended trading in some shares last week.For many it is a reminder of some of the more speculative activities associated with the DotCom boom.  Key for investors remains as ever doing good due diligence and knowing all about the company that you are investing in.  Understanding all the risks and being happy to accept those for the potential return being offered.  No doubt some people got richer in the past week but I am sure that a number of people are also nursing large losses.

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