Feb 9 FT Lots today, US inflation, Taiwan chip diplomacy, China spying & closing Clubhouse app, Softbank and more

09 Feb

MARKETs at 3:30 HK time

Nikkei 225 opened higher at a new record but dipped in early trades after weaker than expected Average Cash Earnings data. But then rallied to 29,585 before consolidating around 29,450 and working higher into lunch. PM opened lower testing yesterdays close before working higher to close +117pts (+0.4%) @ 29,506
Topix a similar patten but opened in the PM in the red and dipped to 1,915 (still above the important 1,900 level) before working better to close +2pts (+0.1%) @ 1,926
Earnings in focus.
Pre market Average Cash Earnings for Dec -3.2% vs -2.2% Nov (F/cast was -0.7%)
After lunch Machine Tool Orders Jan +9.7% vs +8.7% Dec ( F/cast is +7.5%)
Kosdaq opened higher but initially sold down into the red (960 small support then 959 good support) then rallied to 9,66 day high. Tested a couple of times but unable to break out and then sold down to close at the day low -3pts (-0.3%) 958
Kospi opened higher and worked to 3,130 in choppy trading but then trended lower in choppy trading to close -7pts (-0.2%) @ 3,085.
Weakness ahead of options expiry tomorrow and then the long weekend for the Lunar New Year. Won was stronger vs USD but volume was more moderate than Monday. Foreigners remain net sellers.
Market Closed but company earnings continue to show good results.
CSI 300 opened higher, tested yesterday’s close in early trades and then worked higher thought the day. Team China ensuring the market performs well ahead of the Lunar New Year. Closed +121pts (+2.2%) @ 5,686
Opened @ 29,443 +123pts vs +107pts ADR’s
Market sold down to test yesterday’s close initially than traded sideways before selling down just into the red before rebounding into lunch. PM saw an initial uptick to 29,500 but then trended lower to 29,360 and currently seeing an upswing +90pts (+0.3%)@ 29,410
Baba and Ping An remain weak other E Commerce firm. Tech +VE after good numbers from Sunny Optical, Autos +VE along with mining and heavy equipment names.
Expect markets to open flat London’s FTSE is seen opening 7 points lower at 6,524, Germany’s DAX 29 points lower at 14,054. France’s CAC 40 down 6 points at 5,692 and Italy’s FTSE MIB up 12 points at 23,418, according to IG.
Covid concerns remain a drag on the markets. Total reported pre market FY profit -66%; other earnings due from as Ubisoft and Ocado. On the data front, Norway consumer confidence, German current account figures and Italian industrial output figures for December are due.
US Futures
Opened in Asian time Dow +15pts, S&P and NDX also flat. The Dow now -11pts with the S&P and NDX still round flat.
AHEAD US Jolts Job Openings, WASDE Report, API Crude Oil Stock Change Report.
Earnings: Cisco, Twitter, Lyft, Dupont, Mattel, Honda, Nissan, Centene, Hanesbrands, Canopy Growth, Martin Marietta Materials, Masco, Sealed Air, S&P Global, Hains Celestial , Fox Corp, Akamai, Owens-Illinois

FT Print
Front Page
Good eggs. SoftBank fund gains $13bn
EU ready to follow Australia’s lead on making Big Tech pay for news
MEPs move to bolster draft digital rules • Google and Facebook seek licensing deals
Tesla bets $1.5bn on bitcoin and plans to take it in payment for electric cars

The article on page 2 suggests the importance the paper is putting on inflation over other news.
Senior Fed official shrugs off inflation risks from stimulus plan.
Richmond president Tom Barkin says US economy still needs support despite fears of jump in prices. He sees deflationary and inflationary pressure ahead but says he’s main focus is on the medium term inflation expectations and supporting people.
Come as the debate over whether Biden’s stimulus package will overheat the US economy. Larry Summer’s thinks it could, Janet Yellen says she is aware to the issue but the biggest problem would not doing enough.
Plus yesterday the T30 touched above 2% for the first time since Feb 202o and market expectations are rising as US inflation protected Government securities are howering around 2.2%.
But the weak jobs data, the Democrats recent moves on stimulus and the vaccination roll-outs have driven the markets to new highs.
Tom Barkin whilst not commenting on the size of the stimulus package said he was worried about ’scarring’ the US workforce.
Against the inflationary force where the deflation ones caused by globalisation and technology, which would keep prices in check.
He would need to see a shift in long term trends to change his view on the threat of inflation. He thought ‘a short-term price surge would only become an “inflationary event” if businesses were unable to increase production to meet increased demand — something he saw as unlikely in the services sectors that have been most affected by the pandemic.’
All this comes ahead of tomorrows inflation data and Powells speech on the state of the labour market.
Meanwhile Tom Barkin would need to see a rebound in a significant amount of the economy to add to inflationary pressures. At present tapering or reducing asset purchases is not being considered as the Fed’s goals are not close to being achieved and the outlook remained uncertain.

I don’t think the market is really factoring in the potential for inflation because it is too focused on just seeing a recovery. Many people expected that we could see a short term inflation ‘scare', when initially the economy cannot keep up with an initial surge in demand as the vaccination programme allows people to get return to some form of normality. But then the economy gets back into balance.
But the trouble with that is that the new demand really cannot be met because the factors of supply take too long to respond to surge in demand or because some of the companies in the supply chain have gone bust.
Another worry is that the changes in work practices or spending patterns from the pandemic mean that fundamental changes have taken place and that inflation comes from or in unexpected areas. With the amount of money that has and is being printed I think inflation is a certainty. Many would say it will come later the problem for governments and markets is if it comes sooner.
With that in mind investors should already be looking at diversifying their portfolio’s and I think to an extent the recent rally in the Russell 2000 and interest in value plays show that many are doing exactly that.
Read also Long-term US yields hit highest in a year as stimulus expected to fan inflation (Page 10). Also Opinion Biden’s $1.9tn plan is necessary as economic recovery insurance. By Gene Sperling; he served as US national economic adviser to Barack Obama and Bill Clinton.

Taiwan senses opportunity over chip shortages. (Page 4) It will look to use the Curren shortages as a way of building closer relations with western nations. They will use it to raise the profile of country and its importance to the west and western companies. Some within Taiwan have criticised the government for getting involved in private business activity but I think it makes good sense and western government should acknowledge Taiwan. In particular it mentions Germany who seemingly for fear of upsetting China refuse to acknowledge Taiwan and yet many of if businesses are dependant on Taiwanese technology and know how.
Slowly the hypocrisy of many western nations is being revealed. They claim to stand up for human rights of oppressed in various countries and yet fail to stand up for the rights of the free Taiwanese people whose products are essential to so many of their businesses.
Unfortunately many of China’s modern claims do not stand up to modern scrutiny. China seems to be hoping to adopt the same tactics of the nations that she feels oppressed her in the past. But that is hopefully not the world we live in today. China needs to adapt to the modern age. In his recent speech President Xi called for talk and diplomacy and yet his actions expose those words as meaningless. It will take huge strength for China to acknowledge that Taiwan is a free country that does not wanton be part of China. That is the strength that President Xi should want history to remember him for.

China charges detained Australian journalist (page 4) Six months after being detained she has been charged with illegally supplying state secrets overseas; at the time she was working for the state-owned China Global Television Network.
Foreign governments are becoming increasingly concerned that China is arresting nationals as bargaining chips. It follows the detention of two Canadians following the arrest of Meng Wanzhou in Vancouver. The article notes how the practice of detentions has increased since President Xi took office.
A statement from her family said 'the conditions under which her aunt was being held had deteriorated recently and her children were devastated by her absence.’
Another event that whilst not preventing investment in China of itself will raise concerns for investors.

Beijing cracks down on Clubhouse chat app (Page 8) Mentioned yesterday as the must have invitation for many Chinese and today blocked. The audio chat room app that has come to recent prominence was shut down because Chinese officals couldn’t censor it and the discussion over the Chinese government’s large-scale detentions of Muslim Uighurs in Xinjiang, Taiwan, Hong Kong protests and much more were obviously a concern. The app already had limited access because it's only currently available via iPhone. It can still be accessed via VPN. The article notes that 'Yesterday two chatrooms, both titled “Chatroom has been walled”, attracted more than 2,200 Mandarin-speaking participants from China and overseas.’
The key attraction was/is being able to discuss sensitive issues free from censorship. Its popularity reflects what many people in China want and that they are not getting it from the government.
That repression is not going away and will remain a concern for President Xi and his team.

SoftBank’s Vision Fund posts best quarter since launch in 2017. (Lead in Companies & Markets)
Value of investments rises $13bn driven largely by stakes in Uber and DoorDash which has offset the losses from it trading arm of $2.7bn (mainly Nasdaq whale related). Masayoshi Son delivered the results with typical theatrics. Expecting more good news ahead as more of the companies it has invested in go public.
But is was not all goodness; its SB Northstar unit that plays listed tech stocks reported derivative losses and it also made losses from investments over the quarter in Amazon, Facebook and Microsoft. But it said they were now generating a profit.
Softbank’s share price is now at a new high as investors welcomed the news. It will be important for the company to continue to deliver upside from the raft of companies that it has invested in an at the same time reduce its debt.
Personally I don’t like the management of the company and feel too much comes from Masayoshi Son’s ‘gut feel’.
Lex SoftBank: eggs in baskets Is not convinced by the results either. Notes some of the expect gains are not certain; like the sale of Nvidia which is subject to antitrust approval and mayn’t get approval. A number of the other ‘gains’ are unrealised too.
Concludes 'This latter-day keiretsu system of cross shareholdings is great when markets are on a roll. Witness the rise of Alibaba’s rival Tencent, turbocharged by its holdings in Tesla and Snapchat parent Snap. But when this holding network goes wrong — and China’s newfound antitrust zeal suggests a lot could — expect it to unspool far more quickly.'

Japan auto chips supplier buys Dialog for €4.9bn (Page 9) Renesas buying Dialog and expanding its portfolio beyond auto chips. Notable that Dialog said it had had multiple expressions of interest from other parties. Also that Renesas has seen the need to expand beyond auto and is now involved in data centres and consumer devices. BUT is does raise funding concerns. Also notes that Dialog has been becoming less dependant on Apple which is 2019 accounted for 66.66% of its sales in 2019.

Hyundai dashes Apple tie-up hopes. (Page 8) End to speculation over electric car partnership hits Seoul group’s shares. Puts forward the theory that the secretive Apple ended the talks when Hyundai made the public announcement; which caught many in the industry off guard. Apple is know for its strict secrecy agreements but it must raise questions of what information companies should reveal, including Apple! Others suggest that the talks could resume later and another theory is that Hyundai may have found Apple's terms too onerous. Apple is in an interesting position because it will need a experienced partner. Obviously there are a lot of auto makers in the market many with spare capacity but finding ones that haven’t already got a tie up with an exclusive platform may be difficult.

Read also Korea Inc turns back to the future for slice of EV action (Page 8). Big Tech’s entry puts focus on parts supply opportunity but analysts raise value chain fears. Puts forward that Hyundai could end up as an OEM [original equipment manufacturer] for Apple like Foxconn on iPhones and that if Hyundai doesn’t do it someone else will. But unlike iPhone EV can assembly is more complicated and not necessarily a low margin business. Also notes like many industries the incumbents are saddled with existing infrastructure that new entrants are not; making the transition more difficult, a move like this then could ease that pain. Hyundai has already stated that it aims to become a “mobility service provider” in the past and have invested in a number of companies on that basis.
It does make the distinction between EV’s and self driving EV’s and notes that some think S Korea is lagging others because it failed to invest in auto software early enough. That said today it has made significant advances in EV technology via various companies; LG Electronics tie up with Magna Int, Batteries by LG Chem, Samsung SDI and SK Innovation and for other components Samsung Electronics and LG Electronics, have captured areas and LG has a particular focus is interiors.
An interesting read and one that suggests despite the recent pull back Hyundai is still well positioned for gains for the EV market.

Investors position for bull run as commodities jump across board. (Page 11) Broad gains herald talk of 2000s-style supercycle aided by state recovery programmes. Goldman’s think that it is just the start of a much linger structural bull market for commodities. The big driver being China. But the rally is very wide ranging 'A basket of 27 commodity futures — from coffee to nickel — tracked by specialist asset manager SummerHaven showed that all had positive returns over the six months to mid-January, including any gains from rolling over futures contracts.’ That is the first time in 50 years and suggests a big change has taken place. Much of it is driven by restocking as supply disruptions are resolved. But it also notes that many fund managers are using hedges like oil and metal as insurance against the expectation of inflation. Another factor is the slide in the US dollar making commodities cheaper in other currencies.
Goldman’s thinks, according to the article that energy transition is another will create '$1tn-$2tn a year in infrastructure investment over the next decade as the world reduces its reliance on carbon.’ Pushing up demand for raw materials like copper.
All this comes after years of under investment which has also held back supply; especially in mining.
But some express caution; “Historically a supercycle happens every 30 to 40 years and we are just out of one,” said Norbert Rücker, head of economics at Swiss private bank Julius Baer. “So this would be an exception. And if you look at what triggered the last supercycle, it was Chinese urbanisation and the immense spend of it. The energy transition won’t happen as quickly.”

I think that we could be in for a bull run but in some sectors there are reserves waiting in the wings that have suffered because of previous over indulgence. The fact that the last supercycle was due to Chinese urbanisation and the fact that China is a big driver of this one I think is significant. Whilst many think energy infrastructure may take time the fact that President Xi put it on the agenda in an effort to steal the limelight from Trump is likely to mean that in China it is pushed heavily. Also other issues in China suggests that is needs to restock grains due to droughts and flooding, rebuild its hog herds amongst other things makes me think that it will be longer lasting. Also the pandemic has brought forward significant changes and so it is not unreasonable to think that the period between supercycles should also be condensed.

Tokyo’s Topix closes at highest level since 1991 (Page 10) and will close higher again today. It sets out that the rise is due to 'a softer yen, US stimulus hopes and a “short squeeze” sparked by investors trimming their bets against the market.’ 1,900 for the Topix has for years been seen as an 'iron coffin lid' never to be broken, so the event was significant, a first since 1991.
It notes that the Nikkei 225 (ascribes a lower weighting to Japan’s bank sector and more focus on exporters so does well when the Yen is weak) closed at its highest since Aug 1990.
A concern is that it mentions short covering by hedge funds and use of leveraged products by retail investors.
Local commentators do not see it as a Japan specific rally because they don’t see a domestic catalyst. Big themes recently were the Olympics and tourist arrivals but the upside from that is now in question.
My view as an outsider is that I think we are seeing renewed interest in Japan which many funds have been underweight for years. Also the rise of activism and challenging the structure of many companies in Japan will now make them more attractive (as long as it continues) and the reforms, slow as they are, are beginning to draw attention as seen in the recent good results. Japan Inc is still mired in many old views and practices but those are opportunities for future improvements.

Mutations threaten global vaccine strategy. (Page 3) As more people are inoculated or infected, Darwinian pressure will grow on the Sars-Cov-2 virus to evolve variants.
Looks at various issues associated with the mutations.
Which mutations are causing trouble?
Can we expect more dangerous variants to evolve more quickly?
How quickly can vaccines be adapted to a new variant?
How many people have been infected by the 501.V2 variant?
All good questions but the key point once again is that vaccination is only going to be part of the solution. Like the flu the virus looks as if it will be with us for some time and will require annual vaccinations. But just as with the flu people adapted their lives to it and carried on.

For Interest
Opinion Eric Schmidt: US’s flawed approach to 5G threatens its digital future. Former Google chief warns that recent $81bn spectrum auction could hobble American innovation. Stresses that China already has a head start. Thinks the recent US spectrum auction was a mistake because it imposed no meaningful requirement to build necessary network infrastructure. The price paid means that companies don’t have the finance tube able to capitalise on what they have bought. The result will be
'Americans will face higher prices and weaker digital services — yesterday’s internet tomorrow. That is what happened when European telecoms companies paid over the odds during the 3G auctions of the early 2000s. Europe is still recovering from its lost digital decade.’
US companies did well with 4G because they built the core tech behind it. But not so with 5G, China put a lot into that and will soon have a national network with speeds of 1 gigabit a second. Giving Chinese companies the head start in building products and services that can utilise it.
Mentions the need to build base stations for 5G in the US, without which there will be no 5G or 6G for that matter!
Suggests 3 requirements
1. 'Congress should use the proceeds of Auction 107 for a special data infrastructure fund to provide direct aid to states that build physical 5G infrastructure. The money could be allocated to promote rapid and equitable build-out. The foregone revenue would be recouped by the documented economic boost brought by higher data speeds.’
2 'If the US auctions more spectrum, insist on getting infrastructure. A true 5G network will require more than this auction’s 280MHz of spectrum. Japan, China, South Korea, the UK and Canada will assign an average of 660MHz of mid-band spectrum each for 5G by 2023. Future auctions must set stringent build requirements, with penalties for underperformance.’
3. 'Pursue alternatives to auctions. The defence department has proposed sharing government-controlled spectrum with commercial providers if they build infrastructure quickly.’
Makes good sense the question is whether anybody in the administration will listen.

Opinion Gideon Rachman Anglosphere sees eye to eye on China That is a new form of Anglo-sphere; one that involves the bringing together a group of English-speaking countries, all of whom have adopted more confrontational policies towards Beijing due to the increasingly assertive behaviour of China.
Comes as the US is getting more support from the UK, Australia and Canada each for their own reason and in contrast to the EU who seems to fear a Cold War with China, largely driven by Germany who has maybe more commercial interests in China than the others. He notes China has noticed the Anglosphere when Zhao Lijian, China’s foreign ministry spokesman, to comment: “No matter if they have five eyes or 10 eyes, if they dare to harm China’s sovereignty . . . they should beware of their eyes being poked and blinded.”
It suggests that the members are considering adding Japan and maybe India too.
It concludes 'As the US seeks allies willing to push back against China, the Anglosphere plus the big Asian democracies looks like the most promising combination.'
An interesting read

Battle looms over subprime lending regulation under Biden (Page 1 of Companies & Markets)
Notes that Financial services under Trump saw restrained enforcement and supervision. Under the Democrats that is likely to change and swing towards the other extreme. One area in the spot light is instalment lenders; who lend to people that the banks will not touch, but charge what some consider exorbitant rates.
Looks at the case of World Acceptance whose ‘loans are well above the rate that recent pieces of legislation have treated as unacceptably usurious: 36 per cent. That is the level, for example, above which the Military Lending Act forbids interest rates on most loans to members of the military, and the rate cap on all consumer loans that the Illinois legislature passed this month.’
Much is due to its business model of offering new additional loans after several payments have been; each time at a higher level an effectively trapping the borrower into only paying interest. But interestingly from the company numbers even then it is not a profitable business and from the number of shorts out many feel it's likely to fail.
The article concludes 'The debate is not simple, but this much is clear: it will be played out on top of the faultline that divides Americans’ attitudes towards business, regulation, inequality and free markets. How it is resolved will tell us a great deal about where America stands as a nation.’

It is an interesting note at a time when record amounts of stimulus are being talked about; with a significant proportion of the that money likely to go to those that are not really in need.
One would think the administration would try and find a better way to regulate the business. Never letting them give loans that mean that the borrower is paying more than the 36% level the government feels is justified.
But maybe something more fundamental is required, maybe the credit card companies and banks need to contribute and actually deal with those they have decide are not worthy. Just like property developers, who are often required to provide community housing or other elements of planning gain. Maybe financial companies should too, especially those that are receiving government money for administering other schemes. I know it's unlikely but as the article notes in its conclusion the resolution of the issue will define where America is as a nation.

Sturdy allies help pick bludgeoned Melvin Capital up from the floor. (Page 9) Sector’s eyes are on hedge fund that needed $2.7bn from Point72 and Citadel after Reddit pounding.
Looks in detail at what happened at Melvin Capital and how the market found out fit was exposed.
It also once again reflects that it all comes downs to holding power and conviction.
Many shorts got out early. Melvin crystallised its losses on the day the shares hit $483, the shares closed at $60 last night.
An interesting read.

GameStop furore highlights a subtle but important shift. (Page 11) basically that retail investors in the US are going to be more of a presence than they have been in recent years. I think that is possible but I wonder in the post pandemic world when people return to more normal business practices whether retail investors will have the same opportunity/time to play the stock market. It requires constant attention for day traders not to lose money. Are they, when given the opportunity of meeting friends at a bar or stay at hime watching their investments going to choose to remain home? Or will they take a risk and leave the trade on, only to get home later and find a loss. Or trade from the bar after one too many drinks and make an expensive mistake?
For sure retail is a rising force but the endurance of its presence I think in the US is still in question.

Germany, Sweden and Poland to expel Russian diplomats. Tit for Tat on expulsions over diplomats attending protests in support of Alexxi Navalny. They say there were there to observe events which was in line with their lawful diplomatic duties.
Obviously tensions in Russia are rising with Putin under pressure at home and abroad. Increasingly Russia is becoming more isolated from the West.

Opinion Why I was wrong to be optimistic about robots. Looks at why we should make sure robots work for us not the other way around.

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