FT Weekend Biden says the US is back. Ski resorts in trouble, HK's RTHK revamp -VE an

21 Feb

Front Page 
Biden declares ‘America is back’ in pledge to repair Nato allianceFirst G7 meeting Biden sets out that he is seeking to rebuilding relationships and seeking increased co-operation with allies.  He did note that the US would need to ‘earn back’ the position of trusted leadership.  He also committed for long term strategic competition with China.  Saying that the world was facing a contest between democracy and autocracy.  
That I think is bad news for China, which is likely to see more intense scrutiny and greater barriers to exports unless it is prepared to open up more domestically and commit to operating inline with international norms. For President Xi that may present issues having stressed domestically how China would not be constrained by international rules and would set it own. The article reports that Angela Merkel summed up the relief of many European leaders by saying
“The prospects for multilateralism are much better this year than they were two years ago, and that has a lot to do with Joe Biden becoming US president,”
Biden has also re-iterated the US’s commitment to Nato’s article 5 of collective defence.The meeting also looked at the global roll out of covid and again the commitment to work together.
See G7 leaders pledge world vaccine boost (page 4)  ‘Warm glow’ surrounds summit as Biden promises extra $4bn for Covax pot

Uber suffers UK blow as court rules drivers are workers, not contractors  Interesting to note that Uber initially rallied on Friday but then sold down to close -1%, the share price is just off its 12 month high $64.05 and over the past week seen consolidation around $60.00 but closed Friday @ $58.39The ruling will put increased costs on Uber, including the setting up of a workplace pension scheme. It will also have implications for other ‘gig economy’ workers. See also UK Supreme Court ruling threatens to crash Uber’s business model. App must extend holiday pay, minimum wage, sick leave and pension contributions.  in the Companies and Markets section.

Alpine skiing industry faces uphill battle after reopening U-turn (Page 2)
Looks at how the lack of a comprehensive plan is hurting the winter tourism business in Italy. As the new Draghi administration reverses an earlier decision to allow ski resorts to re-open.
What is clear is that the decision was a blanket one rather than looking at specific instances. The article sets out how the resort operator had bought a machine to sanitise the ski lifts after each ride, software to manage queues and bought fuel to power the required generators. It is fair that last year ski resorts were responsible for generating cluster inflections but with reasonable social distancing and tracing apps, it seems to me that there ought to be ways to allow at least limited opening of the resorts. Many Asian cities are operating very well with reasonable social distancing measures.
Also worth reading Tennis Australian Open sees off lockdown, quarantine and mice (Page 4) along with the FT BIG READ. CORONAVIRUS PANDEMIC When will life go back to normal?  It looks at the UK plan to ease restrictions 'Squeezed between some in his party and more cautious scientific advice, Boris Johnson will reveal his plan to ease lockdown on Monday. The rest of the world will be watching how the UK assesses the risks.’

China admits 4 soldiers died in Himalayas border clash (Page 3)
Beijing said it was only now revealing the number, after 8 months, because it did not want to 'overheat the issue’. That might be an indication of how much domestic interest had been created about the border clashes domestically and how Beijing was seeking to manage expectations. Beijing commented that India had played up the issue, distorted the truth and mislead international public opinion.
India has consistently claimed that it was China encroaching on Indian territory; violating agreements and protocols.
I do think that whilst that the incident reveals how unwieldy military action can be and the outcomes uncertain. Many think the original intention was to serve as a warning to India about China displeasure. The resultant action was far worse; with both military and commercial consequences.
My hope would be that Beijing learns from the incident and dials down its actions over Taiwan, Japan and the South China Sea. The reality is however, that Beijing probably accepts the collateral damage as acceptable and the domestic endorsement as positive. That to me is a big worry with a negative cross read to Taiwan. Biden’s pledge to work with Allies and the raising of diplomatic links with Taiwan is important but there needs to be a more united declaration from more nations that China’s actions against Taiwan, Japan and countries around the South China Sea are unacceptable.

Hong Kong revamp of public broadcaster prompts alarm (page 4).
Looks at the replacement of Leung Kawing, a veteran journalist who has led RTHK for more than five years, by Patrick Li, a longtime civil servant with no journalistic experience. With the administration’s Edward Yau, secretary for commerce and economic development, justifying the change saying
“A lot of recommendations were of a management nature, which might better suit someone with an administrative background.”
RTHK was modelled on the BBC (which China has recently banned in China), and has been under pressure from pro Beijing groups and the Chinese State Media since 2019 for its coverage of the pro-democracy protests. The new National Security Law with its vague wording has also been used to arrest at RTHK journalist; and prompted the administration to call for better internal controls and oversight of its output.
Many see the move as another crackdown on the freedom of expression and an undermining of RTHK’s autonomy. 'Grace Leung, a lecturer at the Chinese University of Hong Kong’s School of Journalism and Communication, said the move undermined the broadcaster’s autonomy. “They are going to tighten the editorial independence of RTHK to make it more loyal to the government’s expectations so it will become a government department rather than a public broadcaster,” she said.
I must say as a regular contributor on RTHK’s financial programmes I have always found its reporting to be fair and balanced. It has asked pertinent questions and provided balanced responses. The fact that it will now be run by a man who has pledge allegiance to the Hong Kong government does raise the question of whether he can honestly say he will be working in the public interest especially when it comes to reporting on issues concerning government policy.

Editorial Australia’s Big Tech fight does not provide a modelGlobal approach needed to ensure digital competition is not distorted
Looks at the impact of the proposed Australian legislation which this week saw google spike a deal and Facebook say it would cut off Australian news links. Worth noting though that since the editorial Facebook has back tracked and is again talking with the Australia. Probably because its share price took a hit on the news it was cutting Australian news and it also got adverse reaction from its users.
The article makes a good point that there should be a collective bargaining framework so that small news providers benefit as well as large ones like Murdock’s empire. Equally that there should be an international framework along the lines of the those set by the Basel Committee.
Key it notes is the fact that 'Signs of a greater appetite to curb Big Tech at US state and federal level and the arrival of Joe Biden as president boost somewhat the prospects for such co-operation. One of the most important contributions of the Australian case would be if it gave a further push to a holistic, global approach.’
See also Big Tech remains a bête noire for large sections of the public also Facebook’s Australia purge sparks fury Minister brands move arrogant as political and business backlash grows

Companies and Market Section
Huawei push to see HSBC papers in Meng case fails
It was trying to force the release of papers related to a meeting between Meng and HSBC bankers in a Hong Kong restaurant in 2013, when the Chinese technology company’s relationship to a subsidiary called Skycom was discussed.
For those who like the law:
'Huawei had sought to apply rules set in an 1879 statute on bankers’ books to force HSBC to hand over the documents. The judge decided that the law defined “books” as ledgers and similar entries and not “everything that a bank has, or does, or writes down, in the course of its ordinary business as a bank”.’
For investors HSBC earnings are due to be released Monday but this case illustrates one of the issues HSBC has in operating in Asia. The Hong Kong & Shanghai Bank (HSBC) should be a leader with its history and connections and yet for has never managed to leverage its prime position and even today it still lacks a clear mandate; too British to be successful in Asia and too Asian to succeed internationally.

Copper prices hit 10-year high as green energy push fuels demand for wiring.   As a number of brokers are expecting a new commodity ’supercycle’ with a focus on copper and aluminium.  Copper because of wiring demand in electric vehicles, wind farms etc and aluminium for power transmission and the need to link up renewable energy sources, which are often remotely located to national grids.
That is addition to some buying linked to hedging inflation expectations. Worth noting that not everyone is convinced;
'Commerzbank said they did not share the “euphoria” in the markets, which they said was not matched by a fundamental change in demand. “In our opinion, the price rise has been driven to a large extent by speculation, which puts it on shaky ground,” they said.’

The ‘please just give us some yield’ market By Joe Rennison.
He notes that the high yield market is that in name only. The average yield across high-yield bonds in the US last week was 3.9%. The premium above Treasuries sits at about 3.5%, that for taking the additional risk of not owning super safe Government Treasuries. What makes the current situation special is that the Fed’s target interest rate is now zero. The question he asks is whether they should be so optimistic as we are only a year into the pandemic.
The reasons to be positive are the roll out of vaccines and the-opening of the economy. The problem is that if there are any hiccups then the spread is so thin that there is little scope to absorb losses.
Its not just the economic outlook but also the weight of money chasing product, currently there is more money chasing fewer offerings and that is pushing yields lower too.
He notes that
'Generally, as the economy improves, the Fed raises interest rates. This hurts the price of fixed-rate bonds but can be counteracted by declining spreads due to improving corporate creditworthiness. Yet if the US economy really does take off in 2021, rising interest rates will erode the value of today’s low-coupon bonds, because there isn’t much room for credit spreads to fall further.’
The Fed has promised to keep monetary policy loose even as the recovery takes place but it cannot ignore inflation if that rising significantly. Plus as seen last March the Fed can step into the credit markets to support prices. But as one banker said “When that stops being the case, we will have a very bad outcome. I think the day of reckoning, if we ever get there, will be cataclysmic.”
Central Bank policy has had a significant impact on position on bonds and the fact that yields have been so low for so long will no present some interesting moves if inflation really does take hold.

The Long View
Equity investors need not worry about rising interest rates. Notes that bond yields are rising on the expectation of the recovery but that 'weaning the economy and markets away from artificially low interest rates will still be difficult.’
Low rates are good for homeowners and companies but they also encourage investment in equities and corporate bonds in preference to government debt. Over the past year equities have ‘rallied by three-quarters in value, sending the MSCI All World index into record territory.’ Some other areas of the market have done even better. Making it likely that as interest rates and oil prices rise equities will fall.
He suggests that is a buying opportunity because
'The general narrative of economic recoveries, and indeed what transpired during 2003 and 2009, is that higher rates can be offset by rebounding corporate profits in the early stage of an upturn. And a big increase in corporate earnings is expected this year.’
He notes that 'Where things could become interesting for the bond and equity market relationship is if the economy bounces back so strongly that even the US central bank may find it difficult keeping 10-year interest rates sequestered at historically low levels.’
But until US rates rise to around 3% he suggests continue buying.
Worth a read.

LEX China/blockchain: digital realm Chinese blockchain related companies have seen mixed performance as crypto’s are not considered legal currency in China.  The Chinese listed crypto companies focus on development of blockchain technology for banking and commercial use.  Which should see interest as China pushes for a digital renminbi.'Local blockchain companies should spy opportunities in systems development and support as the digital currency becomes more mainstream. The spur will be nothing like the bitcoin boom during the past few months. But it could be both more sustainable and less volatile.'

For interest Hunt for ancient life on Mars begins after rover lands safely. (Page 3)
Looks at the successful landing of Nasa’s Perseverance rover. The landing will no doubt steal some the limelight from China’s landing due shortly and the scope of the Nasa project will put into perspective how China is behind the US in terms of technical research ability. Nasa intends to see whether flight is possible with its helicopter Ingenuity. Moxie; Mars Oxygen In-Situ Resource Utilization Experiment, to see if it can make Oxygen by electronically breaking down carbon dioxide. Along with a number of more normal experiments and the provision of colour photos.
One of the key things it demonstrates is how advanced the US is relative to China in so many areas. Whilst China is catching up the rest of the world is still pushing forward.

Robinhood concedes it fell short of collateral requirements in hectic week
Brokerage ‘made mistakes’, boss Tenev admits during grilling by US lawmakers.
It admitted it didn’t have the collateral it was asked to post. It was also asked if it was managing it own book properly in terms of margin requirements from its clients. It was also questioned about ‘gamification’ its trading app? To which it replied “Giving people what they want in a responsible way is what Robinhood is about. We don’t consider that gamification.”
An intersting read. Nice quote from John Coffee of Columbia Law School and a former legal adviser to the New York Stock Exchange; “Congress is best at scolding people. The main issues facing markets, he said, “were largely ignored in favour of scolding Robinhood about ceasing trading in GameStop when the DTCC demanded more collateral”.

Next month is heading for some sort of panic — but that might not be a bad thing  By John Dizard.
Looks at the shortage of T-bills; the form of issuance that can be most readily used as collateral for other trades. Whilst at the other end of the spectrum the Fed has ordered a record number of $100 bill be printed. Most of which will go to non-US banks.
He notes 'The dollar is mocked by the well informed, but aggressively hoarded by the fearful, and those who do business in the shadows.’
He notes that financial panics that don’t trigger economic recession can be useful for highlighting excesses that have be excused or ignored.He is expecting such an even in the second half of March in the US Treasury and mortgage-backed securities markets. He thinks the drop in T Bill rates since the beginning of 2021 is a key indicator. By looking at the T Bill auctions and the range of bids. Where low bids indicate dealers wanting to make sure they get some issuance. Very low bids generally only happen at systemic stress points.
Currently it is the case as the Treasury is re-balancing it issuance by redeeming bills and issuing more longer dated bonds.
'That explains part of this year’s unexpected rise in 10-year and 30-year bond yields, which in the past week sailed past the 1.25 per cent level. This in turn triggered a wave of hedging activity by leveraged mortgage banks. As interest rates rise, fewer of the mortgages they own are refinanced at lower rates, and so the “duration” of their assets increases.
To offset this ‘convexity’ risk, they have to sell the equivalent of tens, or even hundreds, of billions in Treasury bond derivatives. This is reinforcing the sell-off in Treasuries and threatening a ‘convexity spiral’ of the sort not seen since 2003. Oh, and the increased derivatives activity needs to be collateralised by T-bills, which you will recall are already in short supply.'
He concludes
'If my guess is right, then we have the makings of another ‘event’ like we saw a year ago. Market freezes have a way of happening in March and September, an echo of the crop cycle. That might make it momentarily easier to get past the politics of raising the ‘debt ceiling’. And the big banks might get one more year’s waiver on shrinking their asset base.’
I guess we will see very shortly he’s right.

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