Dec 1 FT Thoughts China's Tweet, Trumps threats, China Mkt Discipline? And updates


03 Dec

Overview
Asian markets seeing a strong rebound from Monday’s sell off, which with the benefit of hindsight looks to have been window dressing.
Good data helping investor confidence along with Biden announcing more of his team with Yellen for Treasury Sec and Powell to continue at the Fed.

MARKETs @ 1:30pm
JAPAN 
opened higher, futures had opened -280pts but quickly turned +VE and market opened higher despite weak Unemployment and Capex data and rallied to 26,800 level as Manufacturing PMI was better than forecast and traded sideways around that level into lunch. Opened in the PM as the same level and continues too traded sideways Currently +354pts (+1.3%) @ 26,780
Topix opened higher tested to 1,770 but then sold down slight before working back to 1,770 level and traded sideways into lunch. PM opeend lower and is drifting lower currently +11pts (+0.6%) @ 1,766
Data
Unemployment Rate Oct 3.1% vs 3% Sept (F/cast was +2.9%)Jobs/Application Ratio Oct 1.04 vs 1.03 Sept (F/cast was 1.03)Capital Spending Q3 -10.6% vs -11.3% Q2 (F/cast was -3.6%)Manufacturing PMI Nov 49 vs 48.7 Oct (F/cast was 48.3)
S KOREA GDP Growth data pre market was stronger than forecast which saw the market open higher reversing the initial weakness in the futures.
Kospi opened higher and worked higher to 2,627 level where it saw resistance and drift lower down 2,610 level where is saw support and then has worked higher Currently +41pts (+1.5%) @ 2,630.
Kosdaq opened higher tests to 892 but failed to break out and sold down to 883 around midday. Then worked higher back to 888 level and its traded sideways, Currently +3pts (+0.3%) @ 889
Data
GDP Growth Rate Final Q3 +2.1% QoQ vs -3.2% Q2 (F/cast was +1.9%)GDP Growth Rate Final Q3 -1.1% YoY vs -2.7% Q2 (F/cast was -1.3%)Exports Nov +4% vs -3.8% Oct (Consensus was +6.8%)Imports Nov -2.1% vs -5.6% Oct (Consensus was +0.2%)Balance of Trade Nov $5.93 vs 5.8b Oct revised (F/cast was 6.1b)Manufacturing PMI Nov 52.9 vs 51.2 Oct (F/cast was 50.9)
TAIWAN opened higher and test to 13,850 in early trades as Manufacturing PMI was mush stringer than expected. Then sold down to 13,750 level before working back to 13,850 and working slowly higher; currently +144pts (+1%) @ 13,866
Data
Manufacturing PMI Nov 56.9 vs 53.6 Oct (F/cast was 53.2)
CHINA opened slightly higher and worked higher as the Caixin Manufacturing PMI was higher than forecast, continued to work higher through the morning to 5,040 at lunch. PM opened slightly lower but working higher Currently +74pts (+1.5%) @ 5,034
Data
Caixin Manufacturing PMI Nov 54.9 vs 53.6 Oct (F/cast was 53.2)
HONG KONG Pre market opened @ 26,422 +81pts vs -246pts ADRs at 26,095. Saw an early dip on margin call selling but then worked higher through the morning to test 26,630 just before lunch. Currently +262pts (+1%) @ 26,598. Chinese banks strong along with Insurers. SinoPharm weak as results missed.
EUROPE Expect markets to open higher following the surge in Asia on good PMI Manufacturing data and hopes that the PMI data in Europe follows the same pattern.
Data Due
EUROZONE Manufacturing PMI, Core Inflation Rate, Inflation Rate GERMANY Unemployment Rate, Manufacturing PMIFRANCE Manufacturing PMI, New Car Registrations UK Nation-wide House Prices, Manufacturing PMI
US Futures opened slightly +VE but have risen in Asian trading Dow +236ots with S&P and NDX +VE too.
Data due 
Redbook, Manufacturing PMI, Construction Spending, ISM Manufacturing Data (PMI, Employment, New Orders, Prices). Fed’s Powell Testimony. API Crude Oil Stock. Total Vehicle Sales.
Speeches by Brainard, Daly and Evans

FT On Line
China state-owned group caught in default storm owes banks billions

Revelation that Huachen Auto Group borrowed $5.1bn could prompt concerns over credit system. Creditors include China’s CCB (Rmb2bn and ICBC 642m) and Singapore’s DBS (Rmb779m) according the a creditor document from Sept last year. The article lists the other creditors which includes a number of smaller Chinese banks too. Historically Chinese banks have managed to find a number of ways to roll over their bad debts but this level of debt will be difficult to reclassify, especially as it has been so well publicised. That could lead to a re-rating of the Chinese banks.

Front Page
Australia hits out at ‘repugnant’ China tweet 
Refers to a fake picture tweet sent out by Zhao Lijian, the foreign ministry spokesman and a regular critic of Australia. It follows a report that Australian special forces were responsible for the deaths of 39 Afghan civilians.
Australia has apologies to Afghanistan and said that those responsible would face trail.
Whilst the report is shocking it also reveals what China is prepared to step outside the accepted norms of behaviour in order to try and bully those who say or do things that it does not like. I cannot imagine such a tweet would have been released without the approval of President Xi which reveals where the policy is coming from.
It comes at a time when China is trying to establish its presence in Afghanistan where it is seeking to establish a peaceful corridor as part of its Belt and Road initiative. The link and the need for it to be secure from Afghan inter factional attacks is key part of Beijing's plan for an alternative route for oil and other goods from the Middle East to China.

Australia winemaker TWE turns sour on China. In response to the sanctions announced at the weekend the company will diversify away from China. Like many other Australian businesses will be looking to alternative markets for their goods. TWE did also mentioned that it would look at switching from selling if Australian wines into China to selling wine from its French vineyards.
Many businesses will no doubt be reviewing the increased diplomatic risk from selling into China.

Meituan boosts warehouse network in deliveries push Comes as the company plans to expand into more than 1,000 cities and countries before the end of the year. It is focusing on grocery retail. It has three models;
Large cities, it is building its own supply chain for drivers to ferry its goods to shoppers within 30 minutes.
Its app also holds a marketplace where grocery stores can advertise their goods for delivery by Meituan riders.
Its newest venture, launched this summer, brings next-day shipping of cheap fruit to far-flung cities and towns.
In its latest results warehouse spending, hiring and building supply changes accounted for a third of its earnings.
Key point is that grocery delivery is the focus for many but making a profit is difficult and so far Meituan is growing its user base but the business is showing an operating loss and according tot he company likely to do so for the next few quarters.
Alibaba’s approach was to buy a supermarket operator and Pinduoduo says much of its current fund raising will be to aid it refocus on selling produce on line.
For investors is means that the logistics sector will continue to be attractive.

LEX US/China investment: blackout. Looks at the fact the Trump is looking to add more Chinese companies to the list of those with military links. Currently CNOOC and SMIC are in the cross hairs; CNOOC was surprise and its share price has cratered. SMIC was expected and so the impact was smaller. The key is that whilst Trump is still in power no company in China can be said to be safe for now. The biggest threat would be if he decides Chinese Banks are linked, that could really undermine China’s recovery. Investors for the most part are assuming that this will not happen but that doesn’t mean it will not.
It is also worth noting that Trump has provided the Biden with a new weapon for its arsenal of weapons for use in negotiation. Whilst we do not expect him to take such an aggressive line as Trump; Beijing would be wise to remember that it is still an alternative for the US. Int he short term Biden’s first test is likely be how to react to China filing to uphold its commitment on importing US goods.

Editorial China edges towards financial discipline A string of bond defaults changes assumptions on state guarantees. It raises questions about whether the recent defaults are a sign that China’s recovery is not as solid as previously thought. Lastly whether they are a sign of structural problems in the bond market.
Notes that the defaults are are good as they show Beijing is from the statements being made willing to impose financial discipline on companies and local governments and make them responsible. It also notes that the sustained liquidity seen post the 2008 financial crisis will not be repeated. But the PBoC has made clear that it will maintain current policy and not tighten quickly.
The result is that bond yields have risen to reflect risk and that investors are being more selective.
But the whole episode reflects how weak China’s governance standards are, how immature its market is and I would add how little legal protection investors have. Something clearly illustrated by the Arm China situation and the fact that the head could override a main board decision against him and hold the company to ransom. It also highlights why any change to Hong Kong’s legal system risks undermining investor confidence in Hong Kong and China.
The editorial ends by saying 'China’s step towards inculcating greater financial discipline is welcome. But Beijing should realise that governance standards for its big companies are, increasingly, set by its huge bond market. If it allows the bond market to be riven with fraud, pretence, evasion and wishful thinking, companies will remain prey to the same culture. China’s route to corporate efficiency and investor protection lies through an Augean overhaul of its capital markets.'
In many ways it seems less about edging towards Financial discipline and more about it being dragged there by institutional investors

Moderna requests approval for Covid vaccine in US and EU Article notes that UK is likely to be the first western country to roll out a vaccine with the Pfizer-BioNTech shots expected to be given as early as December 7. It also notes that the US has in place a distribution system that could start distribution with 24 hours of approval.
Positive news but there are still concerns the sheer numbers of people to be vaccinated and the fact that mcc of the damage to business has already been done.

IMF warns of second wave threat to the single currency bloc. Says there is a considerable risk and warned, 'that recent progress on vaccines will not deliver a recovery in the near future.’ Key is that it is worried about businesses failing before the vaccines are widely available.
'The EU might need to provide “solvency support” to businesses, the IMF said, and it called on the European Central Bank to consider “direct support” to companies if bank lending dries up.'
It calls for more fiscal and monetary action. The problem for the EU is the difficulty in getting everyone to agree to the terms of its Recovery Fund and other policies.

Exxon slashes capex plans and will write off assets of up to $20bn. Another example of how the previous investment darlings have fallen out of favour. The cutting of capex will have significant impact on the support service companies too; which is likely to have a significant knock on impact to the US economy.

Contrarian moves for investors that threaten to upset the consensus. Looks at the raft of 2021 predictions that will be coming out of the investment houses in the next few weeks. Notes that if someone had predicted a pandemic they are unlikely to have predicted the market closing higher. Many feel the whole exercise is fruitless but the article sees some benefits.
It gives analysts a reason to speak to their investment manager clients. But notes a lot of the forecasts are quite bland and most close to a consensus.
It outlines the consensus and then the contrarian views.
The thing that could upset most views consensus or contrarian is the runoffs in Georgia. If the Democrats did manage to win they would control Congress and that would mean a more ambitious policy from Biden.
Worth a read. The fact that analyst will have to write their reports with various scenarios key being the run-offs does rather highlight why year predictions are of little real use. They serve to make investors think about what might happen and the fact that everything can change so easily. Just as we saw in the US election when the ‘blue wave’ didn’t happen.
Research has to be more than just about the numbers, valuable research is about knowing the company management and how they will react to the changing outlook. To me the biggest wonder at the moment is which of the recent consumer trends that has arisen from the pandemic will really continue post pandemic. Additionally the fact that international relations have become so much more important to most companies; especially those with China. The change from Trump to Biden is likely to be significant but not make things easier for China. More likely China will find its aggressive 'wolf warrior’ tactics backfiring as western countries present a uniform approach and that could well then lead to other Asean countries wanting to be part of a united approach to dealing with China.

THE BIG READ The battle for Georgia
The state gave Joe Biden his closest and most surprising victory in the November election. Now its two Senate races will determine which party controls the upper house — and the nature of his presidency.An interesting quote 'Mr Buck points out that Mr Trump’s antics risked not only suppressing moderate turnout, but could also have the unintended consequence of discouraging the conservative base: “How long can you tell people that the election is rigged before they decide not to participate any more?”'

S&P Global takes on Bloomberg with $44bn deal for IHS Markit. Looks at the deal announced Monday which would create a new information giant but is likely to face scrutiny from the regulators. But illustrates that consolidation is still being seen as a key to market penetration and survival.
It is difficult to see the new group really challenge Bloomberg because of Bloomberg message and trading systems.

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