Dec 16 FT China ratings, data, relations & tech. FOMC & Inflation, Trumps prosecution? and updates

16 Dec

MARKETs @ 2:15pm
Asian markets opened higher and have generally traded sideways except Japan and Taiwan which are trended higher follow a couple of days of consolidation.
Data was disappointing but the rebound in US markets and news of Apple ramping up production gives hope of a strong recovery in 2021.
Nikkei 225 Opened higher following the US and on Apple news and tested to 26,850 but failed to break above and then trended lower through the morning to 26,740 before a small bounce into lunch.  PM opened flat but dipped to 26,720 before starting trend higher Currently +76pts (+0.3%) @ 26,764
Topix followed a similar patten Currently +7pts (+0.4%) 1,789
Balance of Trade Nov Yen 366.8b vs 871.7b Oct revised (F/cast Y510bn), Exports Nov -4.2% YoY vs -0.2% Oct (F/cast +0.5%)
Imports Nov -11.1% YoY vs -13.3% (F/cast -12%)
Flash PMI
Manufacturing Dec 49.7 vs 49 Nov (F/cast 50)
Services Dec 47.2 vs 47.8 Nov. (F/cast 48.5)
Composite Dec 47.0 vs 48.1 Nov (F/cast 49)
Data missed but sentiment improved following the overnight move in US markets.
Kospi opened higher 2,764 and tested to 2,775 but failed to break out. Trended lower in choppy trading but support around the opening level which was tested several times. After 11am market started to trend higher still in choppy trading; currently +15pts (+0.5%) @ 2,772.
Kosdaq opened higher and trended higher to 941, currently has just eased slightly +9pts (+1%) @ 941
Export Price Nov -4.9% vs -6.2% Oct revised from -6.4%
Import Prices Nov -10.6% vs -11.2% Oct revised from -11.6%
Unemployment Nov +4.1% vs 4.2% Oct (F/cast was +3.7%)
Opened higher and worked higher but resistance around 14,300 for most of the session but saw a tick higher around 1pm and closed +236pts (+1.7%) @ 14,305
CSI 300 opened higher tested 4,960 in early trades but then sold down 4,940 before working higher again to 4,968 but then eased back into lunch. PM open lower but has worked back to 4,960. Currently +23pts (+0.4%) @ 4,965
Pre Market opened 26,421; +214pts vs +103pts ADR’s initial dipped to 26,334 (some margin selling) before working higher to 26,500 but unable to break above and eased back to 26,425 level at lunch. PM opened flat, and is trading sideways currently +230pts (+0.9%) @ 26,434
Expect marker to open higher following the US and lead from Asia; ondon’s FTSE indicates +25 points at 6,545, Germany’s DAX +27 points at 13,400, France’s CAC 40 +16 points at 5,554 and Italy’s FTSE MIB +94 points at 22,014, according to IG. Flash PMI and other data will be important and Brexit an Covid still overhang the markets but hopes of US stimulus +VE. Expect some caution into the close ahead for the FOMC decision
EUROZONE PMI Flash Data (Manufacturing, Services and Composite), Balance of Trade, Construction Output, Labour Cost Index, Wage Growth
GERMANY PMI Flash Data (Manufacturing, Services and Composite)
FRANCE PMI Flash Data (Manufacturing, Services and Composite)
UK PMI Flash Data (Manufacturing, Services and Composite)

US Futures 
Opened slight +VE in Asian time but then eased back Dow -31pts. S&P 500 futures and Nasdaq 100 futures also both traded close to the flatline.Stimulus, covid and FOMC the main focus.
MBA Mortgage Applications and 30 yr Mortgage Rate, Retail Sales data, PMI Flash Data (Manufacturing, Services and Composite), Business Inventories, NAHB Housing Market Index, EIA Oil report, FOMC Interest Rate Decision and Press Conference.

On line
MSCI drops seven Chinese companies from indices.  Action follows Trump ban on US investors buying shares in groups with China military ties.  Companies will be excluded from the popular MSCI’s emerging markets indices from Jan 5.  It was widely anticipated and follows similar action by other index providers.  MSCI said it was only removing the companies listed by the WhiteHouse and that it would launch new indexes including those companies for investors that are not impacted by the WhiteHouse’s ban.

Brussels threatens Big Tech with break up to curb monopoly power. The draft new Digital Markets Act warns companies that the EU can impose new fines of up to 10% of global revenues and break up companies that are fined 3x in 5years.  Big threats although the actual implementation by the courts may be significantly more difficult. The EU also released the draft Digital Services Act placing more responsibility on companies for illegal behaviour on their platforms. The EU is following a global trend (including China) of looking to try and curb the power and influence of Tech companies.  The potential for the future is changing as governments come under pressure from their citizens (on in the case of China the Party) and interested groups to control the tech giants.  No doubt they will remain important parts of the economy and an important part of many investment portfolio’s but it appears that their potential to be all things to everybody has been stunted.  
It will be interesting to see if in the light of tougher regulation they begin to compete more directly with each other, something in the past that they have only one in a limited way.  That could actually lead to a better service to users but probably less profit to the big tech companies.
See also LEX Tech regulation: speech impediment. 'The intersection between free speech and malignant expression will be as grey as ever in the wake of these latest rules. But the rapid scaling-up of enforcement starkly demonstrates how badly public goodwill towards Big Tech has collapsed.’

China rebukes rating agency over quality control issues. Tucked away inside but I think important.  Looks at how China has suspended the licence of Golden Credit Rating and forbidden it from taking new business for three months.  A former executive is accused of taking massive bribes. It comes as another potential default is highlighted in China; Shandong Ruyi, China’s largest textile manufacturer.  China ordered it to “immediately carry out a comprehensive rectification . . . strengthen internal controls and compliance management, strictly police business practices and improve the quality of ratings”.That is a charge that could be levelled at all of China’s credit agencies; where ratings are predominately A because of the assumed support of, or pressure from, local or national government.  
For investors its another example of the fact that China’s markets are still immature.  They may appear to have the trappings and semblances of mature markets many of these things are merely cosmetic.  When I first arrived in Hong Kong in 1996 a lot of the building in Shenzhen looked from the outside as good as those in Central but they weren’t.  They didn't have things as basic as good air-conditioning and often relied on window being opened. But they looked good.  Today they are as good but it has taken years.  So too with China’s financial systems; they have a lot of scope to improve. 
Read also LEX China stocks: Darwinian selection Looks at how Chinese companies forced to delist from the US are facing a tough outlook as secondary listings in China may not provide a back up as the bourse there tighten up on their regulation.  Chinese companies have a long record of accounting and governance issues.  Beijing is indicating it intends to tighten up but it will not be easy.  Foreign investment has increased too along with the fear of being trapped by China changing the regulations.'The risk of being blindsided will rise. The reforms include faster suspensions of suspect companies. They may not even be relisted before a final delisting decision is made, which would permit an exit at a rock-bottom price.It is a fragile time for these well-intentioned reforms. A growing number of corporate defaults means more are likely to make the watch list for removal from the markets.'

China powers ahead with rosy figures for industry and retail. Looks at yesterday’s China data which continued to show China recovering well from the pandemic.   Exports from China remain high; still largely pandemic linked in personal protection equipment and electronics.  The real test will come when the vaccine roll out means that those are less sought after and exports return to the pre pandemic diversity.  The key will be can China adapt its industry back and be competitive those more stable items.
Retail sales and Unemployment were resilient but I think they don’t provide a full picture.  Those with money and secure jobs are still spending but with many traditional companies not back to full production it is difficult to see why the numbers were as good as they were.Retail probably because those with money are still spending and taking advantage of sales.  Whilst a lot of the lower paid population remain cautious.  Equally with unemployment; as figures do not reflect migrant workers.  It will be interesting to see whether after Chinese New Year the number remains low.  Whether many of those migrant workers still away from home and looking for work decide at Chinese New Year to return home and stay there.Another concern looking froward will be over more potential company defaults.  If as expected they continue to rise that will impact Industrial, retail and unemployment numbers.

Beijing coal ban would breach WTO rules, warns Canberra  A further deterioration in relations as Australia seeks clarification over what has been reported in the media that China has imposed informal trade sanctions on Australian coal.  Australia is pursuing it under the WTO rules but I wonder how this plays out for the recent RCEP agreement. China has attacked Australia every since Canberra called for an international inquiry into the source of the covid outbreak in Wuhan.  China’s reluctance to allow foreign, independent experts to investigate the outbreak continues to raise doubts in peoples minds as to why, if there is nothing to hide, is China so reluctant.  As time passes the potential to really know what happened in Wuhan diminishes and that leaves the world exposed to the potential for it to happen again.  China is aspiring to be a World Leader and with leadership comes responsibility.With regard to coal and other products from Australia to China, the only one really not impacted is Iron Ore; something that China needs.  I suspect it willingly be a matter of time before Australia decides to link iron ore exports with other commodities too.  
Interesting to note that construction in China is still a big part of kickstarting the economy and that can be seen in sales data from Doosan Infracore; Sales of excavators in China are expected to reach the highest in a decade this year on strong demand.  Data by the China Construction Machinery Association, showed Doosan Infracore sold 1,692 units of excavators in November in China. That should also be good news for Sany, Zoomlion, Lonking, Weichai Power etc. 

China’s online medical platforms take off. Lockdowns and gaps in health coverage drive remote drug sales and patient consultations.  Notes that the pandemic has created the perfect conditions for digital health coverage to grow in China; especially because there were already big gaps in China’s traditional healthcare coverage. In part because the Chinese system sees 'the best doctors and equipment are concentrated in top-tier hospitals in big cities’Notes that JD Health which listed in HK last week rose as much as 75% on their debut and that others like AliHealth is up over 170% this year.  Even now as China returns towards pre pandemic conditions usage of the services remains high; which must be because people see benefits. Ping An Good Doctor is the most active and I think one that has applied some of the best tech to its services.  All of the operators are viewing the online drug sales market as another great potential revenue generator, especially since the drugs market in China is quite fragmented in many respects.  The recent move to a national Drugs list is seeking to resolve many of those issues but it will take time.The big drawback the online operators fee is that their services cannot be claimed from current employer-provided insurance schemes.  China has launched an online medical insurance system in August last year, but only a handful of cities and provinces, including Beijing and Shanghai, have formally implemented it.  But that will make online more attractive over time but there is a lot of bureaucracy and duplication to deal with in the short term, and not all local governments have ample finances today for the services. It concludes by saying 'Companies may also have to contend with a shifting regulatory environment. Ms Lee said the policy framework China was building had yet fully to account for all the risks arising from the sector’s growth, including challenges in standardising care and products across the country. “There remain a lot of unconnected dots,” she said.’
I think in the short term these companies will do well because the rising middle class in China has the money to pay for these services and whilst they would like to reclaim them that don’t need to but they do want the care the services provided.

Fed meeting Policymakers ponder extra monetary support. Looks at how the Fed may react to the current position of a brighter 2021 outlook because of available vaccine but also the current rise in daily cases.  Leaving them to ponder what it needed now.  The article looks at Bond purchases, Vaccines and Rates Rises, Reviving the Crisis Credit Facilities and Nudging Congress on Stimulus.
An interesting read and in the few hours many of the questions will be answered.  I expect that Powell will stress that the Fed views the outlook as improving but is aware of the current situation and monitoring things very carefully.  That they will seek to use as many facilities as possible to support SME’s and the wider economy.
Read also Historic rally threatened by spectre of renewed inflation. Fund managers warn that investors are ‘complacent’ over risk of price growth.  Another article on the dangers posed by inflation to risker assets.  It notes that the current foundation enabling markets to trade at new highs is based on the inflation staying low and well behaved.  If that changes it will be a whole new ball game.  Many think that the markets are complacent about the risks; especially in 2H 2021.  It ends by saying 'Assuming central bankers will look the other way comes with considerable risks, however. Historically high prices of both bonds and stocks are premised on expectations of years of rock-bottom interest rates, and both could tumble if the Fed signals even a chance of higher borrowing costs, according to Shamik Dhar, chief economist at BNY Mellon Investment Management.“That’s a world where fixed income stops being a hedge for equities, and both sell-off together,” he said. “That would be a big shock.”’
Along the same lines The great disconnect has continued much longer than most expected by Mohamed El-ErianIn summary 'Already, the great disconnect has continued much longer than most expected. This illustrates, yet again, the unintended consequences of a policy approach that places an excessive burden on central banks. The hope for 2021 is that, with a vaccine-enabled economic recovery, better corporate fundamentals will start validating elevated asset prices and allow for an orderly rebalancing of the monetary-fiscal-structural policy mix. There are two risks, and not just for markets. First, what is desirable may not be politically feasible, and second, what has proven feasible is no longer sustainable.'

Buyout activity at risk after US court ruling on ‘reckless’ board  Board directors involved in M&A in the US just got a wake up call.  A judge has said that Nine West creditors can sue the former directors.  It comes as they approved a deal to a private equity buyer who they saddled the business with an unsustainable amount of debt resulting in the company failing.  It does make it more difficult for directors who now have to assess both short term and long terms benefits.  But the fact that the board directors now at least have to consider the longer term aspects is a help to shareholders and creditors.  A key part being that the judge said referring to the board “cannot take cover behind the business judgment rule”, Judge Rakoff wrote, referring to the legal doctrine that keeps directors’ past actions from being second-guessed later.The article notes that 'The ruling is preliminary and the situation will now be resolved in a trial or a settlement, but the judge’s statement of legal theory could have long-lasting consequences,’  
The private equity buyer, who actually saddled the company with the debts, is also facing accusations of asset stripping.
Making all parties to the deal more responsible is key. I the years ahead as interest rates start to rise, the amount of leverage placed on companies in such deals will become even more evident.

New Panasonic chief must add a dash of boldness to revive group. Looks at the tasks ahead of the new CEO, after the last one failed to deliver to redefine the company.  Unlike some other Japanese companies it has still not managed to find its core strength and driver for the future.  There have been successes like the bold tie up with Tesla for batteries but it still has 520 other subsidiaries in its diverse portfolio.   But the departing CEO has left the company financial better positioned.  The new CEO inherits a company which many doubt will be able to maintain its lead in the global battery race against the Chinese and S Korea rivals.
The key will be whether the new CEO can be as bold as those of Sony, Hitachi , Toshiba etc and find and focus on those core businesses that will make it great again. A good read.

Credit Suisse tightens focus on wealth management. Looks at the outlook for the firm.  Its stated that it intends to increase profits from its wealth management business by at least a quarter by 2023.  It is also looking to build up trading and investment banking business and achieve a return on tangible equity of 10% to 12%.  Key is that Mr Gottstein, who has been in the job for 10mths says that they are going on the offence, to grow and that it will be done with 'discipline across risk, compliance and cost.’   Asset management was still important too.   He did warn at the investor update that Q4 numbers would be marred by a $450m writedown in its holding in York Capital Management, the US investment group that said it was winding down its European hedge fund business last month.

Travel woes and vaccine delays weigh on next year’s oil demand outlook, says IEA. Looks at the latest monthly report which basically expects demand to recover slowly.  It also warns that another surge in covid cases around Christmas/New Year is likely to result in stricter social distancing measures and hence hurt demand.'Crude stockpiles that had built up as consumption dropped were unlikely to deplete until the end of 2021, it added.On the supply side, global oil production rose 1.5m b/d in November to 92.7m b/d as the US sector recovered from hurricane shut-ins and Libya built its output back up. The IEA said the deal struck this month by Opec and allied producers such as Russia to increase supplies by 500,000 b/d next month — well below the 2m b/d initially planned — was “based on a recognition that the market remains fragile and is in need of careful adjustment”.’

For interest
FT BIG READ. US POLITICS. Prosecuting a president  Donald Trump could face several investigations when he leaves office. Although many Democrats believe any misconduct must be addressed, Joe Biden has strong political incentives to do nothing.  But the whole matter could define his presidency along with the presidencies of this who follow him. Set out that  'Donald Trump will leave the White House with potential personal criminal liability unlike any commander-in-chief since Richard Nixon, who was saved by a controversial and sweeping pardon gifted by his successor Gerald Ford after he resigned in disgrace. Mr Trump, who will depart after attempting to subvert his loss in a free and fair election, is unlikely to receive any similar such clemency from Mr Biden.’Looks at Obstruction Claims, Politicised Pursuit, Avoiding Repeat Problems.A good read and thorny issue.

Opinion There is no stock market bubble.  The bigger question is whether rock-bottom interest rates will revert to ‘normal’ and, if so, when by Martin Wolf.Notes that whether we are in a bubble depends on the prospects and I would add actual earning of companies and interest rates in the future. Looks at the various measures for determining market value and what they are currently showing.  Key really is what interest rates are likely to do (it says rise) and why they are rising.  In summary 'Some major stock markets, notably the UK’s, do look cheap today. Even US stock prices look reasonable, valued against the returns on safer assets. So will the forces that have made real interest rates negative dissipate and, if so, how soon? These are the big questions. The answers will shape the future.'

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