Dec 17 FT Thoughts: SMIC, WTO Aus/China, Huawei, Vaccines, Currency and updates


17 Dec

MARKETs @ 2:15 HK time
JAPAN 
Sentiment cautious as civid cases continue to rise and Tokyo moves to highest alert
Nikkei 225 opened lower and tested to 26,700 before rebounding to flat and then testing slightly higher but easing back just into the red at lunchtime. PM opened higher and working higher Currently +72pts (+0.3%) @ 26,829
Topix traded in a similar fashion Currently +7pts (+0;4%)@ 1,793
S KOREA  Covid cases continue at high levels and authorities are considering moving to the highest level of social distancing; hurting local sentiment.
Kospi opened slightly lower but sold down to 2,742 during the morning. But it reversed from around 11:30am and worked back to 2769 but then eased back Currently -3pts (-0.1%) @ 2,769
Kosdaq opened lower but rallied to 948 in the first forty minutes but then reversed and sold down to flat over the next forty minutes. It then worked higher with resistance at 944 and traded sideways 941/944 currently +4pts (+0.4%) @ 944%
TAIWAN 
Opened slightly higher traded sideways around flat but then sold down through the morning to a low of 14,213 around 10:50am before working higher for the rest of the day; to close -46pts (-0.3%) @ 14,259
CHINA 
CSI 300 opened higher and initially traded sideways about 10:30 the market worked higher to 5,014 before easing back into lunch @ 5,000. PM opened flat and traded sideways around 5,000 level Currently +61pts (+1.2%) @ 5,014
HONG KONG 
Pre Market opened 26,608 +148pt vs -68pts ADR's. E Commerce names strong but sold down in the first 30mins to the day low 26,390 which it tested a couple of times before working back to 26,550 before easing back into lunch. PM opened higher and trading sideways 26,500/550. A lunch the Pharma names were strong but Chinese Financials and some retail names were seeing weakness.
EUROPE 
Futures indicate a higher open. BoE rate decision in focus, sentiment helped by news that a Brexit deal may happen, progress on the US stimulus package and comments from the Fed that it will continue to buy bonds until more progress has been made on achieving its employment and price stability goals.
Data
EUROZONE New Car Registrations, Core Inflation Rate, Inflation Rate
GERMANY No data due
FRANCE Business Confidence, Business Climate Indicator
UK BoE Interest Rate Decision
US Futures 
Currently indicating higher; Dow +96pts and the S&P and NDX also slightly higher. Key focus will be on the initial claims data and hopes of an agreement on the Stimulus package.
Data
Initial Claims, 4 week Ave Claims, Continuing Claims, EIA Natural Gas Report, Building Permits, Housing Starts, Philadelphia Fed Manufacturing Index, Kansas Fed Manufacturing Index.

FT
SMIC stock hit after reports co-chief has walked out. News was out yesterday and the stock was sold down.  Liang Mong-song, co-chief executive, is widely credited with having driven the recent advances at the company especially in regard to 14 nanometer chips.The purported reason was that he was not told or consulted about the hiring of Mr Chiang who was previously at TSMC.  It notes that Mr Liang had previously worked under Mr Chiang as TSMC before moving to Samsung and then SMIC.  
It notes that 'In 2019, Mr Liang and co-chief executive Zhao Haijun battled over whether the group should develop cutting-edge tech in line with Beijing’s aims, as Mr Liang wished, or focus on mature and more commercially viable areas.Mr Liang gained the upper hand, and scores of executives were replaced to align management with his goals, according to people directly familiar with the matter, and Mr Zhao had considered quitting as a result.’
Share rebounded slightly today in HK but they have struggled this year.  Hitting a high in July (HK$44.80) but then selling down and then being hit with US sanctions.
Since Sept then have traded around between HK$18 to HK$25 and are currently HK$20.50.Key for investors will be whether Mr Liang’s resignation means a change in tack for the company.  Will it remain focused on being at the cutting edge of China’s chip tech or now focus on more commercial projects?


Australia takes China to WTO over barley tariffs dispute.  A progression in the deteriorating relations between the two countries that was sparked by Australia calling for an investigation into the outbreak of covid in Wuhan. It Is likely to be the first of several actions by Australia against China and will likely take years to resolve.
As I have noted before China is being very selective and banning anything that is non essential in its view.  I can’t help thinking that Australia should be equally selective and restrict iron ore exports to China until such time as China acts in a more reasonable manner.

German IT law sets high bar for Huawei. Looks a the new IT law in Germany that does not bar Huawei from its 5G roll out but gives the government the ability to bar it should the Huawei equipment ' “if it conflicts with the overriding public interest, in particular security policy concerns”.  Vendors or critical parts will be required to provide 'assurances as to their “trustworthiness” and ensure their products cannot be used for sabotage, espionage or terrorism.’  Which if violated means they can be banned.Some have criticised the law for not going far enough other questioned whether there was the political will to enforce it.  Time will tell but it does mean that Germany has at least kept the door open and that Angela Merkel hopes will benefit German companies doing business in China.

Asia takes wary steps in race to vaccinate against Covid. Contrasting approaches risk slowing global recovery and hindering travel.  Basically highlights that because many Asian countries have been effective in controlling the covid virus they are under less pressure to vaccinate people as compared with Europe and the US. With many viewing vaccination as a matter of choice not necessity.  Additionally many governments are still vary of using vaccines where the potential long term or side effects are unknown.  Where as the surge in cases in Europe and the US has placed medical resources under such pressure that mass vaccination is seen as the only alternative.  The Asian governments also keen to see the results out of the US and Europe before deciding on course of action.I
t also notes that the control of the virus Asian has also meant that not enough people have fallen ill so that mass trials can be conducted; relying on trials being conducted in other countries; which has also slowed down approval times for Chinese vaccines. Another key issue will be China making the trial data available of public scrutiny.
Most Asian countries are talking about vaccinations in the later part of 2021 but some countries will also face distribution issues especially of those vaccines that require super low temperatures.
I also think that many people will be concerned over which vaccine they are getting; as Carrie Lam said in HK people would not be able to choose which vaccine they got.

BioNTech to supply China with 100m doses. They will go to Fosun Pharma for mainland use; who will pay Euro 125m for the first 50m doses and a further Euro 125m once Chinese regulatory approval had been granted.  BioNTech is the first international competitor into the Chinese market but unlikely to be seen a major competitor due to logistic issues over the low temperature required for storage and demand bottlenecks.
It will be interesting to see if their is more demand for BioNTechs vaccine than the local ones.

Bank of Japan lines up $6bn of dollar ammunition. Another innovative step from the BoJ; it is to buy $6bn from the country’s national foreign exchange reserves to boost the central bank’s US currency holdings.  It signals that the BoJ will step up its longer term lending of foreign currency to domestic banks, although it notes bank officials insisted they had no immediate plans to use the dollar cash.  One commentator said “The BoJ’s holdings of US dollars are not so large, so it is a good idea to increase them,” he said. “Also, the government needs yen for its supplemental budget . . . so it’s good for both sides.”An interesting read.  

Japanese retail traders give shares in toaster maker an 88% pop on debut. A boutique consumer electronics company that also makes vacuum cleaners, kettles and what it describes as an “adults-only” curry sauce.  In typical Japanese fashion a range of 'small but perfectly formed range of products’.  Many of which are innovative it will be interesting to see whether the company can grow its products going forward.

Switzerland and Vietnam classed as currency manipulators by US.  Saying that they kept their currencies at low levels to prevent “effective balance of payments adjustments” and, in the case of Vietnam, “for gaining unfair competitive advantage in international trade”. The report also key China on the currency monitoring list along with Japan, South Korea, Germany, Italy, Singapore, Malaysia. New additions were Taiwan, Thailand and India whilst Ireland was removed.According to the article Vietnam has not responded but the Swiss National Bank denied the accusation and said it would continue to intervene as required.
Vietnam has been a big beneficiary of companies moving supply chains out of China and will be very aware of the need to be price competitive as are other Asian countries like Thailand, Malaysia and Taiwan. Taiwan especially with sharp increase in demand for tech; many of its companies have complained about FX losses in recent months with many of them calling on the government to act. It is interesting also that many of those calls noted that the government would need to act in a way so as not to be call a currency manipulator.
All of which is no doubt made harder by the weakening US dollar.
See  Think carefully before betting on a falling dollar.   Looks at how the dollar index has fallen about 10% since mid March and many think that trend will continue and it could fall 20% or more in 2021.  It explores four arguments about why it could happen but overall thinks it is unlikely.
1. Safe haven status reduced by the rollout of vaccines but most of that already price in
2. Easing by the Fed which has been more aggressive that other central banks but notes the Fed was quick to act and others are still implementing measures.
3. The US’s twin budget and current account deficits; that need financing by attracting foreign capital which is easier with a cheaper dollar. It notes 'This is the same “twin deficits” hypothesis invoked before the financial crisis by those predicting a dollar crash. The dollar didn’t crash then, and there’s good reason to doubt it will crash now. The US government will probably continue running budget deficits as far as the eye can see. With the public sector saving less, the US current account, which is the difference between investment and saving, will then move deep into deficit, other things equal.’ But of course other things are not equal, whilst US public savings have falling private ones have risen, early due to lock-downs but also because the pandemic has raised awareness of the inadequacy of precautionary savings. History showed how saving went up as a result of the depression and that people at the time went on to be more more financially and economically conservative; it is possible that covid results in the same. Same with businesses; investment will not return until there is post pandemic clarity over what in society and business has changed permanently. Many of these points it says the currency markets have not yet factored in although some market participants have. 'If a persistent fall in domestic savings and the early recovery of investment were on the cards, then we would observe sharp increases in interest rates and inflation rates implied by US Treasury bond trading. However, there have been only very modest movements in that direction.’
4. The end of US geopolitical dominance will lead to a decline in the US dollar’s status brought about in part by Trumps erratic unilateralism which could lead to China and the renminbi as alternatives. Whilst there is some substance to the point Biden can change that and China will have to do a lot to gain enough investors confidence; noting that seizing the bank accounts of dissidents will not help China’s case.
In summary 'Forecasting exchange rates may be a fool’s game, but for all these reasons it would be foolish to bet on the dollar’s continued decline.'

For Interest.
Robinhood treats trading ‘like a game’ says Massachusetts regulator in filing. The Massachusetts securities regulator, is taking action because it feels the company is acting “without regard for the best interests of its customers”.Focuses on the large number of new users who have little or no experience and says the company encourages them to make more and more trades.  Robinhood denies the allegations and says it will vigorously defend itself.    Notes that 'Robinhood has been accused of blurring the boundaries between an easy-to-use customer interface and gamification, which encourages trading with email alerts and in-app prompts encouraging customers towards more complex, higher-risk investment products.When trades are completed on the platform, customers are sent emojiladen messages prompting them to purchase additional shares.’
I think the regulator will have problems in the action because when anybody starts trading by definition they have no experience, as the quip goes ‘experience is what you get about a second after you really needed it’. The ‘gamification’ is a market progression that has been leveraged as people were such a home due to lock-downs.  But at the end of the day it comes down to free will.  People trading online equally have the opportunity to go on line and do research before entering into a trading situation.  It’s really about free will and then complaining if you lose.

Investors bet on slow return of dividends after Covid-19. Europe’s boards are cautious as regulators discourage payouts by those that received support.
Key 'He also cautioned that a stock market rally powered by optimism about vaccines may not reflect how management teams in economically sensitive businesses feel about the near future. “We are going into lockdowns across Europe, we are far from out of it,” he said.'

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