Dec 18 FT China/EU Deal? Sanction Dilution, WHO to Wuhan, Geeks at Pornhub? and updates


18 Dec

MARKETs 
Most markets have traded around flat in tight ranges due to the mixed signals from the US; on the positive side were have FOMC support and vaccines vs the negatives of rising covid cases, initial claims and uncertainly over a stimulus bill without which the US economy could see some serious longer term damage.
Europe has its issues too with covid and Brexit and China has trade relations issues.
Japan and S Korea have a huge surge in covid cases -VE.
All that ahead of the weekend and then a shortened two weeks of trading for Christmas and New year before we call into 2021!
JAPAN 
Nikkei 225 opened slightly lower as pre market inflation data missed. Tested yesterday’s closing level a number of times but failed to break above and eventually sold down into lunch. PM opened lower and trading sideways but around 2pm took another dip lower. Currently -55pts (-0.2%) @ 26,754
Topix opened lower but worked back into the green for most of the morning but sold down in lunch. PM opened lower tests 1,790 before rallying back into the green but sold off around 2pm down to 1,787 before bouncing back. Currently -1.5% (-0.1%) @ 1,791
Data pre market
Inflation Rate Nov -0.9% YoY vs -0.4% Oct (F/cast -0.5% MoM)
Inflation Rate Nov -0.5% MoM vs -0.1% Oct (F/cast -0.2% MoM),
Core Inflation Nov -0.9% YoY vs -0.7% OCt (F/cast -0.8% YoY),
Later BoJ Interest Rate Decision; no change as expected and announced a 6 month extension to special programme.
S KOREA  
Kospi opened flat and has traded sideways in a tight range 2,782/2763 currently +3pts (+0.1%) @ 2,774
Kosdaq Similar trading pattern range 943/948 currently +0.7pts (+0.1%) @ 945
TAIWAN 
Opened higher and spiked to 14,329 around 10 am but then sold back down to flat and worked sideways. Then around 12:30pm dropped in the red and traded sideways again Closed -9pts (-0.06%) @ 14,250 On Monday after market we get Export Orders
CHINA 
CSI opened lower but traded around flat for the morning session. PM sold down to 4,979 and traded sideways but no rallying back. Currently -22pts (-0.5%) @ 4,994On Monday market open we get Loan Prime Rates
HONG KONG 
Opened at 26,650 -28pts vs -68pts ADR’s but saw selling pressure and trended lower finding support at 26,360 and then traded sideways with resistance around the 26,500 level. PM saw more selling as China sold down support around 26,400 and now working slightly better Currently -258pts (-1%) @ 26,420.
Ecommerce and Chinese Financial names weak but Coal, Petrochems and Renewable energy names +VE as Southern China has to ration electricity amid insufficient power supply.
EUROPE 
Expect a flat or slightly lower open following on from Asia. Brexit, Covid and US stimulus in focus.
Data
EUROZONE No data
GERMANY PPI, Ifo Business Climate, Expectations and Current Conditions
FRANCE No data due
UK Already out Consumer Confidence Dec -26 vs -33 Nov (F/cast was -30)To come Retail Sales, CBI Industrial Trends and Orders
US Futures 
opened Dow flat (+5pts) but eased lower last -44pts, S&P -0.1% and NDX -0.2%
Data
Current Account, CB Leading Index, Baker Hughes Oil Rig, Fed Bank Stress Test Results Second Round.



On Line 
US Treasury seeks to water down Trump’s Chinese securities banPentagon and state department infuriated by attempt to soften impact of executive order.  The FT has a nice quote from Roger Robinson, former National Security Council official  ‘It appears to demonstrate more interest in protecting Wall Street’s fees and Beijing’s interests than scores of millions of unwitting American retail investors and our national security’.The are of contention seems to be on whether subsidiaries should be included in the ban. As most analyst include the earnings an impact of subsidiaries when analysing a company it seems illogical to excluded them from the ban.  So far the MSCI has said it will exclude the companies listed in the order but not subsidiaries and many investors will be waiting to see the outcome of the dispute before selling down their wider holdings.
Interesting to note that the US has had legislation requiring the Pentagon to publish a list of Chinese companies with alleged ties to the military, which was required under a two-decades old law that was not being complied with.  That reflects the previous administrations desire to get along with China.  The latest defence bill would also require the Pentagon to prepare an annual list. Trump has weaponised investment money now and Biden and his team will be able to use it in their negotiations with China going forward.

Front Page
EU and China revive hopes of investment deal this year.  Long-delayed accord on market access would represent a diplomatic coup for both powers. The driver being the fact that China has made concession over access with the acceptance of reciprocal  treatment of companies.The EU hopes to get more access to Chinese markets for its companies key being the FT says 'enshrining sector-by-sector commitments to remove or reduce barriers such as joint venture requirements and investment bans. Sectors set to be covered by the deal include manufacturing, financial services, real estate, construction and auxiliary services to support shipping and air transport.’
Remaining sticking points seem to be getting China to honour international agreements on labour rights. For China it's getting the EU to allow access to its renewable energy market with the ability for it to acquire European companies.
It will be interesting to see what happens in the next few days and how the EU will react to any overtures from the incoming Biden administration. China is obviously aware that Biden will try and build up alliances to jointly negotiate with China and hence has an big interest in having an existing agreement with the EU over access.

WHO team to visit Wuhan in January amid US protest. As Fabian Leendertz, a biologist at Germany’s Robert Koch Institute and one of the team’s experts says “It’s really not about finding a guilty country, It’s about trying to understand what happened.”  
One can only think that if China had taken that on board when the outbreak was first discovered 2020 might have been a very different year. The US is still protesting because this team will not be actually looking for the source and investigate what happened but rather revising Chinese studies and deciding if additional research is required.
That should give them access to details surrounding the first cases but it falls short of a true investigation. The US continued to complain that the WHO has allowed China to dictate the terms and that the WHO has not been transparent in how the terms or scope of the investigation have been arrived at.
I do think that China should be more open and allow the international experts more access; as quoted above is it not about finding guilt but understanding what happened so that it can be prevented from happening again.  China is likely to find that as it assumes greater leadership roles in the world order it is also required to to be more open; something that does not seem to sit well with the current leadership.

Deterioration in ties with China casts Australian diplomacy in harsh light Businesses hurt by sanctions and tariffs call for a reset with largest trading partner.  Looks at the current break down between Australia and China and the fact that some feel the Australian government’s attitude is not helping, saying they can see why the government has picked a fight with China.  
I think that misses the point.  I think this all stems form the Australian call for an inquiry into covid. That was the trigger, but then subsequently other issues came to light and prominence.  It always has be remembered that both sides have contributed to the escalation.  
Also that China seemingly has a very low tolerance of any criticism and yet is happy to criticise others freely.   China to an extent is seeking to use Australia as an example and warning for other nations in its standoff with the US.   As noted in the article above China’s response to calls for more openness on covid have been unhelpful to the world at large.  It's ‘wolf warrior’ diplomacy is not better that Trumps tweeting. For the world to operate smoothly diplomacy has developed; it's not perfect and in many way antiquated but is goal is a good one and China and others should respect that.


Top Toshiba investor raises stakes in fight over CEO vote. The handling of the last AGM is still being contested with Effissimo, a secretive Singapore-based activist fund that owns 9.9% calling for an EGM and independent investigation into the voting which it claims was unfairly conducted.  This will put more pressure on CEO Nobuaki Kurumatani who managed to survive the AGM vote to oust him.  -VE for Toshiba but also Japan as it casts a cloud over the tactics that  Japanese managements may use.

Copper bulls forecast record peaks on back of green agenda. Surge in sustainable energy projects has already pushed metal above $7,900 a tonne.  Key factors are the lack on new mines in mining friendly locations and the unknown of how much existing copper can be reclaimed from scrap.  What is known is that with the global push to more renewable energy the demand for copper is increasing. One interesting point is that the new mining locations lack infrastructure; show there is likely to be a increase in that too. It also notes that some of the new mines are being operated by relative new comers which suggest more M&A in the sector.
It makes that point that for years investors have not wanted to fund growth in the sector.
The biggest unknown is how high can the price go!  I think there is good scope in the miners and the Chinese miners have rallied from the March lows and are approaching the highs seen in 2017 and 2018; Like Jangxi Copper (358 HK), Zijin Mining (2899 HK) and Yunnan Copper (878 HK)


Investment bankers revel in bumper fees from Chinese groups in 2020  The article says Banks based outside China have earned $1.73bn of revenues this year, +113% YoY and close to the 2010 record of $1.77bn.  Reflecting Chinese companies awareness of the fact that they still need Wall Street's access to international investors, something that the Chinese State banks still lack expertise in.  It also reflects the importance of Hong Kong as  an alternative to the US, especially as Trump has sought to weaponise investment money.
For investors the other major beneficiary has been HK EX (388 HK) which is trading at a 5 year high.  This year's rotation of some US listed Chinese companies back to Hong Kong is likely to continue although if Biden takes an easier stance on Chinese company financial reporting and generally of relations with China then the urgency may subside.  The other key element is the impact of the national security law in Hong Kong and its perceived standing in global markets.  Those two questions are vexing on everyone.But what is clear is that Chinese companies need foreign capital, its domestic markets are not yet large enough or sophisticated enough to meet China’s growing needs.  

US says cyber hack poses ‘grave risk’ to critical infrastructure. US energy department says it is investigating a ‘cyber incident’ related to SolarWinds breach.  But saying that there was no evidence it had had an impact on national security functions  (it manages the US nuclear weapons arsenal).  Which isn’t that encouraging considering the hackers had had access for some time before being discovered and that suggests that they could have more malware within the system.   Microsoft also admitted being breached and there must be many more too.
It notes that Cisa said 'the hackers had “demonstrated sophistication and complex tradecraft in these intrusions” and that it would be “highly complex and challenging” to eject the perpetrators.’ That include the revelation that another recent hack used new methods to by pass multi factor authentication systems.It is widely thought to have been a ’nation-state’ hack; with many thinking that Russia is the likely culprit, although it has denied the charge.
Biden commented that he would ‘….not stand idly by in the face of cyber assaults on our nation.” ‘The article notes that once in the hackers could pose as ‘other accounts’ as access further systems and target key people; like IT and incident response people.
It highlights again the vulnerability of systems; their ability to communicate with each other. It is, for the large part, why we use them be is also their weakness link.  I also think that the fact that companies then to upgrade and adapt systems also increases the risks but it is done so to save on cost. The sharing or copy of coding ’to save time and cost’ could also be an issue.  The question that many will now be asking is whether the ’saving’ is worth it. 
It also raises the question as to how active are the western government hackers and what do they focus on.  It cannot only be other nation states that are active in the area.  Makes you wonder.

New unemployment claims in US surge to three-month high.  The increase came despite expectations from Economists that it would fall.  Although quite why they thought they would fall in the light of the past stimulus packages expiring and a surge in covid cases is a little difficult to understand.   They did note that the fall in the number of people collecting state jobless and might reflect the unemployed exhausting their benefits rather than finding new work.  Which is a further negative.  Other negatives are the fall in retail sales as seasonal holiday sales are likely to remain subdued. The hopes rest on the start of vaccinations although that is unlikely to show much impact for a few months because fo the time taken to make and distribute the vaccines.  Key for the economy will be Congress agreeing a new stimulus bill and quickly.  It notes that ‘About 14m unemployed who collect aid from federal schemes set up this year stand to lose these benefits by the year-end unless Washington acts.’That would make a very big impact on the speed of the US recovery and the global one too.

For Interest
Higher valuations will limit recovery in equities returns. By Peter Oppenheimer of GS
Key being 'But, ultimately, the higher starting valuations in this bear market, the lack of room for interest rates and bond yields to fall and a much higher debt burden compared with the decade after the financial crisis, suggest that, over the medium term, returns will be lower.The real opportunity will be in the “alpha” — picking relative winners and losers within each market and industry rather than the “beta” of the index.’

FT BIG READ. MEDIA. The secretive owner of Pornhub  In the internet era, porn is everywhere. But MindGeek, the company which owns some of the most popular sites and is run by experts in algorithms and targeted advertising, is virtually untraceable.An interesting read and it suggests that the company owners have structures the company  extremely well so that they get payouts from subsidiaries that have issued debt to the parent and get interest paid monthly!

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