Dec 2 FT Thoughts US inflation, China Banks, Credit agencies and Tech + Lunch updates

04 Dec

MARKETs at 1:30pm HK timeAfter recent gains markets are struggling to work higher.  Investors torn between the rising number of covid cases and the positive vaccine news.Concerns about China continue to weigh on the market both in terms of its own recovery and its increasingly fraught international relationsTech and large caps still seeing good interest. In HK Ecommerce and property weak on share placement news.
JAPAN Nikkei 225 opened higher at 26,885 but trended lower through the morning  in choppy trading to 26,700 in the red before finding support and then trended slightly higher into lunch, still in the red.  PM opened higher in the green and working higher Currently +42pts (+0.2%) @ 26,829 Topix Followed a similar pattern but found support at 1,770 still above yesterday’s close. PM opened higher and trending higher. Currently +10pts (+0.6%) @ 1,778Data out at 1pm HK time Consumer Confidence Nov 33.7 vs 33.6 Oct (F/cast was 33)S KOREA  Pre market data showed inflation weaker than expectedKospi opened higher and rallied to 2,670 level and then between 2,660/75.  Currently +36pts (+1.4%) @ 2,670  Kosdaq opened higher at 895 and has traded in the range 896/892 currently +3pts (+0.4%) @ 895 Data Inflation Rate Nov +0.6% YoY vs +0.1% Oct (F/cast was +1%)Inflation Rate Nov -0.1% MoM vs -0.6% Oct (F/cast was +0.3%)TAIWAN opened higher @ 13,970, initial trended lower to 13,900 where it found support and worked back to 13,995 but resistance increases at it approaches 14,000.  Has eased back slightly currently +90pts (+0.7%) @ 13,987 CHINA CSI 300 opened higher at 5,072 inched higher initially button sold down to 5,043 before rebounding to 5,080 level.  Tested a couple of times but failed to break above and sold down before bouncing into lunch.  PM opened lower but working higher Currently +4pts (+0.1%) @ 5,070HONG KONG Opened @ 26,670 +102pts vs +5pts ADR’s @ 26,572 with HSBC strong but Longfor -9% as controlling shareholder placed $2.3b worth of shares.  Xiaomi was suspended believed to be for top-up placement other E Commerce names weak on the news.  Market sold down to 26,400 before finding support and then worked back to flat going into lunch. PM opened lower  but working higher Currently -64pts (-0.2%) @ 26,500
EUROPE Expect markets to open flat, although Asia trading slightly higher US futures are weak. Data due EUROZONE Unemployment Rate, PPI
GERMANY Retail Sales
UK BoE FPC Meeting
US Futures opened lower and have continued to fall in Asian trading.  Data Due MBA Mortgage Rate & Applications, ADP Employment Change, ISM New York Index, EIA Oil Report, Beige Book, Fed’s Powell’s Testimony continues.Speeches from Williams, Quarles, Harker and Williams
FT On LineJanet Yellen calls for action to prevent US economic ‘devastation’
Ex-Fed chair expresses concerns about the poor as she is introduced as next Treasury secretary. Her appointment comes as there is doubt about Biden to fully implement his full economic agenda which was set to boost government spending next year, partially funded by higher taxes on businesses and wealthy households. In the short term markets were looking for a package of up to $1tn but Republican McConnell said he was against the bill and wants to implement a broader package; which makes it unlikely that anything is going to happen soon.The article sets out Biden’s hope is 'for more government spending to tackle racial and income inequalities, and reverse under-investment in public goods, such as green energy. He is also seeking an increase in the federal minimum wage and action to forgive some student loans — two longstanding progressive policy wishes.’Yellen also said she would work with Mr Biden’s team to “help restore America’s global leadership” At the same time it says 'Wally Adeyemo, Mr Biden’s pick for deputy Treasury secretary, signalled continuity with the Trump administration’s hardline approach to economic sanctions and foreign investment rules.’So it would appear that the US will remain tough on China certainly it is less clear how it will deal with its allies like Europe. Whilst there is uncertainty over the control of the Senate it seems likely that Janet Yellen like Biden will have to use all their diplomatic skills to push through the polices that they see as important. With the additional stimulus and the positive vaccine news it does make it likely that we see inflation reappearing.
US inflation expectations hit 18-month high on vaccine hopes  Investors see ‘sugar rush’ from rebound while markets still flush with central bank cash.Looks at the potential for inflation from the '10-year “break-even” rate which is  derived from prices of US inflation-protected government securities, hit 1.83% on Tuesday, higher than at any point since May last year.'Additionally 'a swap rate that measures expectations for the average level of inflation over five years, five years from now, has jumped to 2.25%’. That is having been at 1.2% in March; before the Fed acted.The premise is that there is going be a lot of liquidity in the system as people are vaccinated and ’normal’ life returns.  The article says it will be a ’sugar rush’. That coupled with the Feds stated policy to allow the economy to run hot to make up for previous undershoots makes it more likely that we will see inflation.  The market reaction was that longer dated treasuries were sold off on Tuesday; the T10 yield rose to 0.94% from 0.7% back in October.  This will put fixed income investments under pressure, especially at the longer end.Many remain doubtful about the return of inflation as unemployment remains high and businesses remain under pressure.  But I think the changes are increasing.  This weeks Non Farm payrolls will be watched careful.  The Manufacturing PMI data for the US has been good so the chances of inflation are there.
Print Edition US senators seek to break stimulus impasse
Bipartisan group proposes $908bn package in attempt at compromise but the plan was rejected by Senator McConnell; he wants a “targeted relief bill” this year. It would appear that once again politics is coming before the people.

Vaccine success offers hope for global recovery, says OECD. Revises its forecasts because of the good news on vaccines and the potential for immunisations to start this year.   It expects China’s economy to almost 10% larger by the end of 2021 than it was at the end of 2019; due to its response to the virus.  It noted S Korea and Indonesia also doing well.It calls for 'cost effective' spending by governments although that is notoriously difficult to judge at the time and the pattern of spending in previous crisis may not be suitable this time around.  It does stress spending on digital and the article notes it said 'The pandemic has exposed the inability of education systems in many countries to operate remotely via video link.’  Another key was creating employment.Read also opinion A light shines in the gloom cast by Covid by Martin Wolf.  After a grim recession, there is good reason to think that a healthy recovery is within reach
Banks fear China state group default. Huachen owes billions of dollars, prompting worry over debt market stability.   This is likely to become a growing issue with some within China that there are a lot more defaults to come.   In Huachen’s case the article says that almost 70 Chinese and Foreign banks and trust companies are owed Rmb33.5bn, and that includes CCB and ICBC.  It has prompted a realisation that local governments in China will not always bail out state companies.  I think it also reveals the stress with the Chinese Financial system is under because I am sure that if local government's had the available cash they would act. No one wants to come on President Xi’s radar screen because an SoE has defaulted.  Local Government funding will have suffered with through the pandemic with reduced taxes and land sales. Whilst most of the exposure will be to Chinese investors it will also make foreign investors more cautious; especially the more recent ones who have been attracted by the higher yields being offered.  I think it will also mean that even the security of the State banks is reviewed, for years they have managed to roll over bank loans and re classify them but if we see more significant defaults then that is going to put them and the Government in a difficult position.  The fact that the list of creditors including a number of smaller Provisional Banks is also a worry. They have been under pressure for sometime and this will add to the pressure.  China is in dire need for foreign investment to kick start its economy and this revelation will not help.  Couple that with the deteriorating relations with a number of countries including the US and it is possible to imagine that China’s growth may slow significant. It also has made significant foreign loans under the Belt and Road Initiative and other schemes.  Investors will need to be very careful in researching companies and not relying on them just being the biggest state owned enterprise in the area.  Because in Huachen’s case the reason behind the default was poor management, not least the chairman overriding industry experts in his choice of cars to build.
China rating agencies balk at downgrades of state groups. Few face relegation despite a string of defaults as businesses benefit from official protection.  It should be a worry that despite the recent defaults Chinese rating agencies have only downgraded 5 companies out of 5,000 to below double A and one of those is Yongcheng Coal.  Doubt A is required in order to issue publicly traded debt.  That is the key. The article has a nice quote “China’s rating agencies are even worse than [those] in the US,” said Andrew Collier, managing director of Orient Capital Research in Hong Kong. “They’re not only beholden to the customer but also the government.”The Chinese agencies are subject to the same sort of competition as the international ones are but they also have Government or state links too which limits their ability to be independent.  Additionally the SOE have better access to capital as they are preferred counter parties for the banks, especially the main four state banks. It is interesting therefore in the case of Huachen that there are so many other creditors and makes you think that even the State banks were wary.Another key point that comes out is that a lot of western analysts and investors do their own due diligence rather than relying on the credit agencies. That means that it is largely the Chinese domestic investors that are being mislead and I am sure if that continues it will not be long before there is a public backlash.  Which in part explains the fact that the Premier has already come out and promise zero tolerance to try and comfort the domestic investors that have lost money.  Confidence in the system at the moment must be paramount to China as it faces a changing global situation.
China’s move on Ant makes the fight with Big Tech global. Notes that tech is a layer that impacts the lives of millions and all sectors of society and increasingly Governments too. It seems that China has woken up to this too.  Whilst it is uncertain why specifically China decided it was time to act, there are a range of possible reasons; the fact it acted mean control of big tech is now a global factor. It notes how and why the wests response on how to deal with Big Tech is different from China’s. But notes that the world remains concerned that China will try to weaponise its tech to serve Beijing's geopolitical aims and the moves on Ant do nothing to reduce those concerns.  It notes 'Several proposals for a global democratic alliance to govern technology regulation are explicit in their desire to counter China as a global tech power. References to values, such as in the ambitions of democratic nations to band together, are becoming more assertive.’The key is that going forward regulation being it from 'Beijing, Brussels or Washington will ripple across the world.’
Copper price on course for 7-year high as Goldman calls bull market.  They link the price rise for copper to supply disruptions due to covid and an increase in demand derived from green energy sources, which include Electric vehicles. Seems a very reasonable call.  Not in the article but also +VE Neil Newman writing in the SCMP also notes that copper is seen as a good surface for eliminating the covid virus and other bacteria; so is seeing a new demand as a coating for hand rails and the like.
Calls grow for arms accord with North Korea. Another area that people are calling for President Elect Biden to address.  But the issue remains fraught and I would think in the short term not one that will be top of his agenda.  OF course there is always the potential for Kim Jong Un to try and escalate it by firing more missiles.  An interesting read.
Sale of bankrupt Indian lender causes alarm. The sale under the new bankruptcy laws is casting doubt the effectiveness of the new system.  Seems everyone put their bid in at the same time including Adani Group who bid for parts but then Adani submitted another unsolicited bid for all the assets. That unsolicited bid has prompted the creditor committee to hold a vote on whether to have another round of bidding in the interest of fairness.The key point is that the new code was supposed to speed up the process and remove this sort of uncertainty.  The fact that what Adani has done may be legal just underlines that the law may still need to be amended and tightened up in order to work properly.A good thing is that the creditor committee is considering a resubmission in the interest of fairness.  On the negative Piramal Group has said it may drop out because of the situation. It is an important issue because investors are watching both India and China, they are both markets with huge potential but with have their failings; which makes deciding between them difficult.  So having a clear and straightforward bankruptcy law could set India apart and make it more attractive.
For Interest The US needs to address savings crisis for workers. Worth a read looks at the predicament of saving in the US and the need for better financial education and simpler systems for pensions to follow workers.  The key point being to ensure that people have the financial resilience that this year has shown they need.
FT BIG READ. RUSSIAN POLITICS. Putin’s new crackdown
By branding opposition figures ‘foreign agents’, the Russian president is showing his hypersensitivity over potential threats and the need to smother rising dissent before next year’s parliamentary elections.An interesting read. Also interesting is how Putin is using the term ‘foreign agent’ as a means of suppressing opposition. Beijing uses 'foreign agents' in the HK National Security Law. Amazing how they get everywhere and are the source of so much trouble to authoritarian regimes.

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