Dec 21 FT Thoughts. China's coal and Vaccine issues, New Covid strain, HK/SG shifts and updates.


21 Dec

MARKETs at 1:30pm
JAPAN 
Increased covid cases as concern and heavy snow falls another slight -VE for sentiment.Opened higher but sold down to 26,534 in the first 2 hours. After lunch has started to work higher Currently -95pts (-0.4%) @ 26,668Topix traded in a similar pattern currently -10pts (-0.6%) @ 1,783
S KOREA  
Record covid cases and a shortage of hospital beds -VE for sentiment. Kospi opened flat and sold down to 2,750 in the first 40 minutes but then bounced but only to 2,765. Drifted lower before selling done to retest 2,750 support which held and then the market worked higher. Currently flat; at 2,770Kosdaq opened higher, sold down to 940 but then worked higher currently +5pts (+0.5%) @ 952.
TAIWAN 
Opened higher and tested 14,300 in early trades but then sold down to 14,200 and traded sideways for 30 minutes around that level. Then worked higher with resistance atround 14,380 level. Currently +116pts (+0.8%) @ 14,368
CHINA 
CSI 300 opened lower in reaction to more companies being placed on the US entity list and sold down to 4,970 in the first 10 minutes. Loan Prime Rates were kept unchanged. Index then rebounded and worked back to 5,041 before easing back into lunch. PM opened flat but working higher in initial trades Currently +33pts (+0.6%) @ 5,033Shanghai and Shenzhen indexes both worked higher after initial weakness which suggests team China active.
Data
Loan Prime Rate 1 year Dec 3.85% vs 3.85% Nov (F/cast was 3.85%)
Loan Prime Rate 5 year Dec 4.65% vs 4.65% Nov (F/cast was 4.65%)
HONG KONG 
Opened 26,422 -75pt vs +125pts ADR’s Ecommerce names flat, SMIC saw further weakness. Market sold down to 26,275 before finding support. Then rebounded to the opening level and trended slightly higher into lunch. PM opened higher and testing Friday’s closing level. Ecommerce weak after comments from former finance minister Lou Jiwei suggesting that China could restrict the number of banks a single fintech platform can partner with, to prevent any platform from gaining too much market share. Renewable Energy and Autos seeing interest. Currently flat -8pts at 26,491.
EUROPE 
Expect markets to open lower with a new covid strain discovered in the UK resulting in a travel ban of people and goods from the UK likely to outweigh the positive news of Stimulus deal agreed in Congress. Also news that the EU/China traded agreement has hit a sticking point over labour standards.
US Futures 
Opened Dow +100pts, S&P and NDX higher on news a deal has been reached over the $900bn covid relief bill +VE But since have eased back to flat. I would still expect markets to move higher on news after market Friday allowing US Banks to resume share buybacks likely to offset the -VE about a new covid strain in the UK.

FT Online 
‘Politics come first’ as ban on Australian coal worsens China’s power cuts. Factories and street lights shut down to save energy as embargo contributes to shortages.  Reflects Beijing’s dilemma between diplomacy and the needs of the economy.  The extent of the power cuts and restrictions on factory working hours likely to have an impact on China’s recovery. Whilst the government is blaming the situation on unusually cold weather and high energy demand.The expression ‘cutting off one’s nose to spite one’s face’ comes to mind.

FT Paper.
EU countries ban travellers from UK as new virus strain spreads.  Key is that the new variant is more easily transmitted.  Many EU countries have imposed immediate travel bans as a result. -VE for market remitment.  At this stage little has been announced apart that it spreads much more easily.  Read also Scientists alarmed at rapid spread of English Covid mutation which notes the new variant has also been detected in the Netherlands, Denmark and Australia.  Also the fact that the strain contains so many mutations.  On the positive side they think it will be contained by the current vaccines.

China charm offensive poses threat to confidence in jabs.   Looks at how China has promised vaccine supplies to many parts of the world but there are concerns that Beijing’s deviation from international standards for transparency during drug development may result in problems. There are allegations of short cuts being taken and the fact that China has not released the underlying data or details of the analysis.
The concern being that China’s actions will undermine the global immunisation efforts. The main concern being that if the Chinese vaccines have safety issues or are not as effective as claimed then that could impact public willingness globally to be vaccinated.
Western drug companies have completed internationally recognised phase 3 trials and the data publicly released and reviewed. The problem is that supplies of those drugs have effectively been bought by the US and Europe and rich countries leaving the poorer Countries of Asian, African and Latin American with the only option of buying from China. It notes that the WHO’s project to try and secure western vaccines for poorer countries has suffered set backs because not many ‘high income; countries signed up. Beijing did sign up but has yet to announce the terms.
Beijing has instead pursued a number of bilateral arrangements to supply vaccines along with loan deals. It notes that China’s success at controlling the virus at home and the early emergency use of the vaccines has given its drugmakers leeway in exporting its vaccines. But it has faced setbacks; Peru suspended trials of Sinopharm’s vaccine last week due to an adverse reaction before resuming them after discussions with the company. The regulator in Brazil has also criticised China for not explaining its approval emergency use at home.
The key is in the data analysis but for that to happen China has to allow analysis, something that at present it seems unwilling to do. That is a concern and should at some future point issues arise there is likely to be a significant back lash against China. It seems unlikely that China would risk that so why not allow the data to be peer reviewed and analysed? Probably for the same reason that it would not allow an independent investigation into the course of the virus.

Apple supplier staff in Asia protest over unpaid wages. Looks at the case of Wistron in India and Pegatron in Shanghai.Wistron has admitted it made mistakes in its expansion and is looking to rectify the situation by removing its VP for India and restructuring its payroll and recruitment teams.  Apple has said it would stop new business with Wistron until correct actions and been taken. Slight -VE to Wistron but no doubt they will move quickly to ensure the loo of new business is minimal.
Separately there was a protest in Shanghai over unpaid bonuses at the Pegatron plant by dispatch workers 'casual staff employed by agencies in partnership with Pegatron. These agencies often promise staff about three to four months of wages as bonuses to compensate for low base pay. The number of dispatch workers a company can hire is limited under Chinese law.'

Global banks launch ‘subtle shift’ from HK to Singapore.  Looks at how banks are ramping up hiring in Singapore over Hong Kong by as much as 8 times whilst reducing staffing levels in Hong Kong. The aim being to try and do it in such a way as to not angering the Chinese Government.   FT research showed UBS and JP Morgan were advertising 8x as many jobs in Singapore vs Hong Kong and Credit Suisse, Goldman Sachs and Citibank had double that number.  It quotes Citi as saying 'the two cities were important regional hubs with a mix of businesses run from both offices, and it “continue[s] to hire in key areas to support our clients in both markets”. The other banks declined to comment.’
The article mentions that there has been a trend to grow Singapore more that Hong Kong even before the Hong Kong unrest in 2019. The growth in placing Private Bankers, Security and Compliance roles being significant.For investors the key is that Hong Kong will for the foreseeable future remain a key hub but Beijing’s increased control has raised some concerns and so diversification is key.
From my own experience there is also a preference for more Chinese mandarin speakers in Hong Kong which suggests that the focus, for many, is more on China than the west for business growth. That I think is a little short sighted as Hong Kong is a gateway and should be looking to develop both in order to really serves China’s best interests.

New York calling Derivatives trades point to ‘excess enthusiasm’ for Wall Street equities  Specifically the rise in the purchases of call options which have surged since the US election.  'The ratio “is a sign of excess enthusiasm”, said Chris Murphy, co-head of derivative strategy at Susquehanna International Group. “Can the enthusiasm last for six or 12 months? Sure. Can it be a sign of a future pullback being near? That is harder to tell.”’It also notes that these are being heavily used by retail traders which is likely to be as a cheap way to the play the sign market than the historical use to put’s and calls as a hedge. But as I wrote at the weekend and last week there is a increasing consensus view that equities are going to do well and many funds have reduced their cash balances and bought into equities.  Part of that is the fact that yields on bonds have dropped to levels that are unattractive.  That is the consequence of the Central banks policies and unlikely to change in the short term.

Editorial EU should bide its time on China investment deal. Beijing has offered concessions on market access to seal accord.  A good read, the deal has been 7 years in the making with Beijing being slow to offer meaningful concessions.  But with the Biden administration soon to take control suddenly China is keen to get a deal signed as are many in Europe. It makes the point that any deal should not prevent the EU from taking tougher action in the future especially with regard to 'subsidised Chinese companies operating in its single market or Chinese acquisitions of sensitive technology.’
It concludes 'An investment agreement should make life easier for European businesses in China, but it will require much more than this to create a level playing field. Brussels should not be rushed into a deal. It could hold out for more. As Deng Xiaoping, former paramount leader, once said: hide your strength, bide your time.’
Other press reports say the agreement has hit a sticking point over Beijing’s failure to commit to International Labour Organisation standards which could be the make or break issue.
As I wrote at the weekend both sides have trade and political reasons for wanting to have a deal in place. They also both see it as being useful in their relationship with the Biden administration going forward. I agree with the Editor and think the EU should bide its time to get the deal it really wants.

Opinion SolarWinds hack exploited weaknesses we continue to tolerate.  In summary 'These large scale cyber attacks are at root the result of exploitation of our open economies, just as election interference is the exploitation of our open societies. We do not need to change this openness but we can harden it against manipulation. Political will, better organisation, and the application of good technology can make this possible.'
Notes that most of the recent but devastating attacks have come about because of basic weaknesses in the systems. Key is that governments should be focusing on regulating the security of these systems that are becoming such an important part of our lives.He suggests that President Elect Biden should 'implement the recommendations of the refreshingly bipartisan cyber space Solarium Commission. These include mandating “secure by design” as an objective, with appropriate testing and regulation, and introducing some liability for manufacturers of poor security engineering. Raising the baseline of standards will at least make life more difficult for attackers.’ He also calls on large companies to do more to raise their security standards'Assessing whether a vendor is effective, well priced and broadly compliant is no longer enough. What does that company look like in real time from an attacker’s perspective? If there are gaps, they need fixing before the supplier ends up delivering a product or a service which already has “added value” built in, courtesy of hostile intelligence agencies or assorted cyber criminals (and the line between the two is increasingly blurred). Where the cyber supply chain is concerned, we really are “all in this together”.'

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