FT UK Travel Ban too late? Hostile M&A in Japan? China & Coal, Time in the pub well spent, updates


22 Dec

MARKETs at 12:30 HK time 
JAPAN 
Nikkei 225 opened lower but initially traded higher but resistance around 26,625 level and sold down to 26,455 before fining support and working back to 26,625 level at lunch. PM looks to the continue to trade sideways. Currently -130pts (-0.5%) @ 26,580
Topix Traded in a similar pattern 1,777/1765 Currently -18pts (-1%) @ 1,771
S KOREA  
Kospi Opened lower having close at a new high on Monday and initially trended lower in choppy trading to support at 2,756. Then a rebound and effectively trading sideways Currently -9pts (-0.4%) @ 2,769.
Kosdaq opened flat and trended lower to 942 around 11:30am and then started to rebound and work higher; currently -6pts (-0.6%) @ 948
Data pre market
PPI Nov 0.0% MoM vs -0.5% Oct (F/cast was +0.1%)
PPI Nov -0.3% YoY vs -0.6% Oct (F/cast was -0.8%)
TAIWAN 
Opened lower but rallied back to flat after the strong Export Data out after market Monday. But unable to hold and sold back down to opening level. Small bounce, retested support, rallied into the green and hit 14,411 before selling back down. Small bounce but again retesting the support currently -35pts (-0.3%) @ 14,358
CHINA 
CSI 300 opened -12pts and tested lower to 5,024 with concerns over more Trump action against Chinese companies. Then worked higher into lunch Currently +5pts (+0.1%) @ 5,052
HONG KONG 
Opened 26,261 -46pts vs -129pts ADR’s Choppy trading in the first hour (in part I think margin call selling) but trended higher and spiked higher around 10:50 to 26,350 but then sold back down to 26,280 level and traded sideways into lunch. Currently -22pts (-0.1%) @ 26,284
EUROPE 
Expect markets to open flat with Brexit negotiations still in the balance sterling remains under pressure. The new strain of covid issues still in focus but now understood better and with vaccine expected to effective against it less of a concern.
Data 
GERMANY Consumer Confidence
UK  Business Investment, Current Account, GDP Growth Rate, Public Sector Borrowing.
US Futures 
Opened flat in Asian time but have eased lower; Dow -57pts, S&P and NDX flat. With the stimulus package now agreed thoughts will focus on what Biden will do when he takes over and how much trouble Trump can cause in the meantime.
Data
GDP Price Index, Corporate Profits, PCE Prices, Core PCE Prices, Redbook, Existing Home Sales, Consumer Confidence, Richmond Fed Manufacturing Index, 5 Yr TIPS Auction, API Crude Oil Stock Change.

FT
Markets fall as more nations join UK travel ban over Covid variant. A knee jerk reaction to the confirmation of a new mutation with many countries issuing travel bans on the UK. Markets sold off but later saw signs of recovering.  The reality is that the mutation was first ‘sighted in September’ and press reports noted that it had also been detected in a number of other countries (Netherlands, Denmark, Italy and Australia) which suggests that the bans are already too late and more about Governments being 'seen to act’.  The call for greater vigilance is always welcomed.For investors the key is that the medical community believes the current vaccines will be effective against the new strain but rather like the flu vaccines, will need to be modified to keep up with the mutations.  
Read also EU ready to roll out Pfizer/BioNTech vaccine after regulator gives approval The continent will start vaccinations from Dec 27.
B117 Scientists fear new variant will have already spread worldwide. Outlines what is known so far about the virus mutation and highlights that there is another similar mutation in S Africa.  So far only Germany and Switzerland have barred flights from S Africa.
Also Hauliers count cost after France shuts border to stop spread of mutated virus. Looks at the cost involved from the border crossing with some saying it could be an example of what to expect without a Brexit deal.

Japan’s hostile takeover taboo starts to lose its force. Advisers hunt for deals as businesses shed perception that the bids are unpatriotic and only engaged in by foreign vultures.  Looks at the changing state of Japanese M&A.  Historically hostile bids were seen as taboo but that is changing. Key is that whilst it is still not easy for a company to make a bid for another company that is not openly for sale it is now possible. It looks at a number of recent examples and contrasts them with some historic cases that showed how in the past poison pill moves and buying stakes at a loss were acceptable.  Things that would not be accepted today.  Also the willingness of the banks and lawyers be involved in hostile takeovers is changing too; albeit if some banks want to hide behind non-disclosure letters.  With many Japanese companies cash rich but facing tough markets the potential for more M&A is likely and the willingness to entertain hostile or at least unsolicited bids could be crucial to Japan’s prosperity.  
A good read and should give investors more confidence about the outlook for Japan’s ability to embrace change.

Embargo on Australian coal worsens power cuts in China. Was in Monday’s on-line edition under the heading ‘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.
Noted that Coal prices within China have surged 66% since May whilst inventories of Thermal coal in Qinghuangdao are near a two-year low. Good for the Chinese coal miners but they are also under pressure because of tighter environmental standards.
The expression ‘cutting off one’s nose to spite one’s face’ comes to mind.

US stimulus deal brings relief but no cure for economic pain. Package is insufficient to address longer-term damage from the pandemic.  Basically taken as more of a ‘stop gap’ package than a final solution. It will help many US citizens and benefit the US economy but the delay in agreeing the deal has already had a negative impact on the economy.  The lack of assistance to local governments is likely to lead to more public sector lay-offs.
The big question now is how the Biden administration will act on taking power and how resistance the Republicans will mount. The article notes that the Republicans had sought to 'curb the Federal Reserve’s ability to respond to bond market turmoil with emergency lending facilities’ that may indicate that there will be no easy options for the Fed in the event of another significant downturn.
It also notes that the direct payments to some households will result in the money being saved rather than being put to work in the economy. That just highlights the difficulty in trying to use broad measures to help people.

Read also the Editorial US stimulus package falls short of what is needed. The Covid-19 emergency has worsened since the first relief deal

Fed backstop masks rising risks in US corporate bonds.  The ability to pay for debt has declined with the number of zombie groups increasing.  As we look to life post pandemic a big worry is the increase in corporate debt which leaves US company balance sheets at risk.  Part of the reason was the Fed willingness to step-in in March and buy corporate bonds and ETF’s.  A programme that ends on December 31 and that the Republicans are keen should not be re-introduced.
So US companies borrowed a record amount in the bond market to survive the crisis. The leverage (debt to earnings) is at a peak for higher rated investment grade companies. But the ability to companies to pay they debt has declined with a rising number seeing interest payments higher than profits fro three years running. That highlights how long some have been able to survive so far; to get through the pandemic too is a testament to financial engineering. But rating agencies have been downgrading credit ratings and a record number of companies this years are rated triple C minus, close to double last years. Inspite of that, many are expecting a rally in corporate debt prices next year, on the hope of more Fed support. The risk is that without Fed support those companies will collapse, and even with Fed support the potential for them to become viable again is doubtful. Many of the companies that took advantage of the situation have held onto the cash they raised but paying down and clearing other debts looks doubtful.
Quotes Todd Mahoney from UBS 'head of investment grade debt capital markets, added that, typically, a rise in borrowing to recover from an economic downturn was done when yields were high, increasing the borrowing cost to companies. The sharp recovery brought about since March means much of the debt added this year has been borrowed at record low yields. “It’s not as much of a drain on margins,” he said.
The Key will be whether investors are prepared to support those companies without the Fed’s backstop? One can imagine that next year we are going to see a lot of tantrums at the Fed’s actions or lack lot actions. The feds willingness and ability to help are likely to be severely tested.

Read also Policymakers to walk messaging tightrope in 2021 which underlines how important to the markets are the statements from Central Banks and particularly the Fed in maintain investor confidence.

In the same vein Covid support for companies has to change Looks at how government aid to companies needs to be more targeted with a emphasis on supporting companies that are go to drive the post pandemic economy rather than maintaining the status quo.
Mentions a new G30 study chaired by Maria Draghi and the article writer which lays out principles and options for the new post pandemic landscape. Notes 'many of the usual indicators of financial stress are currently masked by the massive liquidity support given to companies, moratoria on their debt payments and regulatory forbearance. As these end in the coming year, an increasing number of insolvencies is likely to occur.’ That could have a knock on effect to other currently viable businesses and so governments should adopt clear priorities. An interesting read and the hope that governments and private sector can work together is always the dream but too often that leads to uncommercial enterprises and the governments need for clear guidelines to show money has been ‘well spent’ can cause further difficulties.
Still an interesting read and he is certainly right that 'Hard decisions will be required, perhaps harder than this year’s. Nonetheless, policymakers have both the instruments and working examples of how to engineer a strong, broad-based and sustained recovery. They should prepare to use them.'

Second wind Vestas seeks to weather drop in turbine prices with €500m bet on new projects. An interesting read as the company seeks to tie up with the fund manager Copenhagen Infrastructure Partners and extend its business into project development, which seems like a sensible move.  

Shell to slash asset values by billions after bruising year  Taking a $4.5bn charge relating to an oilfield in the Gulf of Mexico, the closure of a refinery and unprofitable liquefied natural gas contracts.  Adding to the list on writedowns already announced and with potential for more.  Expect other oil companies around the world to be facing similar decisions.

Opinion Investors buy up Amazon vendors in $1bn spree. Consolidating small traders offers quick way to create big consumer goods brands.  Essentially what big corporations did 20 years ago to stores in the physical shopping malls; taking independent gyms, coffee shops, dry cleaners etc and making them into chains and franchises.  The same is happening to companies in the digital malls. The benefits are 'more financial muscle, better marketing and greater bargaining power with factories and potentially even with Amazon.’It is not all plain sailing and there are a number of issues the article highlights, not least that Amazon doesn’t always make it easy to transfer a merchants assets or on-line brand.There certainly seems to be plenty of opportunity but making it profitable, time will tell.

For Interest
Time spent in the pub is a wise investment. Looks at the building of ‘social capital’ within companies and organisations.  Something usually done at the pub or via other non work situations most of which have not been available during covid.   Zoom or Skype call does not usually allow the same degree of chit chat pre or post calls as you would have after a meeting.   It also looks at the trust issues between staff and management in the work from home environment.   In summary 'The pandemic has strained our ability to maintain the bonds between us, but it has also reminded us just how important they are. Any plan to “build back better” when the crisis ends should include plenty of time in the pub.’I’m sure the brewers would agree too.

Lex.  Financial concepts defining 2020  Corporate resilience: bent not brokenTakes a look at its treatment of the pandemic.  Admits it at first underestimated it but then made up for up .Notes how businesses reacted.  Firstly statements of reassurance highlighting available liquidity. Second highlighted businesses that benefitted or were unaffected by the pandemic (Tech & defensives) Third Phase The swing in sentiment 'Lex reckoned the second wave then emerging would trigger the slew of corporate collapses we correctly pooh-poohed first time round. But salvation was granted for swaths of struggling corporates by results from the vaccine trials of Pfizer/BioNTech, Moderna and AstraZeneca.’'The prospect of mass vaccinations means market financing should remain on tap, even as governments taper direct support. The key questions now are: what proportion of lost earnings will return? And how soon?’

Tech stocks/SoftBank: prince of whales. Key point  'For tech, the real legacy of the pandemic is not the speculative frenzy of which SoftBank’s options trades were the emblem. It was the industry’s ability to consolidate power in a crisis.'

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