Sept 1 FT. Declassified Taiwan, Japanese Buffett, China PMI's, Shifting labour for inflation and more

04 Sep

Sept 1 FT.  Declassified Taiwan, Japanese Buffett, China PMI's, Shifting labour for inflation and more
MARKETs @ 12:50pm Hk time
JAPAN opened lower small rally after good employment data but then sold down to day low before rallying 23,200 only to sell down to flat at lunchtime.  PM opened lower but trending higher  Currently -0.1%
Unemployment Jul @ 2.9% beat f/cast but Capital Spending Q2 -11.3% was missed badly.
PMI @ 47.2 was up MoM and better than expected.
S KOREA Kosdaq opened on good GDP Growth and Trade data, and moved higher before testing the support of yesterday’s close.  Then market rallied to 854 level than back to opening level and trading sideways currently +0.3%
Kospi followed a similar pattern currently +0.9%.
GDP Growth Rate Q2 -2.7% down QoQ but beat forecast, Trade Balance $4.12b, Exports -9.9% both beat, Imports were -16.3% small miss.
PMI Aug 48.5 up MoM and beat forecast.
New Covid cases 235 still a concern.
TAIWAN opened higher and small up tick before selling down, support just below yesterday’s close then rallied back and trading sideways/slightly higher;  currently +0.7%
PMI was 52.2 up Mom and beat forecast.
CHINA opened lower but rallied into the green on good Caixin PMI data but then sold down to 4,800 level before bouncing back into the green and worked slight higher into lunch Currently +0.1%
Caixin PMI highest since Feb 2011
HONG KONG Opened -91pts @ 25,085 with E commerce mainly +VE (BABA -0.3%). -0.1%, but tech and other sectors weak. But market rallied on good China Caixin PMI number but then sold down to opening level before rallying into the green and trading sideways only to sell down into lunch Currently Flat
New covid cases 12.
After market Retail Sales data
EUROPE Expect market to open slightly higher as UK returns, but caution ahead of PMI data  and German Unemployment and the UK credit/mortgage data
US Futures opened -30pts, slipped to -50pts but recovered to -20pts.  S&P and NDX little change.  Data due: Redbook, Manufacturing PMI, ISM Manufacturing Data (New Orders, Prices, Employment and PMI) Construction Spending, API Crude Oil Stock Change, Total Vehicle Sales.

Huawei drops rugby sponsorship amid Australian downsizing Chinese group blames Canberra ban on selling 5G equipment for scale of restructuring.  It is likely to be the first of several downsizings world wide as the US ban on supplying the company with chips hurts its hand phone sales and government pressure to exclude it from 5G has also impacted its business.  

Buffett places $6bn bet on Japan’s big trading houses as other investors fold. Looks at Buffett’s investment in Mitsubishi Corp, Mitsui & Co, Itochu Corp, Sumitomo Corp and Marubeni Corp all of whom rallied yesterday on the news. The initial investment is of 5% but could grow to 9.9%. These are classic Buffett companies in that they are deeply integrated in the real economy and their networks are difficult to replicate giving them the classic moat that he likes to see. The diversity out of the US may be significant too, especially as these firms are involved in commodities too.

Rising domestic demand drives China’s recovery from outbreak. Looks at yesterdays official PMI data. The manufacturing PMI was slower than expected but not unexpected considering the fact that parts of China have been hit with heavy rains and flooding as well as the erratic recovery globally. With flare ups in covid cases impacting demand. Encouraging was the improvement in the Non Manufacturing which suggests a broader economic recovery, albeit a slow one. Mentions that ING are looking for domestic tourism to further spur the spending on services as covid restrictions are eased. However the article also notes that household deposits across China have soared this year as people cut spending whilst the full impact of covid is unknown.
Today’s Caixin number for Manufacturing came in at 53.1 vs 52.8 Jul (F/cast was 52.4). The fourth month of growth and a significant uptick. With both output and new orders rising along with export sales. But staffing levels fell slightly so things are stabilising as back orders are filled. Prices saw softer increases MoM. Sentiment remained solid.
For investors the data suggests that the recovery is continuing and hence that further government stimulus will be limited to targeted areas of the economy. It also suggest that consumer demand will remain light as people remain wary of the full impact of covid on jobs and income.

US declassifies Taiwan security pledges. Release of details relating to promises made by Reagan viewed as warning to China. Seen as a move to deter China from trying to use military force to take Taiwan but making it clear that the US would move to rescue Taiwan if China attacks it. In the announcing statement the move was said to be in response to China’s increasing threat in the region as illustrated by its decision on Hong Kong to impose a national security law. '“We no longer have the luxury of assuming that Beijing will live up to its commitment to peacefully resolve its differences with Taipei,” Mr Stilwell told the Heritage Foundation. “We’ll continue to help Taipei resist the Chinese Communist party’s campaign to pressure, intimidate and marginalise Taiwan.”
It seems that the US is moving away from “strategic ambiguity” and making it very clear that Taiwan has significant interest for the US. China will not like this latest move but it is likely that the US will 'highlight its belief that Beijing, by stepping up military threats against Taiwan, was violating its pledges to seek a peaceful resolution of the issue.’
It is interesting that the US has not formally abandoned its ‘One China Policy’ although this and other recent moves suggests that could come. The importance of the tech in Taiwan and especially in chip technology is not lst on the US, especially after seeing what it has managed to do to Huawei.
Investors will be waiting to see how China responds. President Xi has been pushing for the ‘reunification’ but with this and in the light of how badly the pro Chinese party did in the Taiwanese elections recently, it seems unlikely to happen peacefully. He has suggested force in the recent past with the recent removal of the phrase ‘peaceful’ in statement regrading ‘unification’. A failure to achieve it will open him up to criticism from some within China.

Heady days of Japan Post’s IPO have long gone. Five years on, the investment case for a politically hamstrung business with an ageing customer base looks threadbare.
Looks at the background to the original IPO and how the company has been beset by problems with the future looking no better!
In many ways it highlights the problems of trying too commercialise an enterprise that is not commercial. In Japan Post’s case it has also been shackled with some unreasonable restrictions like having to maintain counter services.
A good summary on why not to invest in the company.
It seems to me that if the company is going to have a recovery then it will need some inspirational vision from the top accompanied with the ability to make very commercial decisions about how it operates. Unfortunately those are not traits associated with most Japanese companies.

Hedge funds criticise extension of South Korea’s short-selling curbs. I wrote on this over the weekend. The regulator extended the ban until March 2021on concerns over covid and market volatility as well as increasing the punishment for infringing the rules. The markets have already surpassed their March levels so there appears to be little reason to maintain the ban. Many worry that with shorting being unavailable that foreign institutions will exit the market because they cannot hedge and that could trigger a sell-off which ends up hurt the retail investors most. Worth noting that Monday’s selling in the market was mainly foreigners and institutions.

Editorial Abe’s struggle with China is incomplete. Looks at the struggle between Japan and China and how as he leaves office it is still unclear if he has been successful.
Both Abe and Xi took power within weeks of each other and Abe’s central task was to strengthen Japan against China. The relationship between the two has always been fraught due to events from the Japanese invasion in the 1930’s that are still raised today. China today is growing quicker than Japan and building its armed forces at an alarming rate which Japan cannot keep up with. There is also the pacifist constitution which Abe was unable to change. Despite this he maintained strong position as China has a sought to expand its boundaries. Recently improved relations could be temporary and just aimed at undermining America’s influence. But Abe has built good relations with the US even under difficult circumstance as Trump pulled out of the TPP. But also extend them to India and others in the region. His successor is going have to deal with the same China problem and will need; skill and luck.
An interesting read.

Only a shift in labour bargaining power can light up US inflation. Looks at the Feds change in policy and how that does not bode well for the US dollar. It notes that inflation has been dormant not because of Central Bank policy but because of the shift in power from labour to capital. Outsourcing, off-shoring and automation have weakened workers bargaining power and hence lowered inflation, not Central Banks. Notes that if it had been the Central banks activities then they would have been able to raise inflation, which they have not been able to do; as demonstrated by Japan.
Nice analogy
'If a medicine did not work, a good doctor should ask herself whether the medicine was the wrong one rather than keep increasing the dosage. If not, the medicine loses whatever potency it has and creates substantial side-effects. That is precisely what has happened with ultra-loose monetary policy since 2008. Yet Mr Powell is going all-in on failed policies. He has admitted that inflation has never returned to 2 per cent on a sustained basis and productivity is falling. These outcomes are not in spite of Fed policy but because of it.'
Notes that US zombie companies (don’t earn enough to cover interest payments) are now about 20% of all US listed companies. Also that in the US the top 10 per cent of the population owns 87% of the stocks, so the rising market perpetuates inequality, leaving the other 90% with bank accounts that earn nothing.
In that regard the article says the Fed has not been responsible for a great modernisation but for a polarisation on social, economic and political basis.
So for inflation to return the balance back in favour of labour needs to return. When it does it will also mean the end of asset inflation and likely to be more bad news for the US dollar.
Then emerging markets will have a new problem that of managing the appreciation in their currencies which will allow them to pay debts and support domestic production and consumption which will appeal to investors.
For the US its not all bad news, because every country is doing much the same the US dollar will still be the best currency to hold relative to the others. It also means that it is good news for gold.

For Interest
Fading dollar gives US stocks a further boost by attracting foreign buyers.
A weaker dollar makes US companies more attractive. Both in terms of money spent and the fact that is also means that US exports are ‘cheaper’ and the revenue from those sales is also flattered when expressed in terms of dollars. Because many investors look at the US as a source of champions of disruptive tech, those companies become even more attractive.
Dollar’s decline unlikely to give world economy shot in the arm Global currency shifts create winners and losers while virus spread hinders change.
Looks at how whilst versus the dollar index the US currency is getting cheaper that index it doesn’t help emerging markets. The main reason being that the index is comprised of developed currencies. Against the emerging market ones the weaker dollar actually hurts them.

The conglomerate remains committed to its struggling European steel and car operations but it is facing calls to pull back and refocus on India, its home market, where there is a big opportunity in ecommerce.

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