Sept 15 FT Thoughts: Suga, Rare Earth, Huawei, ARM and more

17 Sep

Sept 15 FT Thoughts:  Suga, Rare Earth, Huawei, ARM and more

MARKETs @ HK Lunchtime
opened lower and after an initial uptick sold down to test the day lows, with support at 23,350 level. Then saw a slight rally into lunch. PM opened flat and trading sideways Currently -0.6% I think we are seeing caution ahead of the Suga announcing his cabinet and the possibility of a snap election.
S KOREA Kosdaq opened higher but sold down to test yesterday’s closing support and briefly dropped below. But then reversed and has worked higher since around 10:15am, currently +0.5%
Kospi followed a similar pattern currently +0.5%.
TAIWAN opened flat but traded higher in choppy trading; currently +0.5%
CHINA opened lower and sold down ahead of the data release; which was better than forecast. Market traded sideways on the news but then rallied in the last 30 minutes before lunch Currently +0.6%
HONG KONG Opened -19pts @ 24,622 vs -81pts ADR’s @ 24,558 but worked higher in early trades. Rallied on the better than forecast China data and then worked slightly higher before easing back into lunch. Currently +0.5%
EUROPE Expect markets to open flat with concerns over covid and today’s data:
EUROZONE ZEW Economic Sentiment, Labour Cost Index, Wage Growth
GERMANY ZEW Economic Sentiment, Current Conditions,
FRANCE Inflation Rate, IEA Oil Market Report
UK Claimant Count Change, Employment Change, Age Earnings, Unemployment Rate
US Futures Dow and S&P opened flat drifted higher before easing back to flat. Now indicating the markets will open slightly lower. NDX opened +0.1% rose to +0.3% but now -0.1%.
Data due Export & Import Prices, NY Empire State Manufacturing, Redbook, Industrial Production, Manufacturing Production, Capacity Utilisation, API Crude Oil Stock Change

China Data out at 10am

Fixed Asset Investment (YTD) Aug -0.3% YoY vs -1.6% Jul (F/cast -0.5% YoY), Industrial Production Aug +5.6% YoY vs +4.8% Jul (F/cast +4.5% YoY) Retail Sales Aug +0.5% YoY vs -11% Jul (F/cast +0.2% YoY)Unemployment Rate Aug 5.6% vs +5.7% Jul (F/cast was 5.6%)
SUMMARY Better than expected data showing the recovery is continuing in China +VE but the good data means that it is unlikely that there will be any further significant government stimulus in the short term. Beijing is likely to maintain the current policies. Slight -VE for investors.
It is interesting to note that the heavy rains and flooding reported in August do not seem to have had a marked impact on the data at this stage.
Fixed Asset Investment Improving as the Govt lifted covid restrictions but private investment still decreased and public investment eased from 3.8% to 3.2%.Investment in the primary industry +11.5% (vs 7.7% prior), while that in the secondary industry was -4.8% (vs -7.4% prior) on the back of manufacturing. Investment in the tertiary industry advanced more (1.4% vs 0.8%) due to transport, storage & postal industry; education, health and social work; and recreation & culture activities.
Industrial Production the fifth month of increase and the sharpest yet.

Retail Sales reversing last months fall. It is encouraging that people are increasing their spending again; I take that to be a sign that people are confident in the recovery and that their jobs are secure. But it is still significantly behind the monthly increases in spending seen at the end of last year.

Suga success. Abe ally set to take over. 
Key being that he has pledged to continue Abe’s policies but with such strong backing it is likely he will call a snap general election despite the LDP’s coalition party not wanting that. But it would allow him to establish his own mandate.Also see Farmer’s son Suga to become Japan premier With strong backing from both the LDP Diet members and regional chapters.
Hardly surprising I would have thought for a man who is said to be a ‘master of backroom politics’.
Also Japan investors hope for ‘Suga high’ after power changes hands. Looks at what might happen if Suga does call a snap election byYunosuke Ikeda of Nomura.
He expects that long term investors will once again be asking is this time going to be different. Along with a number of non-Japan investors taking another look at the country. It must help that Buffett is a recent investor I would think.
Key here is that Suga has been a long time Abe supporter, When Abe came in Japan saw renewed interest. On previous elections the markets have rallied, at least for the five days after the election according to the article.
On structural reforms it notes that hopes of these tend to pick up when there is a steady tenure as seen with Koizmi and Abe.
It note also that Japan’s apparently sluggish performance can be put down to a shrinking population but the reality is that its a low productive issue; something that Suga seems to understand. He knows its not just at the SME level that there is a link to the inflexible labour laws that needs to be addressed. Hence his drive to the digital economy but it will still require changes to labour laws and lowering entry barriers to allow real competition.
It will be interesting to watch

FT BIG READ. MINING. Can the US compete in rare earths? China controls four-fifths of the global mined supply of the group of metals. But America and its allies intend to reduce dependence on Beijing for elements critical to everything from wind turbines to F-35 jets.
Looks at how the US is now supporting the mining of rare earth both domestically and in Australia. The fact that China threatened sanctions on Lockheed Martin has accelerated the scheme; so as not to be reliant in China. That is providing opportunities for investors too as a large number of small miners or processors look to raise money for projects. But it is an environmentally unfriendly business that requires complex technology and is subject to skills shortages. So to build a viable alternative to China will take a long time; especially as the article notes that '“The Chinese state-owned producers can do the Saudi [oil] trick,” he says, adding: “They turn on the taps, flood the market, the price of dysprosium crashes, the new entrant is washed out, and then they’ve re-established their monopoly.”’ Underlines the difficulty to make money using normal investment models.
Notes that ‘rare earths’ are not that rare but they are dispersed widely making them difficult to mine profitably. Evidently Lynas of Australia is one of the few with the expertise outside China.
It also notes that the US defence industry has a good track record of building supply chains for things it needs; so working with them is the positive.
Looks at how China has about 80% of the rare earth market currently; something that is a part of the Made In China 2025 framework. It notes that; referring to China “They want to produce 50 per cent of the world’s electric vehicles and 50 per cent of the world's hybrid vehicles by 2025,” says Dudley Kingsnorth, a professor at Curtin University in Perth. “If that is successful then that will decimate the automotive industry in Europe and North America and Asia.”
It is interesting to note that MP Materials will initially move the rare earths but then send them to China for processing whilst it raises the money to start its own processing plant.
There are critics of the US venture; saying the mine doesn’t have the commercial scale for military grade magnets and the fact that MP Materials has a Chinese partner undermines the non-Chinese element of the plan.
Key to success seems to be greater collaboration and a willingness to pay for supply security over cheap pricing.
An interesting read and an area that will be of importance to investors as the Auto sector becomes more focused on Electric Vehicles.

Huawei woos app makers despite sanctions threat to its devices. Despite not knowing for how long it can continue to make smartphones it is still encouraging app designers to use its platform. From today Huawei can not longer buy the chips its needs that are made using US technology. But that hasn’t stopped it developing its operating system with the advantage it says of being the first unified system for smartphone to connect to the Internet of Things. It will be interesting to see whether the platform has any radical changes over android and iOS. It also has the benefit of Google being banned in China so developers have already adopted its Huawei Mobile Services (HMS) suite. That helps developers build apps on its system which can then be marketed internationally; with the benefit that Huawei only takes a 15% cut rather than 30% like Apple and Google.
Huawei’s market share is already being taken by other makers in China but none of them are as large as Huawei but one that could benefit significantly would be BBK Electronics who are behind Oppo, Vivo, OnePlus and Realme.
The outlook for Huawei looks bleak the question will be can it re-invent itself to survive.
For China it knew it needed to improve its chip making ability and it was an area that President Xi was early to focus on. One wonders if knowing what they do now whether they would have started the Made in China 2025 initiative with such a fanfare?

Editorial Arm deal is drawing UK into US-China tech war. Looks at the Nvidia Arm deal. The key concern seems to be 'Arm is no ordinary company. It is one of the UK’s few technology successes with global reach. Its chips are sold to a range of customers. Critics fear Arm’s business model, which has thrived on this neutrality, will be destroyed under Nvidia, itself a customer. They argue the ownership change will allow Washington to intervene in Arm’s client relationships under the US’s foreign investment regulations.’
It calls on the UK Government to clearly set out Britain’s industrial policy in the light of a new post Brexit world.

Oracle-TikTok ‘partnership’ faces White House hurdle to approval. Key points are that the deal is not a sale, it will be subject to a Cfius probe and there is no payment to the Treasury.
The key I think is that at this stage its really just a proposal and subject to a lot more negotiation much of which will revolve around standoff between the US and China.
See also LEX TikTok/Oracle: out of sync. 'prompts a question. When is a sale not a sale? When it is a “technology partnership”, apparently.’
‘But if ByteDance maintains an interest, it is hard to see what this messy drama has achieved — and why US/China security concerns will not recur. For Microsoft, losing out to Oracle looks less like defeat than a lucky escape.'

EU recovery hit as industrial output slows and Covid cases rise. Data out Monday shows the recovery in Europe is slowing but it was better than forecast. There are still risks from covid and the rise in new cases in the UK, France and elsewhere could still impact the wider economy. I think it also underlines that there is not going to be a straightforward V shaped recovery. The article notes that German still remains the strongest with the UK expected to fare the worst. That will have an impact on China and its exporters, especially as Europe it trying to arrange a ‘fairer’ deal with China over mutual market access.

Federal Reserve urged to convert dovish words into action. Calls on the Fed to apply the new policy strategy with actions at the meeting taking place today and tomorrow. But I think it will be difficult for the Fed to take much action. Most people think the Fed had hoped that the Republicans and Democrats would have agreed a new stimulus policy by now but that has not happened which further complicates things for the Fed. Add to that the fact that this is the last meeting before the US Election and it is unlikely that the Fed will want to make any dramatic moves or statements.

For Interest
Fears grow over Trump refusing to concede 
Contested result would risk civil unrest and pose dilemma for Congress and courts. Looks at what might happen after America has voted.

Investors switch to FX after policymakers blunt volatility. Central bank interventions have made bond trading less attractive for short-term bets. The article looks at how bond managers are looking at currency plays.
Not mentioned in the article but it is interesting to note how on social media FX trading platforms targeted at retail clients have also seen a dramatic increase. That will also add a new element for traders and portfolio managers to have to consider.

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