Sept 24 FT Thoughts; China pledges on Carbon, Tik Tok and Diplomacy; Apple in India and more
MARKETs @ 1:30 HK time
JAPAN opened lower and initially sold down to 23,100 before working back to flat at lunch. PM opened lower and has drifted lower Currently -1.3% No surprises int he BoJ meeting notes that were related this morning.
S KOREA Kosdaq opened lower traded sideway’s for the first hour then trended lower currently -3.8% and the Kospi followed a similar patten and is currently -2.4%.
TAIWAN opened lower and has trended lower though the day currently -2.5%
CHINA CSI300 opened lower and trended lower through the morning to 4,570 level at lunch. PM trading sideways Currently -1.8%
HONG KONG Opened -205pts @ 23,538 vs -248pts ADR’s @ 23,494 with E commerce, Tech Components and financials leading the declines. Initially sold down to 23,340 level and then drift lower with support around 23,310 level. PM opened lower at day low 23,225 (so far) but trying to work higher. Currently -2%
EUROPE Expect markets to open lower as covid concerns hamper the return to work. London’s FTSE is seen opening 51 points lower at 5,853, Germany’s DAX down 122 points at 12,531, France’s CAC 40 down 52 points at 4,754 and Italy’s FTSE MIB 182 points lower at 18,699, according to IG. Data due
EUROZONE Economic Bulletin, ECB General Council Meeting, EU Council Special Meeting
GERMANY Ifo Business Climate, Current Conditions
FRANCE Business Confidence and Climate Indicator
UK CBI Distributive Trades
US Futures opened lower but initially rose to +40pts, S&P was slightly +VE but NDX was slightly -VE. After significant loses on Wednesday I would expect markets to look to consolidate but today we get Initial an continuing claims and that could put further pressure on the markets and hopefully Congress to sort out a stimulus package. Other data due today New Home Sales, Fed Chair Powell Testimony, EIA Gas Report, Kansas Fed Manufacturing Index.
China carbon neutral pledge hailed despite lack of detail. Taken as being a positive move and one expected to win China some friends in Europe and the US. But as ever the detail and implementation will be key. The article notes that 'The 40-year timeframe to reach near zero carbon dioxide emissions also leaves open the possibility of delayed action in the short term, in the hope that technological breakthroughs will deliver rapid gains later, experts warn.’
Key will be how it deals with its coal fired power stations; this year it has seen the fastest pace of approvals for new ones since 2015. Beijing has also said it will end subsidies for new onshore wind power installations by 2021 and cut support for solar schemes by 50% this year. All of which makes the declaration somewhat surprising. People will be watching the next five year plan due next spring for indications of how it will be achieved.
Yesterday the news saw renewable energy plays being bought although at present there is no strong incentive for the grid operators to buy renewable power; so some pricing mechanism reforms will be required. It also means that coal names are going to be less attractive and could mean increased costs going forward for heavy polluters as they are required to clean up their operations.
China state media decry TikTok deal as US ‘trick’
Editorials signal Beijing disapproval and loss of ByteDance technology feared.
Articles in the Chinese state media indicate that China would not sign off on the current Oracle/Walmart deal. The media appears to be looking to whip up nationalistic sentiment accusing the US of bullying and dirty tricks.
Interesting because I am sure a number of international’s companies would say that China has done that in the past in making them sign up to joint ventures and forced technology transfers.
It really show that business everywhere is always subject to government whims and desires.
Read also What is good for LVMH is now deemed good for France.
Which to an extent illustrates that the same sort of thing is happening all over the world in one form or another.
Opinion China ramps up its punishment diplomacy. Seen in China banning German port exports just before a scheduled call to the German Chancellor. Also in the recent actions against Australia, Canada and others. Seen by many as a way to try an exert pressure; mainly to stop countries being critical of China or doing things that China doesn’t like; closer ties with Taiwan being a key one. It illustrates this with how Norway was treated and how Norway’s policies have changed as a result.
Nice quote "Today, China claims to be the biggest trade partner to 130 countries and regions and the demonstration effect — “killing the chicken to scare the monkeys” as it is known in China — is often enough to cow others into compliance.’
Often China attacks industries that are not at the centre of the dispute and gets industry leaders to lobby governments, effectively on Beijing’s behalf. That way there is minimal impact on China’s industries and it avoids WTO escalation.
But the policy has limitations and increasing countries are diversifying away from China to avoid the threat.
It concludes by saying 'What is needed now is a multilateral mechanism for countries to study examples of this coercion. The next step is for the EU, US and other democracies to form a united front and formally agree they will not be played off against each other when individual countries are “punished” by Beijing.
Until now, the benefits of coercive commercial diplomacy have outweighed the costs. If other countries want Beijing to stop, then they need to reverse that equation.’
I think will increasingly see multilateral organised responses to China and it is quite likely that Taiwan becomes the tipping point for that to occur. Unfortunately it is likely to mean that China is poorer as a result.
Chinese amateur trading frenzy fires up brokers. Valuations of financial services providers pushed to levels on a par with big global banks. Notes that daily turnover in Chinese markets is +60% from the average 5 years ago.
One of the keys to that growth has been the growth in app based trading for many people and the provision of cheap trading but many organisations. Also helping recently would be the work from home experience giving people more time and opportunity to trade. The article also notes that the surge in trading has also resulted in a surge in demand for data; which hopefully means more rational investing rather than just momentum herd trading. Wild swings like those being seen on the Star board new issues are always likely to draw in some speculators as has the recent rebound in stocks but many investors have been hurt and so whilst that may be good for the brokers it has its risks.
Not mentioned in the article but worth noting that the surge has not gone un noticed by the authorities last Friday announce the consumer protection committees of CBIRC and PBoC recently guided investors to embrace concepts of rational investment and value investing. In practical terms, investors should cast doubt on capital-protected financial products with a yield of over 6%, while realizing those with a yield of over 8% are dangerous ones. Investors should brace for the loss of principal when investing in products with a yield of over 10%.
For China whilst there is a desire to grown the domestic market there is also a worry about what happens if the markets collapse and retail investors are financially hurt as has happened before.
There are expectations in the market the the sector will see consolidation especially after the recent tightening of the rules for financial institutions.
Apple unveils Indian online store in time for festivals. Key being the fact that India has eased some of the restrictions on foreign countries as it seeks to encourage them to set up manufacturing within India and take advantage of the diversification of supply chains away from China. Historically companies had to source 30% of components locally. Now with more companies moving operations to India Apple can comply.
'New Delhi’s production-linked incentive scheme, announced in June to boost smartphone manufacturing — have worked in Apple’s favour. In August, technology minister Ravi Shankar Prasad said Apple manufacturers Foxconn, Wistron and Pegatron were among 22 companies to have applied to the scheme.“The Indian government would love to develop the country as a manufacturing alternative to China,”’
Obviously this is likely to be another bone of contention between China and India in the future.
DoJ proposes curbing immunity of Big Tech. Trump administration sends draft legislation on digital content to Congress. Whilst unlikely to be taken up Congress at the moment it does signal a move to made the platform operators more responsible for the content that is being shown; both in what they censor and what they allow. It would have a big impact on Twitter, Facebook, YouTube and others.
Pension funds must appear counter-intuitive and buy riskier assets. By Inigo Fraser-Jenkins head of portfolio strategy at asset manager Bernstein.
Basically saying that Pension Funds need to buy more stocks and riskier assets
It notes that many pension funds and individuals are not saving enough to meet future needs. The assumption that investing in capital markets will preserve purchasing power is in question too.
He notes that 'I believe that, post-Covid-19, the level of risk carried by pension plans has to materially increase. This raises questions for policy and regulation, as well as what investment framework institutional pension funds and individual savers should use.’
Key being low rates hurts savers, negative rates hurt even more. That puts into question risk return assumptions on traditional assets and the 60/40 assumption on portfolio’s (see yesterdays Investors wonder if 60/40 portfolio has a future in the Sept 23 FT Thoughts).
He thinks that high valuations don’t mean the market will fall but that volatility will remain high. Also that Bond Equity non correlation will end and hence a new strategy is required.
Increased use of alternative investments, long/short strategies and private assets like infrastructure. Investment framework needs to be revised to and pensions should outline the probability of their being able to meet their targets.
He concludes 'Saving for retirement is about to become more challenging. It is better to face up to the new reality than ignore it.’
Worth noting the the fundamental reason for all this change is governments pushing down interest rates in the hope of increasing inflation. Something that Japan has demonstrated doesn’t happen.
Opinion Are markets in a bubble because traders live in one? Puts forward the point that all bubbles have one factor in common; mob behaviour. The markets it suggests are dominated by male traders and that there aren’t enough women in the industry.
'Generating uncorrelated returns, or “alpha”, requires differentiating yourself from the herd. Surely that is easier for a diverse group of people to do. The alternative is a community sealed in a bubble, woefully unprepared to recognise irrational exuberance.’
An interesting read. For myself I can say that the trading teams I have built were usually around 50:50 mix; as the article points out you need diversity because your clients are diverse too.
Frontrunners open gap in global race for virus vaccine. Nine contenders pull away from hundreds of competitors to reach final stages. Looks at how the vaccines work, how the trials are structured, which countries have ordered the vaccines, when will the results come. An interesting read.
City of London scraps plan for broad return to office. Workplace perks axed as thousands of staff are told to continue working from home. Following the U turn by the UK government. An interesting quote from Jamie Dimon “the WFH lifestyle seems to have impacted younger employees, and overall productivity and ‘creative combustion’ have taken a hit”.
A clear indication that the office culture is not dead and whilst there may have to be some adaption going forward I think office life will resume.
Dealmakers seek face-to-face advantage. Bankers fear rivals will be first to reclaim ‘weapon of personal contact’. Looks at how investment bankers are keen to get back on the road and get face to face with clients again. Zoom calls only go so far. Notes that face to face meetings are superior in every way according one source in the article.
I think for those with established networks it is possible to continue to do business but difficult to expand the business. But currently it should mean that authorities are looking for better ways to track and trace people in case there are covid outbreaks.