Sept 4 FT Thoughts A tale of two Hong Kong's; Executives dump stock, China tightening rules and more
MARKETs at 12:45 HK time
JAPAN opened much lower and tested the opening level before working higher through the day, hitting the morning high just before lunch time. PM opened lower and trending back towards the opening level Currently -1.3%
S KOREA Kosdaq opened at the 840 level worked up to 860 and then has traded sideways; currently -1.7%. Kospi opened around 2,332 and worked higher for the first hour to 2,370 level and then has drifted slightly lower currently -1.6%.
TAIWAN opened at 12,645 and has traded sideways in the range 12,655 - 12560 currently -1%
CHINA opened around 4,740 level and traded sideways in the range 4,760 - 4,726 Currently -1.6%
HONG KONG Opened at 24,670 in line with the ADR’s and sold down to 24,490 before bouncing back to 24,700 level but then sold down again into lunch Currently -1.8%.May see some margin selling in the PM session due to the extend of the morning sell off.
EUROPE Expect markets to see a significant sell off on the open, although remember that they did sell down into the close yesterday as the US sell off started. Construction PMI data due along with German factory orders, French Current account and budget balance and UK New Car Sales.
US Futures Dow futures opened -100pts and fell to -207pts but then recovered and are currently slightly -VE along with the S&P and NDX but I would expect a weak open with caution ahead of the US jobs report. Other data due tonight; Ave Weekly Hours, Ave Hourly Earnings, Participation Rate, Baker Hughes Total Oil Rig Count.
This could be the beginning of the correction that many have been waiting for. The Dow futures suggest that the US will continue to sell off tonight too. Tonight's US jobs number will be watched with interest not because of possible Fed action but for its impact on sentiment especially since we still have no agreement on the next round of US fiscal stimulus. If the markets do sell down further that should put pressure on congress to find an agreement.
The Big Read Chinese Business
A tale of two Hong Kongs: Beijing cracks down while the financial hub thrives. Ant Group’s IPO will take place against a backdrop of the dismantling of the territory’s pro-democracy movement. The hope is that the Ant listing will signal the continuation of capitalism in Hong Kong even with the new security law. As the article says
“The destruction of political rights in Hong Kong does not necessarily mean its demise as an economic and financial centre. It will be different from what it was,” says Steve Tsang, director of the China Institute at Soas University in London. “It may be the end of Hong Kong as we knew it, but it will not be the end of Hong Kong.”
Key is that Beijing is still reliant on Hong Kong for fund raising, especially for its ambitious Greater Bay Area projects. But with the new security law and recent cases of diplomatic hostage taking by China many foreign nationals and companies and concerned about staying in Hong Kong.
Beijing however sees the new law as necessary for stability and that with stability will come international money.
It's notable that Ant Group is using the US banks to sell to the US and other International investors because the Chinese Banks have not yet developed those relationships but have been focused on domestic clients.
The article says its part of China’s aim of attracting US funds to finance the development of Chinese tech; something that was already being done with Chinese firms listing in the US. The recent tightening of US regulations and trade tensions have prompted many Chinese firms to look at secondary listings in Hong Kong as an insurance agains tUS action, which has been good for the Hong Kong market, especially as it means the bourse has changed from big but boring SOE’s into dynamic tech enterprises that allow investors to invest in the modern economy.
But as the market is changing so is the Hong Kong society with increasing concerns about Mainland influence. It notes that Beijing’s aim of suppressing political opposition without hurting business is fraught with risk but by using Chinese money at the same time the risks may be reduced. But governance and accountancy issues will remain.
It questions what will happen if authorities crack down on journalists that investigate corruption or allows accountancy standards to slip. Or even deny some analysts visa’s to visit companies. The worry is that well connected Chinese families will erode the trust and upset the level playing field that Hong Kong built its reputation on.
It mentions the Trump element of influencing Federal money not to invest in Chinese companies and how Trump could extend that to other non federal funds.
Key is says is how heavy handed Beijing officials overseeing Hong Kong. They have stated that they will only exert a light touch. But many worry that they will want to impress Beijing more than worry about local feelings.
As ever it notes that 'the reaction to the Ant IPO suggests that while civil liberties are under attack, Hong Kong still has an appetite to thrive economically.’
Well worth a read.
I think the risk of further sanctions on Hong Kong remains high especially for Trump to curtail the ability for US money to invest in Chinese companies. He is likely to take the stance of if China is a threat to the US then why are we financing its development. He may not ban US money financing China but he may look to find a way of taxing the returns to such an extent that they money is invested elsewhere.
Central bank makes biggest moves in a decade to protect Hong Kong dollar peg. The HKMA has had to intervene 40 times to keep the HK dollar within its designated trading band. Part of that is because with Fed cut rates to below those available in Hong Kong and also in part to the number of large Hong Kong IPO’s for which international investors need to pay with Hong Kong dollars. With the Ant Group IPO approaching it is likely that the HKMA will be kept busy. It notes that the current action is at odds with Kyle Bass’s view that capital flight could cause the currency peg to collapse.
As noted above the key is that Trump doesn’t further weaponise US investment monies because that would be a huge game changer
Soaring US tech stocks hit reverse as Nasdaq tumbles 5% from all-time peak Looks at the overnight sell off and that it serves to remind us that the rally has been driven by a select few names.
I think the most significant aspect of the sell off was that it was not triggered by some news or data, as far as I could see. The data out was generally good. Initial claims data was discounted because of the new accounting method but there was no announcement at Apple, Tesla or the other companies. Which suggests that investors are really worried about a correction and possible that a lot of day traders on making have got very tight stop losses. So once a few people started to sell everyone wanted to get to the exit. The fact that the markets didn’t fall further I think shows how much money is sitting on the sidelines. As I mentioned yesterday a lot of funds have been waiting for a correction and they probably started to get involved as the Nasdaq fell 5%. So whilst I think that we will see more selling tonight, judging from the fact that the US futures opened so weakly I am not sure we will see as massive a correction as some are hoping for. For certain a number of day traders and retail investors are likely to see loses and that might hinder them from re-entering the market for a while. I read an article this morning that was looking for a 30% correction, I doubt that happens because of all the money that missed out first time around but another 10% to 15% is very possible.
Also read Executives dump shares and reap $6.7bn ‘bonanza’ after record rally. Looks at how US executive were less optimistic about the outlook that investors and close to sell in August. It also notes that many US executives bought the dip in March and April but they were not the ones selling because executives and directors must hold on to profitable stock for at least six months.
It shows yet another disconnect between the view on Wall Street and that in the real world.
Beijing to tighten rules on non-bank finance groups This action will include Ant Group and others. 'State media reported Thursday that China’s State Council, had approved regulations that would introduce licensing procedures for financial holding companies and, potentially, capital requirements.’
The increased regulation is not a surprise and the main point of it being to ensure that China doesn’t see a re-run of the HNA scandal. Full details of the regulation are yet to be published but Ant Group in its prospectus 'signalled it was preparing for the new PBoC regulations and said one of its subsidiaries would apply for the financial holding company licence when the rules were implemented.'
US first-time jobless claims hit lowest level since mid-March. But the count was done using a new methodology. Under the old system the number would have remained around 1.2m says the article.
Worth a read but key takeaway is that layoffs remain widespread and are still occurring and the recovery is slow.
I think those layoffs will continue to be a concern as small firms that have struggled to keep going actually fail. Many of those jobs are not coming back. Furthermore they could have a knock on impact to companies further up the supply chain.
Fed’s inflation shift is another blow to ‘safe’ government bonds. Makes the point that under the Fed’s new policy inflation can run hot and that will further undermine the view that government bonds are safe. Government bonds are safe in many regards but as it notes 'Middle-class people who lived through the second world war invested in government bonds to provide for old age, as they had been influenced by the deflationary conditions of the 1930s. The inflation of the 1960s and 1970s eradicated much of their wealth and impoverished their retirement.’
It also notes that government bonds are no longer a hedge for equities and in some cases they have fallen at the same time as equities. So what are safe investments now?
It suggest the tech stocks that have been behind this years rally. Unlike the dot.com bubble today’s tech is highly cash generative. They have high levels of intangible assets and cost structures that have low fixed costs and low marginal expenses. That can make them hugely scalable and gives them significant pricing power.
To summarise 'It seems counter-intuitive to think of equities as safe. But equally, it is hard to believe that government bonds yielding little or nothing are not a hostage to fortune when central banks are working to generate higher inflation. For long-term investors this boils down to choosing between governmental paper promises and real assets such as property, commodities and gold. It is, in the time-honoured phrase, a no-brainer.'
Bankers crave return of face-to-face trading floors. Looks at why working with other people beats working at home. It seems 'One reason for this, Mr Beunza says, is that what happens within close-knit trading teams matters less than so-called “incidental information exchange” between teams. “The bit that’s very hard to replicate is the information you didn’t know you needed . . . where you hear some noise from a desk a corridor away, or you hear a word that triggers a thought,” notes Mr Bristow. “If you’re working from home, you don’t know that you need that information.” ‘
An interesting read.