Nov 12 FT Thoughts: Corp Defaults, Biden Xi, HK patriot games, China risks, Lunch updates


14 Nov

Nov 12 FT Thoughts: Corp Defaults, Biden Xi, HK patriot games, China risks, Lunch updates

MARKETs at 12:50pm HK time
JAPAN opened higher and rose to 25,587 having attempted a couple of time it sold down into lunch. After lunch it opened lower and dipped below yesterday’s close before bouncing Currently +0.1% @ 25,372%
Topix opened lower but rallied to 1,735 before trending lower. Currently -0.7% @ 1,717
Pre market Data
Machinery Orders Sept -11.5% YoY vs -15.2% Aug (F/cast was -11.6%)
Machinery Orders Sept -4.4% MoM vs +0.2% Aug (F/cast was -1%)
PPI Oct -2.1% YoY vs -0.8% Sept (F/cast was -2%)
PPI Oct -0.2% MoM vs -0.2% Sept (F/cast was -0.1%)
Just out
Tertiary Industry Index Sept +1.8% vs +0.8% Aug (F/cast was +1.1%)
S KOREA Pre market data was weaker than expected
Kospi opened lower and sold down to 2,471 before bouncing. Then worked higher in choppy trading to yesterday’s closing level, which it tested a couple of times but failed to break above and then trended lower. Currently -0.3% at 2,477.
Kosdaq Opened higher and traded sideway’s for the first couple of hours but then sold down to just above Wednesday’s close, a small uptrend for about an hour before it sold down to 837. Seen a small bounce currently -0.3% @ 838
Data
Export Prices Oct -6.4% YoY vs -6.2% Sept (Consensus was -5.6%)Import Prices Oct -11.6% YoY vs -11.3% Sept (revised from -11.5%)(Consensus was -10%)
TAIWAN opened higher at 13,325 but sold down to Wednesday’s close, bounced but then trended lower; currently -0.4% @ 13,204
CHINA CSI 300 opened higher at 4,917 and tested to 4,920 but then sold down to test 4,900 level which it tested five times before bounding to the day high 4,926 only to reverse and sell down into lunch -0.1% @ 4,902. Concerns about the weak loans data and the implications for the recovery.
Shanghai Comp -7pts (-0.2%) @ 3,335
Shenzhen Comp +55pts (+0.4%) @ 13,775
ChiNext +17pts (+0.6%) @ 2,699
HONG KONG Opened 26,409 +182pts vs +9pts ADR’s but trended lower through the morning session -0.4% @ 26,123. E-commerce and Tech names seeing a bounce, but Chinese Financials weak after poor loans data. Harmony (3836) -10% on short sellers report. Rumours of more covid cases a slight -VE for sentiment.
EUROPE Expect markets to open lower with rising covid cases and earnings in focus. Sentiment not helped by the fact that Trump refuses to concede the election. Oil trading higher in Asian hours.
Data
EUROZONE Economic Bulletin, Industrial Production Speeches by Guindos, Panetta, Mersch, Schnabel and Lagarde.
GERMANY Inflation Rate Speech by Mauderer
FRANCE No data due
UK Balance of Trade, GDP, GDP Growth Rate, Industrial Production, Manufacturing Production, Business Investment, GDP 3 Mth Ave, Construction Output, Construction Orders, Labour Productivity, Goods Trade Balance. BoE Bailey speaks, NIESR Monthly GDP Tracker. Speech by Tenreyro and Bailey
US Futures opened Dow +30pts, S&P slightly higher NDX flat but have fallen in Asian hours and currently Dow -181pts with the S&P and NDX -VE too. Covid concerns still overhang the market along with warning of corporate defaults.
Data
Inflation Rate, Core Inflation Rate, Initial Claims, 4 week Average Claims, Continuing Claims, EIA Oil Report, Monthly Budget Statement. Speech by Evans, Williams and Bullard.
Earnings Include Walt Disney, Palantir Technologies, Applied Materials, Beazer Homes, Cisco Systems, Siemens, Burberry, Brookfield Asset Management, Unity Software


Front Page
Ackman expecting short-term woe with fresh bet on corporate defaults.
I think he is right. He is betting against corporate credit. The basis being that a number of companies have struggled on during the pandemic but are now near to exhausting all their available credit and crunch time is fast approaching.
Read also NY’s hotels crisis casts cloud over $4bn in mortgage bonds. Accommodation in city underpinning CMBS deals fares below national average. The CEO of the Hotel Association of New York City, said that, if half the city’s 640 hotels survive, it will be a “great” outcome. Trepp, a CMBS data company, says 37.7% of all New York hotels underpinning CMBS deals now sit on a watchlist designed to warn investors of impending trouble before a mortgage is transferred to debt collectors known as special servicers. A further 44.7% of loans have been passed to special servicers. I have written on this in the past and the problem is only getting worse with time. The vaccine will not arrive quickly enough to save a number of these CMBS deals.


EU banks warned to prepare for bad loans. Head of body responsible for winding down lenders issues pandemic alert. It would seem that Mr Ackman is not the only one aware of the the risks ahead. Elke König, chair of the Single Resolution Board; warned banks needed to do intensive work to sort out viable loans from unviable ones. Really meaning companies. There is concern because at present is seems that the EU doesn’t not have a complete set of bank-crisis rules and there are different national arrangements rather than a European standard. The true extent of the problem will only be known when government guarantee systems end. She expects the NPL’s to start hitting in Q1 or Q2 2021. Nice quote from her that rather illustrates the complacency
‘"The entire debate . . . always lacks one component: who is footing the bill,” she said. Ms König added that “it feels sometimes as if this is the magic system”, one where losses are supposed to evaporate, something “that is not going to happen”.’

Biden presidency likely to ruffle feathers of Trump’s global admirers. Democrat’s move to White House will affect leaders in Russia, Israel, Saudi Arabia, the UK and Turkey.
Also mentions President Xi saying it doubts that China will not have to worry about sudden US tariff increases on the basis that Biden is unlikely to be as volatile as Trump was. But Trump gave China a lot of global strategic opportunities as Trump withdrew the US from Global leadership on things like Climate Change and Health. Trump also focused on bilateral talks and alienated Europe and others. Biden is expected to put America back into the global leadership role, is more likely to work with other countries in confronting China in unison with other countries and has said he will call China to account. There were times in the campaigning where Biden was as aggressive towards China as Trump. It could have been just campaigning but there is now a general anti China feeling in the US which is unlikely to reverse any time soon. Furthermore he knows the power that the US has with sanctions on Chinese companies like Huawei and ZTE. I doubt he will go easy on China. He may also rebuild a number of the alliances around the South China Sea and support Taiwan all of which will make life tough on China.
The article then goes on to look at other relationship; people it thinks have more to worry about.

Pro-democracy legislators ousted in Hong Kong. China’s latest move to dismantle any opportunity for the ordinary people in Hong Kong to have a say I their future. Beijing said that the opposition lawmakers could be removed on national security grounds. Carrie Lam said it was '“constitutional, lawful, reasonable and necessary”. Local press reports that she is happy that now other laws can be passed quickly. I think it is fair to say that civic and political freedoms have no longer been threatened but removed. Beijing has removed the pretence of ‘one country two systems’. One of those disqualified said “If observing the process, protecting systems and functions and fighting for democracy and human rights lead to the consequences of being disqualified, it would be my honour,” said Mr Kwok.
The question for investors is how much does this increase the risk of operating in Hong Kong. Government is now merely an extension of Beijing. We have seen over the years that China does not intend to change its legal system and the threat is now that Hong Kong’s legal system starts to follows the mainland’s.

Chinese tech stocks tumble on antitrust scrutiny. Looks at the massive sell-off that has occurred in the Chinese tech sector since Beijing decided to pull the Ant Group IPO and change the rules on fintech and other platform operators. It says that Traders in Shanghai say that they do not think the rules will impact most of China’s successful companies. They will see it as a warning to play by Beijing’s rules. That is probably right. For domestic investors I think they will be more concerned, many of them will have taken significant losses as a result and at present the government has managed to blame Jack Ma and deflect blame from themselves. But I think international funds will be far more cautious, the pulling of such an important IPO was unprecedented but highlighted the China risk factor. The previous framework is under going change which again increases risks, that fact that it is partly politically motivated further adds to the risk consideration for international fund managers. There is also a risk of investor backlash within China against the authorities, which is something the government has been very anxious to avoid.
Read also LEX Alibaba: trust issues. Makes the point that Alibaba could face more restrictions over its core business; namely over its use of customer data from online search and shopping activity. With the regulators upset about Jack Ma’s criticisms there is really no telling what else they might do; such is the risk in China.

China Construction Bank to issue blockchain-reliant bond It is partnering with a digital exchange to launch an offshore bond that relies on block-chain, in a sign of rising interest in the tech from the country’s bank system. 'The deal works as a securitisation, in which investors purchase notes issued by a vehicle that deposits the proceeds at China Construction Bank Labuan. The notes, which are available as digital tokens, can be bought for as little as $100 and are backed by the underlying deposits at the bank.
It provides a return of 50 basis points over Libor or about 0.75 per cent, which CCB Labuan and Fusang said was “considerably higher than market interest rates for typical fixed deposits”.’ It seems to be just a good fixed deposit scheme which uses blockchain tech to record ownership.

SoftBank sheds light on ‘Nasdaq whale’ unit. Japanese group reveals details of Northstar arm that spent billions of dollars on US tech derivatives over summer and has racked up trading losses of $3.7bn so far. It is run by Akshay Naheta, a 39-year-old former Deutsche Bank trader now based in Abu Dhabi, manages SB North-star, which is registered in the Cayman Islands. The FT points out that SoftBank executives previously told the FT that Mr Naheta was not formally in charge; which is a red flag in anyone’s book. Another worry is that the trades of the unit are cleared by a three-member investment committee composed of Masayoshi Son, Mr Naheta and Ron Fisher, SoftBank’s vice-chairman. It says the Mr Son is the driving force behind the US tech investments. It looks in some detail at the types of trades the unit has undertaken.
Key seems to be that its trading style is short term and the risks associated with it are being played down by Softbank’s management, another red flag in my view. I remain sceptical about Softbank, the shares are trading at Yen 6,682 that’s just off its five year high. But with the outlook for the tech sector under pressure; due to stretched valuations, a vaccine and regulatory threats one wonders if it will last.

TikTok owner challenges order forcing US sale. ByteDance legal petition filed ahead of deadline cites Trump administration delays. The company is seeking assistance from the courts to get the Trump administration to act. It would appear that the administration has little intention in trying to find a solution; despite ByteDance offering various options.
The longer the process takes the more damage to TikTok's business as rivals gain market share. Although have viewed some of them, whilst similar, they just aren’t TikTok.

Toshiba to bolster revenue from renewables. Looks how the firm is seeking to fall into line with regards to emissions. It will focus on renewables and increase its Capex into them fivefold by 2022-23 fiscal year. It will aim to boost renewables-related revenue from ¥190bn to ¥650bn within a decade, of which 35% will come from solar and wind power. A positive moved as Toshiba’s CEO said ‘There is clearly going to be a paradigm shift in the global energy sector’
I think investors are already aware of this and have been for some time. Key will be finding new options. Renewables are still looking for improvement in solar panel technology and wind turbine design. A green credentials become more important the solar panel sector will have to look at how to recycle panels. So there are still going to be significant opportunities in the sector.

FT BIG READ. INVESTMENT. The shake-up in active management
Traditional asset managers said their knowhow would help investors ride out the market convulsions caused by coronavirus. With their strategies often failing, increased outflows and consolidation are likely. An interesting read. Some active managers have managed to outperform but often in niches rather than the broader indexes. I think outperformance of broad indexes is getting harder due increased presence of passive funds, they keep buying the index stocks which pushes the price up then it becomes a self fulfilling prophecy; unless a black swan event happens but even then the active managers are likely to get hit too. Still an interesting read.

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