Aug 10 FT China upgrades LGFV debt, Supply Chain Changes, Taiwan, Mask Diplomacy and more
MARKETs at 2:45pm
JAPAN closed reopens Tuesday
S KOREA Kosdaq opened flat and traded sideways initially before working higher currently +0.6% and the Kospi opened slightly lower but worked better through the day currently +1.5%.
TAIWAN opened flat and saw an initial rally and then has traded sideways currently +0.5%
CHINA opened but rallied into the Inflation and PPI data which were inline, prompting a little pull back but then continues to work higher; currently +1%
HONG KONG Opened -155pts and saw some initial margin call selling but rebounded on the inline China data and then has traded sideways. Saw an initial spike after lunch but now trending lower in choppy trading Currently -0.3%
EUROPE Expect markets to open higher, no data due but earning in focus and some +VE sentiment after Trump signed a new stimulus package which could trigger a deal between democrats and republicans.
US Futures opened slightly lower but trended higher along with S&P futures but NDX flat/lower
China Data was inline with forecasts
Inflation Jul +2.7% YoY vs +2.5% Jun (F/cast was +2.7%)
Inflation Jul +0.6% MoM vs -0.1% Jun (F/cast was +0.6%)
PPI Jul -2.4% YoY vs -3% Jun (F/cast was -2.4%)
Inflation the highest since April driven but rising food prices, especially pork. Non-food prices were flat. Falls seen in transport, rent, fuel and utilities
PPI sixth month of declines in PPI and the slowest in four months due to covid.
Cost of means of production fell less (-3.5% vs -4.2% in June) due to extraction (-7.1% vs -10.5%), raw materials (-6.9% vs -8.5%) and processing (-1.8% vs -2%). At the same time, consumer goods price inflation rose to 0.7% from 0.6% in June, with cost of food productions rising faster (3.7% vs 3.2%) while prices of clothing dropped more (-1.1% vs -0.8%). Meanwhile, cost of both daily use goods (-0.8% vs -0.3%) and consumer durables (-1.6% vs -1.8%) declined further.
Chinese rating agencies in record boost of local government vehicles Bond issuers are upgraded despite fiscal income declining and analysts warn of potential wave of defaults.
The article says that the Local Government Financing Vehicles have been upgraded on the basis of good performance at the end of 2019 with the impact of covid being discounted on the basis it was unclear what the long term impact on the economy would be. Saying they could downgrade later if they impact was more severe than they are currently expecting.
The stronger rating makes then more appealing for investors with a mandate to buy high grade securities and lowers the cost for local governments. They are a key part of the governments plan to restarting the Chinese economy with local infrastructure projects; so many think the upgrades are more political than fundamental.
It highlights how China along with many other nations id seeking to draw in fund to kick start their economies while the real impact of covid remains a big unknown.
How close is China’s economy to a full recovery? Looks at todays CPI number which was in-line with forecasts and showed that inflation was being pushed higher by rising food prices especially pork as bouts of ASF continue to hit herds in China.
The next key data point for many will be Friday’s Retail Sales number with the expectation that it will rise for the first time in six months but some worry it could continue to fall in part due to the recent heavy floods in China. I also think that Chinese consumers are still cautious about spending due to the unknowns associated with covid, not least job security and hence I think the unemployment data due this week will also be important. Should the retail sales number miss then that might mean the government comes under pressure to increase stimulus. I think they will remain conservative on stimulus.
Global threats spark rethink on company supply chains looks at the new report from McKinsey Global Institute (MGI). Forecasts that 25% of global product sourcing could switch to new countries in the nest 5 years; with a big impact on profits. It notes 'Cost considerations and government pressures to become more self-reliant could see more than half of pharmaceutical and clothing production move to new countries’
Covid has been a significant factor but notes some pressure had been building for a while. A large part of that the US/China tariff dispute but it also mentioned cyber attacks and climate risks from heatwaves to hurricanes.
Interesting statistic they reckon 'companies can on average expect a disruption lasting more than a month to hit them every 3.7 years, costing more than 40 per cent of a year’s profits every decade.’
Meaning that you can invest in resilience and still be profitable.
The report follows the BCG consultancy report with similar headline findings.
Whilst some caution against a rapid reversal of globalisation; as many will find it difficult to find alternatives to Chinese suppliers as well as being reluctant to lose access to the Chinese market.
Read also Garment workers in Asia lose $6bn wages. Notes how many fashion workers started having their pay stopped back in February when covid prompted a lockdown in China which hampered the flow of textiles, zippers, buttons and other accessories. It then got worse when the pandemic hit Europe and US in March prompting refusals to take orders or demands for heavy discounts. Just shows how even simple supply chains can be disrupted.
Opinion The great global trade unwinding. Notes how TikTok is now part of the US/China de-coupling story. It mentions how some users took to TikTok to undermine a Trump rally but doesn't comment on whether that added to the case against it in the US.
It does reference the new McKinsey Global Institute report about supply chains changing. It suggests that part of that was the pendulum having swung too far in favour of concentrated supply chains, especially low-value ones in Asia which were efficient but not resilient to natural disasters or politics. Notes how China and India produce the bulk of global pharmaceutical ingredients. Cites the MGI report which found '180 key tradable products for which a single country accounts for more than 70 per cent of exports. Concentration is highest in mobile and communications equipment, one of the most politically contentious areas right now. It is also common in lower profile industries such as textiles and apparel.’
The point is that we live in a world with two super powers who have very different political and economic systems. They are both producers and consumers. The Chinese are in the ascendancy as wages rise but those rising wages could also mean the production of lower value goods moves to other countries. China has also ringfenced areas it considers important like tech and its assertion for made in China was partly the trigger for the current standoff with the US and others. The rise of Chinese consumers has also seen a rise in domestic brands popularity. As the US makes it difficult for Chinese sellers they look to other markets like Europe. The point is that as the MCI report says “as a new multipolar world takes shape, we are seeing more trade disputes, higher tariffs, and broader geopolitical uncertainty. The share of global trade conducted with countries ranked in the bottom half of the world for political stability, as assessed by the World Bank, rose from 16 per cent in 2000 to 29 per cent in 2018. Just as telling, almost 80 per cent of trade involves nations with declining political stability scores.”
It thinks the shift in trade will reshape economics and politics. Notes that in the US both parties 'support public intervention in private markets in strategic areas including semiconductors. In China, supply chains that once churned out cheap clothes and assembled devices to sell to richer consumers in the west are now increasingly serving domestic markets.’ The last point is interesting because China has certainly been trying to develop its domestic consumption markets with some success but all too ofter locally made products do not have the reliability of foreign ones still. That is an area that China is going to have to concentrate on if it wants to change the landscape.
US official’s Taiwan trip widens rift with China US Sec of Health visiting the Taiwan the highest ranked official since 1979. In some ways good for Taiwan but in doing so it increases the threat from China.
The article notes
‘Under commitments made to Beijing as part of its switch in diplomatic relations from Taiwan to the People’s Republic of China 41 years ago, Washington has long avoided any semblance of official ties in its dealings with Taipei. It has a set of internal rules stipulating that communication between government officials must go through the AIT, that Taiwan’s government must be referred to only as “authorities” and that administration officials must not meet representatives of Taiwan in US government offices.’
But that was 41 years ago and many are realising that the situation has dramatically changed since 1979. Trump and his administration have increasingly ignored previous protocols.
Adding to the current pressure will be the funeral arrangements for Taiwan’s former leader Lee Teng-hui. Again China is likely to be upset depending on the attendees, especially from the US and whether the event is acknowledged internationally.
US catches chill from Beijing ‘mask diplomacy’ in push for post-pandemic Latin America trade. Looks at how Beijing is making a big push with support for Latin American countries except for those that have criticised China over the pandemic like Brazil did and Paraguay which has diplomatic ties with Taiwan. The question will be how much real business it generates for China post covid and whether the countries can afford to repay the costs involved as most of those countries were already under pressure.
Pressure builds Inflation threat looms as money supply rockets in US economy. The latest Morgan Stanley report thinks the US’s aggressive monetary and fiscal moves may trigger inflation that the Fed then struggles to control. That could have a significant impact on equities.
Nice quote from Milton Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon”
Notes that the growth in M2 to reduce the impact of covid has been significant and that deflation likely in the short term but a “greater likelihood for inflationary pressures to build”. The report notes that in 2008 inflation failed to materialise but that this time the fact that the response has been fiscal and monetary and with much of the money going direct to individuals the chances of inflation have risen. Banks are in better shape which is good.
For equities it tends to be positive as earnings rise with higher prices and fixed income is less attractive. But it notes that currently the markets are pushing deflationary winners and so inflation would lead to another re-organisation of portfolios.
S Korea retail investors hit by Brazil fiasco. Another hiccup for S Korea investors, they were caught in the EFT’s linked to crude oil and now Brazilian government bonds which have tanked due to the weakness in the currency.
It once again highlights concerns over exotic products being sold to investors who do not fully understand the risk associated with them. In this case many investors failed to hedge the currency risk and are now suffering.
Many are saying that the regulator should be doing more to shield investors from risky products but at present the Financial Supervisory Service is saying “These are direct investments by individual investors. They should be responsible for the investment losses incurred by market volatility.”
It will be interesting to see if public opinion rises enough to change that attitude.
FTfm Top 10 institutional investors fuel market volatility, study finds. Looks at how the large funds (BlackRock, Vanguard, State Street, Fidelity and Capital Group) are increasing volatility and adding mispricing. Notes the top 10 funds own more than 25% of the US stock market. Their strategies are more correlated than those of smaller funds and therefore have more impact. It notes this is less about index funds and more about their other offerings. It may increase the calls for more regulation which would mean lower profit for investors.
Building a global intelligence network. An interview with Takehiko Kakiuchi, chief executive, Mitsubishi Corporation. The pandemic has not changed the 65-year-old’s faith in the supreme value of information.
There are no easy answers for investors in the low-return era by John Plender. Notes that Eriuc Knight of Knight Vinke is saying that reinvestment risk is increasingly destructive as today investments cannot be replaced by equally good ones tomorrow. I think that is questionable. But his point is that insect a situation investing in very long term assets should be more profitable and hence the attraction of real assets like property. He also like restructuring conglomerates to crystallise value when subsidiaries productivity has started to fall.
Fed likely to leave retirees broke after crisis by John Dizard
An interesting read. Nice quotes From David Rosenberg of Rosenberg Research who says: “As the boomers head into retirement age, what do they need? Income. What has this Fed strategy done? It has stripped the markets of income and forced investors into growth stocks. Those are long duration stocks. Retirees don’t need duration. They need cash flow.”
From 'Jim Grant, editor of Grant’s Interest Rate Observer, gives some thought to the inflation experienced by the near-retiree: “I wonder if our monetary masters realise that they have created a rip-roaring inflation in the cost of retirement. The lower the interest rate, the greater the principal required. At a 5 per cent yield, a $1m nest egg delivered $50,000 a year. You need a fivefold larger egg to produce that at 1 per cent.’
His points that with the US population not replacing itself, there will not be the workers to pay into the pension system; so you’ll have to keep working for longer.