Aug 13 FT. US Inflation rearing? China cautious on sanctions? Taiwan Deal? Wechat, Cathay, Foxconn

17 Aug

Aug 13 FT. US Inflation rearing? China cautious on sanctions? Taiwan Deal?  Wechat, Cathay, Foxconn

MARKETs at 1pm HK time
JAPAN opened higher and has worked slowly higher through the day Currently +2% PPI data was stronger than expected as prices fell at a slower pace for petroleum & coal (-19.3 percent vs -26 percent in June), and chemicals (-5 percent vs -5.9 percent). Meanwhile, prices of nonferrous metals rebounded 2.7 percent after falling 1.3 percent. Food inflation edged down to 0.6 percent from 0.7 percent. On a monthly basis, producer prices climbed 0.6 percent for the second month, well above market expectations of a 0.3 percent increase.
S KOREA Kosdaq opened higher and trended higher to a high around 1pm now drifting slightly lower currently +1.9%
Kospi opened higher but saw initial selling pressure and sold down to 2,440 before finding support but then rallied back to the opening level but now drifting lower currently +0.7%
TAIWAN opened higher and initially rallied to 12,800 in the first 15 minutes but since then has trended lower.  Talk of a bilateral traded agreement with the US and the rebound in the NDX overnight helping currently +0.5% CHINA CSI 300 opened higher but sold down for the open to 4,635 level before bouncing back into the red but unable to hold and sold down again to the 4,635 level at lunch  Currently -0.3%
HONG KONG Opened +246pts vs +192pt ADR’s but then trended lower in choppy trading, finding support around 25,190 after about an hour and then traded sideways into lunch. Currently -0.2%  Results out at lunch Swire and SwireProperties, Lenovo, Galaxy, Mobile
EUROPE Expect markets to open higher data due today GERMAN Wholesale Prices, Inflation Rate and FRENCH Unemployment Rate, IEA Oil Report.
US Futures opened flat but initially edge lower; expect a cautious opening with traders watching the initial claims report.  Other data due Export Prices, Import Prices, EIA Gas Report.

US Inflation
Worth noting that yesterday US consumer prices were stronger than expected. I do expect inflation to return, I think that we didn’t get inflation after the GFC because the central bank support went to keep the banks afloat and not much of it ended up in the hands of individuals. This time money has gone direct to individuals and hence the potential for inflation is more likely. If we do see significant inflation it will be for the first time since the 1970’s, and it tends to be particularly good for Property stocks and Resources.
Headline July US consumer price inflation rate was +1.0% YoY vs +0.6% in June and may was only +0.1% (a four-and-a-half-year low). The forecast was +0.8% . KEY was that the rise occurred despite falling energy prices. The drivers were food prices, medical and shelter inflation were all higher.
Core inflation (excludes the volatile food and energy categories) was +1.6% YoY in July vs + 1.2% in June (Forecast was +1.1%) the highest rate since March.
The next CPI prints will be important to see if the trend continues but it would appear that the deflationary impact of Covid could be behind us.

China treads cautious path in face of US sanctions. Beijing’s top envoys signal willingness to talk in change of tack towards Washington. Looks at how China has toned down the rhetoric in its responses to the recent US moves. It suggest that China is taking a ‘wait and see’ approach ahead of the US elections. It quotes Feng Chucheng, a political risk analyst and partner at the independent research firm Plenum; who says that China is aiming to make “targeted, proportionate and surgical” But he also notes that “At the same time, it has a domestic audience that looks to Beijing for retaliation, so it has to take a proportionate response.”
It also notes that the ‘wolf warrior’ diplomats have switched to a media blitz of saying China is willing to talk.
But 'Wang Yi, the foreign minister, warned in a speech that ties were at their lowest point since formal diplomatic relations were established in 1979 and called for both sides to pull back from touching upon “red lines” of the relationship.’
It also notes that 'Yang Jiechi, a state councillor who outranks Mr Wang in the Communist party hierarchy, last week wrote that confrontation between China and the US would be a “disaster”. Instead, Mr Yang dangled the prospect of saving the all-but-forgotten trade war truce signed in January. “We hope the US can work with China to create favourable conditions for implementing the phase one trade deal,” he wrote.’
At the same time China has maintained pressure on Taiwan with military flights crossing the median line and its presence in the South China Sea.
However key to prevent a further downward spiral is for both the US and China to change their approach and I think that neither side is willing to do that. Beijing does not want to show any signs of backing down as to do so would lose President Xi’s credibility with the domestic audience.

Senior US official raises prospect of Taiwan deal. Suggest that visit by the US health secretary could lead to a US trade deal. Such action would no doubt raise the tension with China. It comes after he commented that his talks had touched upon the subject.
That would mark a change in approach to Taiwan and one that Beijing would not like as it may mean other countries also start looking at bilateral trade deals with Taiwan.
Whilst China was annoyed with the visit Mr Azar maintained the Washington stance and did not refer to Taiwan as a country but a jurisdiction.
I still that more countries should support Taiwan which is its own country, failure to do so will see China take military action to ‘unite’ Taiwan to China. Taiwan is a key player in the
Semi-conductor field and if the US and other countries do not want to be beholden to China tech then the ought to be doing a lot more to support Taiwan now,

Behind the wall Tencent says Trump’s ban on WeChat in US will not affect China business
The company says it will only impact the US business. The company notes that the two systems use different servers. However in the past Tencent executives used the names interchangeably and many of the features are similar. The key difference is that non Chinese phone number has less access to its suite of features. The US made up less than 2% of Tencent’s revenue .
The results were good, showing strong profit as it benefited from the Chinese lockdown.

Cathay warns global unrest will add to virus woes. Yesterday it revealed 1H results that were in line with its profit warning. The Chairman said
“This is the biggest challenge to the aviation industry that Cathay Pacific has ever witnessed,”
“With a global recession looming, and geopolitical tensions intensifying, trade will probably come under significant pressure, and this is expected to have a negative impact on both air travel and cargo demand,” he added.
One area of good news was the cargo business; with May being a record month and the company has been using passenger cabins on some planes to increase the cargo capacity.

Foxconn profit jumps on surge in demand at home offices It beat guidance as demand for computers and cloud equipment offset sluggish smart phone sales. It gave an upbeat outlook too. Key going forward will be the move away from low margin labour intensive assemble of mass market products like smartphones and into higher margin driverless vehicles and industrial automation products. The company said its gross profit margin improved to 5.9% from 4.5%; it is aiming for 10% by 2025. Some analysts have doubts that it can achieve that. It also mentioned moving more production out of China.
The proportion outside the country is now at 30%, up from 25% last June.That ratio will rise as the company -- known also as Foxconn -- moves more manufacturing to Southeast Asia and other regions to avoid escalating tariffs on Chinese-made goods headed to US markets.

Wall Street banks’ fees from Chinese listings jump. Notes that the banks have earned hundreds of millions from Chinese firms doing listings and follow on products in the US and Hong Kong. The growth comes despite the deteriorating relations between the US and China and reflects the fact that Wall Street has deep liquidity and comprehensive analyst coverage. Plus any delisting regulation should take time to implement.
But there are some concerns that there is a growing hostility towards Chinese names which may make the banks vary of bringing Chinese companies to US listings. But that Hong Kong is where US banks have a substantial presence and still remains an option.
As I have written before the key thing is that Trump does not stop US money being invested into Chinese companies. It that changes then it will be a whole new ball game.

China factory blasts push up price of solar panel raw material polysilicon. Noted that prices for polysilicon have risen by more than 50 per cent since a series of blasts at the site (run by China’s GCL-Poly Energy) in the country’s Xinjiang region in July. They are likely to go higher, due to the spread of coronavirus into the region, according to analysts.
It has put margins under more pressure and lead to price rises.

LEX Home Depot/Lowe’s: the DIY is cast. Compares the outlook for the two companies and interesting read and LEX thinks that Lowe's has more potential. I mention this one because it shows that DIY is the US is still a major business and its one of the reasons I like Techtroncis (669 HK) that reported yesterday and its shares are currently +10% and trading at a new high of HK$93.60 up from the low of HK$42.45 in March. Difficult to suggest buying here but one to accumulate on pull backs.

For interest
Covid crisis leads to brutal quarter for smaller US groups
Earnings season reveals wide disparity in fortunes between different sizes of enterprise. Key was the lack of financial resources. Many those companies are bankrupt and those are jobs that will not be quickly replaced. An interesting read.

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