Aug 19 FT US Bull market but.. Huawei's woes but implications on others, China wealth gap widening

21 Aug

Aug 19 FT  US Bull market but.. Huawei's woes but implications on others, China wealth gap widening

MARKETs At 1:15pm HK Time
opened lower but good Trade data pre market has saw the market work higher into lunch. Opened a day higher after lunch and trended lower to 23,100 level and now trading sideways Currently +0.2%
S KOREA Markets opened higher and Kospi has trended slightly lower on covid concerns currently +0.6% at 2,360 level. Kosdaq has traded sideways in choppy trading currently +1.7% at 814 level
TAIWAN Opened higher in good local results but trended lower to flat around 11am when it saw a small uptick but then resumed its downward trend; currently -0.5% having bounced off the12,800 level
CHINA opened lower and trending slightly lower in the morning with choppy trading on fears that more Chinese companies may be targeted by Trump as relations with US sour. PM saw an initial down tick but now moving higher currently -0.4%. Expect Team China’s support and note that get China Loan data pre market Thursday
HONG KONG to Open at 1:30pm
EUROPE I would expect a flat open but the UK inflation data along with PPI and RPI plus the Eurozone Current account and inflation data may prompt initial weakness.
US Futures opened flat at +18pts S&P and NDX slightly +VE FOMC minutes will be in focus but they are not out until later in the session. Before that there is the MBA and EIA data. Covid and Stimulus discussions still overhang the market

Japan Data
Balance of Trade July Y 11.6b vs -268.8b Jun (F/cast -120b),
Exports for July -19.2% vs -26.2% Jun (Consensus -21%),
Imports for July -22.3% vs -14.4% Jun (Consensus -22.8%),
Machinery Orders for Jun -7.6% MoM vs +1.7% May (F/cast was +2.5%), (Jun -7.6% YoY vs -16.3% May (F/cast was +17%))
Balance of Trade saw the first surplus in four months, as imports -22.3% to JPY 5.36 trillion and exports -19.2% to JPY 5.39 trillion, dragged mainly by purchases of the US and Western Europe.
Exports The 20th straight month of drop in overseas sales, amid deteriorating global demand due to covid. Shipments of transport equipment -32.9%, machinery -17%, due to power generating machinery (-33.4%) and metalworking machinery (-30.9%). Sales of manufactured goods -22%, dragged by iron & steel products (-32%). Exports down to Hong Kong (-7.5%), South Korea (-14.1%), Singapore (-13.1%), and Thailand (-35.9%), and the US (-19.5%), and Western Europe (-32.5%). In contrast, sales to China +8.2%.
Machinery Orders Core machinery orders (excludes ships and from electric power companies), rebounded 1.7% MoM in May 2020 after -12% April, beating market expectations of a 5.4% drop. Demand was mainly dragged by non-manufacturing orders (17.7% vs -20.2% in April), as transportation activities rebounded a sharp 63.5% after plunging 61%in the previous month. Meanwhile, demand for manufactured products plummeted 15.5% (vs -2.6% in April), dragged mainly by business-oriented machinery (-30.9% vs 20.6%) and oil & coal products (-37.5% vs -20.1%).

The uneven rally that took US stocks to a record high Top-heavy, tech-heavy market still does not look expensive relative to bonds. Notes that the five largest stocks account for 25% of the US rally but a significant number of companies are still below their February levels. Notes ‘ Falling yields on government debt have stoked the stock market rally in several ways, beyond just providing hope that the economy can recover quickly from the pandemic. They have pushed more investors to seek higher returns in riskier assets and made equities look less expensive relative to bonds.’ But from a earnings or sales perspective things are looking stretched.
For interest Youngest American voters dislike the choice in front of them Donald Trump and Joe Biden are failing to inspire Gen Z, which could mean lower turnouts. Personally I don’t think it is just Gen Z they are failing to inspire but much of the population.

US stocks hit record high after 50% rebound from March lows. Looks at Tuesday’s moves in the US markets as the S&P and Nadaq hit new record but notes the disconnect between the markets and the Main Street. With investors still thinking that the Fed and Government will need to do more. Illustrated by the fact that the markets wobbled initially as Walmart said it notices spending cease as the stimulus cheques stopped. US dollar seen weakening makes the US market gains for foreigners but helps countries and overseas companies with USD debt. Also notes that the recovery has not been even but focused on big tech with a lot of companies in other sectors still struggling. The next but market has officially begun.Not mentioned but a number of commentators are still saying that there is still potential for another pull back and whilst the data recently has been good there is increasing risk of inflation as housing sector continues to see strong interest. Watch for today's FOMC minutes for any mention of inflation.

Abe hospital visit stokes speculation over successor. Spotlight turns on two former ministers after eight years of stability. Spotlight on potential successors such as Fumio Kishida and Shigeru Ishiba, both former ministers and leaders of party factions.'Mr Ishiba is a longstanding rival. If he won the succession then Mr Abe would lose control over his party and his legacy.Mr Kishida is a low-profile figure but is regarded as a moderate and the easiest unity candidate for the LDP’s various factions to unite around.’Until covid PM Abe has seen some success for his reforming policies although the 'third arrow’ of Abeconomics was never really seen. But the impact of covid and his handling of covid have dented his public and party standing.Other key issues mentioned are “He tried to revise the constitution, but that’s becoming impossible. He’s tried to agree a peace treaty with Russia [over the disputed Kuril Islands], but that’s been impossible. He’s tried to get the abductees back from North Korea, but that’s been impossible.“His last goal was the Tokyo Olympics but right now it’s a big question whether they can go ahead even next year.”

Huawei woes shake chip and phone supply chain Fresh US sanctions bar China telecoms equipment maker from buying semiconductors. Looks at how the recent tightening of restrictions by Trump would mean the death of Huawei by cutting it off from semiconductors made using US software or equipment without a licence. IT closes the loophole whereby Huawei could buy off the shelf chips. It demonstrates the domination of US tools in the tech sector.
Once Huawei’s current stock of chips is exhausted it is difficult to see where it can get chips from. It has a negative impact on Nvidia, Intel and others in terms of their business and finding new buyers for their products.
China calls it bullying which of course it is but in the same way that China has for years build companies that wanted access to its markets.
The article expects MediaTek to be the first big casualty in terms of business because Huawei had been intending to switch to using its chips. Others that could suffer are Sony, Samsung Electronics and SK Hynix who were suppliers to Huawei. Although to an extent Samsung may see a little upside in terms of smartphone sales although its likely to be limited to the its high price point.
Huawei’s competitors are the beneficiaries Oppo, Vivo and Xiaomi which is good news for Qualcomm.
At present China has not retaliated but Apple an Qualcomm could been the firing line.
It doesn’t mention SMIC but it will be interesting to watch to see what the Chinese company does in this situation. At the same time China is intensifying its efforts to develop its semiconductor capabilities but the reliance of US equipment means it is a long way being and hence what SMIC does will be closely watched.

LEX Huawei/US: incision time. Looks at the impact of the latest tightening on the company by Trump.
'With Huawei’s survival in doubt, many countries face losing access to equipment for installing 5G networks and servicing legacy systems. Huawei is the cheapest option among rivals. Critics say low prices helped the private business disseminate technology useful to spies.
Conspiracy theories cut both ways. China was on track to dominate the global 5G market. Not any more. The sanctions leave the US better placed.
The Trump administration is doing a ham-fisted job of cutting Huawei out of the tech supply chain. When the surgery hurts so many businesses and investors outside mainland China, it is a bad advertisement for the technological dominance the US seeks.'

China’s share of global exports falls in supply chains rethink. Looks at the findings from a new report by Baker McKenzie and Silk Road Associates. Key being that 'companies were looking to geographically diversify their supply chains, build in more safety layers, and supervise them more strictly.
'But the study’s authors believe that the pandemic, and the disruption it brought to global supply chains centred on China, is accelerating the changes. “What we have seen so far has been a shift in the final assembly of the product, with a lot of the components still coming out of China,” said Ben Simpfendorfer, chief executive of Silk Road Associates. “The supply chain as it was built in China over the past 20 years will be replicated — but it needs time.”'

FT BIG READ. CHINESE ECONOMY The widening wealth gap Lockdown was lifted in China before many other countries, but a lack of support from Beijing has left lower-income workers unable to spend even as wealthier households splash out on cars and luxury goods. An interesting read and again re-inforces my view that a large number of ordinary Chinese citizens are tightening their belts and spending less and that could hamper the recovery at a high street level. It contrast as business owner who also has a portfolio of property with an employee.
It is also likely to undermine Beijing's ambition of creating a domestic consumption economy because the low income members of society in China far outweigh the rich. It also calls into question China’s hopes that renewed infrastructure spending will drive the recovery again.
Notes that high end sales have recovered quickly with high end cars and luxury retailers seeing a strong bounce back. But spending at urban resident level fell in Q2 by 6.2% after a 9.5% drop in Q1.
It also highlights how high income positions have not been cut to the same extent as low and middle income ones.
Many think the situation will become worse as job losses continue with a survey 'in June by Peking University of more than 5,000 urban residents, who were employed at the start of the crisis in December, found that 11 per cent had lost their jobs and 10 per cent had zero or an inadequate workload. That stood well above the official unemployment rate of 5.7 per cent in the same month.’
The official employment rate is also questionable because it does not cover migrant workers until they return to their home cities. Further pressure will come too as school and college graduates enter the jobs market over the summer.
It notes that much of the initial recovery has been powered by an increase in credit-fuelled investment in infrastructure and real estate, adding to China’s high debt burden. With domestic consumption struggling to make up the slack.
Beijing is attempting to instil confidence that covid is under control with free testing in the hope that will help the middle and lower income groups and their employers but retail sales are still slow.
It notes that some of the other policies Beijing has introduced have also benefitted the rich like duty free shops in Hainan. But the policies directed at the lower income groups have been limited and because of the hukou system excluded migrant workers who are often those the need them most. 'As a result, official data show that just 2.1m adults had claimed unemployment insurance by the end of June, down from 2.3m a year earlier, despite the pandemic. However, the PKU study suggests that more than 60m Chinese workers — about 7.5 per cent of the working age population — had no job by the middle of that month.'
It is difficult to see domestic consumption picking up under the circumstances. The cynical might say that the support measures are designed to really add the party members rather than the people.
Worth a read

LEX Oracle/TikTok: glory hunter looks at the chance that Oracle might buy TikTok but thinks it unlike and notes 'Oracle’s results have attracted less attention in recent years than Mr Ellison’s ties to Donald Trump, his interest in tennis and his sometimes steep executive pay. TikTok is just a distraction for a stagnant company whose greatest glory is long past.'

Indian cricket trapped on sticky wicket by ‘Quit China’ movement. Looks at the return of cricket which was greeted enthusiastically but it then become a political storm over the league’s decision to keep Chinese smartphone maker Vivo as one of its main sponsors.
It reveals how intertwined Chinese businesses have become into Indian society, as China was one of India’s largest foreign investors until the border clashes.
Breaking with cricket may be a good option for Vivo and other Chinese sponsors under the current conditions but it will hurt crickets sponsorship until replacements can be found.
Key is that the return of cricket will be a morale booster but as the article notes 'The knee-jerk targeting of the IPL, without a sober assessment of the role of Chinese money in India, risks being self-defeating on and off the pitch.'

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