FT WEEKEND China numbers, Frozen Covid, Apple Tax, Alibaba in HSI and more
China consumption falls for seventh month Households’ reluctance to spend casts doubt over recovery from pandemic. As I have written before Chinese consumers tend to be either confidence or cautious with little in between. Even as the government seeks to reassure people that covid has been contained the people remain cautious. There remains uncertainty about second waves not just in China but in the rest of the world too. There also remains uncertainty over job security therefore and the implication. Also a lot of Chinese people are landlords and they have seen their tenants leave because of the pandemic and so have additional mortgage payments to make which will curtail their other spending. Plus many companies have cut wages because of the pandemic meaning that people have less disposable income to start with. All those factors are going to mean the the recovery will take time. Add to the mix the ongoing trade tensions with the US and the potential for that to impact the economy and the outlook is not rosy and so people are cutting back for the long haul. It also calls into question whether China really will be able to significantly move its economy from an export one to a domestic consumption one.Industrial output however did show growth although less than forecast, which is a worry. Local governments have been spending on new projects creating demand for commodities and heavy machinery but there is a limit to how many new roads the cash strapped local governments can build; seen in the drop in Fixed Asset Investment.
The big question is whether the weak data means that the Cental government will consider more stimulus and in what form?
More interestingly was the unemployment data which was unchanged at 5.7%. Part of the issue here is that it probably excludes a lot of migrant workers because you can only register as unemployed in your home town. But other bug issue looming is all the ne graduates and school leavers coming into the market finding jobs for them will be a crucial factor in ensuring that there isn’t a rise in social unrest. The SME’s are traditionally the creators of jobs but with them under pressure due to covid and limited access to finance their ability to create new jobs will be tested this year.
Beijing targets frozen goods after Brazilian chicken tests positive. Brazil has refuted the claim and cited the WHO’s ruling saying that there is no scientific evidence of transmission of the covid-19 virus from frozen food or food packaging. China, however is maintaining that the refrigerated food industry poses a significant risk and could allow the virus to survive for a long period of time. As a result they are removing the imported frozen good which they claim are a risk. China is not the first to suspect shipping of being a possible weak link in the defence against the virus, New Zealand is also investigating whether its first cast in 100 days was linked to imported frozen goods.
Another example of how little we really know about the virus and how it spreads.
EU hit by record loss of 5.5m jobs due to Covid. A huge number that largely excludes those on government backed furlough schemes BUT there are signs of improvement with exports rising almost a third during May - June. PMI data has been encouraging too.But the recovery is slow and fragmented key being that ordinary people, consumers, remain cautious especially as potentially there could be further lockdowns.
It notes that Nordic regions has suffered less than most of the rest of Europe.
I think the keys the there is a recovery underway but as noted its slow and fragmented. Consumers are cautious and that will have an impact. The unknown risk is really about how many companies end up failing which represents not just jobs lost but gaps in supply chains that could have knock on effects.
‘Fortnite’ maker declares war on Apple over 30% sales cut Epic launches App Store lawsuit after its game Fortnite was removed from the App Store for launching a direct payment option to get around Apples practice of taking a 30% cut for in-game purchases. (Google also removed it from its Play store for the same reason).
It will be the first real rest of what is referred to as the 'Apple tax’ since it was introduced in 2011 and comes as Congress is also investigating Apple’s and other big tech companies for anti-competitive behaviour. David Cicilline, chair of the US House of Representatives antitrust committee, called the 30% fee “exorbitant” and compared it to “highway robbery”.
Epic filed a 65 page lawsuit in which it said 'it considered Apple’s payment system illegal and monopolistic because of the way an app developer’s access to the App Store was “tied” to the developer’s use of Apple’s payment mechanism.
“With Apple’s unlawful conditions and policies, Apple ensures that the App Store is the only distribution channel for developers to reach iOS app users, giving Apple overwhelming monopoly power in the iOS app distribution market,” it said.
It also portrayed Apple had become what Steve Jobs had once fought against.
It reminded Apple that Jobs introduced the Macintosh computer as “a beneficial, revolutionary force breaking IBM’s monopoly over the computing technology market”. Today, the lawsuit went on, “Apple has become what it once railed against: the behemoth seeking to control markets, block competition and stifle innovation”.
It is notable that is isn’t seeking monetary compensation but ' injunctive relief to allow fair competition’
For investors this will put one of Apples important revenue streams under threat and so the case will be followed with interest.
Alibaba joins HK shares benchmark in changing of the guard. Looks the the HSI changes announced after market Friday
Link to full details
Key is that Alibaba and Xiaomi were added and the index becomes more China focused and embraces E commerce and tech. It means the index has moved further away from is historic roots in Finance and Property. The caution for investors will be Trumps current attack on China names and tech. Index following funds will need to hold the stocks but I think a lot of other investors will remain cautious.
WeWork secures $1.1bn loan from SoftBank as virus buffer. The loan is structured as a senior secured debt and can be draw down in the next 12 months. It is to help with the large expected outflows in Q2. Although the finance chief said they did not expect to use the loan imminently it was nice to have. The company also disclosed on Thursday that it burnt through $671m in the three months ending in June +40% QoQ, which included $116m or restructuring costs (including severance package). Sales dropped by around 20% from Q1 and membership was -12%. It has also slowed its expansion which was at Softbank request.
I think WeWork still faces a tough outlook as does Softbank.
Investment bank critics ‘swing for the fences’ and miss. Looks at how banks have gone from risk taking to risk adverse. Notes that over the past 10 years they have been under pressure to abandon trading; especially in fixed income, currencies and commodities. But the pandemic has illustrated how having trading especially fixed income has benefit the banks as investors were forced to re-organise their portfolio’s. Goldman’s and Morgan Stanley both did well from trading; whereas other banks that cut their trading took hits; like UBS. The best example it says was Barclays much to the annoyance not doubt as activist Ed Bramson who had called on it to shrink trading. He said the results were distorted by covid-9 and that investors don’t care about the trading business.
But the article says they should care 'Do they want exposure to the consumer, with spiralling unemployment and a tidal wave of defaults coming, or markets, with benign volatility and prices backstopped by the Fed?’ Bank that have lost money recently have not done so because of trading but bad loan decisions and debt issuance.
In summary it says 'Meanwhile, fixed-income revenues have helped soak up provisions for future consumer loan losses at banks including Barclays. Some banks, such as Deutsche, have not needed big fixed income revenues as they are not making large provisions. Perhaps that means the German lender’s business is fundamentally safer; it could also mean it cannot afford to confront the reality of its souring loan book. Who is swinging for the fences, really?'
Fall in working hours boosts US productivity. It’s a technical measure; so because the number of hours worked was -43% (largest decline since records started) then unit labour costs (which measure the average cost of labour for each unit of output produced) went up 12.2%. More importantly productivity growth is expected to remain soft and that is likely to keep interest rates low.
Other data; Retail sales and Industrial Production showed growth but at a slower pace and less than forecast. Retail showed a growth in clothing and accessories, electronic and sales in F&B. All to be expected as lockdowns eased. Car sales and car parts were weak; little need to drive during lockdowns.
So-called control sales, which exclude volatile items such as food, petrol and building materials, were ahead of expectations.
The data also showed factories ramped up production and the University of Michigan data showed people were feeling slightly more optimistic.
The reserved nature of the retail sales I think is a concern, historically that has been a big driver of the US recovery but this time the recovery isn’t following the normal pattern. Consumers seem to be more worried than we have seen before and I think means the recovery will be less V shaped.
Editorial The economy is too weak for inflation to return. If central banks bow to governments, prices could eventually soar. Sets out that we haven’t really seen inflation for over 40 years and for the past 10 year deflation has been more or a worry.
But with Gold hitting highs again and broad money rocketing, some economists think that inflation will return.
It notes that inflation ‘exacerbates social divides, affecting the worst off the most.’ It also hurts confidence and impacts decision making. Not good in the environment already hurt by covid. As lockdowns ease price is says could jump a business seek ti benefit from pent-up demand and shocks to supply chain could also prompt price rises. If those pressures persist then there will be pressure for wages rises too and that was a major driver of inflation in the 1970’s. It says the hallmark of the low inflation era has been low wage growth despite low unemployment and that inflation has been confined largely to asset prices.
Now we have jobs under threat and so a rise in wages and prices seems unlikely. It suggests that economists should remember that 'monetary aggregates were ditched for good reason. Money matters, but it is not everything — setting policy on the basis of aggregates proved tricky and they were less reliable indicators of inflation than hoped.'
It thinks deflation remains the greater threat but the huge debts taken on recently carry an inflation risk not least amounts them is fiscal dominance. Central banks take credit for bringing prices under control and claim it is due to their independence to set policy. But in the US this seems to be under threat. Meantime a number of governments have locked in low borrowing costs by issuing long dated bonds but not all have been so wise.
In summary it says
'When the time comes for central banks to raise rates, this generation of policymakers — like their forebears — will face pressure. If they buckle, then inflation could finally return.'
Generation TikTok could soon be calling the political tune. Looks at the rise of influencers on social media and how with TikTok under pressure how many of those that were on TikTok are moving to a new platform Thriller. These influencers have grown their followers horizontally and have developed the ability to keep their followers following. The benefit of doing so is that they can make $5,000 to $20,000 from a single post involving a product placement.
The question is what this might do for politics and it looks at Brock Pierce who has been a mentor to the influencers and is now running as a independent presidential candidate. It’s a long shot but he is hoping that the Thriller audience will help. Thriller has had about 250m downloads vs TikTok’s 2bn. The ability to harness these followers could have a big impact as Trump found out when his rally in Oklahoma was undermined.
For many in the establishment this is going to be a new target audience who are already listening to their adopted influencers. Getting the influencers on board will be a new political skill.
Person in the news The testy tycoon defying Beijing. After his arrest, Hong Kong’s pro-democracy media magnate remains defiant. Looks a Jimmy Lai who has been a prominent critic of Beijing for more than 30 years. The large number of police sent to arrest him and colleagues and gather evidence may have been intended to intimidate those who followed the pro democracy stance that Jimmy Lai supports but if it was it didn’t work because his media outlets saw a significant uptick in demand and readership.
It looks at his upbringing and background. His editorial style and his support of the protests.
Key is that now the battle really starts Mr Lai says he has no regrets, whilst he was in police custody many came to support him. He said “People were so excited, so loud,” he said. “I was so touched. It just reaffirms that whatever I had done wrong in the past, at least what I’m doing now is right.
An interesting read.
Bullish oil outlook suggests only way is up for bond yields. Suggest if oil prices rise we can expect inflation and for bond prices to fall and yields to rise. The events of the past few months with general oil activity falling and the large companies cutting Capex suggests that supply cannot snap back quickly. So as demand rises oil prices should too and it thinks that US$60 per barrel in the next couple of years is likely.
It notes that 'Oil can also affect inflation disproportionately. Energy has an 8 per cent weighting in the US consumer price index basket and the sector’s prices have much greater volatility than most other CPI inputs. This tends to give oil an outsized impact on that measure of inflation.A 10 per cent jump in the crude price raises inflation indices by between 0.5 and 1 per cent, depending on the country, according to a recent paper from the International Association for Energy Economics.’
With that in mind it suggests oil related ETF’s and stocks as a better option than gold.
'The precious metal’s price has moved inversely with real US bond yields, which turned negative this year. If real yields started to move higher, gold’s glittering run would end.The price of oil offers a barometer on economic activity. Right now, it is rising. '