FT WEEKEND Trumps Relief Package & Sanctions, Implications for Tech, Gold exits HK, and more
Trump takes executive action on economic relief. US president issues orders after collapse in talks with Congress on coronavirus stimulus package. This will give a boost to US markets on Monday and should also help off-set some of the downside from Trump sanctioning Hong Kong and Chinese Officials.
Trump has signed four presidential orders to help:
1 A memorandum that partly renews the unemployment benefits ($400 per week vs $600 previous) that expired last month
2. Suspending pay roll tax for those earning less than $100,000 pa
3. An order that makes it harder for landlords to evict tenants struggling to pay rent/mortgages
4. Easing the burden on students with education debt
It is unclear whether the orders will face any legal challenge over the payroll tax order.
To pay for the package 75%of the duding is expected to come from the federal government with the rest from the states. But many states are already under financial pressure due to covid with increased expenses and reduced taxes.
Whilst many see it as a highly political move ahead of the election it is likely to prompt the democrats and republicans to reach a deal.
Trump steps up anti-China push with sanctions against HK officials. Sanctioning 11 Chinese and Hong Kong officials.
Carrie Lam (HK Chief Executive),
Chris Tang (Police Commissioner),
Stephen Lo (Previsous Police Commissioner),
John Lee Ka-chiu (Security Sec),
Teresa Cheng (Justice Sec),
Erick Tsang (Secretary for Constitutional and Mainland Affairs),
Xia Baolong (HK and Macau Office Director),
Zhang Xiaoming & Luo Huining Deputies at the HK and Macau Office),
Zheng Yanxiong (director of the new Office for Safeguarding National Security)
Eric Chan (secretary general of the Committee for Safeguarding National Security).
It will be interesting to see how the local Hong Kong banks react and whether any of those sanctioned hold accounts with the likes of HSBC.
It follows the executive orders on TikTok and WeChat and marks a significant ramping up by Trump and begs the question about how China will respond.
China could take action against US companies operating China but in many cases that would result in harm to Chinese businesses and the people working there. Slowing down approvals or customs clearances is another option but again that will hurt Chinese companies and also China’s reputation as a manufacturing base and could accelerate foreign com[any plans to relocate out of China.
So it is difficult to see how China will respond and for investors that means uncertainty. That is generally bad for markets and is likely to mean that we see increased selling and a rotation into safer assets.
On Saturday the response from Hong Kong and Chinese was to call the action unreasonable. The HKMA, SFC and others are monitoring the situation but as such the sanctions against individuals do not have a direct impact on Hong Kong institutions. Investors will be waiting to see whether China retaliates further.
Big Tech keeps its cool in the heat of Trump’s trade war. Suggests that US Tech companies and by inference their investors are too complacent about the US/China tensions. It points out that US tech companies have a huge reliance on China as a market; companies like Nvidia, Texas Instruments, Qualcomm, Intel, Broadcom, Apple, Facebook, Take-Two, NBA 2K online, Skyworks and others. Shares of many of these companies are nearing highs. Investors it suggests do not believe that the US will pull the plug on China or that China would opt for damaging retaliation. Those assumptions could be tested in the coming days.
Tencent crackdown poses threat to US champions from Apple to Nike. WeChat ban would hurt China but also hit businesses that rely on the platform’s popularity. The ban could be similar to the ban that was imposed on ZTE with consequences for both the Chinese company but also the US companies that interact with it. The executive order is vaguely worded (maybe learning from the benefits from the New National Security Law imposed on Hong Kong?) which means that it could have very wide ranging impacts. On Friday Tencent at one stage was -10% and Monday could see it under further pressure.
The article points out that it may mean Apple and Google have to remove WeChat and Weixen from their app stores; that could hurt Apple’s iPhone and other accessory sales in China. That would hurt Walmart, Coke, Nike and others who use WeChat to sell their products in China. It could also impact WeChat Pay who has linked up Visa, Mastercard and Amex to use its system. Symphony the financial messaging app could be impacted.
The impact could be larger if it is expanded and includes Tencent access to US tech (servers and chips) and services (like the US financial system).
It is also unclear whether it could impact Tencent’s gaming revenues from direct apps and also those it holds stakes in like Riot Games, Epic Games, Activision Blizzard, Lyft, Warner Music, Snap and others.
Read also China tech stocks shed $75bn in HK after Trump directive Notes how Tencent, Alibaba and JD.Com reacted on Friday to the news.
Also LEX Tencent: executive disorder. Notes 'Tencent investors will be perplexed by the explanations provided for the orders. Washington’s concern that user data on these apps might be used for espionage could be applied to many similar Chinese tech services . Ecommerce giant Alibaba’s payment service Alipay and Weibo, China’s Twitter, are just two examples. Shares of both companies fell yesterday.
Most US apps, including WhatsApp and Twitter, have long been banned in China, though US tech groups have found ways to make sales. Now that retaliation has begun, shareholders should prepare for the worst.'
KEY for me is that the executive order shows what Trump can do with action against just one company. That is the tip of the iceberg. Just think off the impact he can exert on China by threatening is stopping US funds investing in Chinese companies.
So far Trump has only stopped Federal Pension money investing in Chinese companies. But he is increasing the pressure on Chinese firms to either delist in the US or allow US audit oversight (something China is adamantly against). Having Chinese companies de-list in the US but still let US investors access to them in Hong Kong makes no sense.
The next logical step is stopping US pension money investing in Chinese firms in Hong Kong. China is no doubt aware of that.
Trumps comments last week about Hong Kong no longer being a successful international market as the US stopped its special status and that US stock exchanges would be recapturing more business should not be dismissed lightly.
The Hong Kong Financial Services and the Treasury Bureau along with the HK Stock Exchange may say that Hong Kong 'has topped the world's fundraising markets for seven times in last 11 years’ but that was on the basis that US firms being allowed free access to the markets.
His aim would be to make Chinese come to the US and be subject to US audit oversight.
That is the real threat to Hong Kong and China.
China fears prompt HK’s rich to send bullion abroad. Notes that 10% of gold stored in Hong Kong has been moved out over the past 12 months, the pace of its relocation has picked up since the imposition of the new security law. Key seems to be be that Hong Kong is now viewed as risky as China. Historically many mainland Chinese would hold gold and other assets in Hong Kong knowing that is was safe from Chinese authorities grasp. With the new security law that has changed. Also worth noting is that whilst trading and holding gold in China is allowed it cannot be exported.
The new Hong Kong security law allows for confiscation of assets and that worries some rich Hong Kong and mainland citizens, so having assets outside Chinese authorities reach is seen as an insurance policy. Gold and cash can be easily moved. There are also signs that Hong Kong property is no longer seen as a safe with some looking to buy assets further afield.
China exports rise as global trade edges up. Friday’s data was stronger than expected and suggests that global demand is starting to recover; exports to the US were +12.5% after 5 months of decline. Many think a large proportion of the increase is from Medical protection products along with work from home products. I would also expect that part of that 12.5% rise in exports to the US is from an increase in products linked to ‘drop shipping’ which seems to have become very popular in the US during the pandemic although its long term success remains to be seen.
Declines were still seen in refined products, unwrought aluminium and products, steel products, rare earths and grains; which would suggest that the recovery is not uniform.
Imports declined slightly MoM due to weaker commodities prices and payback following strong shipments the previous year. Meanwhile, import volumes of industrial raw materials remained robust, with record imports of iron ore and copper, along with a sharp jump in crude oil. That suggests domestic reconstruction will continue +VE of Construction names.
Ahead this week we get Chinese Retail Sales; so it will be interesting to see whether domestic consumption has also risen. China has been trying to build its domestic consumption and reduce its reliance on exports. Retail Sales will be a guide as to domestic confidence about the recovery in China. Retail sales in June were -1.8% YoY and the forecast for July is +1.5%.
Read also Eurozone industrial producers beat forecasts. Which notes that Germany benefited from increased trading with China as its Exports to China rose 15%, which
Editorial Dividend cuts are an opportunity for a reset Investors should back businesses that reinvest in long-term growth. Dividends have implications for investors and companies and due to the pandemic they are being cut. Dividend income has been important to pension funds, charities and foundations especially as bond yields have fallen. But dividends have also meant that some companies have invested in ‘unhealthy’ companies.
It suggests that now is an opportunity to re appraise the situation.
'Global payouts hit a record in the first quarter, before Covid-19 struck. Dividend cover, the ratio of earnings to dividends, had worn thin in many economies. Companies now need to rethink how they allocate resources as they insulate balance sheets and strengthen supply chains in case the pandemic surges again.’
Equally investors also need to rethink and not take for granted the predictable income from riskier equities. It is also evident that some countries and sectors the focus of dividends too.
So now investors have a chance to re look at their strategies and focus on sustainable income. The current situation has shown how some companies underinvested in order to pay dividends and undertake share repurchase programmes rather than invest in long term growth and others who are using the crisis as an excuse to hoard excessive cash.
Post pandemic dividends will also be a signal that the worst is over. Going forward the dividend policy should be clearly set. It suggests that 'Shareholders could simply enjoy the income stream. But they can also redirect it from companies that can afford to pay, to those deserving but financially stretched enterprises that, for now at least, cannot.'
A good read and could make a significant change to some funds investment policies.
Gold’s stellar run puts investor mettle to test. Critics say race into ETFs sets stage for losses while backers pin hopes on bullish forecast. Looks at the recent rise in price and the standing of the asset. Notes that Tudor Investment Corp thinks the price could reach $2,400 per ounce and could even go to $6,700 is we see the same extreme demand that the metal saw 40 years ago; Paul Tudor Jones wrote “Gold remains a very attractive hedge against the ‘Great Monetary Inflation’ and hedges against other risks clouding the outlook, including a renewed flare-up in the China-US relationship where financial sanctions could eventually be used in a brute-force decoupling,”
It notes the rising holdings see Thursday's Gold hoard of $80bn raises ETF above central banks in bullion owner rankings.
Gold bulls think the asset is still under owned by historic standards BoA puts current ownership at 3% (vs 10% in 2011) with Gold ETF’s holding 2.5% according to Schroders.
Some are concerns about it previous track record noting its previous sharp rally in the late 1970’s and again in 2011 which were followed by significant collapses. Also how in 2008 after that crisis when inflation did not occur and wrong footed many investors.
It quotes Campbell Harvey, a professor of finance at Duke University, who calls it an unreliable hedge and warns that the rush into Gold ETF’s could be irrational exuberance. He quotes Warren Buffett’s who said that gold buyers can be “‘bandwagon’ investors [who] create their own truth”.
The article notes that for some gold provides a means of security outside the banking system.
I do think that with all the stimulus and policy that is currently being applied we are likely to see inflation and the hence the attraction of gold. ETF’s are a useful access tool in this case. A number of gold miners have also seen good rallies but the EFT’s are a cleaner play.
US consumers cut household debt as lockdowns put the brakes on spending To me this suggests one more reason why we may not see a V shaped recovery. The fact that people are not spending and instead are looking to cut debt. Additionally the cut in credit card balances suggest that Mastercard, Visa and Amex are in for some weak results along with the wider consumer sector.
It notes car loans were little changed which makes sense when lock downs prevent travel. Student loans rose. It also noted that delinquency dropped by 1% point. The fact that courts have been closed has also kept bankruptcies down but they are rising. Those rising bankruptcies also mean that there will be less jobs which is also a worry.
It also notes that the Cares Act has prevented a number of delinquencies from showing up on credit reports and damaging future credit access. But that may just be a temporary feature whilst those protections are in place. Mortgage foreclosures have grounded to a halt again due to government action. That to me could be another hiccup in the V shaped recovery. People have been given a breathing space but if their job hasn’t returned by the time they have to start repaying the mortgage then they could be in more serious difficulty. It is interesting to note that in the GFC people were kore inclined to pay their car loans because they needed to get to work and you could sleep in your car. This time with potential lock downs it seems likely that mortgages are probably safer but if you don’t have a job paying the mortgage is tough; especially for lower paid workers. The fact that people are paying down debt is encouraging but I still think the outlook is going to be tough.
Central banks caught in a leverage trap of their own making. Looks at how
'Central bankers have spent years warning of the perils of excess corporate debt. But their solution to this year’s coronavirus storm in financial markets has led to even more of it.’
By providing more debt to companies so that they can survive the crisis the government’s and central banks are now faced with having to either create a huge amount of growth so that companies can grow and repay the debt or continue to provide debt to keep the companies going.
The article notes how companies have issued more bonds so far this year than for the whole of 2019 and more debt is coming due. It also points out that net debt to EBITDA was over 2.4x at the end of Q2 the highest for 19 years according to BoA.
This is a re-run of 2008 when QE was introduced. Post 2008 as the Fed started to raise rates it was also warning about indebtedness in its Financial Stability reports.
Key is that it puts a strain on companies when earnings unexpectedly fall as per covid. They have to pull back on employment and investment; it “lowers investor demand for risky assets, thereby raising spreads and depressing valuations. As business losses accumulate, and delinquencies and defaults rise, banks are less willing or able to lend. This dynamic feeds on itself, potentially amplifying downside risks into more serious financial stresses or a downturn.”
Now that to the generosity of the Fed an Government many companies have higher debt levels but no clear sign of how long it will be before their businesses get going again. The risk is that the recovery is delayed for lack of a vaccine or cure for covid and that companies either fail or more debt is provided for them.
At some point, as has been said since 2008 the government should let bad companies fail and restructuring take place. But for most politicians that is not an option that will help them get re-elected. The hope is for inflation to create huge amounts of growth; another reason to hold some gold!
The technology baron caught in a bind. US president’s attack on TikTok leaves the founder’s global dream in tatters, write Yuan Yang and Hannah Murphy. An interview with Zhang Yiming. An interesting read he has always outside the mainstream of Chinese tech companies. This week some in China called him a traitor for not standing up to Trump. In the past he has had 'run ins' with Chinese censors over content. It looks at his background and how he build the company with its focus on video’s for small screens. An interesting background read.
US unemployment rate falls but surge in Covid-19 cases hampers job creation. Fewer jobs were created due to the resurgence in covid outbreaks in some locations it would appear. A large number of the jobs were in the leisure and hospitality sector. Also flattering the numbers were a 27,000 advance in federal government employment reflected the hiring of temporary workers for the 2020 Census. Increases were also seen in retail trade, professional and business services, other services, and health care. Nonfarm employment remained 12.9 million below their pre pandemic-level.
So the fact that the rate of job creation or maybe resumption has slowed and I think that should be a concern. Many of these positions are not new jobs but the resumption of previous positions. Analysis of the Average Hourly earnings month on month is complicated by the large fluctuations in lower paid industries but that I think is still where much of the downside risk remains.
Going forwardly the markets will focus on getting an agreement on the new aid package for those still out of work.
Business needs to see real demand for the creating of jobs and the fact that the rate is slowing I think reflects the fact that a lot of businesses are not yet seeing that demand. Key will be whether the demand come before more businesses go out of business.
Lunch with the FT is an interview with Mary Trump. President Trump’s niece on fear and greed in the Trump family — and why she wrote her explosive tell-all memoir
An interesting read .