July 15 FT Sanctions, Recovery doubts, Bank provision implications and more

17 Jul

July 15 FT Sanctions, Recovery doubts, Bank provision implications and more

Opened lower but worked higher through the day to Close +1.6%
S KOREA Opened higher as New Deal package announced. Kospi trended lower for most of the day but reversed in the afternoon to close +0.84%. The Kosdaq opened higher, saw an initial drop but then traded sideways around flat to close +0.4%
TAIWAN Opened higher but sold down mid session and then traded sideways around yesterday’s closing level. Closed -0.05%
CHINA Opened slightly higher but sold down on US/China worsening relations. Day low just before lunch and rebounded in PM back into the green just but couldn’t hold and sold down at the end Closed CSI 300 -1.3%. Still think Team China at play. Key data out tomorrow.
HONG KONG Opened higher and saw an initial squeeze but then trended lower into that red at lunchtime. PM saw a slight recovery, effectively traded sideways to close flat THE big concerns about more US sanctions that could hurt HK and worries that Beijing will not recognise the Legco election in September if its candidates don’t win. Closed flat -0.2%
EUROPE Markets opened higher on the Moderna news
US Futures Opened +300pts as Moderna after hours, says early trial results show its vaccine produces antibodies to coronavirus. S&P +0.7%, NDX +0.5%. Currently the futures Dow +200pts NDX and S&P also positive.

Covid-19; we had some good news after market US from Moderna about their early stage vaccine trial but we still don’t know as much as we would like about the spread and that’s highlighted by an article from Agence France-Presse
Argentina is trying to solve a medical mystery after 57 sailors were infected with the virus after 35 days at sea, despite the entire crew testing negative before leaving port. A total of 57 sailors, out of 61 crew, were diagnosed with the virus after undergoing a new test. All the crew members had undergone 14 days of mandatory quarantine at a hotel in the city of Ushuaia. Prior to that, they had negative results, the ministry said.
Two of the other sailors have tested negative and two others are awaiting test results.
"It's hard to establish how this crew was infected, considering that for 35 days, they had no contact with dry land and that supplies were only brought in from the port of Ushuaia," said Alejandra Alfaro, the director of primary health care in Tierra del Fuego.
The head of the infectious diseases department at Ushuaia Regional Hospital, Leandro Ballatore, said he believes this is a "case that escapes all description in publications, because an incubation period this long has not been described anywhere.”
Does remind us that we still know very little about Covid-19

Trump signs Hong Kong act clearing way for China sanctions.
So Trump now has some new tools to use and its expected that possible actions will be discussed later this week. I think the fact that he’s removed Hong Kong’s special status that there are going to be actions that further impact HK. The FT quote him saying ‘ “Hong Kong in my opinion . . . will no longer be able to compete with free markets,” Mr Trump said at a news conference at the White House. “We’re going to do a lot more business because . . . we just lost one competitor.” ‘
That I think is further bad news for HK and investors should be cautious.

Doubts cloud China’s post-coronavirus recovery. Return to growth expected in Q2 but questions remain about health of economy. Looks ahead to the economic data due out on Thursday but that fundamentally people in China do not feel financially secure. They like me think, that hopes that domestic consumption will make up for export slowdowns will be disappointed. Most seem to expect a mixed bag of data. It notes that infrastructure projects are being used again and that ’special purpose’ debt is again being raised BUT many worry that it will not be enough because of the lack of domestic confidence. Without confidence the Chinese in my experience tend to save more and spend frugally. The fact that this is a global crisis and one for which we have yet to have a solution underlines how difficult it will be for China to navigate its way out. Especially with doubts about the containment of the virus within China. Add to that the deterioration in relations with US, UK, Europe, Australia and a number of Asian partners and the outlook does not good.
The data on Thursday will provide a snap shot and no doubt show some improvement but with a resurgence of cases in the last few days the data cannot proved a clear guide to what lies ahead.
China data due Thursday; House Price Index, GDP Growth Rate, Industrial Production, Industrial Capacity Utilisation, Retail Sales, Unemployment Rate, NDS Press Conference, Fixed Asset Investment (YTD)

Big US banks set aside $28bn for loan losses as pandemic takes toll
. JPMorgan, Citi and Wells take record provisions and Risk of charges rising, warns Dimon.
Whist the results from JPM and Citi were better than expected mainly through increased trading revenues the taking of such large provisions indicates that they are not expecting a classic V shape recovery; Jamie Dimon said ’This is not a normal recession’ and that JPM was prepared for the worst case. That I think indicates that they are looking at their loan book and realising that there could be a domino effect in defaults that takes time to become apparent.
Wells Fargo was the worse performer but its balance sheet has been restricted due to past mis-selling infringements and it doesn’t have the same trading revenues as the others. It too took large provision and cut its dividend, which whilst many had expected it to be cut, most were surprised by the size of the cut. Again suggesting that the management is bearish on its outlook.
Read also Time to prepare portfolios for the Covid debt crunch by Mohamed El-Erian who also makes the point that there is the likelihood of wider non-payments by companies and individuals ahead. Worrying signs are increased bankruptcies, job losses moving from SME’s to larger companies, increased delays in paying rent or invoices, deferring credit card payments etc etc. He things asset managers are raising funds for a dual investment strategy.
'The first involves waiting for a correction to buy rock-solid companies trading at bargain prices.
The second involves engaging in well-structured rescue financing, debt restructurings and collateralised lending as countries, and some bankrupt companies, seek to reorganise and recover.
Liquidity-driven rallies are deceptively attractive and tend to result in excessive risk-taking. This time, retail investors are front and centre. But it is the next stage that we should think about. That requires much more careful scrutiny from investors than the past few months have demanded.’
As earnings season unfolds it is likely to become a more paramount issue.
Also see Lex US banks’ earnings: spread your bets

UK to ban new Huawei kit in policy U-turn Existing equipment must also be stripped from 5G networks by 2027. It’s also interesting that John Browne chairman of Huawei UK announced he would step down in September. The reversal of an earlier decision seems to make sense in the light of the change in circumstances at Huawei. US sanctions depriving it as access to TSMC chips raises the risk that it will use Chinese chips in its equipment and those are unlikely to be of the same standard. Obviously there are now risks of retaliation from China although since access to Chinese markets has always been restricted it will be interesting how. The article mentions how China has already some significant investments in the UK in terms of rail companies, water and nuclear power but it's difficult to see how it could leverage these. More likely is that those investments come under greater scrutiny which could be a slight -VE for CK Asset, CK Infrastructure and others.
Read also Editorial Britain takes long view with Huawei 5G ban The government must ensure its China relations remain constructive

Offshore investors dump China stocks after ‘incredible’ rally. Funds outside the mainland sell a record $2.6bn of Chinese stocks in a day according to the FT calculations using the ‘Connect’ link. If true it would show very good timing but it doesn’t mean the A share bull run is over. I expect Beijing to continue to push the ‘managed’ bull market. On Monday and Tuesday there were a number of signals warning that retail investors shouldn’t assume the market was one directional; namely a number of Government funds announcing their intention to sell.
However I believe the President Xi wants to see the market continue to move higher if only do demonstrate how well China is doing when the rest of the world is struggling. Key data out tomorrow is likely to show an improvement. However I don’t think investors should rely on the data too much, in the light of a resurgence of covid cases both in China and globally over the past couple of weeks.

China warns Lockheed on Taiwan arms deal. Sanctions threat is latest sign of growing rift between Washington and Beijing. The trouble for China is that it has little actual impact on US companies so whilst it may sound significant it is not. If anything it could prompt the US to take an even strong position along side Taiwan than it currently has.

LEX SoftBank: Arm dealer. Notes that Softbank should be selling not buying assets at present. Arm would be a good candidate to list because of the expected slow down in demand for chips and the fact that Softbank has transferred out of Arm its Internet of Things business. But also makes the point 'Given Mr Son’s investment record, he will be selling assets into a wary market. The assets buyers are likely to want most are the most lucrative for SoftBank to hold on to. That suggests SoftBank must choose between a fire sale of unwanted holdings or leaving a weakened rump of leftovers for shareholders.'

Tech experiment makes India a testing ground for the future. Looks at how the shutting down of Tik Tok made investors realise how big companies can stifle the growth of start ups; as the article says the game is effectively rigged and that has big implications for that section of the economy.
This is not new, others have written about it before but the banning of TikTok made the situation clearly apparent. No doubt a number fo regulators will be watching carefully with a view too trying to curb or control the international player and create a more level playing field…. At least one would hope so.
Essentially local start ups could not get the size required quickly enough to be able to ‘professionalise’ their offering to compete with the ‘international’ players. It says that WeChat, Facebook etc etc are so advanced that they are advancing at ever faster rates. It should not really be a surprise it happens in every sector.
TSMC for example is not sitting still waiting for China and other competitors to catch up. Not at all, it announced a record Capex amount this year to ensure it stays ahead. It's the same for App developers. It says that scale matters more than the ability to innovate and cites the example of Pinduoduo taking market share from Alibaba although I am not convinced that Pinduoduo’s business model is going to last but ByteDance taking market share from Tencent is a better example. It also makes the point that China being closed does not mean it isn’t a competitive market. It is but it excluded international competition which allowed some home grown champions. But I would guess that those home grown champions are now stifling local competitions too.
India has always be open to outsiders, albeit with some government conditions, which has allowed Amazon and Facebook to operate but also given local developers some protection.
It says there is no ideal policy and that it is all about trade-offs. Which is true to a large extent, except where the dominant players take out the start ups before they can get going. ByteDance was approached but was able to resist. Others may not be so fortunate in which case government or regulators should be there to protect the broader market.
It also asks if banning Chinese capital and business models means will influence a countries skills in the tech sector. I would say obviously not as there are dominant players from outside China. But I think regulators need to be able to control both the Chinese and Western players to allow start-ups a fair run at the business.

Fight for French luxury group sheds light on Chinese investor woes. Fortune Fountain struggles to keep control of Baccarat Crystal after credit deal goes awry. Looks at how reliance on private credit deals, at rents higher than bank lending, has resulted in problems. Fortune Fountain is a Wealth Management Company based in Beijing. It agreed to buy Baccarat in June 2017 and invest Euro 30bn in the company. Then in 2019 it defaulted on two lans from HK based private lenders, they had evidently financed half the deal. Then in March it replaced the Baccarat CEO with Sun Zhen a shareholder of Fortune Fountain; without the lenders approval which is required under the loan agreement. That has triggered a control battle. The lenders are now seeking to remove Mr Sun and replace him with someone who has experience of the French luxury sector.
It is interesting because from what is reported there seems little logic in the acquisition in the first place. The second is the use of private lenders off shore. BUT 2017 was when so many people in China were trying to get money off shore into various projects and schemes. Often using private lenders who already had money off shore even if it mean paying the higher interest rates. In the past couple of years China has increasingly tightened up on off shore money and that is starting to reveal a number of questionable transactions.

LG Chem lifted by surge in EV battery orders says it has Won150tn ($125bn) worth of orders that will keep it busy for the next five years and help the world’s largest electric vehicle battery maker ride out the coronavirus pandemic. Orders were hurt by the pandemic but its a growing global market. It cuts Capex this year but hopes to increase Capex next year to make up for that. Company is trading at a 10 year high but the outlook continues to look good.

Mounting US risks likely to extend dollar weakness. Aggressive monetary policy and political uncertainty point to more losses, warn analysts. Many have been talking about the US dollar weakening and this article goes through a number of the reasons and it doesn’t mention inflation. Good quote from Kit Juckes at Soc Gen (I do like the stuff he writes and would recommend it) '“The Fed has done everything you can usefully do to undermine your currency, and In doing so, did the world an undisputed favour.”’

Investors pull $500m from ETF in sign of Wall Street tech rally exhaustion. Looks at how some people are beginning to question the strong rally in a narrow selection of Tech names. It could just be some caution ahead of results which would make sense. Key will be whether we see money going back in post results.

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