July 17 FT China Data, US Consumers, Ivanka Trump & Mongze Xi, Moutai and more

21 Jul

July 17 FT China Data, US Consumers, Ivanka Trump & Mongze Xi, Moutai and more

Markets. At 2pm HK time
Opened slightly higher following the US but trended lower through the day Nikkei 225 currently -0.5%
S KOREA Opened slightly higher Kopsi +0.7% trading sideways whilst the Kosdaq +0.9%saw a small rally mid morning and now trading sideways.
TAIWAN Opened higher and has traded sideways around flat currently -0.1%
CHINA Opened higher and saw an initially rally to the day higher around 10:30 but then sold down into lunch. PM saw a bounce after lunch but then sold off again as retail becomes more cautious ahead of the weekend. CSI 300 -0.4%
HONG KONG Opened higher as recent shorts squeezed then saw some margin call selling from yesterday’s 2% sell-off bounced mid morning before selling down into lunch. Sold off again after lunch to day low, support currently around 25,000 level. Rising local covid-19 and US/China relations continue to overhang the market HSI currently +0.4%
EUROPE Expect markets to open mixed but with caution ahead of the weekend.
US Futures Opened +60pts and initially climbed. I would expect a mixed open with Options expiry confusing the open. Rising covid cases suggest more caution.

My own view
Key to the market’s being able to stage a V shaped recovery will be the production of a vaccine.
Dr Fauci yesterday commented that he expected one later this year, others are less optimistic a few are more. I don’t know but I would err on the side of caution because we still dint know that much about the virus, how it spreads, mutates etc.
So in the meantime covid-19 will be an addition swing factor to add to global trade tensions. Currently economic data is of limited use due to the resurgence in covid-19 cases and so we are left wondering again.
The US Banks, in taking significant provision, are suggesting that the markets should err on the side of caution; which means sticking with good companies, with little debt. But as time passes one must also look at the smaller suppliers to those companies especially if there are key bottlenecks, because even the best companies are only as good as their weakest link.
For traders the volatility looks to remain good whilst retail continues to see the markets as an attractive alternative to having cash in the bank. But sticking with liquid names will remain crucial. If we do see a significant pull back, it is likely to be retail that takes the brunt of the pain, and there will be another raft of retail investors who will have been warned off the market for a significant period of time.

Print Edition
China’s economy returns to growth in sign of virus bounce back.
Looks at yesterday’s data with GDP +3.2% YoY, which indicates a return to growth. Despite that, the markets sold down by the most in 5 months, as other data in the release mitigated the good news. I think the most worrying was the lack of retail spending. That I think reflects how the citizens of China really feel and in this case, it’s not good.
CHINA’s data
GDP Growth Rate Q2 +3.2% YoY vs -6.8% prior (F/cast was +2.4%)
GDP Growth Rate Q2 +11.5% QoQ vs -9.8% prior (F/cast was +10.2%)
Clearly beat but concerns about the resurgence in Covid-19 cases since the data was collected.
Industrial Production Jun +4.8% YoY vs +4.4% May (F/cast was +4.8%)
Retail Sales Jun -1.8% YoY vs -2.8% May (F/cast was +0.5%)
A big concern as people it seems do not feel confident enough to go ut and spend.
Unemployment Jun 5.7% vs 5.9% May (F/cast as 5.7%)
Industrial Capacity Utilisation Q2 74.4% vs 67.3% prior (F/cast was 75%)
Fixed Asset Investment (YTD) Jun -3.1% YoY vs -6.3% May (F/cast was -3.3%)

US consumers help drive recovery. Shoppers’ enthusiasm adds to rising confidence among housebuilders. Looks at yesterdays US data which was showing a positive up tick in the US data, although like China the markets sold down. The other big difference I think is in the amount of media attention that stimulus in the US has received. In contrast China has not been as vocal in what it is doing and that has led to caution within China. But the data from the US is not a ‘get out of jail free card’ the fact that there have been further outbreaks of covid-19 in the last week also makes the data questionable. Confidence to spend was rising on the basis that covid -19 was under control, however if it is not then next months data could show a backlash. With people becoming even more cautious having been ‘fooled’ by a false dawn.

Ivanka Trump offers ‘let them eat cake’ economics to world. Edward Luce looks Ivanka Trump’s speech to the American people urging them to use this time to find a new school. He shows how for her and her husband and even for Donald Trump their lives have been ‘privileged’ as have many in American society. He notes how whilst Mr Trump may be out of a job in November not doubt the lecturing will continue.
One wonders whether the people of China think the same of their leaders? It was in his early years that President Xi told cardes that they had to earn the right for the communist party to lead China. He cracked down on a number of leading families whose sons and daughters where driving around in ‘flash' cars and often drunk and causing embarrassing press coverage. We don’t hear to such things these days; whether that is because the censorship is better or there has been reform but the message is the same there is historic privilege everywhere. The difference in China is that partly officials aren’t subject to elections but can be to purges.
President Xi’s daughter Xi Mongze attended Harvard in 2010; graduated in 2014 and returned to Beijing after that we haunt heard anything. But it was rumoured last year that she had left Beijing in 2018 and returned to the US. Hardly an endorsement of life in China.

China distiller Moutai sheds $25bn of value on graft claims. Stock was -7.9% Thursday after state media accused the company of benefiting from corruption. The stock is trading around 5 year highs. But from early 2018 until end Q1 2019 it has languished again because of its association with corruption and bribery. The reality is that the accusations are probably fair although not directly by the company but by the system under which China operates. It’s known as Mao’s tipple, which gives it prestige. Its supply is limited by the areas that water is drawn from, that is used to grown the grain and used in the process. The factory gate prices have not risen as much as the investment value.
I think more interesting is that President Xi is once again mentioning corruption. That would appear to suggest that he and his recent policies are coming under a lot of pressure from some in the party opposed to his vision.

LEX TSMC: chipper days. Looks at how the pandemic has been good for TSMC judging from the latest numbers. But warns it may not last as it losses Chinese customers (circa a fifth of sales; Huawei was its second biggest customer). TSMC can’t chose sides as it relies on US tech and materials. It also mentions the reasons to be optimistic; good margins and demand for products that it chips are used in. Lex things it will keep rising. I agree and would go further, it mentioned yesterday that is would not have a problem finding customers to take the production that would have gone to Huawei which makes sense. But also it announced increased Capex. Morris Chang the founder believes in staying ahead of the game. He said once when asked about the threat of China catching up, that TSMC was still 5 to 10 years ahead…but more importantly it was still moving forward and not waiting for others to catch up. That to me is the key.

Barr warns against China ‘appeasement’. He took the opportunity to warn US business leaders that advocating for Beijing could fall foul of foreign lobbying laws. He noted that Chinese government officials had been active in urging US executives to support Chinese policies and said that could mean they have to register as foreign agents. His targets seem to have been those working for Tech companies and Hollywood. He made clear in his speech that in applying such pressure China was trying to achieve its own aims and ultimately that meant replacing US executives. He mentioned Google, Microsoft, Yahoo and Apple accusing them of becoming ‘pawns’ to China. For Hollywood he was critical of ‘self-censorship’ to ensure getting distribution rights in China.
It is almost funny how close the actions of Beijing and Washington have become. Beijing accuses those in Hong Kong of being under the influence of Foreign power and Washington does the same for it's people. When the reality is that people are trying to make a living and historically government have tried to put in place the framework for that to happen.
But these are not normal times. The change of policy brought about by President Xi coupled with the changes in technology that enable greater espionage have the changed the playing field forever. It would be nice to think that both governments might take a step back and try to determine what is really in the best interests of their citizens. Unfortunately that seems unlikely.

Dead calm leaves government bond investors stranded. Measures of volatility have plummeted as central banks ramp up intervention policies. Looks at how government bond traders who were so busy at the start of the year are now quiet. It comments that there is a chance that everywhere becomes like Japan which would be a worry. It notes that JPM’s Dimon warned that he expected trading revenues to half in the coming months. The problem is the unintended consequence of huge government intervention; which has dampened the ability of bonds to reflect the potential for growth or inflation. An interesting read and highlights that whether or not the Central Banks move to unwind the recent unprecedented actions designed to alleviate the impact of the covid-19 pandemic there will be a price to be paid …. at some point.
Also worth reading US fund managers seek to safeguard portfolios against risk of inflation. Looks at how demand for Treasury inflation-protected securities (TIPS) which are US government bonds where returns are adjusted in line with movements in consumer prices have recently seen their yields close to record lows in some cases. Suggests that at least seem fund mangers are worried about the potential fro inflation in the light of all the government stimulus being applied at present.

For interest
ESG concept has been overhyped and oversold.
A good read in common sense. It suggest that whilst there is much that is good to do with ESG a lot isn’t. Key it says is 'If, as an individual, you are upset by a company’s behaviour, the best response is to not invest in it or buy its products or services — and vote for governments that will institute the polices you favour.’ That makes more sense.

FT BIG READ. US ECONOMY The comfort of cash in a crisis. Americans are using less cash at the till during the pandemic but they are hoarding more. The resilience of paper money presents the Federal Reserve and other central banks with an expensive challenge.

Huawei and the hard facts facing global Britain. Looks at the background to Britain’s decision from a sovereignty point of view. Nice quote
'No one should be surprised. In 1960, the then Conservative prime minister Harold Macmillan asked his top advisers for a comprehensive assessment of where the world was heading. Their conclusion was that it would soon be dominated by a series of power blocs — the US, the Soviet Union, China and the new European common market.
The danger, these experts said, was that, shorn of empire and standing outside of each of the blocs, Britain would have to sign up to choices made by others. Macmillan’s reaction to the advice was clear-sighted. He lodged Britain’s first application to join the European Community.'

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