July 9 FT Trump steers more Federal Pension money away from China and more


13 Jul

July 9 FT Trump steers more Federal Pension money away from China and more

Most important
White House warns railroad pension agency over China 
investments Administration officials caution Railroad Retirement Board over ‘unnecessary economic risk’. This again is Federal pension money but I think Trump will increasingly widen the use this tactic against China. I think he could bring the same pressure on private pension and investment money; which would be devastating for China, it would be like ZTE and Huawei combined and on steroids!
In this case the FT article says 'Robert O’Brien, national security adviser, said in a letter that “such investment . . . channels American worker funds into [People’s Republic of China] companies that raise significant national security and humanitarian concerns”.’The line in the letter than says “Such concerns include the possibility of future sanctions or boycotts that may arise from a wide range of issues, including the culpable actions of the Chinese government with respect to the global spread of the Covid-19 pandemic,” the US officials wrote.It also mentioned 'They said the concerns included China’s “suppression of Hong Kong’s democracy”, and “gross human rights violations” in Xinjiang, a province where more than 1m Uighurs are being detained in re-education camps.'
This to me is an significant warning that the US has in mind to announce something shortly. 
Just as I’ve been writing that there would be no point in forcing Chinese companies to delist in the US if you are going to allow them to be bought overseas when they re-list. Trump cannot order Federal pension money not to invest but he can ‘influence’. Whether he has more or less influence over people’s personal pension and investment money is debatable. But you wouldn’t want to be the PM who just increased his weighting in China only to find the US Govt had then brought in significant sanctions as it did with ZTE!

Markets
JAPAN 
Good Machinery Orders pre market although Foreign investment continues to fall; share sales slowed but foreign bond selling increased. Market trading sideways slightly above yesterday's close.
S KOREA Opened higher and trading sideways slightly above Wednesday’s close.
TAIWAN Opened higher but drifted lower, trading sideways, still in the green.
CHINA Opened lower with caution ahead of the the data; Inflation Jun +2.7% YoY vs +2.4% May (F/cast was +2.5%) [Jun -0.1% MoM vs -0.8% May F/cast was 0%)] and PPI Jun -3.0% YoY vs -3.7% May (F/cast was -3.1%). Saw an initial rally but then tracked lower tested the support at yesterday’s closing level before rallying into lunch.
Hong Kong Pre Market +222pts @ 26,351vs +209pts ADR’s @ 26,338. Pre market T/O dropped to 4.97b. Small squeeze on the open then tracked lower and tested yesterday’s closing level before working higher into lunch. Choppy trading to me suggest Team China active.

On line
Rise in margin lending stokes fears of China bubble.
Growing concerns that the current rally carries a number of the hallmarks from the last time China stokes a rally back in 2015. Notes that margin financing reached Rmb1.27tn on Tuesday after a week on consecutive rises; couple with a rush to open new broker accounts (85,000 new ones in June +33% YoY).
Whilst many have said this time is different because valuations are lower I think miss the point. This is a momentum rally with little to do with fundamentals or valuations. The people most likely to get hurt are the who can least afford it, retail margin investors.
As Q2 earnings season approaches it could be that there is a soldi recovery underway and companies start to re-introduce guidance. BUT that is not what I am expecting.

Fed withdraws from repo market after 10 months. US central bank’s aggressive intervention brought short-term borrowing costs under control. A sign of a start on the path to ’normal’?


Todays FT Print
Silicon Valley considers retreat from Hong Kong after Beijing crackdown
Big Tech faces choice of complying with data requests or decamping to hubs such as Singapore. Key the article says being 'The national security law passed last week effectively moves Hong Kong’s internet within China’s great firewall, giving police the power to censor the web and potentially arrest the managers of tech companies who refuse to hand over data on users.’The move has prompted the firms to review their policies. But even moving the servers outside of Hong Kong will not protect them as they can stile forced to block certain websites that offend China or the Hong Kong authorities.The new law also impacts messaging apps and whist the conversations may be encrypted the police can still request the metadata (the time a message was sent, the number it was sent to, or who is in the same group conversation etc).There are also concerns about automatic surveillance and tracking; the article notes 'For instance, mobile carriers could message everyone within a certain distance of a protest to tell them to go home.’They can also find out who has downloaded VPN’s and getter service cut. Hong Kong does not represent a significant amount of business for the operators, although China does. So abandoning Hong Kong is an option. The question is then whether people around the world would react in defence of Hong Kong; that is a much more difficult question for them to answer.The article also mentions how individual firms need to know who to respond to information requests from the police. I suspect many will be moving data hubs out of Hong Kong in order to protect confidential information. It also mentions that cloud data is relatively safe as in the cloud as it's not easy to identify which informations belongs to whom.

Also the Editorial Tech giants at forefront of east-west decoupling. Companies face difficult choice over Hong Kong’s new security law. Notes that Hong Kong is an example of a global trend. 'The world looks set on a path towards two systems that are assertively different in outlook. Technology is at the frontier of this decoupling between the west, led by the US, and China — both because of its central role in intelligence and surveillance and because it is the industry of the future that both sides want to dominate.’The stakes are raised because China blocks access to its market allowing it to build national champions that can compete internationally.Hong Kong is being pulled into Beijing, western firms have to work out what id the best path work with Beijing and hope they get access to China but risk their western clients or exit. There will be no right answer. An interesting read.

India Inc in race to secure alternatives to China goods. Following the recent spate between the two countries. Most companies are aware of the popular back lash against Chinese products and so are keen to fined alternatives so as not to upset customers. This is business that China has now lost and will I think struggle to replace. It is likely to result in higher costs for the Indian consumer, so we will need to wait to see if companies can pass on those costs but one should not underestimate the power of nationalistic spirit. The article notes that many see this as a potential opportunity for India to 'step up’.

Gold shoots above $1,800 for first time since 2011 It has been seeing increased favour this year and is around +19% YTD; with Gold ETF’s being a key contributor which off-set the collapse in gold jewellery demand. Article notes that another factor that has helped is US Treasuries and a number of other government’s bonds offering negative rates. I have been positive on gold for the last few months and I think it will continue to move higher especially as I expect inflation expectations to rise in response to all the government stimulus that has been pumped in. I like some of the Australian Gold Miners and because diesel prices are low they are better placed than they were in previous rallies. Watch St Barbara Mines, Gold Road and Silver Lake, for smaller names I’ve been directed to BRB and DEG are good plus GCY when it comes out of admin will be a gold sensitive romp.With the spot light on Gold investors should also look at Nickel and Copper which are also likely to see improving performances ahead.

Foreign investors losing faith in Japanese stocks. Notes how 8 years ago a lot of investors bought into PM Abe’s Abenomics with high hopes of change. Now foreign holdings have dropped back to the levels seen in 2012. With little prospect of them reversing the current trend. The article sets out three reasons
1. At Japan Inc’s shareholder meetings there were a record number of shareholder proposals and everyone was defeated.
2. Railway companies increasing their cross share holdings. Cross holding were to be a thing of the past under Abenomics. The reason they are popular is to protect managements from activists.
3. Is that so many listed companies are subsidiaries of other listed companies, on an even greater level than Russia and Brazil the only other places its common.
It notes that the exiting now may have mis-timed their departure are Covid-19 might actual prompt more M&A and streamlining and that could result in M&A premiums for fund managers. But to benefit investors will need to be properly informed a patient; rather than just buying the blanket dream of Abenomics.
I think that even with waiting the potential to disappoint remains high.

US to restrict visas for Beijing officials over Tibet policy. A sign of the rising tension although it is notable that Trump has not mentioned Hong Kong; which could lend credence to John Bolton’s claim that Trump has already done a deal with President Xi to 'back off’ on any support for Hong Kong. Sec State Pompeo said China “continued systematically to obstruct travel” to Tibet while Chinese officials and citizens “enjoy far greater access to the US”.In the whole scheme of things visa restrictions are more akin to sabre rattling than anything else. Sending a message without any economic damage; especially as the names of those affected are not being released.

China cheer relieves some of Daimler’s strain. Whilst its 1H 2020 car sales were -19% the CEO is ‘cautiously optimistic’ as Q2 sales in China were +21% plus. China is their most profitable market and he is hopeful that other markets will follow as similar trajectory. At the same time he warned on cost cutting and job cuts as it works through moving over to electric vehicles. Some shareholders remained critical of the company, saying it lagged in the move to electric vehicles and that its current offerings are too late, too expensive and too boring. Its share price has rebounded from the March lows but it is still on a 5 year downward trend. In China it benefits because China does not have a premier brand of its own that matches international standards of the likes of Daimler.
The rise in China sales could be after significant discounting but it still shows a growing divide in China between those with money; who are getting richer and still prepared to spend on premier brands. Whilst the majority of the population is struggling and a recent survey reported in the SCMP today highlights that many are not spending and that could impact the recovery in China.

US shopping rebound falters as infections leap. Worries that just as the footfall in Malls was picking up retailers may be forced to close units in some areas; it cites the case of Levi’s. It comes as Brooke Brother filed for Chapter 11 bankruptcy protection along with a number of demin groups like G-Star RAW and Lucky Brand.
This could further impact Asia which is where many groups source their products.

Gilbert set to keep strong grip on Quicken Loans after US flotation. Its the largest mortgage lender in the US. And originated $52b in Q1 2020 more that doubt 2019’s. It has managed to gain market share as money other s faced a liquidity crunch as millions of American’s took payment forbearance on their montages. That left the mortgage lenders still on the hook for servicing the loans that had been sold onto investors. That has been slightly off-set by a large number of mortgage refinancing’s to lock in the current low rates. All sounds great and may prompt other non-bank lenders to follow Quicken and do a flotation.
My concern is those mortgages in forbearance. The assumption is that after six months everything will be good. For some of those situations we are already 2 months in and the US recovery is still not clear. People could well be still struggling and if they aren’t back on their feet in 3 or 4 months time there could be problems. A good opportunity for Quicken but I am not so sure its as good for its potential investors.

Articles from yesterday’s online which I touched on yesterday
China scales back meat imports over virus concerns. 
Restrictions against processing plants in US, Europe, Brazil, and Canada to push up food prices. Interestingly the article says 'WHO and various governments insist there is no evidence of coronavirus transmission via food or food packaging, but Chinese customs officials from several cities said there was a “good chance” that the virus could stay alive in a frozen container.’ One wonders if their ‘good chance’ is based on some knowledge they have about the source of the covid-19 virus?For investors it means that pork prices and other meat prices in China are rising and of course frozen salmon is off the menu too. So adding to inflationary pressures in China which is a negative. Also importers costs are rising and with a lack of storage space that means keeping containers on ships for longer; which is a slight +VE for the shippers.

Security law jeopardises HK democrats’ hopes of election victory
Activists fear Beijing will use national security legislation to ban anti-government candidates from September poll. I would think the risk is that they use the new legislation to harass any anti government candidates. Before last Tuesday it looked very likely the pro democracy candidates would have good chance of winning the Legco elections and could have secured a majority and with that the chance to force Carrie Lam out as Chief Executve. Many think that Being would not allow that and hence the rush for the new legislation. Whilst local elections are unlikely to chance anything it could provide a clear view of what Hong Kong feel. I say could because many worry about the freedom of the vote and whether there will be any tampering of the results. (It is said that China doesn’t mind elections, as long as it knows the result before the first vote is cast.)The article says that the only powers capable of checking Beijing’s actions in Hong Kong were the US and its allies. To be honest Beijing is not going to reverse its course of action. The only action that would prompt that in my view is fro Trump to bar US pension and investment funds from investing in Chinese stocks, an action which at present I think unlikely but possible.Also worth noting that is clamping down on TikTok, Facebook etc in Hong Kong I think that Beijing has under estimated the feeling of the youth in Hong Kong and their ability to organise in retaliation.

For Interest 
European banks need to prepare now for Covid-19 losses later. Timely ahead of Banks reporting for Q2 next week and investors will be watching to se if the view on provisioning has changed. Key is that in the GFC US banks too bigger provisions quicker and were rewarded. European ones didn’t and were mired for years. The ECB is again guiding the same way and the writer things that is a mistake. Worth a read.

FT BIG READ. NEW SOCIAL CONTRACT The generation scarred by two recessions The double blow of the financial crisis and coronavirus risks a permanent setback for those aged under 40. Politicians will face heavy pressure to support policies that help millennials get back on their feet.

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