FT 24 June China's soft power, Apple, Roche/Chugai, Why markets moved


FT 24 June  China's soft power, Apple, Roche/Chugai,  Why markets moved

Markets
Japan 
opened slight higher but has traded sideways around yesterdays closing level.
S Korea Opened higher and worked higher for music of the session but looks to be running out of steam.
Taiwan Opened higher but has drifted lower through the day but still in the green.
China Opened higher but again drifted lower but still in the green
Hong Kong Opened above 25k but couldn’t hold and has traded around yesterday’s close for most of the morning. Sold down in the PM; expect caution ahead of the Tuen Ng Festival (Dragon Boat Day) tomorrow. Re-opens Friday
Europe Expect to open lower with concerns over covid-19
US Expect a flat open; Futures opened -35pts but are now +45pts

The notable element today, I think, is the lack of news about individual stocks and about the situation in Hong Kong. Covid-19 is something we are getting used too. I focused on an article that gives some insight into why markets may have bounced back but there are a number of articles that seem to warn that whilst the markets are hitting highs and economic data is improving the fundamentals underneath are still in dire straights. I don't consider myself a ‘bear' as I think there are good opportunities but I would still recommend caution.

Online
Kim Jong Un ‘suspends’ plans for military action against S Korea.
No reason given but a relief in the short term but expect them to resume some sort of activity in the near future as they are still under stress. FT also reports that the satellite imagery shows trade between China and N Korea may be picking up again after N Korea shut its border 5 months ago.
Slight +VE for S Korea but with the North still unpredictable its not really constructive news towards a long term solution.

SoftBank raises $14.8bn from T-Mobile US share sale Japanese group begins unwinding holding in carrier that took over its Sprint unit. The first deal was agreed yesterday will raise US$14.8bn and was priced at a less than a 4% discount. Its also agreed to sell the remaining shares to Deutsche Telekom via a structured call option, which give Deutsche Telecom control of T-Mobile US.
A good deal for Softbank but with more needed it has said it will sell part of its Alibaba stake too and it has also been hurt by its exposure to Wirecard’s collapse.
Which features on the Front page of the Print Edition with the headline Wirecard founder Braun arrested on suspicion of false accounting. It also runs the article from the on-line edition yesterday and the article about German Regulators being under pressure due to their actions and attitude as the scandal unwound.

Print Edition
France’s contact tracing app falters with only 68 people registering virus.
A reflection of how in France people are not not really worried about the potential of Covid-19 to impact their lives.

China leads west in offering Africans university scholarships. Most see this as China seeking to use ’soft power’ along side its economic investment and Belt and Road Schemes ti gain influence. To quote the article “China’s aid is regionally specific and tends to be defined by Belt and Road,” he said. “One feature of Chinese policy, compared with the UK, is long-term continuity.”
The article also mentions China’s' global network of Confucius Institutes’ again to promote China. Whilst there maybe questions over the benefits for the actual students, it certainly helps China’s PR image in Africa at the moment.

Apple makes concessions to iPhone app developers. Follows yesterday’s article about the overhang at Apple’s annual developer conference. Apple in addition to launching the new iOS14 which seems to have got +VE initial reviews it also made reference to opening up the iPhone and its other devices to rival apps in new ways. Whilst not going into detail this seems to be aimed at trying to minimise the impact of the probes that Brussel’s have just launched into the company.
It mentioned changes to the ‘app review process’ but without details its difficult to know the real impact.
It also mentioned using its own chip design going forward which will be -VE for Intel but it also means that Apple will have more control over products.
It also made an anti trust concession '“Developers will not only be able to appeal decisions about whether an app violates a given guideline of the App Store Review Guidelines, but will also have a mechanism to challenge the guideline itself,” Apple said in a press release.’
The one area that was not mentioned was the so called 30% Apple tax
Other concessions included allowing Apple Home Pod users to control Spotify directly rather than just Apple Music, along with other concessions on wireless tracking tags and the selection of email and browser selections as default.
That brings it in-line with Google’s Android system.
Overall I think it reflects the fact that Apple realises its under a big spotlight. I suspect that all these concessions could have been made ages ago but it was effectively abusing its power in not making them until now because the regulators were make it change. In reality that means regulators may need either more power to bring pressure on the likes of Apple and others and maybe better awarenesses of what developers and users want. Finding the balance is always going to be difficult but its worth striving for.

Roche shows the path to cross-cultural marital success in Japan. An interesting read and shows the difficulties and potential benefits as acquisitions in Japan. Roche brought the controlling stake in 2002 (it holds 60%) but has taken a largely hands off approach. The Japanese management still don’t accept that it was a merger but refer to it as a “strategic alliance”; allowing them the ‘face’. That I think is key, to often executives look to ‘win’. If you know you do actually have to power to control then you don't have to put them down, you just allow them to continue. I am sure a lot of mergers would do far better if that attitude was adopted. It has for Chugai and Roche. It contrasts the relationship to that of Nissan /Renault in part. Key to me is that it’s about understanding what is important and what is cosmetic.

Volatility and options trading play large role in rebound Technical factors have pushed price jumps since March, just as they did in earlier sell-off.
Provides an alternative explanation to the rise in retail players to explain the strong recovery.
The rise in volatility being a main driver but also the rise in derivatives because low bond yields have driven investors to look for ways to improve returns by selling potential market gains via calls and protection against falls via puts. The other side of that trade is matched by those expecting the reverse (that makes a market). AS Luca Paolini of Pictet AM points out '“One of the lessons of the past decade is that long periods of low yields have a lot of side-effects and this is one of the costliest,” . “Financial engineering does nothing to help the economy, long-term.”
The issue is that volatility works on the way down and up; as seen in the rise of the VIX, post 2008 for years the VIX was around 14 (its long term average is 20) due to Central Bank action. It took a non financial event to make people wake up, covid-19 has seen it spike and it recently hit over 80. That turbulence has had a impact. Hedge Funds and others have also been forced to cover short positions and take more long positions. It notes 'Risk parity funds tend to move more slowly but managed-volatility funds have added up to $20bn to their equity exposures in the past two weeks after the longest stretch of daily increases in allocation since October 2019, according to Deutsche Bank.’
Others think liquidity has also had a big part to play.
The wonderful thing about markets is that its the combination of all these and more. A good read; It quotes one PM as saying there is risk that the recovery is a lot stronger than people expect - that’s what makes the market.
I think there are a lot of uncertainties; next quarter results will provide a useful guide to the current impact. Economic data is improving albeit from a low base. The uncertainty over the how long before we get a vaccine could be the crucial aspect. The recent moves have been good but the impact on the SME businesses is still unknown and that to me is the key risk to employment, and to consumers feeling confident to going out and spend again.
Also Distressed markets are masters of disguise
Read Record number of US groups seek loan relief as fears of covenant breaches rise. 'Last month, 43 US issuers of leveraged loans asked their lenders for relief on the conditions attached to their debts. That surpassed the previous high of 25 set in March 2009 for these typically lower rated borrowers, according to figures from LCD, a unit of rating agency S&P Global.’
Also ‘Fear of missing out’ prompts investors to redeploy $105bn from cash-like funds.
And Financial gravity will force credit defaults across Europe
FT BIG READ. US ECONOMY Walking a fine line on debt While consumer debt levels are lower than in 2008, non-housing loans have grown. A swift end to payment holidays and other measures to cope with coronavirus would leave millions vulnerable.
The key is that volatility is going to remain high in the short term.

For Interest
Alitalia pins hopes on crisis overhaul to revive profits and pride
Italy’s flag carrier aims to turn its fortunes with strategy shift and€3bn cash injection. As a case study in why you don't want to be involved in the airline industry its worth reading. Strong unions and hard decisions in a sector with thin margins run by politicians …. What could go wrong.

Banks prepare their offices — for those who want to come back
Rules put in place as staff return, ranging from the commute and use of lifts to the wearing of masks. An interesting read. Key takeaway is that until there is a vaccine face masks are going to reman in demand. Uber, Lyft and other taxi firms are going to continue to see some benefit whilst public transport systems are likely to see less use. I wonder how the UK train operators are going to survive; if less people need to travel everyday the annual season ticket is going to see less demand which is likely to put them under further pressure. Will they also be facing calls for refunds during the lockdown?