FT June 10 Cathay, HSBC, Softbank, US Retail, Fed options and more


FT June 10 Cathay, HSBC, Softbank, US Retail, Fed options and more

Markets are flat ahead of the Fed
JAPAN opened lower, pre market data was weak with Machinery orders missing and PPI seeing a sharp drop. But market worked higher and managed to go positive for a while but then reversed with more caution ahead of FOMC tonight. Currently flat +0.01%
S KOREA opened flat with unemployment higher than expected Kosdaq worked slightly higher, currently +0.3% , Kospi has traded sideways around flat; currently -0.02%
TAIWAN opened flat but worked slightly higher a expected with a focus on Tech currently +0.3%
CHINA opened lower and sold down on the poor China data PPI weakened for a forth month and inflation at it lowest since March 2019 which is not going to help China’s recovery. Market effectively traded sideways for the morning. Expect more weakness in the PM as investors likely to remain cautious over US/China tensions, the FOMC decision and the lack of new stimulus from Beijing.
HONG KONG opened higher vs the ADR’s which were -VE and squeeze higher despite the China data missing but then reversed to 24,960 before a rally back only to sell down to close +25pts at lunch. I expect more caution in the PM session ahead of the FOMC.
EUROPE likely to open flat with only French Industrial Production data executed and trade cautiously ahead of the FOMC
US Dow futures opened flat but have risen slightly, expect a slightly +VE open but with all eyes on the fed.


Hong Kong to acquire Cathay Pacific stake in $5bn rescue plan. Hong Kong Govt support via a HK$39bn deal made up of a bridge loan, preference shares and warrants. Rights issue: 7 for 11 at HK$4.68 each a 47% discount to the previous close. The government to own 6.08% of Cathay and have two observers on the board.
Key here is that the Hong Kong government is keen to ensure the survival of the Hong Kong International Airport and Cathay is key to that. Additionally it has said it does not want to be a long term investor; which is good. Some concerns about the political implications but I doubt these have been increased from the pressure it saw last year directly from China about allowing staff to exercise their right of free expression over the extradition bill which cost it and Swire dearly.
I have been -VE on Cathay Pac for several years and whilst I think this is a good deal for Cathay Pac I would NOT be buying the stock until there is more clarity on when international air travel will start resuming. This morning there was a sharp increase in volume as short sellers covered at least some of their positions.
See also LEX Cathay Pacific: rescue flight. Notes that the real winners are the lawyers and bankers who will receive US$13m for setting up the deal. Minorities have the option to be diluted 15% and hope that the airlines ‘root and branch review’ and Hong Kong itself comes up with good results.

HSBC treads geopolitical tightrope in backing Beijing’s security law Bank’s decision to pick sides in Hong Kong sparks investor backlash and internal debate
Follows yesterdays article When expediency dictates support for Chinese repression which focused on Standard Chartered’s support for Beijing imposing a national security law on HK.
HSBC now has to hope that it has pleased more people than it has upset. Many believe that Mark Tucker’s experience of operating in China will ensure that HSBC takes the right action for its business. The article suggest that some at the bank are not so sure.
The key being that Beijing has put pressure on everyone it can to endorse its action and the obvious threat is that is you do not your business will suffer. It ably demonstrated this last year with its actions against Cathay Pacific and Swire.

SoftBank cuts jobs from Vision Fund unit The result of the problems at the fund and carried out despite the rebound in Softbank’s share price recently. The cuts will be seen as particularly harsh after the recent announcement of a substantial pay rise to more than US$15m for Rajeev Misra who runs the Vision Fund from London. It is difficult to see how in the current environment Softbank is going to be able to restore its former image and regain shareholder confidence. I remain wary of the stock.

Retail stock market investors pile bets on bankrupt US companies. Looks at how names like Hertz and JC Penny; that have applied for bankruptcy protection, have seen a huge rally mainly from speculative retail investors. It has also intensified the disconnect between the markets and the economic reality.
It notes that accounts at Robinhood have bought more Hertz in the past three days than any other US listed company, doubling bets in a week. (Hertz was -24.4% Tuesday). Many professional investors see the move by retail investors as a warning sign.
It quotes one and manager '“When the retail investor starts to view the market as a one-way bet it’s usually an alarm bell and that does seem to be happening,”'
Retail investors are probably hoping for bailout packages for a number of these companies as was seen during the GFC. It could just be that stuck as home some people are just dabbling and hoping. Another good quote “It’s great that Vegas is open again but who needs it when you have the stock market instead?”
You might also add, you can safely stay at home and trade the stock market.
For mutual funds and ETF providers they will be wondering for the longer term; if these retail investors lose money and it is likely many late comers will; will they be turned off trading equities completely or will they switch to the more mainstream products available.
Read also the Editorial A market rally built on shaky foundations Recovery in equity prices is driven in part by absence of alternatives. Thinks that whilst there is some reason for optimism, like the jobs data and the amount of stimulus from governments and banks. There are also plenty of reason to remain cautious. But sitting on the sidelines with cash is not really an option as it is also costly. However there are few other alternatives and so investors look to get back into the market s and that explains the markets strong rally back since the March sell off.
All of which will present the Fed with ‘a challenge’. It is not there to support the markets but any hint that it is not going to remain dovish is likely to result in a market tantrum sell off. But if the markets are going to recover quickly it doesn’t want to ‘add fuel to the fire’. The Editorial suggests the best option is to ignore the fluctuations in the market and maintain the current policy.
I agree I think the Fed will say it remains committed but it watching the data and will act if needed but currently doesn’t see a need to alter policy.

Fed faces tricky balancing act in recession response First forecasts in six months risk unnerving investors, who expect dovish stance to stay.
Looks at the possibilities for the Fed at today's announcement on its macroeconomic projections which is declined to issue in March. Many expect the Fed will say output going to drop big this year, rates remain at zero for a few years and policy will be kept very loose. But it notes that if the Fed indicates any hesitation to support the recovery the markets are likely to have a ‘tantrum’ as we saw when is was about tapering in 2013.
There is also debate about whether the Fed will give forward guidance, benchmarks, yield curve controls and a number of other possibilities.
I think Powell will try and be straight forward and say no change, ready to act but need to watch the data before doing more. Markets have rebounded and the jobs data, which only one data point was encouraging (even if not fully accurate).
I don’t think he will be worried about the markets having a tantrum as they currently look over bought in the light of the macro data coming out. In a few hours time we will know!

US-China rivalry ensnares United Arab Emirates. Beijing’s expanding trade and diplomatic links are causing concern in Washington. Beijing is one of the UAE’s largest buyers of crude and will be using that for as much leverage as it can. It has enhanced the relationship with a JV for screening for covid-19 and to date the UAE has screen more than 2m people out of a population of 9m, one of the highest rates globally.
It notes that Beijing has been successful in building trade links in the Middle East and that covid-19 has allowed it to enhance these but supply equipment and knowledge on covid-19. It has also supplied telco equipment via Huawei.
But a number of the Middle Eastern states still rely on the US for military/defence support, and as the arbiter of security; something Beijing has been happy to avoid, due no doubt to their volatility. But is has been willing step in and supply equipment where the US would not (supply of drones to Saudi Arabia and UAE who then bought Chinese ones).
Key is that tensions are likely to continue and both sides will be keen to try advantages where they can.

Thailand and Vietnam expected to reap the ‘Covid dividend’. Looks at the fact that life in both countries is fast returning to normal and that in Vietnam most people have stopped wearing masks. They are both kept their non retail companies working by enforcing strict social distancing and tracing regimes. Now they are looking to try and win new investments from companies looking to hedge their bets on US/China trade tensions and tariffs. The article expects Vietnam to be ahead of Thailand which historically has relied more on Tourism and medical tourism in recent years.
To me another factor that could come into play depending on the US election is that Vietnam has been moving up in terms of trade balances with the US and come come onto Trump’s radar screen in the not too distant future because of its success; which could be a slight -VE.
Another market to watch will be Cambodia which is also looking to increase its international footprint. Currently closely tied with China it is building out infrastructure and industrial to cater for companies seeking to move out from China in a similar fashion to that seen in Vietnam.

Global research reveals scientists have much to learn about new coronavirus. What appeared to be a classic respiratory illness causing pneumonia turns out to be far more complex.
Worth a read as I think it highlights why the recovery will not be V shaped. Key being that we still do not know what we are actually dealing with yet. It asks and tries to answer a number of key questions
How many people have been infected? Not know yet and until total testing is carried out it will remain unknown.
What proportion of those infected come down with the disease? Not know; We don’t know why some people are infected and never develop symptoms and why for those that do; it can be lead to death.
How long does it take Covid-19 to harm the body? Typically five to six days to incubate but may not present as covid-19 in the initial stages. We also don’t really know how long it takes to fully recover from the infection.
What is the fatality rate? Unknown because of lack of testing.
How fast is the virus spreading? Depends on containment measures. When properly contained can be eliminated quite quickly as seen in New Zealand.
How about super spreaders? Not known one super spreader in HK infected 73 others tai contact in bars. One in Seoul infected more than 50 people again in bars.
With so many unknowns it seem surprising that the markets are so confidence that it is under control.

China rebuffs Harvard claim of earlier Covid-19 outbreak. Harvard analysed satellite images of hospital car parks in Wuhan and search on Baidu about symptoms such as a cough and diarrhoea. It’s basic premise is that there was an increase in activity since the late summer. China is rebuffing the claims. But it makes sense that in the initial stages before covid-19 was actually recognised it would have been present. It also endorses the Dr Li WenLiang’s warning message sent to fellow doctors about an unknown disease.
China has problem though, having had its propaganda machine spin the ‘official’ story; constructed to show President Xi and the Party in a good light the truth then becomes difficult to deal with. It also explains why the party is so reluctant to allow an investigation. This could be China’s ‘Incovenient truth’.
What China should be doing is endorsing the study which shows it probably occurred and was circulating for a number of months before being recognised as a new strain. That would get China off the hook about it escaping from a lab.

Opinion Covid-19 will hit developing countries hard This shock is devastating and the impact of the crisis on societies is unlikely to be brief. Martin Wolf reviews the latest World Bank report Global Economic Prospects.
Summary
'They illuminate the scale of the damage. Never can there have been a greater need for an ambitious and co-operative response. Alas, not for a long time have these qualities been so absent.’ Worth a read.

Opinion A hunt for alternative indicators of recovery. Economist are struggling to find good data points that will help them determine what happens next’
Summary
'The alternative economic data suggest we’ve at least stabilised and are no longer on quicksand. Beyond that, given what we have to work with, you can’t put much stock in any particular economist’s forecast. Although, at last, you can buy hand sanitiser.'

Pyongyang to cut Seoul communication line Move is aimed at piling pressure on the US over sanctions, warn analysts. Another possible flash point and whilst not mentioned in the article comes as a UN human rights expert voiced alarm on Tuesday at "widespread food shortages & malnutrition" in North Korea, made worse by a nearly five-month border closure with China and strict quarantine measures against COVID-19. It seems likely that North Korea is seeking as before to engineer a situation to try and keep concessions. Cutting comms though does increase the risk of accidents on the board and escalations. I also think that after the recent ‘disappearance’ of Kim Jong Un and the fact that it was his sister making statements to South Korea last week that there could be other power plays taking place too. For investors is likely to be a slight -VE regarding S Korea where the markets have been steadily rising for the past 10 days.

Collapsing rates leave investors perilously exposed to equity risk. Says that the classic portfolio of 60% equities and 40% government bonds; the standard for the past 20 years is no longer working. Mainly because low interest rates means that there is no longer a cushion in government bonds. Going forward rather than relying on government bonds for insurance investors are going to have to pay for insurance.

I hope you enjoyed, feedback welcomed