July 15 FT & Asian Update. Inflation, Buying Chinese assets but will it continue? SMFG buys into Jefferies but will it work?

This and previous notes can be found at  Substack ( Asian Market Sense )
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Asian markets mixed the China data showed slowing but was generally better than most were expecting considering the RRR cut last week.

Market opened lower but has traded around flat in the morning session.  Employment data overall +VE but concerns about how the lockdown extension will hurt that.  Little reaction yet to the good China data but may see upside in the PM. Miners +VE but Financials weak along with growth names.
Employment Change Jun +29.1k vs +115.1k May revised (F/cast was 25k)
Full time Employment Change Jun +51.6k vs 97.5k May (F/cast was +35K)
Part time Employment Change Jun -22.5k vs +17.8K May revised (F/cast was -10k)
Unemployment Rate Jun 4.9% vs 5.1% May (F/cast was 5%)
Participation Rate Jun 66.2% vs 66.2% May (F/cast was 66.2%)
Nikkei opened lower at 28,539 and trended lower through the morning with weak sentiment as covid cases remain a concern and ahead of the BoJ rate decision tomorrow; at lunch was -265pts (-0.9%) @ 28,344.
Topix followed a similar pattern opened 1,958 and was -17pts (-0.9%) @ 1,946. Hitcahi -3% led the laggards.
Foreign Bond Investment ¥-1217.8B vs ¥-191.4B prior
Foreign Stock Investment ¥-10.5B vs ¥-310B
Due later Tertiary Index May (Apr was -0.7% F/cast -0.6%)
S Korea 
New covid cases hit 1,600
Kospi opened higher at 3,269 as Fed’s Powell indicates it will stay accomodative, and initially ticked up to 3,272 before selling down to test yesterday’s closing level but then trended higher in choppy trading with resistance approaching 3,274. Sentiment helped by generally positive comments from the BoK.
Kosdaq opened higher and trending higher, currently +11pts (+1%) @ 1,055
BoK Rate Decision unchanged at 0.5%
Taiex opened higher and trended higher but seeing resistance as it tests 17,950 and currently trending slightly lower. TSMC earnings awaited.
Pre market PBOC 100bnYuan of MLF citing demand from tax payments partial rolling over the faciltiy.
CSI 300 opened lower but ticked higher initially before easing back and trading around flat. Housing data out on the open was weak. but markets rallied strongly on as the GDP growth data slowed but was better than expected considering last weeks PBoC RRR cut. But does raise further questions about why it was necessary and what the PBoC can see that investors cannot? I think the reliance on covid protection products and Tech over traditional exports. Retail sales & Industrial Production beat (Kweichow strong). Unemployment steady but its not a good indicator as many SOE workers are employed but reportedly not being paid. CSI 300 currently easing back from high +22pts (+0.4%) @ 5,106
House Price Index Jun +4.7% YoY vs+4.9% May (F/cast was 4.9%)
Fixed Asset Investment (YTD) Jun +12.6% vs 15.4% May (F/cast was 13%)
GDP Growth Rate Q2 +1.3% QoQ vs +0.6% Q1 (F/cast was +1.4%)
GDP Growth Rate Q2 +7.9% YoY vs +18.3% Q1 (F/cast was+8.3%)
Industrial Production Jun +8.3% YoY vs +8.8% May (F/cast was +8%)
Retail Sales Jun +12.1% YoY vs +12.4% May (F/cast was +11.1%)
Unemployment Jun 5% vs 5% May (F/cast was 5%)
Capacity Utilisation Jun 78.4% vs 77.2% May (F/cast was 77.1%)

Pre market opened @ 27,801 +13 pts vs -44pts ADR’s.
Market has worked higher all morning until the China data came out and now easing back slightly.
News that Alibaba and Tencent working better together +VE.
Property +VE as Powell indicates rates to stay low for foreseeable future. Consumer, Tech and Energy seeing good interest.
Coal may see weakness as China announces to release 10m tonnes from reserves. Healthcare and Consumer Staples relative weakness
Expect markets to open higher with just UK employment data due but covid still overhanging the market
US Futures
Opened Dow -10 points. S&P 500 futures were flat and Nasdaq 100 futures +0.04%. Caution ahead of more corporate earnings and labour market data and Powell’s continued Testimony.
Front Page FT

Brussels unveils sweeping plan to cut EU’s carbon footprint

• Net-zero emissions target date set at 2050
• Carbon trading system at heart of new strategy
• Fierce talks expected among bloc’s 27 states
A bold initiative and it highlights to many the costs invovled, a key point is that whilst this will be costly for developed countries it will be hugely expensive for poorer nations.
Worth a read. This is the master plan but it will no doubt take years of negotiation to get an agreement.
Read also Brussels begins 30-year journey to net zero with plans to reshape economy  Tough regulation, carbon pricing, pollution taxes and investment in green tech are at heart of effort  

BlackRock’s Fink warns on higher US inflation as staff take home 8% pay rise
But says the pay rise is not related to inflation but to sharing the ‘benefits of the groups growth’.  That said they must be under pressure to attract good talent and so their pay rise will add to wage inflation. 

Fed ready to act on inflation, says Powell

Central bank ‘prepared to adjust’ policy but chair expects price rises to ease.
Maintaining the Fed’s previously outlined stance but trying to address concerns that it may behind the curve with regard to the rising inflation that people are seeing in their everyday lives. I think a number of items are due to bottlenecks but not all. The ‘get out of jail card’ for the Fed is the fact that in saying its ‘transitory’ it hasn’t actually given a time frame. How long is transitory?
Powell’s big concern is that if the Fed moves too soon it could stall the recovery and also that wage inflation is the key element rather than goods inflation.
Having listened to some of the testimony the one thing he is right about is that this is new for everyone, no one has experienced this before. There is no text book for this.
Worth also reading  UK inflation rises more than forecast for third month in row  The BoE has also said it views inflation as ‘transitory’.

China forecast Beijing weighs risks of boosting growth as it seeks to bolster pandemic recovery.  Takes a view on today’s GDP data by asking:
Will industrial production and fixed-asset investment growth decelerate?
Will China enter a new easing cycle?
Will Liu’s goal to contain financial risks outweigh economic slowdown concerns?
Will restraints on local government spending be relaxed?
Will China’s Covid strategy hold back growth?
Interesting questions to ask when we see the data. Notes that there does seem to be a tension between the PBoC and the Cabinet. Also that bad debts are a rising concern both at a company level and also with local governments. The funding of local governments is an ongoing issue and one that again could prove to be a thorn in the side of Central government plans.

Companies & Markets
International investors buy Chinese assets at record pace
Looks at the data over the past 12 months. In which case it is hardly surprising because China was the first out of covid and its exports were driven by covid related equipment. Also the fact that it has been offering attractive yields; in a world starved of yield by Central bank policy. It is also worth noting that it has really only been in the last couple of months that major issues have become apparent. Additionally China has been making significant steps to opening up its debt markets as it seeks the means to finance its recovery.
The real question now is whether the interest in China continues as regulatory change takes place, the economic recovery slows and international relations between China and several other nations sour. Another key change is the assumption that the government would bail out large chinese companies. Beijing is trying to walk the fine line between encouraging citizens to participate in the market but also to realise there is risk associated with the rewards.
I suspect that the risk premium associated with China will rise.

BofA and Citi suffer falling revenues as lending stalls

• Low interest rates weigh on banks
• Sector chiefs talk of inflection point
The results were under welming and the outlook for the banks looks, I think, uncertain. They are hoping that consumers revert to their old ways but it is possible that this generation revert to more fiscal prudence and credit growth remains stunted. I also remain concern about mortgage related loans and whether once the current concessions expire that all those loans will resume payments.
Also  worth reading Private credit joins PE group to freeze out the banks  Thoma Bravo’s $6.6bn buyout of Stamps.com reveals shift in financing for leveraged deals; another area of banks traditional business coming under threat.

SMFG snaps up Jefferies stake for $386m
Move comes as hopes grow for brisk Japan Inc return to international dealmaking.
An interesting deal that on paper makes a lot of sense but it will be in the practical working of the deal that will be key. Namely whether the people on the ground can work together.
Having worked for a Japanese broker I know that often the foot soldiers get on well but ofter the upper Japanese management can be resistant to any change from their established patterns of business. The reality is that outside of Japan their business practices just are not competitive. The article mentions the past record of Japanese attempts to build business.

LG poised to invest $5.2bn in EV battery materials production
Says that LG is urgently trying to cut its dependence on China. It is also keen to diversify its base and make the transition from a petrochem into a eco friendly conglomerate with a focus on supply. But it also has to address the technical problems with its own batteries that has resulted in some brand damage.

Toyota’s self-driving arm buys US mapping venture Carmera
An interesting read, slightly worryingly is the statement ‘“I’m looking to double or quadruple Woven Planet in the next couple of years,” said James Kuffner, the head of the unit who also sits on Toyota’s board as chief digital officer. “That means we are going to be aggressively hiring, acquiring, doing partnerships and, where it makes sense, bringing in companies to the Woven Planet group that are complementary and strategic.”’
I would have thought that he should be more focused on what was needed to achieve the goal than pure expansion. An interesting read just because currently mapping is so difficult.

For interest
Can the Olympics succeed behind closed doors?
Intended to mark Japan’s economic revival but hit by the pandemic, the games have become a matter of political survival to be played out against public anger, empty stadiums and disgruntled sponsors.