May 15


Markets opened higher but sold down after the China data which was weak but better than most expected. I still think the unemployment under estimates the true picture.  But markets are looking  to the positive and tracking higher from the lows with a number back in positive territory.US futures currently flat after the strong US rebound on Thursday.
CHINA DATA
Fixed Asset Investment (YTD) Apr -10.3% YoY vs -16.1% Mar (F/cast was -12.6%)
Industrial Production Apr +3.9% YoY vs -1.1% Mar (F/cast was +1%)
Retail Sales Apr -7.5% YoY vs -15.8% Mar (F/cast was -9.3%)
Unemployment Rate Apr +5.8% vs 5.9% Mar (F/cast was +6.3%)

Industrial production saw a broad based recovery except for power equipment. Key will be whether the trend continues over the next couple of months as China's exports react to the lock-dons in other countries.

Retail sales show the cautious nature of the Chinese consumer but Sales declined less for garments (-18.5% vs -34.8% March), jewelry (-12.1% vs -30.1%), home appliances (-8.5% vs -29.7%), furniture (-5.4% vs -22.7 %), oil, oil products (-14.1% vs -18.8%), building materials (-5.8% vs -13.9%).
Autos flat, after -18.1% in March.
Sales that picked up personal care (8.3% vs 0.3%), office supplies (6.5% vs 6.1%), and telecoms (12.2% vs 6.5 %), and cosmetics (3.5% vs -11.6%)
Still good news for cosmetic companies it seems once again that despite the bad news little luxuries are still being bought as seen in most downturns.

Shipment of 10m masks to Europe halted The shipments from China are being suspended after complaints about previous batches which were found to be substandard. Also mentioned is the growing tension between Europe and China about disinformation and censorship over covid-19. This comes at a time when China is trying to play down its mis-steps when the virus first appeared and build its international credibility by supplying protective and medical equipment to countries in need I an attempt to enhance it global influence.

Brazil soyabean imports pose risk to US-China trade target. Questions whether China will be able to meet its obligations under the Phase 1 deal with the US. So far China has only bought $3bn of the $36.5bn its committed to buying. The articles is a little unclear but it seems that a lot of the May, June and July orders have already been placed with Brazil adding further concerns. Also it notes that this is a value deal and prices have been falling. For China the Brazil deal makes sense with falling prices there and currency advantages. For the US there could be a further problem because farmers are currently planting soya-beans in the expectation of Chinese demand, if that does not happen there will be more issues.

China businesses under fire as high-risk bets turn sour. Listed ventures lose $1.6bn from investments aimed at propping up core activities. Looks at the non-core activities of a lot of Chinese companies who tend to have stock portfolio’s to try and enhance their earnings with recent loses these are coming under more scrutiny. It is a fact of a market developing. When I started in Hong Kong almost every HK company, under its Bloomberg description had at the end '…and property investment’. In China it is in stocks and other financial instruments. Often it started from having excess cash and either not trusting the banks or not getting a reasonable return and hence they sought a more profitable home for their money. It’s all good when markets are going up, but Q1 of this year that dint happen and they are now under the pressure. No doubt in time, just as in HK, they will be removed. As China becomes more institutionalise the pressure for change should accelerate that process. Mind you, if Trump fully weaponises pension money it may not matter. For more on that read the Editorial The looming danger of a US-China financial war. There are reasons to shun some Chinese stocks. Covid-19 is not one. Continues the line started yesterday about weaponising US pension money

Japan lifts emergency rules in most districts as infections fall. A positive for Japan as long as they don’t see a large scale second wave. The government feel that they have the virus under control and can contain any future outbreaks in those prefectures where is has eased. The government has also announced working on a second supplementary budget.

Cash-hoarding Japan looks like a lockdown winner by Jesper Koll Notes that Japan is a good place for young people, an ageing population means there are plenty of job vacancies. He goes to at the cash war-chest that Japanese companies has amassed; which he reckons is about 130% of GDP. Around 3x that in the US, and in the US its concentrated in tech whereas in Japan most companies have cash. Under Abeconomics some of the historic cash has been returned to shareholders but that may change going forward. He sets out three things
1. Dividends will not see significant cuts although some cuts likely
2. Expect more domestic M&A. He things the current fragmentation will end. Especially in ' in financial services, machinery and machine components, as well as food, pharma and energy.
I would not be so sure, he think PM Abe will introduce tax sweeteners to encourage such action. I think the boards of most Japanese companies want to remain in charge.
3. An increase in overseas M&A and JV’s. He thinks car and car parts, Megabanks, Insurers, chemicals and base materials.
I think there is potential but in the same way that Japan has just announced companies that are of ’national importance’ so will other countries and so the potential will be significantly reduced.

Nissan looks to switch Renault lines from Spain to UK. Looks as the potential restructuring. I can’t imagine the EU is going to be happy though. No final decision yet so need to keep watching. The alliance is still facing a lot of problems not least the resignation of its US president.

Kick-off La Liga strikes 15-year partnership deal to build football brand in China. Interesting to remember that President Xi wanted to see China as a leading football nation a few years ago… I wonder if he’s still planning that? Anyway the deal is to quote the FT 'The Spanish league has teamed up with Super Sports, a subsidiary of DDMC, one of China’s biggest sports and entertainment groups, and Mediapro, the Spanish media company backed by Chinese private equity group Orient Hongtai Capital Management.’ It underlines the fact that China is still attractive to as it has a huge potential; key is tying up with someone in China that has the distribution reach to lock in that potential.

Asia new business sales at Pru sink in quarter. Operations in Hong Kong were worst hit, sales halved as a result of the drop in mainland visitors who accounted for 60% of HK sales. Key is that they are not alone AIA also reported a drop. These companies are looking at trying to move their business on-line but I suspect agents will be reluctant because of the loss of control of ’their’ client. Additionally it is difficult to ’sell’ this products on line as they usually require good sales people to get that first signature; renewal business is easier but the first sale and then selling of additional products usually still requires that human touch.

Norwegian Zoom rival Pexip soars on market debut. So far so good as they say but longer term people are still questioning whether and how many of these tech start up that have leapt into the spotlight will still be operating once covid-19 is brought under control? Key will be for them to build there brand and usefulness. It seems likely that more video conferencing will take place but with few barriers to entry these companies are going to have to find ways of cementing their clients. Security will be one; as Zoom found out to its cost recently.

‘Deep hole’ opens in US labour market as lockdown jobless claims rise to 36m looks at the initial claims data out yesterday which would indicate that a sift recovery is unlikely. The pace of initial claims is falling but yesterday’s number was higher than expected. Another thing to remember is that the ave hourly wage rose which indicates that the lot of the job losses have been low paid ones which will put more stain on the welfare system. A bigger worry must be that job losses from this point are more permanent than the initial job losses. Those occurring now are despite the Payroll Protection Plan are businesses take stock of their staffing needs in the light of the situation they see ahead of them. Read also Swamped bankruptcy courts threaten US recovery Looks at how the system is under pressure; Chapter 11 is expensive and cumbersome for small companies and only works if debtors can obtain financing through the process (which is currently unlikely). Much of corporate debt is in CLO’s (See yesterday FT article in that), Covid-19 means asset valuations are arbitrary and lastly a shortage of judges. Many of these things can be dealt with by government action. Which leaves the question will Trump act?
A warning ' investors need to worry not just about which companies go bust, but how. Remember that the next time a company follows Neiman Marcus or J Crew into bankruptcy, and pray the White House acts.’ It’s always the knock effect that surprises it was in the GFC; how many people thought letting Lehman go bust would have such global implications. I think more that prayers are required.

Macron berates Sanofi for saying US set to have priority on vaccine. Key here seems to be the lack of coordination between governments and the drug companies. It also reflects the lack of global co-ordination and whilst an accrual availing may be many months away governments and other bodies should be co-ordinating plans so that when a vaccine is available it is produced and distributed in the most efficient way to everyone. In the same vein WTO chief to step down one year early which could not really come at a worse time for a body that should be at the helm for reaching a global plan for dealing with covid-19. It partially reflects how Trump’s blame game has disrupted attempts to bring countries together to agreed a plan to deal with covid-19. The resignation is also likely to mean Trump can heavily influence the successor which may or may not be a good thing. The hope is that the successor will have more success at engaging all the players large and small so that the WHO can take the leadership role is should enjoy.
Read also US whistleblower warns on vaccine rush. Looks at the testimony of Dr Rick Bright, the former head of the Biomedical Advanced Research and Development Authority, he filed a whistleblower complaint. He says that Trump’s officials ignored his warnings in the early days. He also warned that opening to early risked making similar errors. The reality seems to be that authorities, in trying to balance the risk to human life with the risk to the economy, are not fully aware how dangerous this virus really could be.
Read also the Big Read Vaccine ‘nationalism’ slows virus fight Health experts fear the rivalry between Beijing and Washington and the ‘race to be first’ to discover a vaccine could halt global co-operation and limit the access of poorer nations to any treatment.

LEX Accounts/ebitdac: sum craziness Lex looks at the latest accounting wheeze ebitdac with the c standing for Coronavirus or covid-19 (to be accurate!). To describe the estimate of profits if we hadn’t had the pandemic. Tweaks can be useful until they become the norm. Finance directors usually try and put a good spend on numbers for investors. Lex makes the point is people are going to add back profits lost due to covid-19 then later you should subtract the rebound activities. In summary to quote Lex 'Investors have enough on their hands coping with recent accounting rule changes, such as IFRS 16. Ebitdac muddies the waters even more. It is an accounting tweak too far.’

LEX US-listed Chinese stocks: feeling Luckin. Looks at the case for Chinese companies listing in the US vs Asia and thinks it is still better to try the US.