FT 8 June Shipping, Huawei, OPEC, Olympics and more
Markets opened higher following the European and US rally on Friday but have struggled to maintain the upward motion. Dow futures which opened +100pts and rallied higher have now eased back to just +64pts and Europe is looking at a mixed open.
JAPAN opened higher initially drifted slightly lower as GDP was better or inline with forecasts. Around midday the market saw an uptick as the Eco watchers survey came in better than expected and then the market traded sideways
S KOREA opened higher but initially sold off and briefly dipped into the read before bouncing back and trading sideways around flat.
TAIWAN opened higher and trended higher in the morning then drifted lower in the PM
CHINA opened higher and initially trended higher but then reversed and drifted lower .
HONG KONG opened higher inline with the ADRs but didn’t see a significant squeeze and then sold down and traded sideways/lower through the morning in choppy trading and closed just positive at Lunch. PM saw an initial sell down into the red but has at the time of writing rebounded to the lunchtime level but looks to retest the lows. Volume is high
Shipping industry warns of trade blockage as crew are left stranded. Looks at how the crews of vessels have been impacted but covid-19. Some crews are stranded at sea and others at home. Many of those at sea have exceeded the lawfully allowed time at sea (11 months per year). The International Chamber of Shipping is seeking governments to agree arrangements to allow crews to travel but so far there has been only a slow take-up. It is just one further pressure on a sector already under pressure. Goods sent by sea (80% of world trade volume) are falling into two categories; those in demand who are looking for the faster routes and ship speeds. Those that had been ordered under contract but are not in great demand; they are looking for slower speeds and cheaper costs.
There are now starting to get instances of ships not sailing and that will be bad for the shipping companies and for the recovery.
Huawei launches fightback to keep role in UK’s 5G networks. It will be trying to get PM Johnson to ease back on the restrictions it has been placed under. In an interview with the FT Victor Zhang, Huawei vice-president, stressed the company was not government owned and warned it could cost the UK billions of pounds of lost growth if Huawei’s equipment was removed from the UK 5G network. It comes as MP have raised concerned along with Washington about the use of the equipment. Interestingly today also has a comment from Mark Tucker head of HSBC warning that more action against Huawei could hurt the Bank.
Not only is there the normal dilemma that many have of balancing security with cost but also in the UK’s case there is also the issue of Hong Kong. There is no easy answer, it will be interesting to see if there is more public input into the decision making process.
Opec and Russia to extend oil supply cuts An important decision to support the oil price which is so important as a revenue source for many countries; not least Saudi Arabia and Russia. The agreement is also important as part of the plan to keep oil prices from rising too quickly as the world face a global slowdown due to covid-19. But the fact that the agreement was not extended for three months reflects the pressure some countries are under to see the oil price rise further.
Olympics in doubt without travel deal, says Tokyo governor. Looks at the problems facing the Olympics and for Tokyo and Japan having invested a lot of money into the project which is increasingly looking like wasted money. Bad not just for the government but the individual businesses that committed capital to expansion only to be face with the bottom falling out of the market. Key here is that travel restrictions without a deal some athletes and many spectators would not be able to attend and that could cause more problems to the Japanese recovery.
In the pits Rating downgrades in US leveraged loan arena outnumber upgrades by 43 to 1. Important because the loan market has been a 'critical source of funding for mid-sized US businesses and leveraged buyout firms’ according to the article. The downgrades reflect the pressure that a lot of those companies are now under with many of them seeing revenues and profitability under pressure. A key point being is that if these companies fail it will have a knock on effect to the wider economy and hence the US recovery. It will also impact the managers of collateralised loan portfolios many of whom have restrictions regarding owning loans that are rated triple CCC and many are already close to breeching those restrictions. It, for me, is a reason I am not expecting a V shaped recovery. Even as the economy recovers a number of these companies are going to see downgrades if not failure and that will have a knock on effect to even well run companies and slow the recovery at the very least.
Read also US lenders upbeat on return to normal loan repayments The banks are optimistic that a significant number of borrowers will recommit to repayment schedules. That will be a key indicator to the future level of defaults and losses. The article cites some positive research from banks. Those who still have jobs should be unaffected but it is the rest that are of concern especially in the lower wage brackets. In the last crisis people were more likely to make their car payment because they needed the car to get to work. This time the scenario has changed; most will now focus on their home. But that could be bad news for the car loan guys.
Shell faces spending scrutiny after dividend cut Looks at how many investors are asking questions about how the company is create value for shareholder in the light of cutting the dividend. Especially how they are going to use the saved cash. It quotes an investor who says many companies are struggling to answer that question. Board's don’t know, they just know its a good idea to hoard cash. Rather like the banks taking provisions they don’t know how much they might need but know its a good idea.
It’s not just Shell, every company that has cut its dividend can expect the same. Investors are have to relook all the stocks they bought for dividend income where that income has now been cut or reduced and test to see whether there is still an investment rationale for keeping it. Investors then have the added problems of if they decide not to hold the stock what else to buy. Not easy decisions in todays markets. The good alternatives have probably already rallied so it will be interesting to see if fund mangers chase good stocks or build up cash to buy on possible pull backs or just stay invested.
Fed eyes tools to help ensure a recovery takes hold. Looks at key events ahead this week.
What next for the Fed? Investors will be looking for more guidance and what tools the Fed intends to employ; some wonder about yield controls, other forward guidance. I think they will just re-iterate they they are watching the data carefully and reman committed to doing whatever it takes.
Will the euro maintain its run? It has had a good run in the light of easing lock-downs and the associated optimism for the recovery. Thinks that further gains will be more about US dollar weakness than more Euro strength.
China disinflationary forces Data from China; because it was first into lockdown and first out ,so this weeks consumer price inflation data will be closely watched for indications of what sort of recovery other nations could expect. BUT there are concerns that the data doesn’t tell the whole story. Recent inflation in China was driven largely by food prices, especially pork. Apart from food the consumer demand is expected to remain slow. They quote Hao Zhou from Commerzbank and I agree and have written before that consumers in China are not confident at this stage. From my experience when that is the case they cut unnecessary spend and save more. In the current environment of savings have been depleted due to work closures and uncertainty over job security I think a large number of households will be focused on saving not spending. Mr Zhou makes the point that until Beijing does more to stimulate the economy households will remain worried and tenth risk of deflation in the latter part of 2020 becomes a risk. That I think is something Beijing wants to avoid but its also worried about creating asset bubbles and money being wasted. It has put in place funding direct to City and town levels which suggests it is aware of the problems of getting money from regional level to where it is needed most. It will be interesting to see if in the year ahead it looks at overhauling the way taxes and other revenues and collected and distributed?
Hyundai Heavy underlines shipbuilding demand shock. The company warns that the recent deal flow is not enough to support the sector. Notes that new orders are good but existing orders are facing requests for delay or deferment. There is more bad news to come. Hyundai and the other S Korean shipbuilders are under pressure still from Chinese shipbuilders which are state backed and had been increasingly winning orders. I think this is another illustration of what will be happening throughout businesses world wide. New orders are good and represent real demand but existing order could be the hiccup as client seek to cancel, reduce or defer the order. If the supplier says no they risk not getting paid (or at least not on time) and little prospect of getting new orders. If they accept cancellations what are they going to do with the stock? The capital tied up in stock could be the difference between failure and survival. Its another reason I believe it will be a slow recovery with hiccups on the way.
US officials struggle to pin down actual jobless rate looks at the detail behind the numbers which it has been admitted may be inaccurate due to misclassification of some people due to the difficulties in collecting the data due to covid-19. Key is that some were labelled as working but absent when they should have been classified as temporarily laid off. That could have made unemployment 3 percentage points higher. An interesting read but the important thing is that a large number of people returned to employment and that is good. The question now is whether that turns into a trend or whether it's a short term reaction to an initial over reaction by employers to the initial covid-19 shutdowns. Only time will tell on that point.
FT BIG READ. CORONAVIRUS End of the line? Derided early in the pandemic as ‘floating Petri dishes’, the cruise ship market is trying to repair its reputation and return to the open seas. Bookings for 2021 are good but the industry is badly wounded. The real point about cruises is that they require a vaccine and or a drug cure to really give people confidence about cruising again. That is likely but it is a matter to time. So the question is can they survive until then? They have successfully raised cash and many have seen share prices recount albeit from huge sell-offs, and they are seeing a many faithful ‘cruisers' sign up for new holidays. Some smaller operators may suffer but the larger ones seem set to remain.
I hope you found it useful, feedback and comment welcomed