Oct 15 FT Thoughts, Thai State of Emergency, China lose lose. Lunchtime update Asia consolidates,


18 Oct

FT Thoughts, Thai State of Emergency, China lose lose  and lunchtime update Asia consolidates,

Summary Asian Markets as at 1:30pm HK time
Asian markets continue to consolidate with US earnings and global covid overhanging the markets.
Good data from China offset but the threat of more sanctions on Chinese E Commerce names and the failure of the Evergande placement raising concerns about the risks to investing in Chinese companies; especially in the offshore bond markets.

JAPAN
Market opened lower at 23,550 and drift lower through the morning. That move lower continued after lunch with the market re opening and selling down to 23,460 before finding support. Market has trended higher for the last 45 mins but lacks conviction. Caution ahead of the US initial claims data tonight and US earnings. Currently -0.6% @ 23,495
Data
Tertiary Industry Index Aug +0.8% vs -0.5% July (F/cast was +0.6%)

S KOREA
Markets opened lower following US markets and with concerns of a new covid cluster in Busan. The BTS’ debut saw the stock hit the 30% max limit initially and I currently +28% with other entertainment stocks weaker. Samsung and Hyundai also weak.
Kospi opened lower and has trended lower through the morning in choppy trading Currently -1% @ 2,356
Kosdaq opened flat but sold down quickly to 841 level before a small bounce to 850 but then drifted lower. Currently -2.9% @ 836.

TAIWAN
Market opened slightly lower at 12,892 and initially traded sideways around 12,900 (vs 12,920 Wednesday close) but then sold down to 12,786 abvefore working back to 12,850 level and trading sideways. Currently -0.6% @ 12,847

CHINA 
Markets opened slightly higher after the good New Loans data but the Inflation and PPI data out on the open missed expectations. Markets trading effectively sideways in choppy trading.
Shanghai opened lower and traded sideways in choppy trading to 3,344 at lunch. Reopened at 3,340 flat
Shenzhen opened higher but trended lower in choppy trading to 13,677 at lunch. Re-opened flat but seeing some selling currently -0.25% @ 13,657 test the morning low support.
China CSI 300 Opened higher and traded sideways again choppy trading flat @ 4,807
Data
Inflation Sept +1.7% YoY vs +2.4% Aug (F/cast was +2%)
Inflation Sept +0.2% MoM vs +0.4% Aug (F/cast was +0.2%)
PPI Sept -2.1% YoY vs -2% Aug (F/cast was -1.8)
Detail
Inflation the lowest since Feb 2019 with a marked easing in food price inflation. Non Food was flat and declines in transport costs, rent, fuel, utilities, household goods & Services and clothing. Price rises in healthcare, other goods & services, education, culture & recreation.
PPI fell for the eighth month as covid continues to impact the economy.

HONG KONG
Pre Market Opened at 24,533 -133pts vs -178pts @ 24,489 ADR’s with E Commerce names and HK Banks weak on the threat of more US sanctions. Evergrande remains weak. Market then sold down to find support at 24,400 and bounced to 24,573 before selling back down to 24,400 and trading sideways for a while before selling down to 24,312 and saw a small bounce into lunch. PM opened flat and trading sideways. Currently -1.2% @ 24,382

EUROPE
Expect markets to opened lower FTSE is expected to open 33 points lower at 5,902, Germany’s DAX 95 points lower at 12,933, France’s CAC 40 38 points lower at 4,904 according to IG. Covid concerns remain high as France introduces curfews as covid cases rise to 22,951 in 24 hours. Investors will watch European and react to the US earnings overnight . The fact that a US stimulus package pre election is now unlikely another -VE for sentiment.
Data French Inflation

US
Futures opened opened flat and have sold down with Dow currently -107pts and S&P and NDX also lower. Key will be the initial claims data along with earnings today from Morgan Stanley and Walgreens Boots Alliance along with others.
Data Philadelphia Fed Manufacturing Index, Import and Export Prices, NY Empire Set Manufacturing Index, Initial Claims 4 week Ave Claims, Continuing Claims, EIA report

FT Thoughts
Thailand declares state of emergency and cracks down on demonstrators.
The peaceful demonstrations took on a new twist as protestors marched on Government House and surrounded it and also jeered the Queen. The protestors are demanding PM Prayuth’s resignation, the writing of a new constitution and limits on the monarchy’s powers and wealth.
Two leader have been arrested and the protestors accused the a large number of new protestors with crew cuts, who joined the protest on Wednesday of being policemen. The protests have been peacefully on going for 3 about months.
Again it is the youth who are at the centre of the protests and it is likely that China will be watching closely.

China braced for lose-lose scenario in US election. Trump triumph would further sour relations but Biden win poses longer-term challenge as he is likely to garner greater international co-operation for action against China. As opposed to Trump’s unilateral approach.
Biden has said “When we join together with fellow democracies, our strength more than doubles. China can’t afford to ignore more than half the global economy. That gives us substantial leverage to shape the rules of the road on everything from the environment to labour, trade, technology and transparency, so they continue to reflect democratic interests and values.”
For President Xi; Trump is likely to be the preferred winner as his anti-China stance continues to enhance Xi’s nationalist support.

Evergrande share placement falls short China developer raises half its $1bn target as debt burden damps demand. The reality is that the company is heavily indebted and there are concerns about how long it can continue. The placement was supposed to refinance existing indebtedness and general working capital.
It must raise questions about how the group finances are structured and the profit levels. Developers are allowed to pre-sell properties so they are able to reduce the risk of final sales and the escalation of rolled up project finance. The fact that Evergrade last started to discount its new properties at a 30% discount could indicate that the strength of the property market in China is not good. A lot of existing landlords are suffering because of lockdown which saw them loses tenants but still had mortgages to pay. Another issue is the vast regional differences. The tier one cities continue to see good demand but in the lower tier cities it can be very different.
Also of concern will be size of Evergande’s debt and the fact that much of it is held by both foreign and national institutions could present China with the added problem of ’two big to fail’. Longer term it is likely to mean stricter control on Property company financings. Already lenders have been tightening up and that is likely to continue.
See also Evergrande highlights the risks in China’s offshore bond trade. Highlights that much of the Evergrande debt is offshore and bondholders don’t have collateral. An offshore default could make international investors wake up to the additional risks associated with China which I don’t think are currently being reflected in the yields being offered.

Value of Chinese stocks tops $10tn as economic recovery accelerates. It is now larger than the equity bubble 5 years ago; which was just before the market crashed. It mentions that most analysts feel the market is ‘less frothy’ than five years ago and that the growth potential is better. Much of the recent rally has been due to China’s speedy recovery post the covid lockdown and by adapting output to medical and electronics. I would question if those are really long term drivers.
The article notes that this time the use of margin finance to buy stocks is much less than last time which suggests more holding power that before. Valuations are thought to be less stretched too and the rise of institutional investors is also seen as positive.
Another reason for confidence is that a lot of investors were burnt 5 years ago and have struggled since. But there are still reason to be concerned not least the fact that relatively few Chinese savers use pension/savings plans; most prefer to run their own portfolio’s and are active investors. The property market in China is also still a major aspect and with the problems at Evergrande things may not be 'as safe as houses’. The fact that the government has been warning investors and taking down financial blogs also indicates that the government is being a lot more cautious than before. A couple of month ago it effectively called for a cautious rally!

LEX Shenzhen/Huawei: the other Bay Area. Looks at the growth planned by Beijing and wonders if that can 'foster the creativity free markets inspire on the US west coast.’ Key being the re-invention of Huawei via the spinning off of its phone business Honor. Interesting to note that 'The impression of military manoeuvres by alternative means was reinforced by Tencent, another Shenzhen resident. It was among big Chinese social and video platforms, including iQiyi and Weibo, that simultaneously cancelled the livecast of Apple’s iPhone 12 launch.’
An interesting read.

Zambia warns of pandemic-linked default. Seeking to restructure $12bn of debt and requesting a 6 month interest payment suspension. Bond holders are unhappy because Zambia has not revealed enough information about its Chinese debts and wider plans to rein public finances. Many bond holders are cornered that they are not getting equal treatment. Article reports that some Chinese lenders were insisting on arrears payments before they would consider future suspensions.
As Africa’s second largest copper producer there could be implications to copper prices going forward.

Falling rates drag on BofA and Wells Fargo profits. Low rates continue to compress lending margins and overshadowing falling credit costs and improved results from the banks’ fee-based businesses. Their good results were partially due to taking smaller provisions for bad loans. They also benefited from the rise in home re-finacing. But net net the bad news outweighed the good. Both noted a weakness in demand for corporate loans as companies had other options.
The real problem is that there is little to suggest the outlook is changing and whilst BoA’s CFO said he thought that Q3 will be the bottom there is really no way of knowing.
See also LEX Goldman Sachs: the K Factor Notes that Goldmans results were good largely thanks to trading and private investing but those activities cannot pick up the slack indefinitely.
Also Wells Fargo: stuck Chuck. Key being that until Mr Scharf seizes the initiative with a plan to turn the company around, the stock will remain in a valuation limbo.

Apple raises hopes for speedy adoption of 5G. Operators claim rollout of iPhone 12 will herald end of apathy towards networks. I actually watched the presentation and it was very smooth and full of 'advert tech’ to paint the picture of the new world and of 5G in particular.
Whilst it certainly is designed to take advantage of the benefit of 5G there is no clear indication of whether it is the horse or the cart.
The fact that it can do certain tasks is useful but one has to ask how often is the average user going to want to do that? I mean is being able to play League of Legends on an iPhone with 5G ability really going to be the driver for paying more for a 5G service?
Personally I doubt it. Costs are saved by not including ear plus and chargers; slight -VE to those who make those items. It’s claim that its more environmentally friendly now because the boxes are smaller is mute; why where they so big to start with? But is has made environmental advances which is good to see.
Many users will now be watching for the response from Samsung and the Chinese makers. Overall I think the camera module makers, screens, castings etc should do well. For Apple’s stock price it is difficult to see this as a key driver. Yes many people may upgrade their phones +VE but the threat to its App business is potentially a bigger threat in my view.


Hedge fund short-sellers target pandemic winners Bets placed that profit boosts for groups benefiting from lockdown will fade very fast. An interesting read; the question is whether consumer habits have really changed. Home delivery has done very well but will that continue or will shoppers return to the shops. Electronics have done well as people set up home offices but that extra spending is not going to be a regular expenditure. As ever it requires some good research to find those businesses where the changes mean a permanent increase in business and those where it is just a windfall profit.

For interest
Big Read CORONAVIRUS. Can ghost cities be revived?

London and New York have experienced the biggest drop in foot traffic since the start of the pandemic among big cities. Many experts believe there will be a permanent shift of jobs and workplaces to the suburbs.

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