FT Thoughts Potash sanctions?, China trials and dredging, Jimmy Lai impact on HK, CB's under pressure

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Asia at 1:30pm HK time
Australia 
ASX200 market opened higher to 7,150 and worked slowly higher through the day to close +89pts (+1.3%) @ 7,184
Financials strong with Commonwealth Bank back above$100, Iron ore miners higher, but some weakness in Tech.
The Victoria lockdown having little impact.
Japan 
Pre market data saw CPI data in-line, unemployment only slightly worse. Govt extended the state of emergency as expected.
Nikkei opened higher and worked higher for most of the day. Resistance at 29,200 just after lunch and traded sideways. Currently +627pts (+2.2%) @ 29,176
Topix traded in a similar pattern currently +37pts (+1.9%) @ 1,948
Data
Unemployment Apr 2.8% vs 2.6% Mar (F/cast was +2.7%) 
Job/Application Ratio Apr 1.09 vs 1.1 Mar (F/cast was 1.1) 
Tokyo Core CPI May -0.2% YoY vs -0.2% Apr (F/cast was -0.2%)
Tokyo CPI May -0.4% YoY vs -0.6% Apr (F/cast was -0.4%)
Monday pre market we get Industrial Production and Retail Sales
S Korea 
Kospi opened higher on easing inflation concerns and increased confidence in the recovery after US data. Trended higher but did dip briefly aruond 10 am to 3,175 but then continued the upward trend currently +31pts (+1%) @ 3,196
Kosdaq opened higher muted started but after 10.30am worked higher to 980 but failed to break out, retrenched to test 978 before working slowly higher; currently +5pts (+0.5%) @ 979
No data Friday but Monday pre market Industrial Prodcution, Construction Output and Retail Sales
Taiwan 
Taiex opened higher and worked higher with resistance each time it approached 16,900. Closed +269pts (+1.6%) @ 16,871
Across the board buying but TSMC in focus along with Steel as raw materials continue to surge globally. Critically now closed significantly about the 16,550 resistance (60day MA).
China 
CSI 300 opened flat and dipped to 5,320 before bouncing back into the green briefly but then trended lower to 5,324 before a bounce into lunch. PM opened higher and touched 5,360 but then sold down heavily currently -27pts (-0.5%) @ 5,309
China reported 7 new imported covid cases.
HK 
Pre market opened @ 29,219 +106pts vs +125pts ADR’s higher than normal pre market T/O due to the MSCI at close reweight Thursday. Market initial dipped to 29,150 before rallying to 29,336 but then reversed to 29,200 which it tested a couple of times before working higher into lunch. PM tested 29,320 but now selling down +51pts (+0.2%) @ 29,167
Sentiment hurt on news Jimmy Lai and others get jail sentences for unlawful assembly.
Meituan weak ahead of results, Chinese Financial +VE, Healthcare seeing some weakness. Lenovo seeing upgrades
JB Logistics +11% on debut
Europe 
Expect markets to open higher following the trend in Asia
Data due
EUROZONE Consumer Confidence & Inflation Expectations, Sentiment (Economic, Industrial and Services), 
GERMANY Import Prices
FRANCE 
GDP Growth Rate, Inflation Rate, Household Consumption, PPI
UK 
No data due
US Futures
Opened Dow +122pts S&P +0.3% and NDX +0.22% on increased optimism on the recovery and worked higher Dow now+170pts.
Ahead
Personal Spending and Income, Goods Trade Balance, Wholesale Inventories, PCE Price Index, Core PCE Price Index, Chicago PMI, Michigan Data Final (Current Conditions, Consumer Expectations, 5 yr Inflation Exepctations, Consumer Sentiment, Inflation Expectations) Baker Hughes Rig Count Presdients FY 2022 Budget.
Fed Speakers None


FRONT PAGE
Russia forces airlines to cancel Moscow flights over Belarus

• France and Austria carriers hit • EU discusses Minsk sanctions • Fears of politicised airspace
More on the Belarus air piracy issue. Russia is supporting Belarus by making it difficult for some airline to observe the EU directive not to fly in Belarus airspace when transiting to Russia. Russia also called the EU reaction as ‘hysteric’.
Key is that EU foreign ministers are discussing punitive action against Belarus and seem to be focusing on its potash business where it is one of the worlds largest suppliers.

If they do agree on that that will take a signifcant amount of supply out of the market. Canada is the largest supplier with 31.6% in 2019 (Canpotex a big player), Belarus is third with 18.2% market share. Russia (Uralkali) and China (Sinofert, Sino-Agri and CNOOC) are the other, big suppliers. The fact that Belarus ships most to China could make sanctions contentious.
Beneficiaries are likely to be ICL, K+S and EuroChem.
See also Lukashenko defiant in face of fresh sanctions
Dictator shows increasing readiness to intimidate dissidents at home and abroad. He is now aiming to detain other dissidents currently abroad. Commentators are saying he feels safe because of Russia’s backing. But it notes ‘Though Moscow is believed to be pushing for Lukashenko to step down after a constitutional referendum, Russian support is enough to embolden Lukashenko to ignore the west, said Shraibman. Instead, the EU sanctions could “irritate Lukashenko and he might escalate more”, Shraibman said.’
An interesting read because of the precedent it could set which might embolden China to take more similar action.


AT&T paid bosses $9m in bonuses for Time Warner deal now being reversed
AT&T in the spotlight for the wrong reason and intersting read about how US$9m was distributed back in 2018 for completing the Time Warner deal.

INSIDE
Biden in party tug of war over spending
Progressives and moderates divided over talks on striking agreement with Republicans.
An interesting read into the issues facing Presidents Biden infrastructure spending plans both from within his own party and the opposition.

New US jobless claims fall to pre-pandemic low
Looks at yesterday’s economic data. Overall encouraging for the recovery; ‘But the report also showed that orders for durable goods, or items meant to last at least three years, dropped 1.3 per cent in April from the previous month on a seasonally adjusted basis.’
Worth a read.

Intelligence agencies split on lab leak theory
Worth a read but the key is really until there is a fully free investigation we will never know. Unfortunately due to the passage of time it may already be too late to know for sure.

Beijing bars Australia diplomat in spy trial
Canberra criticises lack of transparency in case against its citizen.
Another human rights issue; ‘Yang’s secretive trial echoes those of Michael Spavor and Michael Kovrig, two Canadian citizens who have been charged by Chinese authorities with spying. Their detention was in retaliation for the arrest of Meng Wanzhou, chief financial officer of Huawei, the Chinese technology group, in Vancouver following a US extradition request over allegations that she had violated sanctions against Iran.’
China has a number of high profile instances going on within China and increasingly in HK. The use of vague espionage charges undermines China’s standing as a international world leader in my view and could over time mean that investment money is diverted to other Countries that have better records on human rights. As ESG becomes more established for institutional investors it may put pressure on governments to change.

Territorial dispute. Coastal waters
Chinese dredgers ratchet up pressure on Taiwan
Incursions by illegal vessels viewed as tactic to wear down island’s defences.
An interesting read about the use of civilian vessels to stretch and wear down Taiwanese defences. ‘the privately operated sand dredgers were part of Beijing’s “grey-zone tactics”, designed to wear down the islands’ defensive capabilities and intimidate the population without resorting to military force. Taiwanese officials added that the dredgers were destroying the marine environment, causing Matsu’s beaches to recede and accelerating the decline of the fishing stock.’
It is also interesting because there is profit involved:
‘The uptick in incursions comes despite Taiwan raising sentences for illegal sand dredging to a maximum of seven years in jail, along with a fine of NT$100m ($3.6m).
Analysts said that profits from selling sand outweighed the risks of losing the dredger. Su estimated that in one day, a 5,000-tonne ship could fill the equivalent of three Olympic-sized swimming pools with sand, which could sell for $55,000.’
At the same time ‘Beijing has limited dredging activity in its own waters to protect its marine ecology, pushing Chinese boats into waters that Taiwan says it controls and exploiting conflicting territorial and maritime claims.’
Again if investors are really committed to ESG issues then the use of suspect sand by construction companies should impact their investment status.
At the same time more international support for Taiwan could also prevent or reduce the tension. Whilst China is allowed to continue under the mistaken belief that it has rights over Taiwan and the free Taiwanese people these actions will not cease but increase. More countries need to explicitly make it clear that China does not have any rights over Taiwan.

Commodity prices heighten concerns of uneven recovery.
Looks at yesterday’s data which highlighted the uneven nature of the recovery in China. ‘Higher prices for raw materials have boosted the profits of miners and other producers but they also stand to increase costs for downstream businesses further along the supply chain.’
The uneveness of the recovery and the fact the government is trying to stop higher raw material prices feeding into consumer prices looks doomed to failure. It underlines the fact that despite government moves to try and stimulate domestic consumption; a lot of people are just not spending for the same reasons that are being seen in the west.
Most of the measures being used so far are quiet blunt and the fact that some factories are refusing new orders because of raw material price volatility will not help.
For investor it reinforced the argument to be invested in resources.

COMPANIES & MARKETS
HSBC quits US retail banking after four decades.
Draws a line under what has not been a happy experience for HSBC. Shares were little moved by the news which had been expected. The slight +VE is that it is one less distraction for the management going forward.

SoftBank reveals cost of WeWork founder exit.
The key for Softbank was that it needed him out of the way in order to list WeWork via a Spac.
Much has been written about the role Son played in the whole affair. I still remain concerned about the decision making process at Softbank.

Shares in jailed Hong Kong tycoon’s group surge 330% as trading resumes after authorities unfreeze assets.
I think the FT has it wrong here. They haven’t unfrozen the assets but they are confident that even with the assets being frozen they satisfy the exchange rules and can still trade.
The pop in the share price reflecting I think both the smaller number of available shares out there but also support for the publication in defiance of the administration.
The move by the administration to freeze his assets whilst still awaiting trial has undermined the principle on Hong Kong of innocent until proven guilty.
Furthermore Jimmy Lai had already moved a significant amount of his assets offshore in the expectation that the changes in the law were in part based on chasing money.
Interesting to see CY Leung quoted ‘the city’s ex-leader, said in a Facebook post this week that Next Digital’s management was being “negligent”, “irresponsible” and “misleading” to say that the operation and financial health of the group remained unaffected by the freezing of Lai’s assets.’
Without having a detail knowledge of the company I am not sure how he is making that assertion but the company has obviously satisfied the Exchange that it is able to continue. It is the exchanges responsibility not CY Leung’s. But it probably has more to do with him wanting to be Chief Executive again than anything else. Such out bursts may raise concerns about how he would act if he was Chief Executive and that may worry more western business people in the city. At present Beijing has not indicated who it will back in next years Chief Executive election but businesses will be watching careful.

Airbus prepares to increase A320 production
A sign of confidence that air travel is going to recover quickly. Key for me is the impact that could have on the oil price and inflation. It follows IATA saying on Wednesday ‘that it expected passenger numbers to recover to 52% of pre-pandemic levels this year and to surpass that in two years once borders reopened.’

Parody of board accountability casts a cloud over Silicon Valley By Richard Waters
Looks at what he calls the ‘annual pantomime of shareholder capitalism is playing out in Silicon Valley.’ Panto because the special voting rights of the founders means that other shareholders concerns do not really register.
But he notes that there is increasing pressure from ordinary shareholders to be heard and he concludes ‘With Big Tech stock prices at or close to record levels, entrenched founders have shown little need to respond to shareholder pressure. But the drumbeat of unrest heard at this year’s annual meetings is only set to get louder.’
Worth a read.

Tesla set to shell out in advance for chips
Foundry purchase also under consideration in effort to tackle crunch.
It’s a bold statement but difficult to achieve although it does already have a ‘team that designs the high-end semiconductors used in autonomous driving.
More interestingly it notes that ‘Some contract chipmakers have begun allowing large customers to pay deposits to guarantee certain orders at a fixed price. Such a practice used to be unusual for contract chipmakers; the flexibility to allocate capacity to orders from different customers has been a cornerstone of their profitability.’ But that might also reflect the demand for increasingly specialist chips.
It concludes that ‘For TSMC, the top contract chip-maker with gross margin of more than 50 per cent, profitability rests on ability to juggle capacity between customers. TSMC has resisted requests to set aside dedicated capacity for any customer.’
Worth a read, the business is changing and as the auto industry becomes more tech orientated the co-operation and communication between car companies, chip designers and foundries will have to improve.
LEX Tesla/Samsung: delivery driver A good read, gives a good summary of the chip business and how it works and why there are huge costs involved. Auto chips are less profitable because they have to last longer under harsher conditions and with greater safety implications so cost more but are priced lower than others. So it concludes there is no quick fix. Worth a read.

Financials. Virtual hauls
Crypto laundries answer call from criminal gangs
Forensics experts tracking transaction flows are locked in a battle with bad actors.
An interesting read about how the hackers actually get their cash.
A key point being that ‘said authorities “need to modernise forfeiture and asset freezes” to make it easier for law enforcement to seize crypto from exchanges.’
As I have written before; realistically governments needs closer co-ordination and to write new laws and regulations in order to police the space rather than trying to stretch the existing ones to fit.

Commodities. Staples
Rising breakfast costs bring worrying food for thought
Political concerns grow as consumers start to feel impact of higher ingredient prices.
Looks at the background to the price rises; higher raw material prices as Countries like China look to rebuild their stockpiles which were depleted by both drought and flooding last year; impacting a number of soft commodities. Also the rise in shipping costs and also the delays are having an impact.
Interesting that China is the one country that is most mentioned as being behind the demand. That suggests that China is likely to see more inflation; it is already clearly worried about the surge in iron ore and the likes but that is relatively easy compared with trying to control food prices which have a much more direct impact on people; especially the poor. So staples like rice and pork will be of especial concern. Milk is mentioned and here because of past scandals overseas products are preferred.

Shell’s defeat spells trouble for other polluters
Dutch court sets precedent on cuts to oil major’s emissions that is likely to embolden climate activists across the globe.
More on the implications from the case.
See also Opinion Big Oil has learnt to listen on climate
Also Australia ruling binds mining approvals to children’s health An interesting read that governments too might have a ‘duty to take “reasonable care”’ when it comes to approvals of projects that have emissions issues.

Fixed income
Buoyant Carnival cuts interest expense amid recovery cheer
An interesting read about it refinancing some of its pandemic loans at lower rates. +VE Notes that others like Kohl’s and Nordstrom have benefited too.

Inflation fears take toll on convertible bond prices.
Investors have been jolted by a slide in the price of convertible bonds issued at the top of the market this year, as fears of higher inflation have pushed interest rates upwards and hit the debt’s value.
Worth a read been a ‘double whammy’ ‘as inflation fears have stirred with the rebounding economy, the prices of the convertible bonds have sunk, with higher interest rates eroding the value of the debt and the tech groups’ shares. These concerns triggered a global exodus from convertible bond funds in the week to May 12, with a net $530m pulled, EPFR data showed’ Worth a read and whilst many have exited you can be sure that some players are cautiously bargain hunting; notes ‘Peloton’s zero per cent coupon bond sold in February traded as high as 110 cents on the dollar, but has fallen to just 93.5 cents. Airbnb’s bond from the start of March is now 92.5 cents and Twitter’s convert, sold at a similar time, fell below 90 cents this month before retracing slightly. All three notes mature in 2026.’
Read also LEX Convertible bonds: keep options open
Tech stocks are being hammered. The threat of inflation is weighing on corporate bonds. One unlucky group of investors is feeling the effects of both misfortunes.’
Concludes ‘Volatility, all else equal, makes the call option more valuable. But that may not be enough to compensate for extended concerns about inflation and interest rates.
If a convertible bond with a 75 basis point yield is what counts for a hedge, the sharp run-up in growth stocks may finally be facing its reckoning.’
A good read.


Markets Insight
Investors are underestimating Europe’s upturn By Graham Secker chief European equity strategist at Morgan Stanley.
Another +VE article on the outlook for Europe again in part because of the impact of the soon to be released European Recovery Fund.


FT BIG READ. INFRASTRUCTURE
Can Britain ever fix its railways?
The UK government is tearing up a fragmented system but critics say the new plan, which envisages a halfway house between full nationalisation and full privatisation, suffers from ‘magical thinking’.

POLITICS
Designing democracy on Mars can improve how it works on Earth By John Thornhill
Looks at an experiment at Yale for students to write a constitution for Mars.
‘Unsurprisingly, with its focus on universal values, the imaginary Martian bill of rights echoed the US constitution and the Universal Declaration of Human Rights. But the students’ 31-page constitution also reflected more contemporary concerns, enshrining the rights of bodily and psychological integrity, of privacy and non-interference by government and of sole ownership of personal data, for example. Moreover, it explicitly extended constitutional protections to animals and the environment.
But its most distinctive feature was that it implicitly rejected the electoral model of democratic politics, establishing six standing “mini-publics” of 250 randomly selected Martian citizens to legislate in areas of economic, social and environmental policy, civil rights, government oversight and interstellar relations. Fifty representatives from each of these mini-publics would then sit in the overarching central chamber, which would approve the government’s budget and have veto powers over legislation.
The students have clearly been staying awake in class because Landemore is one of the most compelling advocates for this kind of “open democracy”. Her argument is that traditional electoral politics has all too often been captured by the rich and networked and dominated by narrow elites who fail to deliver. “At some point you have to be honest and say there is not much that can be salvaged from this electoral model,” she says.’
He concludes ‘ … Their fear was that Vladimir Putin’s Russia was a “messenger from the future”, showing how it was possible for an authoritarian regime to reject universal moral values and international rules and build a “managed democracy” behind the facade of an electoral system.
That danger is real in many other countries, too. We should not wait until astronauts reach Mars before we experiment more with participatory politics to strengthen democracy.’
Worth a read.

LEX Quantum finance: jump to it
An interesting read about a technology that always appears elusive. BUT ‘Criminals and spooks may already be stealing data that they hope to decode years from now. Business should pay more attention to quantum computing as an opportunity — and as a threat.’
Interesting