The Opening Belle - Side Effects May Include Premature Optimism

Hong Kong’s government ousted four opposition lawmakers immediately after China passed a law allowing the disqualification of officials deemed unpatriotic, prompting a pro-democracy legislator to say the others would resign en masse.

The 16 remaining opposition lawmakers in the city’s 70-seat Legislative Council will quit at a press conference later Wednesday, democratic politician Fernando Cheung said via text message.

China’s top legislative body earlier passed a measure requiring Hong Kong lawmakers to be patriots, curbing debate in a democratic institution that has endured more than two decades after the former British colony’s return.

“It’d be hard for us and myself today to admit that is not the hardest or the saddest day for Hong Kong,” Kwok Ka-ki said as opposition members briefed Wednesday. “But I would urge the people of Hong Kong should not give up. We can’t give up.”

The resolution is the latest sign of China’s determination to rein in dissent in the wake of anti-government protests that rocked Hong Kong last year. Beijing bypassed the Legislative Council to impose controversial national security legislation in June, causing the Group of Seven nations to accuse China of violating the terms of its handover agreement with the U.K. and prompting the Trump administration to sanction more than a dozen senior officials who oversee the city.

A mass resignation would highlight international concerns about China’s human rights practices just as President-elect Joe Biden prepares to take office on a promise to defend democratic values around the world. He has vowed to “fully enforce” the Hong Kong Human Rights and Democracy Act signed by Trump last year.

Chinese technology giants from Alibaba Group Holding Ltd. to Tencent Holdings Ltd shed almost $260 billion of market value over two days of frantic selling, as investors scrambled to assess the fallout from Beijing’s broadest attempt to rein in its most powerful private-sector firms.

Technology shares tumbled for a second day after Beijing issued regulations designed to curb the growing influence of internet-sector leaders including JD.com Inc., Meituan and Xiaomi Corp. The Hang Seng Tech Index slumped 5.6% on Wednesday in Hong Kong, taking its two-day loss to 10% as of midday. Shares in the quintet of firms have sunk at least 8% over two sessions.

Beijing on Tuesday unveiled regulations to root out monopolistic practices in the internet industry, pivoting away from a mostly hands-off approach while dealing a blow to businesses at the heart of the world’s No. 2 economy.

The vaguely worded edict landed a week after new restrictions on finance triggered the shock suspension of Ant Group Co.’s $35 billion initial public offering, scuppering founder Jack Ma’s ambitions to dominate online finance in the process. They also emerged on the eve of Singles’ Day, the event Ma invented a decade ago that’s evolved into the nation’s largest annual shopping spree.

”China’s Big Tech will have to rethink their business models,” said Zhan Hao, a managing partner with Beijing-based Anjie Law Firm. “The philosophy of internet companies is winner-takes-all, and especially for platform operators, they garner user traffic and build up ecosystems that are similar to each other.”

“I literally gasped when I first read these guidelines,” said John Dong, securities attorney at Joint-Win Partners in Shanghai. “The timing -- on the eve of Singles’ Day -- the forcefulness and the resolve to remake the tech giants is startling.”

 🇨🇳 Chinese foreign trade firms are buying more FX on concerns that the CNY may weaken following a 5-month rally, per the 21CBH, citing market participants. As the U.S. election result becomes clearer, traders believe that the CNY has peaked, the newspaper said.— Anthony Barton (@ABartonMacro) November 11, 2020 

Apple Inc on Tuesday introduced a MacBook Air notebook and other machines with its first central processor designed in-house for Macs, a move that will tie its computers and iPhones closer together technologically.

The new chip, called the M1, marks a shift away from Intel Corp technology that has driven the electronic brains of Mac computers for nearly 15 years.

Patrick Moorhead, founder of Moor Insights & Strategy, estimated Apple will save between $150 and $200 per chip in costs by using its own central processors. “We didn’t see Apple add any expensive features,” he said. “They’re going with a much higher margin.”

In June, Apple said it would begin outfitting Macs with its own chips, building on its decade-long history of designing processors for its iPhones, iPads and Apple Watches.

Apple executives said on Tuesday that the M1 was intended to be efficient as well as fast, to improve battery life, and that Apple’s newest version of its operating system was tuned to the processor.

“This announcement underscores how important high-performance, custom processor designs will be to leading the next generation of client computing,” said Jon Carvill, vice president of Nuvia, a data center chip firm founded by former Apple executives. “We think a similar trend is playing out in the future of the data center as well.”

European banks need to prepare their balance sheets for the risk of pandemic-induced non-performing loans hitting them in the new year, the head of the EU agency tasked with winding down failing lenders has said.

Elke König, chair of the Single Resolution Board, rejected suggestions from the European Central Bank that the EU needs to set up a network of “bad banks” to handle higher non-performing loans (NPLs), but she warned banks needed to do intensive work to sort out viable loans from unviable ones.

In an interview with the Financial Times she also urged the EU to properly harmonise its state aid rules for handling embattled banks with its “resolution” regime, which intervenes to ward off systemic financial crises. Ms König argued that as things stand there was a “misalignment” in the system.

The SRB was set up following the eurozone sovereign debt crisis to wind down stricken banks while securing financial stability and consistent treatment of the region’s lenders. But with regulators now weighing the risks of a surge in NPLs, the agency is still working with an incomplete system of EU bank-crisis rules which must operate over a patchwork of different national arrangements.

Last month, the ECB’s top bank supervisor Andrea Enria wrote in the FT that, in a “severe but plausible” scenario, non-performing loans at eurozone banks could reach €1.4tn, well above the levels of the 2008 financial crisis and the ensuing EU sovereign debt crisis.

Ms König said it was too soon to know how bad the situation with NPLs would get, because this would depend on the nature of the downturn and recovery. Current actions by governments, such as state guarantee schemes, were “shielding” the lenders, she added.

But she said that non-performing loans could start coming through in the first and second quarters of next year. In light of this, her message to banks was “be aware NPLs are coming and the best thing to do is address them early . . . That is the best thing we can do for the time being, and then it is steering through the fog.”

The Reserve Bank of New Zealand (RBNZ) did not cut rates as we suggested last week might happen, following the recent 3Q20 spike up in the unemployment rate, and the 15bp cut administered by their central bank neighbours in Australia.

But where we go from here is considerably less clear.

On the one hand, you could argue that the new $100bn funding-for-lending (FFL) program will circumvent the issues of housing-market overheating that further rate cuts might deliver. But there are problems with this. Unless the RBNZ can ensure that this lending predominantly supports businesses, it is often easier for cheap funding to simply fuel more mortgage lending, which has been the experience of a lot of other countries that have gone down this FFL route.

Likewise, the RBNZ's quantitative easing measures have also got it to the point where it now owns more than a third (37%) of all the outstanding stock of government bonds, with little further room to move. Such policies also tend to just drive down market and retail rates more generally, so any problems (such as overheating property) associated with easing policy rates further are shared by the current QE scheme.

Then there is the inconsistency between the RBNZ noting that the economy has actually been stronger than anticipated, but painting a downbeat picture of the quarters ahead, saying they won't be tightening policy any time soon, and noting they are making progress on being able to deliver a negative cash rate. It's very hard to reconcile today's rate pause (if it is just a pause) with the economic realities and keep a credible view open for negative rates in the not too distant future.

One interpretation of all this, and the one we are leaning towards, is that the RBNZ is playing a complicated game of expectations management, though one that trips over some existing economic realities. So the RBNZ is keen to keep expectations alive to the prospects of further easing and to dim the prospects of future tightening in order to keep rate expectations low, and thereby longer-term market rates and yields low.

 🇳🇿 A lot of focus from the sell-side on the shift in the RBNZ's unconstrained OCR track re: their reasoning behind RBNZ call adjustments.

- Note that BBG OIS strip pricing points to markets no longer pricing in a negative OCR during 2021. pic.twitter.com/37DHbkmkdY— Anthony Barton (@ABartonMacro) November 11, 2020 

Coronavirus vaccines are expected to boost international passenger transportation and oil consumption, but the first significant impact will not be felt until well into the second half of 2021, based on futures price movements on Monday.

Brent calendar spreads surged that day as traders priced in an announcement from Pfizer about successful immunisation trials, fuelling optimism an effective vaccine will become available within the next few months.

Before Pfizer’s announcement, flat prices and spreads had been under pressure since mid-October, prompting a statement from Saudi Arabia that OPEC and its partners are prepared to “tweak” their production agreement.

The combined effect of Pfizer’s announcement (potentially boosting oil consumption) and Saudi Arabia’s talk about tweaking (potentially reducing production relative to the planned baseline) sent oil futures soaring.

Front-month Brent futures prices closed more than 7% higher, an increase of more than three standard deviations, and the largest one-day percentage gain since the start of June.

In the last two weeks, hedge funds and other money managers had sold the equivalent of almost 120 million barrels of Brent and WTI, including the creation of 62 million barrels of fresh short positions.

The existence of so many shorts accelerated the price rise, as fund managers raced to buy back some contracts they had earlier sold, a classic high-volatility short-covering rally.

Crude oil traders are not anticipating that even a successful vaccine will increase oil consumption significantly until well into next year. Vaccine-driven futures buying is therefore being concentrated at the back of 2021 and into 2022.

Deferred buying is causing the calendar spreads to tighten. Brent spreads for the third quarter of 2021 strengthened by 23 cents per barrel (30%) yesterday, and for the fourth quarter by 22 cents (37%), compared with just 18 cents (17%) for the second quarter.

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