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Markets

Bonds: China’s US Treasury holdings just fell to six-month low amid escalating trade war 

China’s holdings of U.S. Treasury bills, notes and bonds dropped to a six month low of $1.171 trillion in July, from $1.178 trillion in June. The data is closely watched, since dumping Treasury securities is viewed as one way China could retaliate against the U.S. in an ongoing trade dispute, but bond strategists are skeptical China is really trying to send a message this way. China is the biggest holder of U.S. Treasurys, followed by Japan. Japan’s holdings rose to $1.04 trillion from $1.03 trillion in June.

“This is a rounding error. If the Chinese were going to show their displeasure because of the tariffs, this is not where they would do it,” said Andrew Brenner of National Alliance. “Would the Chinese rather own 2-year Treasurys at 2.80 [percent yield] or 2-year German bunds at minus 0.53? China’s not going to show its displeasure in this venue.” Strategists say China is much more likely to retaliate against U.S. tariffs by slapping its own tariffs on American goods, which it has done. Some market pros believe China would use its currency as a weapon before it would dump Treasurys.

The 2-year yield moved up to its high of the day, at 2.80 percent. “The market’s traded up a smidgeon,” said McCarthy. “But we were at the lows of the day. So far, it’s not having much of an effect.” CNBC

FX: Iran Sanctions Are Damaging The Dollar

The “America first” foreign policy, the trade wars and seemingly arbitrary nature of tariffs, trans-Atlantic tension and other geopolitical rivalries are all factors that could push the dollar off of its perch.

The inability of Europe to blunt the impact of U.S. sanctions on Iran has demonstrated the dominance of the greenback, and has pushed European officials to look for solutions. Some have proposed a rival international payments system, others have suggested buying Iranian oil in euros. In August the EU announced an 18-million euro aid package for Iran. Most recently, the EU – led by France, Germany and the UK – are working on setting up a “special purpose” financial company to help Iran skirt U.S. sanctions and continue selling its oil.

A growing effort at elevating the euro, or conducting euro-denominated oil sales, combined with a smattering of other initiatives intended to weaken the influence of Washington’s financial dominance, could chip away at the dollar over time.

Meanwhile, earlier this year, for its own reasons, China launched a yuan-denominated oil contract based in Shanghai. The move was intended to bolster China’s currency, reduce foreign exchange risk, and in a broader sense, gain geopolitical and economic leverage at the expense of the dollar. OP

Stocks: A Low-Cost Airline Is Planning a Rare IPO

While Europe’s second-tier airlines collapse or wrestle with stretched finances, Wow Air plans to sell shares to the public.

The Iceland-based low-cost carrier hired Arion Bank and Arctica Finance to prepare for an initial public offering in 12 to 18 months, it said late on Tuesday, when it also published details about a bond issue. The 60 million euros ($70 million) bond, maturing in three years, will pay a 9 percent coupon. That’s the highest interest of any bond by a European airline denominated in euros or U.S. dollars that’s still actively trading, data compiled by Bloomberg show.

Wow Air needs funds to pursue an aggressive growth plan – a strategy that has caused the demise of other airlines on the continent. While Norwegian Air Shuttle has fended off takeover approaches by IAG SA and is trying to fix its balance sheet, Italy’s former flag carrier Alitalia remains insolvent. Germany’s Small Planet Airlines filed for insolvency on Tuesday, while Air Berlin, the country’s second-largest airline, and Monarch Airlines in the U.K. folded last year.

Rising oil prices are another factor weighing on airline profitability. Wow Air isn’t hedged against the risk but may reconsider that stance, Chief Executive Officer Skuli Mogensen told the Financial Times. The carrier hopes to raise between $200 million and $300 million from the sale of less than half in the company, he said. B

Stocks: Pot stock short sellers increasing bets even as losses and costs mount 

Investors shorting stocks related to the cannabis industry have lost $490 million on paper this year, but bets that pot stocks will fall have only increased despite high costs as the sector has rallied.

Massive gains in the industry among names such as the recently public Tilray Inc. Canopy Growth Corp. ― which received a $4 billion investment from Constellation Brands Inc., which seemed to be a major factor in the sector’s rise ― and Cronos Group Inc. have likely encouraged short sellers to take positions in cannabis stocks.

Short interest has increased 44% since the end of the second quarter, climbing to $1.5 billion across 33 stocks, according to data from financial technology and analytics firm S3 Partners. Most of the increase in short activity was focused in Canopy and Tilray, S3 said in a note released late Monday.

The number of investors interested in shorting the stock and the amount of interest has made short positions very expensive. According to S3 data, the average borrow fee for the basket of pot stocks is 21.8%. “On the whole, 20% is ridiculous,” said S3 managing director of predictive analytics Ihor Dusaniwsky. “It’s totally out of the ordinary, the normal fee for a general collateral stock ― IBM, General Electric for example ― is 30 basis points.”

Stocks: Tilray Surges After CEO Touts Cannabis Growth Prospects; Now Bigger Than American Air, Clorox, CBS 

Tilray Inc. is having its best day since its July debut, adding as much as 94 percent to briefly touch $300 per share, after CEO Brendan Kennedy touted the company’s growth prospects and said he sees potential for his company and others in the cannabis sector to ultimately top $100 billion in valuations. The stock’s dramatic move triggered a halt for volatility.

Tilray soared Tuesday after announcing the U.S. DEA approved plans for it to import medical marijuana to supply a clinical trial in California; the stock has gained 42 percent this week and more than 1,100 percent since its trading debut in July. The company’s valuation exceeded $25 billion, making it larger than some more mainstream stocks including American Airlines, Clorox

Cannabis peers traded higher in U.S. trading Wednesday, with Cronos Group rising 12 percent, Canopy Growth Corp. up 6 percent, Aurora Cannabis Inc. 9.3 percent higher and Aprhria climbing 1.9 percent. Related stocks also got a boost, including a 18 percent lift for New Age Beverages, which has said it is testing CBD-infused beverages, while Shopify, which was selected to run online marketplace for marijuana products in Canada, rose 2 percent. B

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Economics & Trade

ASEAN: U.S.-China Trade Tussle Is Creating Winners in Southeast Asia 

“No one wins from a trade war,” is a standard refrain among economists. Southeast Asian businesses are trying to prove that maxim wrong. The region is capitalizing on a rush of new orders and production moves as firms reconsider their business in the U.S. and China amid a deepening trade war. About one-third of more than 430 American companies in China have or are considering moving production sites abroad amid the tensions, according to survey results released Sept. 13 by AmCham China and AmCham Shanghai. Southeast Asia was their top destination.

Vietnamese furniture producer Phu Tai Corp. is among those looking to cash in. The maker of home furnishings for Wal-Mart Stores Inc. outlets in the U.S. is planning for a 30 percent increase in its exports this year and in 2019, according to Deputy General Director Nguyen Sy Hoe. It’ll invest about $10 million to expand two factories at its base in Binh Dinh province and to upgrade production lines in two other factories in Dong Nai further south.

The 10-economy bloc of the Association of Southeast Asian Nations, or Asean, is a natural magnet for new factories thanks to low production costs and well-trodden manufacturing plants, solid growth with the five biggest economies expanding at about 5.3 percent on average, and improving ease-of-doing-business rankings — not to mention geographical proximity to China. B

China: Germany considers billion euro fund to stop China buying up vital tech firms

The German government is taking steps to counter a surge in Chinese bids for stakes in German technology companies, including the creation of a billion euro fund that could rescue such firms in financial trouble. Senior officials are also working on changes to foreign trade regulations to ensure that key technologies remain in German hands. These would include government reviews of foreign acquisitions of stakes in companies below the current 25 per cent threshold, and expanding which types of purchases must be examined.

Berlin was galvanised into action by the surprise takeover of robotics firm Kuka by China’s Midea in 2016 and the purchase earlier this year of a 9.7 per cent stake in Daimler by Chinese carmaker Geely.

Chinese companies completed 30 acquisitions in Germany last year, nearly double the number for 2016, and Chinese proposals accounted for 40 per cent of the 165 reviews of foreign takeover plans in the last three years. Chinese firms, some state-owned, were particularly interested in German companies with special know-how, start-ups in the area of new technologies, and companies active in critical infrastructure fields.

As a last resort, the government also wants to set up a fund that could help companies if no private investors could be found to replace a possible Chinese bidder, or if guarantees by the state development bank KfW were not sufficient. SCMP

Repatriation: U.S. Companies Repatriated $169.5 Billion in Second Quarter

U.S. corporations are required to pay a one-time tax on their offshore profits, but don’t expect those stockpiled funds to come onshore quickly — or ever. Companies repatriated $169.5 billion in the second quarter, according to data released Wednesday by the Commerce Department, up from $34.9 billion a year earlier. Still, that followed a downwardly revised $294.9 billion returned in the first quarter.

The numbers for the first half of the year are just a fraction of the more than $3 trillion companies are estimated to have accumulated overseas to defer U.S. taxes on the money. President Donald Trump has said, without specifying his source, that he expects more than $4 trillion to return to the U.S., which will help to create jobs and more investment.

The tax overhaul signed into law by Trump in December gave companies incentives to bring money back to the U.S. by lowering the tax rate on repatriated profits. The new rules set a one-time rate of 15.5 percent on cash and 8 percent on non-cash or illiquid assets. Previously, companies had to pay the old 35 percent corporate rate, but only if they brought the money back to the U.S. Companies pay the “deemed” tax whether or not the profits are actually brought back onshore.

The Joint Committee on Taxation estimates the repatriation levy will generate $338.8 billion in tax revenue over 10 years. If cash and non-cash assets were to be repatriated in equal amounts that would equal corporations paying taxes on approximately $2.86 trillion. B

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Politics & Policy

Koreas: North Korea to invite foreign experts to permanently scrap missile sites 

North Korea pledged to roll back some of its missile program on Wednesday, drawing an enthusiastic response from U.S. President Donald Trump, even though some U.S. officials and experts fear a ploy to weaken Washington’s resolve and its alliance with Seoul.

In a joint statement after a summit with South Korean President Moon Jae-in in Pyongyang, North Korean leader Kim Jong Un pledged to permanently abolish North Korea’s key missile facilities in the presence of foreign experts. He said he was also willing to close the country’s main nuclear complex – but only if the United States took unspecified reciprocal action.

Analysts said Kim’s pledges could inject fresh momentum into stalled nuclear negotiations between Washington and Pyongyang and lay the groundwork for another Kim-Trump meeting. But two senior U.S. officials involved in U.S. North Korea policy said the Moon-Kim summit had reinforced fears of some within the Trump administration of an easing of pressure on North Korea to give up its nuclear weapons, and a weakening of the longstanding U.S. alliance with South Korea. R

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Finance

Fintech: Goldman just put an African fintech on the map

African fintech JUMO, which operates a financial services marketplace that includes loans and savings options, has closed a $52 million funding round led by Goldman Sachs, taking its total funding to $90 million.

The round also saw participation from existing investors, including Proparco ― part-owned by the French Development Agency ― Finnfund, and Vostok Emerging Finance, among others. The startup, which has 350 employees and 10 offices across Africa, will use the funds for expansion, especially in Asia, where it’s already opened an office in Singapore.

JUMO’s large addressable market likely helped it secure backing from heavyweight Goldman Sachs. The company claims to have helped 9 million people save or borrow in Africa since its launch in 2014, with 70% of these users being micro- and small-business owners. In total, the platform, which manages over 25 million monthly customer interactions, has originated over $700 million in loans.

Over 1.7 billion people worldwide lack access to banking services, either from a financial institution or through a mobile money provider. In Sub-Saharan Africa, for example, 57% of people over the age of 15 lacked a bank account in 2017, per World Bank data. The story is similar in Asia ― 20% of those over 15 in China and India lacked an account, with that figure jumping to 51% in Indonesia and 79% in Pakistan. As a result, JUMO’s has a large addressable market for its products, both in Africa and across the developing world. BI

Insurance: Competition, RBC reform may drive Indian insurer M&A

Fierce competition and potential regulatory change could trigger consolidation among Indian insurers while simultaneously making the sector more appealing to foreign investors, industry experts believe.

As it stands, India has 24 life insurers, 33 general insurers and two re-insurers, data from the country’s Insurance Regulatory and Development Authority (IRDAI) shows. And a government pledge in the last Budget to merge National Insurance Company, United India Insurance Company and Oriental India Insurance Company to create a behemoth controlling up to a third of the non-life market for the moment appears to have stalled.

But with pricing pressures taking their toll on profit margins as the battle for market share intensifies, a wave of mergers and acquisitions looks likely.

So far, six insurers have listed on the main stock exchanges – General Insurance Corp., HDFC Standard Life, ICICI Lombard General Insurance, ICICI Prudential Life Insurance, SBI Life Insurance and New India Assurance. More are scheduled to follow, the most recent applicant being PNB Metlife, a joint venture between US-based  Metlife, Punjab National Bank and other entities.

“With some large insurers having listed, there is reasonably fierce competition to retain clients and corporate agents like banks, which can lead to compression of margins for the industry as a whole and add to the risk,” Shanbhag said. Consequently, a change in the rules in India to a more risk-based capital regime for insurers, as seen elsewhere in Asia, seems increasingly justified, he said. AI

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Labour, Education & Demographics

International Labor Markets: Some regions are more vulnerable to automation than others

A paper published this week by the OECD, the Paris-based club of mostly rich nations, says the distribution of jobs at high risk of automation varies sharply. In general, northern Europe, North America and New Zealand are at much less risk than southern and eastern Europe. In west Slovakia, almost 40 per cent of jobs are at risk, while in the region around Oslo in Norway, the proportion is about 4 per cent.

Some countries, but not all, have wide disparities within their own borders. In Spain, for example, the gap between the most and least exposed regions is 12 percentage points. In Canada, the gap is just 1 percentage point.

As should be clear from these findings, the OECD does not believe everyone’s jobs are equally exposed to automation. Its calculations are based on an assumption that some tasks remain beyond the capability of robots and algorithms: creative intelligence, social intelligence and some types of nimble and unstructured physical activities. By examining the tasks that people do in different occupations, the OECD has concluded that jobs that require high levels of education mostly remain safe, while jobs that require only basic education (with some exceptions like social care) are much more exposed than in previous waves of automation.   FT

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Services

Social Media: The biggest trend in Chinese social media is dying, and another has already taken its place 

China’s live-streaming sensation fueled an unprecedented boom. But, since last year, short videos ― typically lasting between 15 seconds to a few minutes ― have become one of the fastest-growing trends in China. Packed with music and special effects, they are usually fun and quirky for both their makers and viewers. Douyin, one of the most popular Chinese short video apps, said its platform had more than 300 million domestic monthly active users and more than 150 million daily active users as of June. That’s about one in every 10 Chinese people.

The app is owned by Beijing-based tech company Bytedance, which also owns news aggregator app Jinri Toutiao. Known as TikTok in markets outside of China, Douyin has begun to gain international popularity: The app’s global monthly active user count reached 500 million across over 150 countries and regions, it said in June. For comparison, Instagram announced in June that it had reached one billion monthly active users.

Meanwhile, Douyin rival Kuaishou ― meaning “fast hand” in Mandarin ― is backed by Chinese internet giant Tencent. The app has gained popularity among users from China’s less-developed areas, garnering more than 234 million monthly active users and about 130 million daily active users, according to the company. CNBC

Video Games: 5 facts about Americans and video games

Overall, 43% of U.S. adults say they often or sometimes play video games on a computer, TV, game console or portable device like a cellphone. But there are substantial differences by age and gender. For example, Americans younger than 50 are twice as likely as those ages 50 and older to say they play games on one of these devices (55% vs. 28%).

Puzzle and strategy games are the most popular genres among those who often or sometimes play video games. Around six-in-ten of these adults play puzzle and strategy games (62% play each type).

Gaming is popular among teens – especially teenage boys. More than eight-in-ten teens (84%) say they have a game console at home or have access to one, and 90% say they play video games on a computer, game console or cellphone.

Teens are divided on whether they spend too much or too little time playing video games. A quarter of teens (26%) believe they spend too much time playing video games, while a similar share (22%) feels they spend too little time doing so.

A majority of adults – especially seniors – believe video games are a contributing factor to gun violence. Six-in-ten adults say the amount of gun violence in video games contributes a great deal or a fair amount to gun violence in the country today. PRC

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