Markets rattled by piling negative developments
As we had feared the US stock market is starting to get rattled by number of overlapping negative developments. First and foremost, the fiscal cliffs related to extending the virus-related relief bills look increasingly unlikely to be agreed upon in time before their expiry at the end of this month as infighting among Republican lawmakers have left their timely passage in doubt. With US unemployments claims ticking back up again, economists are becoming increasingly concerned about the probability of a double-dip recession, especially as raging infections across the US are forcing state governors to contemplate another lock-down phase. Moreover, with Mr. Trump signing an executive order to send more federal agents in trying to quell unrest beyond Portland, now targeting Chicago, Kansas City and Albuquerque, and promising to expand troop presence to more cities including New York which are generally run by Democratic mayors, chaos which we feared that the US president might resort to in creating, in his last ditch attempt to win back support among voters ahead of the presidential election looks to be unravelling.
News on the geopolitical front have been equally grim as tensions between US and China continue to elevate to alarming levels with US ordering the closure of China’s consulate in Houston and China retaliating by closing the US consulate in Chengdu. President Trump has declared that he no longer deems the Phase I trade agreement with China as an important deal in the post-pandemic world despite the fact that Chinese have continued to accelerate their purchases of US agricultural produce. US allies have also come to support its hardened stance against Beijing with France joining the UK in banning Huawei from its 5G infrastructure and denouncing China’s treatment of its Uighur population. Meanwhile, Australia announced that its warships are now conducting military exercises in the Philippine Sea alongside the American and Japanese navies. Indonesia also declared that its navy too has conducted a four-day exercise in the South China Sea, all in major show of force against Chinese claims to the waters. With so many actors now actively operating their naval forces in the region, the risk of a potential military incident, accidental or otherwise, cannot be taken lightly at this stage.
None of the above events have come as a surprise as we have been warning investors of dark clouds gathering. We fear that risks of policy missteps can only increase from here as the Trump administration could potentially resort to any tactic including what we previously described as ‘scorched earth’ over the next three months, in the run-up to the US presidential election in early November. Although very promising news by Covid-19 vaccine developers have continued to dominate headlines with three candidates entering their phase 3 trials, rising near term anxieties are starting to engulf hopes of mass vaccination of richer nations which will undoubtedly be prioritised but that still looking unlikely before early next year. As a possible indication of growing market concerns, we have seen the first notable uptick in value of assets in US money market funds which had peaked in May at historic high of $4.8trn and had been on a steady downtrend until last week when it suddenly bouncing back up close to $4.6trn.
Abe’s policy failures have left Japanese stocks largely rudderless
As we have previously underlined, global investors can do far worse than investing in yen-denominated stocks given the generally solid balance sheets of Corporate Japan, relatively high dividend yields but low payout ratios that leave them somewhat insulated from hefty cuts and generally compelling valuations. However, as we have also noted Japanese stock market provides little downside protection as it continues to move generally in line with performance of US stock indices and sectors. With Covid-19 infections also on the rise there, and its lawmakers looking equally incompetent as those in the US in tackling the contagion, the country provides little refuge from the pandemic either. Moreover, potential for foreign policy missteps could prove even more costly for Japan as Mr Abe’s nationalistic tendencies have in the past twelve months led to needless trade friction with South Korea and his recent hard political stance against China, its biggest trading partner by far, leaves the market little to cheer about.
With Abe government’s latest ‘Go To Travel’ campaign to encourage domestic tourism having been fiercely criticised as fears of spreading the contagion have left residents in rural areas protesting against such stimulus measures and at the same time having angered more people in the country’s capital by suddenly excluding tourists from Tokyo from the scheme (but not Osaka which is also seeing the highest rates of daily infections), Abe’s cabinet seems to continue to stumble at almost every hurdle. Amazingly, total number of Covid-19 tests thus far equal to only 0.5% of Japan’s population, almost 5 months after the shambolic mishandling of virus-stricken Diamond Princess cruise ship. Indeed, the most recent polls suggest rising dissatisfaction with Japanese prime minister who we continue to believe has overstayed his welcome as the head of the LDP and his days as leader of the country look increasingly numbered.
With Abenomics having largely failed as the illusive third arrow of economic reforms was never launched, Abe’s signature policy to change Japan’s pacifist constitution never garnered enough support, his big push for casino resorts openings have largely stumbled as key US investors have backed out of their big investment plans and his trophy of holding the Tokyo Olympics scuppered by the pandemic which could still be canceled by next year, ultimately Abe has achieved very little except to escape the wrath of Trump’s trade policies by befriending the US president. Even his handpicked BOJ chief, Kuroda-san whose aggressive QE policies from 2012 has done much of the heavy lifting in the Abenomics era, the central bank under his leadership has utterly failed to increase inflationary expectations, it has manage to destroy commercial banks’ lending margins by its zero interest rate policy (which in later years was half heartedly reversed through a stealthy yield curve control program), its large equity ETF purchases have not allowed for much price discovery in the stock market while it has ultimately failed to keep the yen at competitive levels to help Japan’s exporters. Despite these failures, the same stale economic policies continue to remain in place.
Intel’s spectacular stumble
Although we have been cautiously negative about Intel for some time despite booming server demand and have steered clear of its key Japanese suppliers such as Ibiden this year, we had expected the US chip giant to redouble its efforts on its 7nm node to try to catch up with its competitors. Having fallen desperately behind in the EUV race versus TSMC and Samsung foundries that have been producing better performing, lower power consuming chips for competitors such as AMD, Nvidia, not to mention, Qualcomm which forced Intel out of smartphone modem chip market last year, Intel’s production problems have been reasonably well known within the industry. Moreover, with Apple having very recently ditched Intel’s processors and decided to design its own MPUs for its Mac computers and outsource production to TSMC, the market was given an early warning of Intel’s continued struggle with yields and defects which one of its important customers could no longer tolerate.
Having reportedly had major issues with its multi-patterning lithography both at 14nm and 10nm nodes, we were anticipating Intel to dedicate a large sum of R&D and capex towards scaling up its 7nm lines, to move away from its multi-patterning problems altogether. However, not only Intel further delayed mass production on 7nm node, claiming that related yields are 12 months behind its targets but the firm’s management had raised the once unthinkable possibility of outsourcing chip production to foundries at cutting edge geometries. With TSMC having already pledged $12bn in building a state-of-the-art fab in Arizona, providing that US lawmakers deliver on their promise of big grants and tax credits, we now wonder if the Taiwanese foundry had already been given the heads up to Intel’s future outsourcing plans.
Another very interesting and related development is Softbank’s planned sale of its ARM unit whose chip architecture not only dominates smartphones’ silicon design but it is starting to gain a foothold in the server market through cloud giants such as Google which are designing their own server chips and abandoning Intel’s archaic x86 architecture. Ultimately, Intel might have to move further away from its existing business model by ditching its own architecture and become an ARM licensee. Come what may, Softbank is now likely to see strong bidding interest in its wholly owned Cambridge-based chip design firm which reportedly seem to already got the attention of Apple and Nvidia.