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The trick is not to be distracted by the noise and avoid drawing all the wrong conclusions. So, I try not to scream when the market seems blithely unaware of the cataclysm of bad news threatening to overwhelm it.

More often than ever before I find myself wondering if markets have some form of dementia. Stocks suddenly rise a couple of percent when the news sounds unremittingly bad, solely on the basis that tomorrow will likely be better, or that really, really bad news will force Central Banks to give up on monetary tightening – thus making bad news into good news.

Market sentiment is up and down like a see-saw. When senior bankers, like Jamie Dimon of JP Morgan, are telling their banks' largest clients they see a greater than 20% likelihood of something worse than a hard recession – then maybe it’s time to check your hard hat is a snug fit.

For the last few months, the tone of markets has become more and more confusing. Whether the driver of uncertainty is China, Russia, inflation, war, Ukraine, energy or simple political or central banking ineptitude – the up and down of prices feels like it is making less and less sense by the day. The thing is – these are all known unknowns, things we are aware of, and have worked out how they will hurt us.

As a humble market strategist, I continue to pick the information together to discern probable outcomes. Whether it is raw data, reading through behaviours or seeing patterns in events, there is plenty of information out there – often too much. I try to interpret it and use it to discern what markets might be doing. (The key is to understand markets don’t think – they are just a voting machine.)

But the thing that really knocks-out markets are the no-see-ums – like the pandemic or the energy spike that has routed European economies.

Recently, I was looking at Risk On/Risk Off scenarios and came to the conclusion that US Treasuries will remain the core risk mitigation strategy. What could possibly undermine the mighty dollar?

Chips have become a key strategic resource. No one wants a destructive, costly war over Taiwan, or to wreck the global chip supply.

But then I also figured out the role of the humble computer chip in the global economic picture. Such a small thing could trigger a geopolitical crisis.

Perversely, the global chip business seems to be in short-term trouble. Investors are focused on declining demand for chips as post-pandemic shortages ease, and the rapidly escalating costs of new chip foundries required to make new ones threaten to overwhelm the market. Even as some of the major manufacturers have seen their stock price tumble, global demand for chips is set to double in the next decade – hence the need for greater investment.

On the other hand, semi-conductors (to give chips their proper name) are about the most important component of the global economy. Without chips… nothing works. We would go back to the horse and cart. The imperative from Washington to Beijing is to secure their access to chips.

Chips have become a critical strategic good – and that means they have become a key issue in the geopolitical Game of Thrones being played in the South China Seas.

Here are some points relating to semi-conductors to think about. Chips are ubiquitous:

Chips have become a key strategic resource. No one wants a destructive, costly war over Taiwan, or to wreck the global chip supply. The Chinese have enough on their economic plate – property fallout, the domestic loan market, youth unemployment, plus the ongoing damage of COVID restrictions to contend with. The conflict would simply exacerbate their economic weakness ahead of critical party meetings.

But… If China wanted to inflict economic self-harm by inviting Western Sanctions and lost manufacturing orders, then they could.

The Chinese don’t actually need to invade to thoroughly destabilise the West. All they would need to do is institute a blockade of Taiwan. The West would not be certain of global support against such a move. If the Chinese frame it as domestic police action, the same countries that failed to rally against Russia’s invasion of Ukraine – critically the Gulf States – may decide to withhold support and wait and see how it plays out.

A global shortage of chips will swiftly impact the West’s manufacturing capabilities, closing down the auto sector and causing chip rationing towards defence spending. It would be dangerous – a blockade would raise the likelihood of mistakes, miscalculations and raise the risk of confrontation turning a cold war hot.

Sprinkle in some more confusion – like a new Trump administration likely to unravel the Western Democratic Alliance and break NATO. Trump had his successes, but his first presidency was an unmitigated disaster in terms of America’s international standing and relationships. He offended US allies and diminished the reputation of the Bastion of Democracy as a reliable partner. Should Trump’s new MAGA republicans win the mid-terms it will further change the signals – perhaps encouraging China to take a risk on Taiwan’s chips…

The company revealed that first-quarter sales dipped 35% in China a vital market for its clothing. Before the onset of the pandemic in early 2020, around one-third of the global luxury industry relied on Chinese spending, both at home and as tourists aboard. 

Excluding China, Burberry’s sales rose 16% globally, but when included, sales were up just 1%. The company said that EMEIA sales were up 47% compared with the first quarter of last year which was heavily impacted by lockdowns and global restrictions. 

Burberry Chief Executive Jonathan Akeroyd commented: “Our performance in the quarter continued to be impacted by lockdowns in mainland China but I was pleased to see our more localised approach drive recovery in EMEIA (Europe, the Middle East, India and Africa), where spending by local clients was above pre-pandemic levels.”

“Our focus categories, leather goods and outerwear continued to perform well outside of mainland China and our programme of brand activations boosted customer engagement.”

“While the current macroeconomic environment creates some near-term uncertainty, we are confident we can build on our platform for growth,” Akeroyd continued.  

[ymal]

 

 

Michael Kamerman, CEO of Skilling, shares his opinion on what stock you should buy this week.

Tesla 

By now, Tesla is renowned for its well-performing stock as well as its prolific CEO, Elon Musk. But, the company has reached new heights, delivering 310,048 cars in the first quarter of 2022.

Despite ongoing supply chain interruptions and China’s zero Covid policy, Tesla broke their own sales record – delivering nearly double the 184,800 cars in Q1 2021.

With Tesla’s Berlin factory up and running, and the increase in overall production, momentum will only grow for the company.

Whilst this progress is impressive, it is the news of a stock split that has accelerated Tesla’s stock price. Investors may see this as a green light to invest in Tesla stock but they should be wary that a stock split could have little to no impact on the overall stock price.

An added facet for investors to consider is the concerningly high valuation of the company. This gives very little room for the company to stall or misstep, something which comes with the territory of the market. 

Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 89% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. 

Not investment advice. Past performance is not indicative of future results.

The move by India was prompted by the country’s rapid adoption of digital coins, bringing it closer to regulating such investments following several warnings about the risks of terrorism and money laundering from the central bank. The move also follows China beginning CBDC trials in numerous cities, while the US Federal Reserve and the Bank of England are exploring possibilities for their economies. 

On Tuesday, Finance Minister Nirmala Sitharaman said in her budget speech that income from the transfer of any digital assets will be taxed at 30%. 

There’s been a phenomenal increase in transactions in virtual digital assets,” Sitharaman said. “The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.”

Sitharaman also announced the launch of a central bank digital currency for the financial year beginning in April, to attract more efficient and more affordable currency management. 

The bank’s proposal is the latest in a global cryptocurrency crackdown. Governments from Asia to the US have expressed concern that highly volatile digital currencies could diminish their control of financial and monetary systems. 

Russia has long been against the use and mining of cryptocurrencies. While the country gave them legal status in 2020, it banned their use as a means of payment and has said they could be used to finance terrorism or to support money laundering. 

In a report on Thursday, Russia’s central bank proposed preventing financial institutions from using cryptocurrencies and said that mechanisms should be put in place to block transactions aimed at buying and selling cryptocurrencies for fiat currencies. This would include crypto exchanges. 

The central bank said it plans to work with regulators in countries where crypto exchanges are registered to collate information about the actions of Russian users. The bank is looking at the steps taken by other countries that have moved to ban crypto, including China, which did so in a series of gradual phases last year.

The Chinese property giant is struggling to repay over $300 billion in liabilities, a figure which includes nearly $20 billion of offshore bonds now deemed in cross-default after the company missed payments. 

Evergrande says it is seeking a six-month delay due to the “current operational status” of Hengda, the issuer and flagship property arm of the company. Evergrande is hoping to defer redemption and coupon payments of Hengda Real Estate Group’s 4.5 billion yuan 6.98% January 2023 bond from January 8 to July 8. This would allow bondholders the option to sell bonds back to the issuer this coming weekend. 

Hengda has said that trading in the bonds will be paused from January 6 ahead of the meeting. 

While Evergrande has not yet missed any onshore bond payments, the firm did fail to meet the $82.5 million owed in offshore interest payments at the end of a month-long grace period at the beginning of last month. Evergrande is currently the most indebted property developer in the world. 

Shares have dropped to an 11-year low for indebted Chinese property developer Evergrande following signs that it is on the verge of a default that could lead to a full-scale restructuring for the company. 

In recent months, Evergrande has gone from one crisis to the next as it faces a series of repayments on debts. In a statement released at the weekend, Evergrande said there was “no guarantee” that the group could meet its obligations, adding that creditors were demanding an immediate repayment of $260 million.  

Evergrande’s most pressing problem now is how to repay the $82.5 million due Monday. This is a deadline that has already been pushed back 30 days from November. 

“Since September 2021, the Group has been diligently reviewing its capital structure and liquidity condition with the help of its financial and legal advisors, evaluating all available strategic options, and maintaining ongoing dialogue with offshore creditors. In light of the current liquidity status of the Group, there is no guarantee that the Group will have sufficient funds to continue to perform its financial obligations,” Evergrande said in the statement. “The Group is taking a comprehensive view in assessing its overall financial condition, considering the interests of all stakeholders, upholding the principles of fairness and legality, and plans to actively engage with offshore creditors to formulate a viable restructuring plan of the Company’s offshore indebtedness for the benefit of all stakeholders.”

The announcement by Chengdu comes after several real estate firms, led by industry giant Evergrande, fell into a financial crisis after China began a regulatory drive to end speculation and leverage. The move left companies struggling to meet their debt obligations, exacerbated by the fact they were unable to offload properties or borrow more cash. 

However, addressing the issue, Chengdu said it would speed up approvals for home sales and property loans and would ease restrictions on the use of pre-sale proceeds. 

There had been some signs that Beijing was shifting away from its tough line on the property sector. In September, the central bank asked financial chiefs to help local governments support the housing market amid dramatically slowing growth in the country’s economy. 

The crisis has been highlighted by the struggles of Evergrande. The property development giant currently has debts worth $300 billion and is facing a serious threat of collapse. If Evergrande were to collapse, the crisis could further spread into the wider Chinese economy and could even impact the global economy. 

Evergrande has been stumbling from one deadline to another in recent weeks as it wrestles with over $300 billion in liabilities, with $19 billion of these being international market bonds. 

Chinese media outlet Cailianshe reported on Thursday that several bondholders had received interest payment of the three bond tranches, worth a total of $148 million, that had been due last month. Evergrande made the payments on Wednesday, at the very end of a 30-day grace period. This was also the case with two separate offshore coupon payments due in late September with the grace period for these ending late last month. 

Had Evergrande failed to meet the payments then the result would have been a formal default by the company which would have led to cross-default provisions for other Evergrande dollar bonds. This would have exacerbated the debt crisis that is looming over the second-largest economy in the world. 

While Evergrande has managed to avoid default again, concerns in the property sector showed no signs of letting up as other blocks of substantial debt approach. Evergrande has coupon payments totalling over $255 million due at the end of December. 

China Evergrande Group was down by more than 10% in Hong Kong at midday on Thursday, while one of its most profitable units, Evergrande Property Services, was down 6.45%. 

On Wednesday, Evergrande announced that it had officially abandoned its plan to sell a 50.1% stake of Evergrande Property Services, saying there was “no guarantee” it could meet its financial obligations to stay afloat. The property developer has debts of approximately $305 billion. However, due to a government crackdown on lending and a slump in property sales, Evergrande is rapidly running out of cash. Since September, it has been trying to offload assets to generate the cash required to repay creditors, including the 1.6 million homebuyers who have purchased currently-unfinished properties from the company. 

Concern that a cash crunch at Evergrande could lead to economic contagion has seen swathes of other indebted property developers hit with credit rating downgrades. Some smaller property developers have already defaulted.

Some bondholders said they did not receive coupon payments totalling $148 million on Evergande’s April 2022, April 2023, and April 2024 notes which were due by Tuesday at 0400 GMT. This comes as the property developer missed two other payments in September, and puts investors at risk of significant losses at the end of the 30-day grace period. Evergrande currently has over $300 billion in liabilities. 

According to Refinitiv data, a total of $101.2 billion in bonds issued by Chinese property developers will be due in 2022.

On Tuesday, trading of high-yield bonds remained soft after a retreat in the previous sessions on concerns over contagion in the $5 trillion property development sector, which accounts for a quarter of the Chinese economy. 

According to Shanghai Stock Exchange data, the five biggest losers amongst exchange-traded bonds in morning deals were all issued by property development companies. 

Fantasia did not repay a bond that matured on Monday. Ratings agencies have downgraded Chinese developers Fantasia Holdings as Sinic Holdings over risk from their limited cash flow.

The developer has halted trading of its share since Sept 9 until further notice, with those shares plummeting almost 60% year-to-date. However, the fallout from Fantasia would be small in comparison with the potential fallout from Evergrande, the world’s most indebted property developer with liabilities of $300 billion. According to the company’s first-half financial statement, Fantasia has total liabilities of $12.8 billion. 

Since Evergrande’s debt crisis surfaced, China’s property sector has come under the spotlight. Evergrande has twice warned that it could default, triggering widespread concern from investors. The company has missed interest payments on two US dollar offshore bonds so far and has been hurriedly attempting to raise cash to pay off investors and suppliers. 

Other Chinese property developers have also been hurriedly attempting to raise cash, signalling further distress in the industry.  

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