Access both platforms from your single Saxo account.
A South Korean canary in the coal mine?
Peter Garnry
Head of Equity Strategy
Summary: It seems more and more likely that the world is in a state of "false stability” in the wake of forward guidance accommodation from central banks, most notably the Fed, and stimulus from China. Against this backdrop, a downwards trending KOSPI in South Korea, and Uber's inauspicious start, seem ominous developments.
The canary in the coalmine is South Korea equities, which are down 10% from their peak in April as macro data has surprised to the downside and China is weaker than initially thought just two months ago.
Add to this a likely breakdown in US-China trade deal talks, or as we say a “non-solution outcome”, which meant higher tariffs on midnight into Friday (from 10% to 25%) on $200bn worth of Chinese goods. The two parties seem to have moved to a position where neither of them can now cave in without losing face with their citizens, hence the probability of a ground-breaking deal has gone down.
We see pricing of this across emerging market assets, CNH (now at 6.9000 against the USD) and Asia Pacific equities. With the global economy still slowing it’s not the time to be complacent and the VIX closing at around 16 on Friday is a major puzzle given what is going on in markets. We remain defensive on equities.
Add to this a likely breakdown in US-China trade deal talks, or as we say a “non-solution outcome”, which meant higher tariffs on midnight into Friday (from 10% to 25%) on $200bn worth of Chinese goods. The two parties seem to have moved to a position where neither of them can now cave in without losing face with their citizens, hence the probability of a ground-breaking deal has gone down.
We see pricing of this across emerging market assets, CNH (now at 6.9000 against the USD) and Asia Pacific equities. With the global economy still slowing it’s not the time to be complacent and the VIX closing at around 16 on Friday is a major puzzle given what is going on in markets. We remain defensive on equities.
More stress signals from Chinese consumers
Adding to China’s troubles passenger car sales was again weak in April down 18% y/y. In the first four months of the year sales were down 12% compared to the same period last year. In any event, the activity in the Chinese car market is around the lows in the world and Europe during the financial crisis of 2008.
As we have been saying for half a year now this indicator is probably the best coincident indicator on China and it shows that the country is experiencing a recession. Many have argued against that position on the grounds of 6% GDP growth failing to recognise that China does not measure GDP growth as output as developed countries but as input to the economy. But one does not need macro indicators to tell that China’s economy is weak. Investors simply need to look at the government’s behaviour. The amount of stimulus being orchestrated is not done in a booming economy but one in weakness.
Adding to China’s troubles passenger car sales was again weak in April down 18% y/y. In the first four months of the year sales were down 12% compared to the same period last year. In any event, the activity in the Chinese car market is around the lows in the world and Europe during the financial crisis of 2008.
As we have been saying for half a year now this indicator is probably the best coincident indicator on China and it shows that the country is experiencing a recession. Many have argued against that position on the grounds of 6% GDP growth failing to recognise that China does not measure GDP growth as output as developed countries but as input to the economy. But one does not need macro indicators to tell that China’s economy is weak. Investors simply need to look at the government’s behaviour. The amount of stimulus being orchestrated is not done in a booming economy but one in weakness.
The disastrous Uber IPO
As we indicated in our IPO analysis of Uber “Why the Uber IPO is all about network effects” the valuation was priced aggressive and especially against Lyft. In addition we updated our views on Twitter as the pricing date (last Thursday) approached.
First Uber said that demand was strong enough to price shares in the high end of the price range ($44-50 per share) but then settling for $45 on the actually pricing date as sentiment soured as Lyft’s shares continued to make new lows. We were not optimistic on Uber and we were indeed vindicated on Friday with the share price down 7.8% from the peak at $45 which was reached shortly after opening at $42.
Investors are increasingly worried over the spending spree of on-demand ridesharing companies and the biggest risk looming, besides regulation of course, is the business model’s robustness against a recession. Our suspicion is that the business model is not robust but time will tell.
Uber 1-min chart on first day of trading (Friday):
As we indicated in our IPO analysis of Uber “Why the Uber IPO is all about network effects” the valuation was priced aggressive and especially against Lyft. In addition we updated our views on Twitter as the pricing date (last Thursday) approached.
First Uber said that demand was strong enough to price shares in the high end of the price range ($44-50 per share) but then settling for $45 on the actually pricing date as sentiment soured as Lyft’s shares continued to make new lows. We were not optimistic on Uber and we were indeed vindicated on Friday with the share price down 7.8% from the peak at $45 which was reached shortly after opening at $42.
Investors are increasingly worried over the spending spree of on-demand ridesharing companies and the biggest risk looming, besides regulation of course, is the business model’s robustness against a recession. Our suspicion is that the business model is not robust but time will tell.
Uber 1-min chart on first day of trading (Friday):
Latest Market Insights
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)