TheChek News Flow

Drop in trade highlights economy’s exposure to global slowdown and effects of zero-Covid

China’s exports contracted in October for the first time since the early stages of the Covid-19 pandemic, a sign of mounting pressure on an economy still gripped by strict antivirus measures.

Exports in dollar terms fell 0.3 per cent year on year last month, official data showed on Monday, compared with an economists’ forecast of 4.5 per cent growth and a 5.7 per cent gain in September. The figure last fell in May 2020.

China’s trade has supported its economy throughout the pandemic. Its exports skyrocketed in 2020 and 2021 as global markets shifted to buying goods rather than services.

But the latest data highlight the country’s exposure to a global slowdown as other big economies raise interest rates to tackle higher inflation. Unlike China, most countries have largely removed Covid restrictions.

“Consumer preferences overseas have changed, and the decline in goods consumption undermines the demand for China’s exports,” said Hao Zhou, chief economist at Guotai Junan International, an investment bank.

As policy tightens, “the risk of economic recession overseas will rise, considerably weighing on global demand”, he added.

The weaker-than-expected trade data adds to domestic pressures on China’s economy as policymakers struggle to contain a nationwide property slump and the damping impact of its strict zero-Covid policy. The strategy aims to rapidly eliminate all coronavirus outbreaks through mass testing, lockdowns and quarantine for close contacts of positive cases.

In the three months to the end of September, China’s economy grew just 3.9 per cent year on year, below a 5.5 per cent target that was already the lowest in three decades. Lockdowns of big cities to contain small outbreaks have weighed on consumer demand, with retail sales adding just 2.5 per cent in September.

Equities in Hong Kong and mainland China have gyrated in the past week following rumours that the zero-Covid policy would be eased. But Beijing quashed the rumours over the weekend, and at the Communist party’s congress last month, zero-Covid was praised and no timetable was offered for any relaxation of the rules.

Last month, imports also fell for the first time in more than two years, dropping 0.7 per cent in dollar terms year on year.

Zichun Huang, an economist at Capital Economics, noted that a third of China’s imports were in turn used for its exports. “We anticipate further weakness,” he said.

China on Friday launched its fifth International Import Expo in Shanghai, a vast conference that hosts thousands of foreign and domestic companies. President Xi Jinping, in remarks delivered by video link, emphasised that China remained committed to opening up to the outside world.

DAX:

MDAX:

SDAX:

* 1AT PW Raised to Neutral-Short Term Sell at Santander Biuro Maklerskie

* BP ADRs Raised to Equal-Weight at Wells Fargo; PT $36

* Colruyt Raised to Buy at Jefferies; PT 29 euros

* CompuGroup Raised to Outperform at Exane; PT 44 euros

* ING PW Raised to Neutral-Short Term Sell at Santander Biuro Maklerskie

* Pekao Raised to Outperform at Santander Biuro Maklerskie

* Swisscom Raised to Neutral at Credit Suisse; PT 490 Swiss francs

>>> Down

* Estee Lauder Cut to Hold at Berenberg; PT $220

* Golden Ocean Cut to Sell at SpareBank; PT 85 kroner

* Kingfisher Cut to Neutral at Credit Suisse; PT 247 pence

* Metro Cut to Underperform at Jefferies; PT 5 euros

* Nordea Bank Cut to Neutral at Goldman; PT 139 kronor

* OCI Cut to Neutral at JPMorgan; PT 43.50 euros

* RS Group Cut to Underweight at JPMorgan; PT 820 pence

* Shell Cut to Neutral at Goldman

* Shell ADRs Cut to Neutral at Goldman; PT $76

* Swedbank Cut to Sell at Goldman; PT 170 kronor

* Thales Cut to Neutral at JPMorgan; PT 160 euros

>>> Initiation

* Allianz Rated New Buy at Goldman

* Knorr-Bremse Rated New Hold at Jefferies; PT 48 euros

* Rheinmetall Reinstated Overweight at JPMorgan; PT 240 euros

* Saint-Gobain Resumed Buy at Citi; PT 55 euros

>>> Call

* Colruyt Preferred to Metro Amid Consumer Pressure: Jefferies

* Kingfisher Downgraded at Credit Suisse on Macro Challenges

* Morgan Stanley’s Wilson Says Stay Bullish Ahead of US Midterms

* Goldman Cuts S&P 500 Earnings Estimate Citing Margin Headwinds

* Rheinmetall a New Overweight at JPMorgan, Thales Cut to Neutral

Nikkei +1.29% Hang Seng +2.62% CSI -0.12% Shanghai -0.08% Shenzen +0.00%

Eur$ 0.9944 CNH 7.2229 CNY 7.2183 JPY 147.16 GBP 1.1332 CHF 0.9957 RUB 61.95 TRY 18.5933 WTI$ 91.56 -1.13% Gold 1,672.44 -0.56% BTC 20,867 -1.24% ETH 1,588.23 -0.99%

S&P -0.10 % Nasdaq -0.19% EuroStoxx -0.08% FTSE -0.61% Dax -0.12% SMI -0.28%

Macro :

- Morgan Stanley’s Wilson Says Stay Bullish Ahead of US Midterms

- Goldman Cuts S&P 500 Earnings Estimate After Fall in 3Q Margins

- Pound to Lead UK Market Suffering as BOE Flags Long Recession

- Britons Face £2 Billion Tab to Heat the UK’s Biggest Houses

- Scholz: Germany Won’t Delay Path to Climate Neutrality by 2045

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- EDF FP : EDF in Binding Agreement to Buy GE’s Nuclear Turbine Business

- EDF FP : US funds press France to increase €10bn EDF buyout price

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- SHEL LN : GE Gas Power, Shell to Collaborate on LNG Decarbonization

- SWMA SS : Philip Morris Wins Elliott’s Backing for Swedish Match Deal: FT

- SWMA SS : Elliott Said to Tender Shares to PMI’s Swedish Match Bid

- SWMA SS : Philip Morris Wins 83% Acceptance for Swedish Match Bid

- TEL2B SS : Tele2 Avoids SEK363m Tax Claim After Winning Case on Kazakhstan

- TIT IM : Italy Official Says State-Controlled Phone Network ‘a Priority’

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- VIV FP : TF1 Says It Reached New Distribution Pact With Canal+ Group

- WLN FP : Banco Desio Sells Payment Business to Worldline for EU100m

JPM Call this Morning :

Sector seeks more support to get fledgling green fuel industry off the ground

Britain will struggle to create an industry producing sustainable aviation fuel unless the government provides regular subsidies to manufacturers, leading airlines and airports have warned.

The government has set a 2050 “Jet Zero” target for the airline industry to eliminate net carbon emissions, mainly through the use of green fuel produced by household waste such as cooking oil, known as “SAF”.

The government has promised £165mn as seed capital to encourage manufacturers to open at least five plants producing the new fuel and hopes they will be under construction by 2025. It has also set a target under which 10 per cent of aviation fuel must be SAF by 2030.

But leading airports and airlines, including Heathrow, Gatwick, Manchester Airports Group, Virgin Atlantic and British Airways have written to Mark Harper, the new transport secretary, calling for more state intervention to get the fledgling industry off the ground.

The letter, seen by the Financial Times, is also signed by some of the manufacturers with plans for SAF plants in the UK, including Fulcrum, Velocys and Alfanar.

“We believe UK SAF production has the chance to become a domestic success story, but the government needs to act now to ensure manufacturers get the price certainty needed to unlock private investment into this sector,” the groups wrote.

They want the government to create “contracts for difference” (CFDs) to agree a set price for SAF, similar to those the state has used to underwrite nuclear and offshore wind projects.

Under CFDs, when wholesale prices exceed a fixed level producers pay back the difference to the government. When the market rate is below the fixed price, the government tops up the difference.

The letter warns that without this kind of regular subsidy, investors will go elsewhere and airlines will end up importing sustainable fuel from the EU or US.

“To stimulate billions of pounds of investment in UK industry requires targeted action and further direction must be taken to share the current investor risk profile that is a barrier to capital investment in UK production,” the letter says. “The only question is do we make our own SAF, creating jobs and growth for the UK, or do we import it from other countries?”

Flying is one of the hardest industries to decarbonise and technologies such as electricity- or hydrogen-powered aircraft are years away from being able to make long-distance flights.

Aviation accounts for about 2 per cent of global CO₂ emissions and the International Air Transport Association’s (Iata) net zero 2050 target relies heavily on changing fuel mixes to achieve most of its planned reduction in greenhouse gas emissions.

Other countries, including Indonesia, have sought to produce aviation fuel from crops such as palm oil or soyabean oil, prompting concern from environmentalists.

A spokesperson for the Department for Transport said the UK government already had a SAF programme which was one of the most comprehensive in the world.

“We’ve already invested in eight SAF plants, [we] now have a further £165mn available through our Advanced Fuel Fund, and are creating demand by mandating that 10 per cent of jet fuel comes from SAF by 2030,” the spokesperson said.

“This is providing investors with reassurance while helping to deliver our ambition of having five commercial SAF plants under construction in the UK by 2025.”

Traders say the performance of put options this year calls into question their value

Investors who poured money into funds aimed at protecting them from the sell-off in shares are finding many of the strategies have backfired, offering little or no safeguard from a drawdown that has sliced $13tn off the US stock market.

Funds that focused on buying equity put options, which are often used as insurance against stock declines, have struggled to make gains even as the S&P 500 suffers its worst drawdown since the 2008 financial crisis. Those who prepared for violent swings by buying call options on the Cboe’s Vix index — which would pay off if the market gauge of expected volatility spiked — have also been left wanting.

A Cboe index that tracks a theoretical portfolio that buys both stocks within the S&P 500 and equity put options — known as the PPUT index — has fallen roughly 20 per cent this year, not any better than the total return of the S&P 500.

Dylan Grice, co-founder of Calderwood Capital, a hedge fund advisory and research firm, said the performance of put options this year had raised “fundamental” questions about the point of some strategies. “It’s like an insurance company that doesn’t pay out when you have an accident,” he said.

The lacklustre performance has been driven in part by the slow grind lower in the stock market, which has driven up costs without providing the sort of sharp sell-off that provided mammoth pay-offs in the early days of the coronavirus pandemic in March 2020 or the midst of the financial crisis in September and October 2008.

Many mutual funds and exchange traded funds that are marketed as hedging against declines in the US stock market use relatively simple strategies, continuously buying contracts that would protect their portfolio if the S&P 500 falls below a given threshold. They adjust those thresholds each month, spending heavily on new put contracts in the process.

While the Vix has been well above its historical average throughout 2022, it has stayed in a relatively narrow range, limiting returns for traders. In past crises, a return of 200 per cent or 300 per cent from a relatively small bet on the so-called “fear gauge” could offset declines on an endowment or pension plan’s wider portfolio. Recent swings between 25 and 35, in contrast, provided only a fraction of the return that some investors enjoyed when the index shot from 13.68 in February 2020 to 82.69 a month later.

“You have had to be a very nimble tail hedge manager and a lot of them . . . are rules-based and formulaic and that’s a dangerous place to be,” said Peter van Dooijeweert, a hedging specialist at hedge fund Man Group. “The Vix has been completely useless as a hedge since the initial days of the Ukraine war.”

Funds that use a broader mix of assets to hedge against downturns have had a far better year. The Eurekahedge tail risk index, which tracks a basket of specialist hedge funds, is up 13 per cent year to date by contrast.

That is because the volatility in sovereign bond and currency markets has been far higher than in the equity market. Ice’s closely followed Move Index, which tracks the swings in the US Treasury market, this year surged to its highest level since the coronavirus-induced turmoil of 2020. That has made it a far more lucrative space to trade options — and for funds that have focused on other asset classes the results have been solid.

“The crisis we’ve been through has really been a rates led crisis,” said Thomas Leake, the head of solutions at volatility-focused hedge fund Capstone. “It has really been about central bank tightening and about the market being uncertain about the future path of interest rates and that’s led to a big, big increase in the market price of interest rate volatility.”

Saba Capital Management’s Boaz Weinstein told the Financial Times last month that his tail risk fund, which had climbed 31 per cent, was holding assets that protect against credit defaults rather than equity puts because they do not perform as well when markets grind lower.

State moves for remaining 16 per cent of energy utility in reversal of 2005 privatisation

Several US funds are pushing the French state to lift its €10bn buyout offer to minority shareholders of energy utility EDF and asking France’s market regulator to recommend a price bump, adding to pressure from investors unhappy with the terms of the nationalisation. 

The French government is moving to buy out the 16 per cent it does not already own in EDF, as the group grapples with production outages at its French nuclear reactors and soaring wholesale power prices in Europe, and gears up to build costly new plants. 

The process reverses a 2005 privatisation and subsequent fall in the power company’s stock price since it was listed at €32 per share, leading to opposition to the €12 per share buyout price from some long-term investors, such as employee shareholders. 

US funds holding several hundred million euros worth of EDF shares, which include hedge fund TIG Advisors, have now called on France’s Autorité des Marchés Financiers [AMF] to challenge the offer price and recommended it be raised to €15.80 per share, according to a November 3 letter sent by lawyer Sophie Vermeille and seen by the Financial Times.

The funds have argued that disclosures over the impact of government decisions in recent years on EDF’s finances were insufficient and not taken into account by an independent consultancy hired by the utility to review the offer. They have also called for some changes to the terms of the tender and how bids are collected. 

“By not allowing minority shareholders a chance to benefit from a fair price or from the necessary information to come to an informed opinion about the financial conditions, [the AMF] would be sending an extremely negative signal about Paris as a financial centre,” Vermeille wrote. 

The AMF is due to rubber-stamp or raise objections to the bid, in a decision that could be made public on Tuesday according to the tender offer filings. The AMF, EDF and France’s economy ministry declined to comment.

Once the offer is launched, the government needs to reach a 90 per cent acceptance threshold from its 84 per cent holding before it is able to squeeze out the rest of minority shareholders. EDF shares are hovering just under the €12 offer price level, after slumping close to all time lows at €5.8 in March.

The state’s €9.7bn buyout offer includes a bid for EDF’s convertible bonds. The bid represented a 53 per cent premium to the company’s closing price before the nationalisation was announced in July.

EDF, which last week cut its production forecast for the fourth time this year owing to reactor outages and maintenance programmes, was also hit in January when the French government made it absorb the cost for its bid to cap rises in consumers’ power bills at 4 per cent in 2022.

Vermeille told the FT the funds were not looking to derail the nationalisation, but pushing for more transparency around the process.

Some other shareholders are also calling for the price to be raised to at least €15 per share, such as employees who invested in the shares, and own collectively around 1.5 per cent of EDF’s capital.

“Minority shareholders are being forced to sell at the worst time in EDF’s history,” said Martine Faure, a representative of the leftwing CGT union and chair of two employee shareholder funds.

French activist shareholder CIAM, which holds under 1 per cent of EDF, has also criticised the process.

“It’s clear that the price is not adequate when you see how the state has intervened and caused the share price to fall,” CIAM co-founder Catherine Berjal said. The AMF should be the one appointing an independent expert to review the offer, not EDF, Berjal added.

The AMF has options including choosing to take more time to review the tender offer. The government has been looking to move ahead as swiftly as possible as EDF’s various production woes tear into its core profit.