China’s Xi Emphasizes ‘Peaceful Reunification’ With Taiwan, Days After Record Show of Force
Remarks part of speech to mark 110th anniversary of revolution that overturned imperial rule
HONG KONG—Chinese President Xi Jinping called for a “peaceful reunification” with Taiwan days after China’s People’s Liberation Army sent a record 56 bombers and other aircraft on sorties near the self-ruled island in a single day.
“The historical task of the complete reunification of the motherland must be fulfilled, and can definitely be fulfilled,” Mr. Xi said in Beijing on Saturday, adding that achieving that goal by peaceful means is in the interests of people in Taiwan.
Mr. Xi’s remarks were part of a speech that marked the 110th anniversary of the revolution that overturned Qing imperial rule in China. In the decades that followed, the Communists and Nationalists jostled for control of China, which later led to a split between China and Taiwan amid a civil war. Nationalist forces withdrew to the island, and communist leader Mao Zedong proclaimed the founding of the People’s Republic in 1949.
The Communist Party considers Taiwan part of China, despite never having ruled the island, and has vowed to take control of it, by force if necessary.
In a response to Mr. Xi’s speech, Taiwan’s Mainland Affairs Council said China’s continued threat of military action is the key to problems across the Taiwan Strait.
“The Chinese Communist Party’s rigid Taiwan policy doesn’t take a realistic measure of the current situation, completely fails to account for the development of global circumstances, and fundamentally ignores the doubts and opposition of the Taiwanese people,” it said.
Mr. Xi has long spoken of realizing what Beijing has called a peaceful reunification with Taiwan, but his remarks came as concerns within the U.S. mounted over China’s yearslong military buildup and recent threatening moves against the island.
The PLA has flown 150 sorties near Taiwan so far this month, a blitz that has sparked expressions of concern from the U.S., U.K. and Germany.
On Thursday, The Wall Street Journal reported that a small number of American troops have been secretly training local military forces on the island.
Taiwan’s independence is the biggest obstacle to Beijing’s goal of unification and poses a “serious hidden danger to national rejuvenation,” Mr. Xi said. “Those who forget their ancestors, betray the motherland or split the country have always been doomed. They will definitely be spurned by the people and judged by history,” he added.
Mr. Xi said the issue of Taiwan is China’s internal affair and that no external interference is allowed, without naming any country. He didn’t mention the use of force on Taiwan in his speech.
Bridgewater warns fighting inflation risks derailing economic recovery
Co-chief investment officer says central banks could find themselves powerless as rising energy prices rock markets
A top investor at the world’s biggest hedge fund has warned that high inflation is here to stay and central banks may be powerless to fight it without derailing the economic recovery, following a week in which soaring energy prices rocked markets around the world.
Bob Prince, co-chief investment officer at Bridgewater Associates, said the Federal Reserve’s assertion that the current burst of inflation will prove transitory is likely to be challenged. Price pressures will be hard to fix, he said, given they are coming out of a shortage of resources that are in high demand as the global economy rebounds from pandemic lockdowns.
“If there is inflation, the Fed is in a box because the tightening won’t really do much to reduce inflation unless they do a lot of it, because it is supply driven. And if they do a lot of it, it drives financial markets down, which they probably don’t want to do,” he told the Financial Times.
“Deciding between the lesser of two evils, what do you choose? I think most likely you choose inflation because you can’t do much about it anyway.”
Prince’s comments echo a ratcheting up of inflation anxiety in markets this week, as intense competition for natural gas supplies sent prices for the fuel rocketing, fanning concerns of broader price rises and triggering a drop in bond prices, which are sensitive to inflation. The US 10-year Treasury yield, which rises as prices fall, climbed to a four-month high of 1.60 per cent on Friday as market-based measures of inflation expectations hit their highest levels since May.
Moves were even sharper in Europe, where the gas crisis is more acute. Ten-year inflation breakevens in Germany — a measure of investors’ inflation expectations over the coming decade — rose to their highest since 2013 at 1.68 per cent, lifting yields to levels not seen since May. In the UK, where the Bank of England has said it could raise interest rates as soon as this year in an effort to tame inflation, 10-year breakevens are at their highest since 2008 and gilt yields climbed to 1.14 per cent on Friday, the most since May 2019.
Prince described the BoE’s rates warning last month as a “wake-up call” to investors. However, he suggested that central banks also needed to adjust to their limited ability to fight back.
“We’re in this situation where you still have this inertia from demand, it is pushing up against constrained supply and that has pushed inflation up,” he said. “And while the consensus is that that will be very transitory and bounce right back, we don’t think so, because there is plenty of inertia from that spending to continue and it’s just not going to be that easy to resolve these supply constraints, particularly as Covid remains an issue.”
The comments represent a departure from Prince’s view in June, when he played down comparisons between the present and the “Great Inflation” of the 1970s.
“It starts to look a bit like the 70s and the oil shocks,” he said this week. He explained that in the 1970s, oil prices rose on Opec supply cuts, pushing inflation higher. That dynamic drove the economy down while it was also driving inflation up. “Raising interest rates isn’t going to increase oil supply.”
Despite the latest bond selloff, and a pullback in stocks over the past month, many investors are sticking to their view that a large part of the current round of price rises will prove temporary, and central bankers will hold their nerve unless they get more compelling evidence of broader demand-induced inflation.
“Central banks should respond to inflationary pressures if demand is exceeding supply on a consistent basis,” said Gurpreet Gill, fixed-income strategist at Goldman Sachs Asset Management. “Today they are in isolated areas. We are expecting to come out of this crisis on a higher inflation path but it’s not a return to the 1970s when you had double digit inflation.”
Others argue that the spectre of stagflation — a combination of rapid price rises and slowing growth — is holding bond markets in check. A steep climb in the cost of living could quickly become a drag on growth and even fuel fears of recession, argues Luca Paolini, chief strategist at Pictet Asset Management. In that environment central banks could be expected to keep rates low — or reverse any premature hikes — making long-term government bonds more attractive and limiting any selloff.
“Inflation is like a tax that kills demand,” Paolini said. “In a sense if it gets too bad, it kills itself off — but that’s not a positive scenario.”
French antitrust chief ‘surprised’ to be removed from post
Emmanuel Macron’s decision not to renew Isabelle de Silva’s mandate comes as regulator reviews ‘difficult’ TV merger
France’s antitrust chief has expressed her “surprise” and “disappointment” at President Emmanuel Macron’s decision not to renew her mandate in the middle of a review of a far-reaching broadcasting merger and several competition cases against US tech giants.
Isabelle de Silva, who won plaudits after imposing two penalties against Google for a combined €720m, said she found out last week that she would not be nominated by the French president for a second five-year term, and will therefore leave on October 13. The Elysée has not commented on the decision.
“Until a few days ago I was quite confident that I would be renewed although you never have absolute certainty,” she told the Financial Times. “So it came as a bit of a surprise.”
“I would have liked to continue, but obviously I respect the decision and hope a new person will continue the work I have started. It is a personal disappointment for me and my team to have to come to terms with.”
The decision comes six months before presidential elections, in which Macron is seeking a second term, and at a time when the regulator is reviewing several large national mergers. One of them is the tie-up between TF1, France’s largest broadcaster, and smaller group M6. Tf1 is owned by construction billionaire Martin Bouygues and its 8pm news programme is the most watched with about 6m viewers on average.
The new group would control about 70 per cent of the French TV advertising market but the government has signalled it regarded the merger positively.
Other large combinations under review include the merger of water and energy utilities Veolia and Suez, as well as that of book publishers Editis, owned by Vincent Bolloré’s Vivendi, and Hachette, controlled by Lagardère.
De Silva said that the agency would continue to review the TF1 -M6 case with its in-depth and “serious methodology”, which meant that “there is no possibility that changing the president (of the competition authority) will change the outcome.”
She added: “I felt that it was not necessarily a good thing to change to the captain in the midst of such an important and difficult case.”
De Silva, a Franco-American lawyer who spent her entire career in the French civil service, was appointed in 2015 by then president François Hollande. She became a prominent advocate for stricter oversight of tech companies and carried out antitrust investigations against Google, Apple and Facebook. In addition to fining Google, she managed to extract a pledge from the search giant to make changes to its advertising business.
The competition authority is still working on probes into Apple and Facebook, and De Silva had also worked closely with the European Commission’s antitrust watchdog.
More recently she had been building ties with the Biden administration’s new antitrust chief Lina Kahn, who is also pushing for more technology regulation. She has been a powerful voice in the discussion of new draft legislation in Brussels set to curb the power of large technology companies.
Such international co-operation “must be preserved and built on” if regulators were to effectively oversee big tech companies. “To tackle those digital platforms we need to really come together and work as a team,” she said.
Beware the Tech Stock Trap. How Bond Yields Can Signal When It’s a Good Time to Buy.
Bond yields are rising—and that could be bad news for Apple and the rest of Big Tech.
There’s no question the Nasdaq 100, an index comprised of large-cap tech companies, has suffered a lot of pain recently. It dropped 7.7% from its Sept. 7 all-time high through Oct. 4, as the 10-year Treasury yield surged to 1.61% from a September low of 1.29%. The yield’s spike began when the Federal Reserve confirmed it is likely to soon begin reducing its monthly bond purchases—something the disappointing September jobs report is unlikely to change. Rising yields are generally bad news for fast-growing tech stocks with nosebleed valuations—and others expected to have large profits many years in the future—by making those profits less valuable.
The selloff has dissipated in the past few days, with the Nasdaq 100 up 2.5% from the Oct. 4 low as bond yields momentarily stopped rising, perhaps making it look like the worst was over for tech investors. That’s far from a sure bet.
Bond yields appear to be rising again, which means tech stocks may not be out of the woods yet. Indeed, bond yields look low. Analysts have recently noted that the 10-year yield could easily head up to above 1.7% soon. Not only is Fed policy a factor, but the yield already looks low compared with inflation: The 10-year’s real yield—its yield minus long-term inflation expectations—is still below 0%, meaning that investors are losing value when factoring in inflation.
The yield’s 2021 peak was 1.75%, and once it moves meaningfully higher than 1.6%, it can revisit that high fairly quickly, says John Kolovos, chief technical strategist at Macro Risk Advisors. The 10-year closed at 1.6% on Friday.
That could mean big problems for the Nasdaq 100. When the yield was a touch above 1.75% at the end of 2019, the average forward one-year earnings multiple on the index was 23.7 times, according to FactSet. Today, that multiple stands at 27.6 times. “There’s this area within the chart between 1.6% and 1.7% that could pose a problem for tech,” Kolovos says, adding that the index could drop another 5% from here.
Others see even more downside ahead. Frank Cappelleri, chief market technician at Instinet, notes that the Nasdaq 100 has usually held support around 14,800, but couldn’t do it this time. That indicates the index could soon fall another 6% from here.
It isn’t all bad news for tech investors, though. DataTrek founder Nicholas Colas notes that analysts have slashed their forecasts for Alphabet (ticker: GOOGL) and Amazon.com (AMZN), while keeping their forecasts for Apple (AAPL), Microsoft (MSFT), and Facebook (FB) unchanged. That gives tech stocks a low bar to jump over when it becomes time to report earnings in a couple of weeks. “The funny thing about all these estimates is that in every single case, they are lower than what these companies reported” in the second quarter, Colas explains. “That’s likely too pessimistic.”
When tech stocks do find a bottom, the more profitable, scaled, and dominant companies should be reliable picks. Those are often seen as shoo-ins for several years of fast earnings growth, which can bring their stocks higher—so long as their earnings multiples are reasonable.
“It’s fairly inevitable those businesses will continue to grow,” says David Miller, chief investment officer of Catalyst Capital Advisors. “Some of these growth companies are just so dominant, even with rates going up, they’re still probably worth it.”
Just wait for yields to stop rising before diving in.
Sweden’s SKF , which makes parts for Tesla, Nio, and other electric-vehicle manufacturers, has been dragged down with others in the sector over fears delays in getting some raw materials will have an impact on manufacturing and demand for products.
Shares in the company (ticker: SKF.B.Sweden)—which designs and manufactures bearings, seals, and lubrication systems for the mining, heavy industry, construction, agriculture, and transportation industries—have tumbled 16.1%, to 205 Swedish kronor (about $23), in the past six months.
Investors were spooked when rival ball-bearing maker Timken (TKR) in September warned about “unabating customer and supply-chain disruption.”
But SKF, the world’s largest maker of ball bearings, is well diversified. The business has been revamped in the past five years, and SKF has developed new technology that remotely monitors and services wind-farm and railway equipment to avoid costly repairs.
Only 20% of SKF’s sales—and 15% of operating profit—comes from the automotive sector, which has been hit by shortages in chips that are the brains controlling cars. While SKF dominates the bearings market for electric vehicles—it provides much of Tesla’s and Volkswagen ’s (VOW) bearings for their electric motors—it has limited exposure to cars fitted with internal combustion engines, with just a 5% market share in bearings.
A cost-cutting plan aims to achieve savings of SEK5 billion by 2025, with consolidation of facilities and investments in factory automation to reduce manufacturing costs. CEO Rickard Gustafson, who took the helm at the beginning of the summer, is conducting a strategic review.
Some analysts think the shares are cheap and set to soar. Anders Roslund, an analyst at Norwegian investment bank Pareto, has a Buy rating, and he estimates that the stock could increase 60%, to SEK330. SKF is “one of the most undervalued Nordic industrials,” he says, adding that the company’s transformation continues.
Based in Gothenburg, SKF has a market value of SEK94 billion and employs more than 40,000 workers. It fetches a low multiple of 11.6 times this year’s expected earnings and is valued at a 10% discount to its peers.
SKF posted pretax profit of SEK5.2 billion for the six months through June, on sales of SEK40 billion. This was up from the SEK2.4 billion for the same period in 2020, on sales of SEK36.6 billion.
“SKF has a really strong brand and leadership position—especially when it comes to application knowledge,” CEO Gustafson told Barron’s. “Being able to offer the products and services that help our customers’ machines rotate more efficiently, longer, and sustainably is what sets us apart.”
The company forecasts 10% organic revenue growth in the third quarter from the same period in 2020. Gustafson said in the last earnings statement that while demand remains strong, “there is also uncertainty related to both Covid and to the supply situation.”
SKF’s customers, such as car makers, have received large orders in the first and second quarters—10% more than expected. That should make for bigger ball-bearing sales for SKF. “Overall, management sees a strong demand environment across all regions and segments,” says Gael de-Bray, a Deutsche Bank analyst. “Even in China, demand remains strong.”
Sebastian Kuenne, an analyst at RBC Capital Markets, has an Outperform rating and a price target of SEK300. SKF is an “exceptionally attractive investment” because shares trade at only 12 times estimated 2021 earnings, despite 70% exposure to a “high-margin and robust industrial end market.”
Closing Stock Market SummaryThe S&P 500 decreased 0.2% on Friday in a tight-ranged session, as investors contemplated the Fed's policy course following the release of a mixed September employment report. The Nasdaq Composite (-0.5%) and Russell 2000 (-0.8%) underperformed, while the Dow Jones Industrial Average (-0.03%) was relatively unchanged.
Headline nonfarm payrolls growth increased by just 194,000 (consensus of 450,000), badly missing expectations and seemingly supporting the case for the Fed to delay its taper announcement past November. Beneath the surface, however, were numbers that painted the case for tapering sooner rather than later.
Specifically, private sector payrolls increased by 317,000 (consensus 385,000), the unemployment rate improved to 4.8% (consensus 5.1%) from 5.2% in August, and perhaps more noteworthy, average hourly earnings rose 0.6% (consensus 0.4%). The latter reflected lingering supply-driven inflation pressures.
Inflation concerns/expectations continued to drive oil prices ($79.40, +1.09, +1.4%) and long-term interest rates higher, which fueled the gains in the S&P 500 energy (+3.1%) and financials (+0.5%) sectors. Notably, WTI crude futures briefly topped $80 per barrel for the first time since 2014 while the 10-yr yield increased three basis points to 1.60%.
The energy sector might have risen 3%, but since it only represents a small weighting in the S&P 500, it didn't have much of a positive influence today. The other nine sectors closed lower, led by the real estate (-1.2%) and utilities (-0.7%) sectors. The heavily-weighted information technology sector decreased 0.4%
Separately, the Senate passed a bill Thursday evening to raise the debt ceiling by $480 billion until Dec. 3. This was the anticipated outcome based on the reporting from the prior two days, and the bill now heads to the House where it's expected to pass on Tuesday.
The 2-yr yield was unchanged at 0.31%, contributing to some curve-steepening activity in the Treasury market. The U.S. Dollar Index decreased 0.1% to 94.12.
Reviewing Friday's economic data:
- September nonfarm payrolls increased by a disappointing (and weak) 194,000, the unemployment rate dropped to 4.8%, average hourly earnings jumped 0.6%, and the labor force participation rate dropped to 61.6%.
- September nonfarm payrolls increased by 194,000 (consensus 450,000).
- September private sector payrolls increased by 317,000 (consensus 385,000).
- September unemployment rate was 4.8% (consensus 5.1%), versus 5.2% in August.
- September average hourly earnings increased 0.6% (consensus 0.4%).
- The average workweek in September was 34.8 hours (consensus 34.7).
- Narrowing down to one takeaway: the report will feed an ongoing sense of uncertainty about the state of the labor market and the state of the Fed's policy course.
- Wholesale inventories increased 1.2% in August (consensus 1.2%) following an unrevised 0.6% increase in July.
Looking ahead, there is no economic data scheduled for Monday while the bond market will be closed for Columbus Day.
- S&P 500 +16.9% YTD
- Dow Jones Industrial Average +13.5% YTD
- Nasdaq Composite +13.1% YTD
- Russell 2000 +13.1% YTD
As Central Banks Taper, Investors Should Take Cover
Previously, the European Central Bank and the Fed offset each other’s impact. No such luck this time
Do you have too much money? Losing sleep over that ballooning bank account? Perhaps not. But spare a thought for Jerome Powell and Christine Lagarde, who must lead us all out of a global monetary glut. Facing essentially the same pandemic-era problem, the Federal Reserve and the European Central Bank have come to the same solution: drastically cut monthly net asset purchases. Unfortunately for financial markets, they will be pulling back at the same time, setting up 2022 as the year of the “taper tandem”—the fastest liquidity drain in a decade.
Monetary data indicate that advanced economies are awash in money, thanks to central banks’ voracious buying of financial assets. In March 2020, amid financial panic over Covid-19, the New York Fed was creating money to buy up to $75 billion of assets every day. Around the same time, the ECB announced an emergency program targeting €1.85 trillion ($2.15 trillion) of purchases in total. Plentiful liquidity helped governments, businesses and households survive lockdowns. Cash flows collapsed but bankruptcies barely increased. Asset markets and the real economy exited the crisis on a strong footing.
The Covid public-health crisis seems to be abating, but the infusion of money never stopped. The two central banks are still buying roughly $235 billion of assets every month between them. Because neither the U.S. nor the EU has capital controls, this additional liquidity flows freely across borders, flooding markets everywhere. For global liquidity, it does not matter much which of the two central banks is doing the purchasing.
The result has been a feverish rally in nearly all assets, suppressing borrowing rates, inflating stock prices, and even creating assets where none existed. The financial system is having to invent new kinds of assets because not enough exist to absorb the deluge of central bank liquidity. More than 6,000 cryptocurrencies are now being traded, not to mention nonfungible tokens, which supposedly establish ownership of easily copied digital artworks.
With inflation picking up, the central banks are reining in purchases. The ECB has already begun, announcing a move to a “moderately lower pace of net asset purchases.” The Fed essentially promised to do so this quarter, warning markets that “a moderation in the pace of asset purchases may soon be warranted.”
In two respects, the key term here is “moderate.” First, it reveals the banks’ concern that markets will react too abruptly to the policy change. Second, it is untrue. The two banks’ combined net purchases are scheduled to go from the current pace of about $235 billion a month to zero in 12 months, a deceleration of about $20 billion a month.
The last time net purchases were reduced in the U.S., setting off the “taper tantrum” of 2013-14, the Fed’s deceleration pace was $8.5 billion a month over 10 months. But at the time, the ECB was gearing up to start its own purchases, providing markets with a counterbalance. When the ECB implemented its own taper in March 2017, it took 21 months to complete it, decreasing net purchases by an average of €3.9 billion a month. The snail’s pace—and the ECB’s resumption of net asset purchases 11 months later—helped counterbalance the net sales of securities by the Fed.
In both these episodes, the two central banks offset each other’s impact, damping the aggregate effect. This time, however, the two banks are set to taper in tandem, amplifying the effect on money flow. This should terrify investors. Recent pioneering research by Xavier Gabaix and Ralph Koijen shows that flows not only move asset prices; they move them disproportionately. A dollar added to the stock market can increase aggregate market valuation by as much as $5. A dollar subtracted can have the opposite effect, decreasing aggregate valuation by $5.
No flows are more sizeable or more predictable than a big central bank’s purchase schedule. As the world’s two major central banks prepare to turn off the taps, financial markets are on notice. Frontier assets such as NFTs will likely be the first to fall—but experience suggests that no asset class is safe from a liquidity drought. As the taper tandem unfolds, investors and asset managers will need all the downside protection they can get.
Mr. Valatsas is chief economist at Greenmantle, a macroeconomic and geopolitical advisory firm.