FT : A new global crisis is looming in east Asia

A new global crisis is looming in east Asia
China’s pride and paranoia are a dangerous mix for the world

What is China up to? From Hong Kong to Taiwan and from the South China Sea to the Indian border, the Chinese government, led by President Xi Jinping, is pursuing more aggressive policies. There is growing concern about Beijing’s behaviour, not just in Washington but in Delhi, London, Tokyo and Canberra.

The Chinese government may feel that coronavirus makes this a good time to act, while the world is looking away. The turmoil on the streets of America has further divided and distracted the west. But democracies cannot afford to lose focus on east Asia. A new global crisis could easily break out there, with even graver long-term consequences than the pandemic.

Beijing’s growing assertiveness reflects both pride and paranoia.

After 40 years of rapid economic growth, China is now — by some measures — the world’s largest economy. Its navy has more warships and submarines than that of the US. Its internet bubbles with nationalistic chatter about the inexorable rise of the nation.

The biggest grossing film in Chinese history is Wolf Warrior 2 — a Rambo-style action movie, released in 2017, that features heroic Chinese soldiers battling against mercenaries, led by a racist American. A promotional poster for the film featured the slogan, “Anyone who insults China — no matter how remote — must be exterminated”. When Chinese diplomats respond to criticism of Beijing with threats and insults, they are often said to be practising “wolf-warrior diplomacy”.

But, alongside the pride, there are plenty of reasons for paranoia at the top levels of government in Beijing. The past 12 months have presented Mr Xi with an unprecedented range of threats and challenges. The pandemic has seen China widely accused of responsibility for a global calamity. A regime that used to believe it needed 8 per cent growth a year to maintain social stability now has to deal with a deep economic contraction — compounded by a trade war with the US. Pro-democracy protests in Hong Kong have continued for more than a year and represent a severe challenge to Communist party authority. And in January, Taiwan’s president, Tsai Ing-wen, won a crushing re-election victory — a humiliation for Beijing, which had worked hard to undermine her.

All of this seems to be creating a siege mentality in government. In response, Beijing has intensified its appeal to nationalism. The propaganda goal is to rally the people against external threats and deflect anger about Covid-19 outwards, to the world beyond China.

Beijing’s external and internal policies are increasingly bold and aggressive. A new national security law is to be imposed on Hong Kong, which threatens to inflict mainland-style censorship on a free city. Military exercises and rhetoric aimed at intimidating Taiwan have been stepped up. Confrontational naval activity in the South China Sea has also increased, aimed at rival claimants such as Malaysia and Vietnam. Thousands of Chinese troops have skirmished with the Indians at their disputed border — albeit without known fatalities. Some hawks in Delhi claim China has seized some 40-60 square kilometres of Indian territory. Countries that dare to criticise China over Covid-19 are getting a dose of wolf-warrior diplomacy — Beijing even imposed tariffs on some Australian exports, after Canberra called for an international inquiry.

The Xi government may genuinely be convinced that hostile “outside forces” are plotting against China. But understanding how the world looks from Beijing’s perspective cannot slide into acquiescence. Even if Mr Xi and his cohorts firmly believe that China’s actions are “defensive” in nature, the system they are defending is a one-party state that seeks to repress criticism at home and abroad — while pushing forward with a series of unreasonable international demands.

Beijing will argue its case on legal, diplomatic and historical grounds. But it will never convince democratic countries in Asia and the west to be anything but horrified by the sight of China threatening the freedoms of Hong Kong and Taiwan.

The fact that China is the rising power of the 21st century means Beijing’s actions now have global implications. Countries around the world watch the wolf-warrior diplomacy — and wonder if they might be next in line for coercion.

China’s policy has always been to make an example of countries that displease it. Foreign nations or leaders that upset Beijing find themselves shut out of meetings and business deals. These tactics are often effective because the global response is so divided. Critics of Beijing can be singled out for punishment — as has just happened with Australia. Over the years, China has learnt that an aggressive response often works, persuading foreign critics to back down.

Changing that pattern of behaviour will require a more unified and principled response from the world’s democracies, perhaps through the formation of a permanent contact group to discuss policy towards China. Given the paranoia and nationalism in Beijing, there is clearly a danger that a tougher, more co-ordinated response will spark an even more aggressive reaction. But the bigger danger is that the outside world is too distracted, divided and intimidated to respond coherently. That may persuade Beijing to take one risk too many — plunging the world into a new and dangerous crisis.

>>> US Gapping down

Gapping down

Other news:

  • OPNT -33.3% (issues statement on NARCAN decision)
  • EBS -10.8% (issues statement on U.S. District Court patent litigation decision ruling in favor of Teva (TEVA))
  • AXLA -2.4% (files for $125 mln mixed securities shelf offering)
  • PCG -2% (expects to pursue $5.75 bln underwritten public offerings of common stock and equity units to partially fund emergence from Chapter 11)
  • GCAP -1.5% (stockholders vote to approve merger with INTL FCStone)
  • XENT -1% (files for 6,309,459 share common stock offering by selling shareholders)
  • ASB -0.6% (withdraws 2020 prior guidance due to extraordinary economic uncertainty)
  • KZR -0.5% (announces proposed public offering of common stock)

Analyst comments:

  • PENN -0.9% (downgraded to Sell from Hold at Deutsche Bank)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance
:

  • REVG +18.9%, AAN +7.5%, DK +7%, THO +4.2%

Other news:

  • MESA +21.3% (reported Mesa Airlines' operating performance for May)
  • CLDX +13.6% (reports Phase 1 CDX-0159 data)
  • CASI +11.6% (submits Clinical Trial Application (CTA) (IND) with the United Kingdom's Medicines and Healthcare Products Regulatory Agency (MHRA) for CID-103)
  • SRPT +9.5% (will present new data from the ongoing study of SRP-9003 on Monday)
  • BCRX +6.2% (provides 48-week data showing treatment with Berotralstat provides robust and durable reductions in HAE Attacks)
  • GILD +4.1% (Gilead Sciences and Galapagos NV (GLPG) announce new analyses from trials evaluating filgotinib in adults with psoriatic arthritis)
  • JD +2.1% (launches Hong Kong Initial Public Offering )
  • RDHL +1.9% (to provide update on development program with opaganib for COVID-19 and Phase 3 development program with RHB-204 for pulmonary nontuberculous mycobacteria infections)
  • QFIN +1.7% (acquires 30% stake in Kincheng Bank of Tianjin)
  • BLDP +1.7% (files for $750 mln mixed securities shelf offering)
  • TSLA +1.6% (sold 11.905 Model 3 vehicles in China in May, which was triple April's volumes, according to Reuters)
  • TEVA +1.4% (favorable NARCAN decision)

Analyst comments:

  • MIK +21.6% (upgraded to Overweight from Neutral at JP Morgan and added to Analyst Focus List)
  • PK +11.2% (upgraded to Outperform from Mkt Perform at Raymond James)
  • JBLU +9.2% (upgraded to Neutral from Underperform at BofA/Merrill)
  • BA +8.8% (initiated with a Buy at Seaport Global Securities)
  • ALK +8.1% (upgraded to Buy from Neutral at BofA/Merrill)
  • LLNW +6.2% (upgraded to Outperform from Mkt Perform at Raymond James)
  • MGTA +6.1% (upgraded to Buy from Neutral at Goldman)
  • DNKN +3.8% (upgraded to Overweight from Sector Weight at KeyBanc Capital Markets)
  • Z +3.7% (upgraded to Buy at Needham)
  • RESI +3.3% (upgraded to Mkt Outperform from Mkt Perform at JMP Securities)
  • NXPI +2.4% (upgraded to Outperform from In-line at Evercore ISI)
  • AYI +1.7% (upgraded to Outperform from Perform at Oppenheimer)
  • MAA +1.3% (upgraded to Outperform from Market Perform at BMO Capital Markets)
  • BKU +1.2% (upgraded to Buy from Neutral at BofA/Merrill)

>>> US Early premarket gappers

Early premarket gappers

  • Gapping up:
    • SRPT +9.8%, CLDX +8.8%, BCRX +7%, REVG +6.5%, GILD +4.9%, THO +4.9%, JD +2.4%, QFIN +1.7%, BLDP +1.7%, TSLA +1.5%, TEVA +1.2%
  • Gapping down:
    • OPNT -34%, EBS -13.4%, AXLA -2.4%, PCG -1.8%, GCAP -1.5%, XENT -1%, KZR -0.9%, ASB -0.6%

Bus. Of Fash. : Why Chanel Doesn’t Want to Change the Fashion System

Why Chanel Doesn’t Want to Change the Fashion System
The French luxury titan is doubling down on six shows per year and the Cruise extravaganzas pioneered by Karl Lagerfeld. Chanel’s Bruno Pavlovsky lays out the logic to Tim Blanks.

LONDON, United Kingdom — Chanel has little interest in changing the fashion system. In recent weeks, a growing cadre of designers and retailers have called for rethinking the calendar that governs the development, delivery, presentation and discounting of collections. But when Bruno Pavlovsky, Chanel’s president of fashion activities, laid out his plans for the future of the multi-billion-dollar bastion of French heritage ahead of its latest Cruise launch, he made clear he still believes in the old way of doing things.

Many of the labels calling for change are small-and medium-sized players, but even luxury megabrands such as Gucci and Saint Laurent are exploring initiatives to downscale the excesses of a crammed calendar of fashion shows and the colossal carbon footprint that accompanies it. Chanel, on the other hand, intends to hold fast to its six-shows-a-year schedule: two prêt-à-porter, two haute couture, Croisière (Cruise) and Métiers D’Art, the December presentation highlights the work of the brand’s artisanal ateliers.

“I don’t know if the right number is two or six; it’s up to each brand,” said Pavlovsky. “But we are quite advanced in the calculation of our carbon impact, all the time we’re making a lot of progress in our approach. And we feel it’s important to do these shows. We still need to have the creative freedom to express each moment.”

Granted, there are precious few brands in fashion with pockets deep enough to match Chanel’s spectaculars, which have long been the maxi-budgeted benchmark of extravagance so imperial it has become emblematic of a fashion giantism that felt increasingly unsustainable, however munificent its owners Alain and Gérard Wertheimer. Under Karl Lagerfeld’s tutelage, the brand recreated airports and supermarkets, replanted forests, relocated icebergs, beaches, ski resorts, even launched a rocket, all in the name of providing an appropriate backdrop to its clothes and accessories. And, starting in the year 2000, Chanel pioneered the Cruise show extravaganza, with an audience eagerly following Lagerfeld all over the globe for presentations that celebrated — it was often claimed — some transformative moment in Coco Chanel’s life.

For Bruno Pavlovsky, all things Chanel evolve from its shows, not only because the ensuing global media coverage burnishes the brand, but also because they offer such an all-encompassing opportunity to maintain a regular communication with customers. “The défilé is the beginning of the story,” he explained. “The pace is to be able to deliver novelty at the boutique level every two months, and we feel very comfortable with that pace. Each collection is quite agile and very focused on one topic, and we have this storytelling six times a year.”

Then Pavlovsky painted a bigger picture. First, his commitment to continued participation in Paris Fashion Week. “Other brands can do whatever they want whenever they want,” he said, “but we’re working quite hard to make this twice-yearly creative celebration of women’s ready-to-wear as influential as possible.” And next, the two shows that he described as “only our moment” — Cruise and Métiers D’Art, the special presentations which take place outside the competitive noise of traditional fashion weeks. Pavlovsky defined them as the expression of “a very privileged relationship between the brand and the people around the brand."

“In the future, we will continue to have this privileged moment,” he continued. In the present? Not so easy. The next cruise collection was scheduled to launch on the island of Capri on May 7. Chanel’s offshore spectaculars are famously planned with ferocious attention to detail, so you can imagine the blueprint was well in place before the coronavirus appeared in Europe. At the time, the immediate concern was the Autumn/Winter show on March 3rd. That went ahead. But the ravages of Covid-19 were escalating fast. “We were already questioning Capri,” said Pavlovsky, “and we very quickly took the decision not to go.” As France went into lockdown, Chanel’s famous petites mains worked from home sewing masks for hospitals.

The Cruise collection was renamed Balade, to evoke the inspiring light and colour of a Mediterranean journey. Chanel was clearly faced by the challenge of finding another way to communicate the intensity of a live show in a glorious physical setting, and Artistic Director Virginie Viard had to adapt the collection. “Yes, we had to adjust not only the content of the collection, but also the way to present,” acknowledged Pavlovsky. “It’s not the same as being in Capri or being live in a show but it will bring something different. At the end of the day, we moved to keep the energy, and to communicate this energy to our friends.”

He called the constraints “a very good exercise” but said he wouldn’t know until next year how successful the approach would prove. “We’ve done so many things we’ve never done,” Pavlovsky added. While she was re-thinking Cruise, Viard also worked to “re-energise” the unsold Spring/Summer product that has been slumbering for weeks in stores forced closed by the coronavirus. The brand’s Autumn/Winter and Métiers D’Art collections will hit retail in July, at which point Spring/Summer product will be taken off the shop floor only to be re-introduced to accompany the launch of the Cruise collection in November.

Though these shifts were induced by circumstances beyond Chanel’s control, Pavlovsky claimed the coronavirus crisis had also accelerated a transformation that was already well underway. The Capri show, for instance, would have been a much more intimate affair than usual, a mere 200 invitees, though there’d apparently been 3000 requests from around the world. “After you do a show with 200 people, you have more enemies than friends,” Pavlovsky noted drily.

How would Lagerfeld, with his acute appreciation of the vagaries of history, be coping right now? You have to wonder, don’t you? Pavlovsky laughed. “I am sure his spirit is here behind us. At the same time, Virginie is able to dare to go to a new level — that’s most important — and not try to compare with Karl… to do what she feels is strong for Chanel.” Right now, that is simplicity, apparently. “It is sometimes the most difficult,” Pavlovsky said. “You get it or not. It’s not about the red carpet. It’s just about being who you are. Talking with the models, they’ve said, ‘It’s exactly what I want to wear tomorrow.’”

It’s the day after tomorrow that remains uncertain. As the lockdown eased in China, Chanel stores were mobbed, even though the brand had raised prices on its core products. The brand is set to report its 2019 results in mid-June, but it will be some time before we get a glimpse at 2020 numbers and the brunt of the pandemic’s effect on Chanel. Bain estimates the luxury sector will contract by up to 35 percent this year.

But the precariousness of a market that depends on discretionary spending is not only subject to the possibility of a second or third wave of infection. There’s also the question of fashion’s relevance in a time when intractable social and economic injustices are galvanising millions of people around the world. Pavlovsky felt it was too soon to project.

“At the moment, we’re working on different scenarios for the coming years,” he said. “It’s a very important time for a brand like Chanel to listen to its customers. So, let’s see if they are feeling the same in the coming months.” And did he imagine the eventual return of continent-hopping in pursuit of a Cruise collection, just like in the olden days?

FT : Elliott/Travelport: booking problems

Elliott/Travelport: booking problems
Firm’s decision to deploy legal indignation in this situation looks awkward

Elliott Management believes it has the skills and fundraising prowess to do it all: private equity, distressed debt and everything in between. In the pandemic, Elliott’s private equity group is relying on the firm’s other forte: aggressively deploying the law.

Struggling travel-booking platform Travelport, co-owned by Elliott and Siris Capital, has filed a lawsuit in New York state court asking a judge to bless its complex rescue financing. Travelport borrowed $500m from its owners in a loan secured against the company’s core intellectual property. Creditors worry such a deal represents an improper grab of collateral. If the two sides do not settle, a judge will have to rule on the legality of the arrangement.

Over the years Elliott has become a major investor in technology stocks. Eventually, it figured that if it could own 5 per cent of a software company and fix it, why not the whole thing. Travelport was acquired for $4.4bn in 2019.

The pandemic has hurt Travelport’s business, sparking the need for cash. Leveraged loan documents for Travelport make allowances for so-called “restricted payments” and investments in “unrestricted subsidiaries”. Based on Elliott and Siris’s interpretations, Travelport believed it was able to move just over $1bn worth of copyrights, trademarks and patents to entities not accessible to existing loan holders. Loan holders, including Blackstone, had been willing to extend new capital. But the sides could not agree on terms. The legal questions will focus on fiduciary duty, valuation and just how flexible covenants in loan agreements really are.

Elliot’s decision to deploy legal indignation in this situation looks awkward when compared with its position in previous situations. Years ago, Elliott and GSO made billions of dollars challenging the wheeling and dealing at private equity-owned Caesars Entertainment. Then again, some in the Travelport camp claim that when Blackstone owned Travelport a decade ago it trampled on creditors’ rights. These back stories will not matter to courts. But if it feels as if every firm is willing to push the line when it suits their purpose, they probably are.

>>> Europe : Brokers Upgrades & Downgrades - 8th of June 2020 V2(+)

>>> Up
* Campari Raised to Outperform at Bernstein; PT 8.90 euros
* Carlsberg Raised to Overweight at JPMorgan; PT 1,050 kroner
* Covivio Raised to Buy at HSBC; PT 82 euros
* Hays Raised to Overweight at Morgan Stanley; PT 145 pence
* Kingfisher Raised to Outperform at RBC; PT 230 pence
* Siemens Healthineers Raised to Buy at Citi
* Swiss Re Raised to Outperform at RBC; PT 100 Swiss francs

>>> Down
* Andritz Cut to Hold at Commerzbank; PT 38 euros
* Banco Santander Cut to Neutral at Oddo BHF; PT 2.80 euros
* Deutsche Euroshop Cut to Sell at Bankhaus Metzler
* Deutsche Euroshop Cut to Hold at Commerzbank; PT 16 euros (+)
* Evraz Cut to Sell at Citi
* Hochschild Mining Cut to Add at Peel Hunt
* Inditex Cut to Sell at Mirabaud Securities; PT 26 euros (+)
* Ipsen Raised to Buy at Bryan Garnier; PT 96 euros (+)
* JD Sports Cut to Underperform at RBC; PT 625 pence
* Kion Cut to Hold at Commerzbank; PT 60 euros
* Klepierre Cut to Sell at Goldman; PT 15.20 euros
* Lloyds Cut to Hold at Investec; PT 37 pence (+)
* Lufthansa Cut to Underperform at Davy
* Melrose Industries Cut to Hold at Stifel; PT 150 pence (+)
* Merlin Cut to Sell at Goldman; PT 6.10 euros
* Munich Re Cut to Reduce at Oddo BHF; PT 225 euros (+)
* Orsted Cut to Hold at Grupo Santander; PT 820 kroner
* Polypipe Cut to Hold at Berenberg; PT 480 pence
* RBI Cut to Hold at Deutsche Bank; PT 19 euros
* Telefonica Deutschland Cut to Neutral at Redburn (+)
* Unibail Cut to Sell at Goldman; PT 44 euros

>>> Initiation
* Deutsche Wohnen Rated New Buy at M.M. Warburg; PT 47.40 euros (+)
* HelloFresh Rated New Buy at Bankhaus Metzler; PT 45 euros (+)
* Royal Unibrew Rated New Underweight at JPMorgan; PT 465 kroner
* Triple Point Social Rated New Buy at Stifel; PT 115 pence (+)

>>> Call
* Breedon Among U.K. Construction Picks; Polypipe Cut: Berenberg
* Campari Upgraded at Bernstein, Which Boosts Beverage PTs by 15% (+)
* Hays Now Top Staffer Pick, Worst Case Priced In: Morgan Stanley
* H&M Faces ‘Challenging’ 2Q, Sales Outlook Improves: Berenberg
* JD Sports Gets Only Sell With RBC Cautious on Growth Prospects
* Kingfisher Double-Upgraded on Strong Positioning, Self-Help: RBC
* Siemens Healthineers Up to Buy at Citi on Covid-19 Test Upside

>>> TradeGate Pre-MArket Indications

DAX:
  • Vonovia (VNA TH) +0.8%
  • MTU Aero (MTX TH) +0.6%
  • RWE (RWE TH) +0.6%
  • Infineon (IFX TH) -1%
  • Munich Re (MUV2 TH) -1%
  • Deutsche Bank (DBK TH) -1.8%
  • VW (VOW3 TH) -1.9%
  • Wirecard (WDI TH) -7.6%
    • Wirecard Offices​​​​​​​ Searched in Probe Targeting Senior Management
MDAX:
  • Airbus (AIR TH) +2.6%
  • Aroundtown (AT1 TH) +2.5%
  • HelloFresh (HFG TH) +2.3%
  • TeamViewer (1UD TH) +1.9%
  • Hugo Boss (BOSS TH) +1.9%
  • ProSieben (PSM TH) -1.4%
  • Aurubis (NDA TH) -1.4%
  • GEA Group (G1A TH) -1.6%
  • Duerr (DUE TH) -1.7%
  • Sartorius (SRT3 TH) -2.1%
SDAX:
  • Corestate (CCAP TH) +14%
  • Zeal Network (TIMA TH) +6.3%
  • Encavis (CAP TH) +1.9%
  • Ceconomy (MEO TH) +1.6%
  • Shop Apotheke (SAE TH) +1.6%
  • MLP (MLP TH) -1.4%
  • Schaeffler (SHA TH) -1.6%
  • Takkt (TTK TH) -1.8%
  • Hornbach Holding (HBH TH) -2%
  • Jungheinrich (JUN3 TH) -2.6%

>>> Stoxx 600 Pre-Market Indications

  • AstraZeneca (ZEG TH) +6%
    • Big Pharma Looks Beyond Covid With AstraZeneca Eyeing Gilead
  • Renault (RNL TH) +4.5%
    • Nissan, Renault Collaboration Must Be Competitive: Uchida
  • Peugeot (PEU TH) +3%
  • Saint-Gobain (GOB TH) +2.7%
  • BP (BPE5 TH) +2.6%
    • Oil’s OPEC+ Boost Eases With Compliance Concerns Lingering
  • Telecom Italia (TQI TH) +2.4%
  • ING (INN1 TH) +2.4%
  • Kering (PPX TH) -2%
  • Ericsson (ERCB TH) -2%
    • Ericsson Sees SEK1b of Costs Related to China Writedowns in 2Q
  • Vinci (SQU TH) -2%
    • Vinci’s Notebaert Says Co. Airports Ready to Reopen In France
  • BNP Paribas (BNP TH) -2.1%
  • Kion (KGX TH) -2.3%
  • HSBC Holdings (HBC1 TH) -2.3%
  • Sartorius (SRT3 TH) -2.8%
  • Husqvarna (HRZ TH) -2.9%
    • Husqvarna Sales Decreased Some 12% in First Two Months of 2Q
  • Ryanair (RY4C TH) -3.7%
  • Wirecard (WDI TH) -7.8%
    • Wirecard Says Latest Investigation Won’t Affect Operating Business
    • Wirecard Offices​​​​​​​ Searched in Probe Targeting Senior Management