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China faces a bleaker end to 2018

Bloomberg
China adds stimulus as its markets reopen after a week-long holiday, Trump and Kim set for another tete-a-tete and Asian markets set for a weak open after last week’s bond rout. Here are some of the things people in markets are talking about today.

China’s Stimulus

China’s central bank cut the amount of cash lenders must hold as reserves for the fourth time this year, as policy makers seek to shore up the faltering domestic economy amid a worsening trade war. The People’s Bank of China lowered the required reserve ratio for some lenders by 1 percentage point, effective from Oct. 15, according to a statement on its website Sunday. The cut will release a total of 1.2 trillion yuan ($175 billion). The central bank has shifted to looser monetary policies this year as the combined effects of Beijing’s financial clean up and the trade conflict with the U.S. threaten the economic expansion. Meanwhile, China’s foreign-currency holdings fell in September, as heightened trade tensions with the U.S. fueled concerns of capital outflow and further yuan depreciation.

China Traders Return

Traders reacted to the PBOC’s move by selling the offshore yuan. With the Chinese currency weakening past the 6.9 per dollar level, the equity market also looks likely to be under pressure Monday as trading reopens following a week-long holiday that saw significant moves globally — bonds sold off and equities were hit hard in Asia last week. Elsewhere, futures also indicated a lower start for shares in Hong Kong and Australia, while Japan is closed for a holiday.

Trump, Kim Meeting

U.S. President Donald Trump said he hopes to see North Korean leader Kim Jong Un “in the near future” after his top diplomat reported progress Sunday at a meeting with Kim in Pyongyang held to resolve details over a potential second summit. Secretary of State Michael Pompeo told South Korean President Moon Jae-in upon his arrival in Seoul that Kim had agreed to meet with Trump “as soon as possible,” according to a statement from Moon’s office. The South Koreans said the U.S. and North Korea discussed establishing formal negotiating groups to set a “denuclearization process” and work out a time and location for a follow-up meeting to the first Trump-Kim summit in June.

Coming Up…

The International Monetary Fund and World Bank host meetings in Bali to discuss global economic development and finance. U. S. third-quarter earnings season begins, led by JPMorgan, Citigroup and Wells Fargo.  There is a pretty thin economic docket this week. Japan’s current account is due Tuesday, while China will report on foreign direct investment. The U.S. releases producer and consumer inflation figures.

Interpol President Resigns

Interpol said its missing president, Meng Hongwei, resigned as Chinese authorities said he is under investigation for unspecified illegal conduct. The international policing agency, in a release, said only that its general secretariat received Meng’s resignation on Sunday, effective immediately. Meng was taken into custody immediately upon his arrival in China for questioning by authorities, the South China Morning Post reported, citing a source it didn’t identify.  China’s Central Commission for Discipline Inspection disclosed the probe on its website, without specifying the alleged wrongdoing.

What we’ve been reading

This is what’s caught our eye over the last 24 hours.

And finally, here’s what David’s interested in this morning

Short Lenovo and also consider shorting Wistron, Wiwynn, Quanta, Inventec. That’s the advice from JPMorgan to its clients in light of last week’s explosive Bloomberg Businessweek investigation. In case you missed it, the story discusses how China used a computer chip the size of grain of rice to infiltrate a long list of large U.S. companies. The bank’s thesis is simple — the U.S. will slow down server imports in the near term and you probably don’t want to own these stocks while the market’s attitude is to sell first, ask questions later. Now, that also tells us where to start looking for opportunities when markets start to discern.

In the meantime, investors dumped the stocks down and the companies involved distanced themselves. Even Lenovo issued a statement on Friday that Super Micro (company at the center of all this) is not a supplier in any capacity. Moving forward, the bigger implications are changes to supply chains and the likely vertical integration by U.S. firms to reduce future risk. While it’s virtually impossible (and expensive) to fully integrate, it’s not hard to see companies reviewing their supply chains and rejigging what they can. With security and intellectual property at stake, changes are almost inevitable irrespective of government influence or even cost. You can also trust the distrust between the U.S. and China to remain for the foreseeable future. And that doesn’t bode well for trade tensions.

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