Southeast Asia Is A Top Choice For Firms Diversifying Supply Chains Amid U.S.-China Tensions

Economic

Summary:

Southeast Asia has emerged as a top beneficiary of the "China Plus One" strategy where businesses seek to reduce the risks associated with full reliance on China's market or supply chain.

Southeast Asia has emerged as a top choice for firms looking to diversify production away from China, including Chinese companies, amid escalating tensions between Washington and Beijing.

"Southeast Asia is well-placed to benefit significantly from the China+1 phenomenon as both foreign and Chinese companies diversify their supply chains and operations," said Kuo-Yi Lim, co-founder and managing partner of Southeast Asian venture capital firm Monk's Hill Ventures.

"Geopolitical [tensions have] accelerated these activities, which started during the Covid lockdowns," Lim added.

The "China Plus One" strategy seeks to reduce the risks associated with total reliance on China's market or supply chain through diversifying manufacturing operations, expanding into other countries even as companies' maintain a presence in China.

This has spurred greater investments into the ASEAN bloc. Foreign direct investments into the ASEAN economies of Indonesia, Malaysia, Philippines, Thailand, Singapore and Vietnam rose to $236 billion in 2023 compared with an annual average of $190 billion between 2020 and 2022, OCBC economists said in a May report.

The inflows mostly came from the U.S., Japan, European Union as well as Mainland China & Hong Kong.

"The ASEAN-6 region has benefited from a diversification of global and regional supply chain as well as the adoption of 'China+1' strategies. FDI inflows from Mainland China and Hong Kong SAR into the region have risen, with manufacturing and certain services receiving the bulk of inflows," the OCBC economists said.

Vietnam

Vietnam has become a key manufacturing location for Apple as the U.S. tech giant seeks to diversify the assembly of its products away from China.

Beijing's tough Covid-19 measures and worker unrest at Foxconn's flagship iPhone factory had majorly disrupted production.

MacBooks, iPads and Apple Watches are reportedly being manufactured in Vietnam.

"Vietnam's proximity to China has long made it a preferred destination for supply chains to offshore processes that could drastically reduce costs of production," said Yinglan Tan, founding managing partner at Insignia Ventures Partners.

Vietnam is already a major research and development hub for Samsung, as well as a manufacturing and export base for Samsung's smartphones, according to local reports.

"Vietnam has added advantages. Its competitive labor costs, market access – it has a whole slew of free-trade agreements – so that makes it a lot easier to export to other markets, for example, the EU," Kai Wei Ang, ASEAN economist at BofA Securities, told CNBC's "Squawk Box Asia" earlier this month.

Malaysia

Malaysia has seen semiconductor firms including Intel, GlobalFoundries and Infineon setting up or expanding operations in the country over the last few years amid U.S.-China tensions.

"Malaysia has seen a revival in its longstanding semiconductor sector, attracting renewed investments from companies such as Intel," said Lim of Monk's Hill Ventures.

Industry observers said that Malaysia's edge has always been its skilled labor in chip packaging, assembly and testing, and relatively lower operating costs.

"It's not just the semiconductor stories in Malaysia that's taking off. You do see a lot more investments into data centers that have come into play, especially the last couple of months, and perhaps there's other sectors, like solar, EV related components as well. So Malaysia is getting that breadth of investments into the country," said Ang of BofA Securities.

Indonesia

The archipelago has vast resources of copper, nickel, cobalt and bauxite — crucial for the manufacturing of electric vehicle batteries.

"Indonesia – that's another interesting country as well – where they are hoping to emerge as an integrated EV hub," Ang said. "It's probably still at a very early stage, but they are looking to scale up capacity across the whole supply chain."

The Indonesian government has been luring EV companies with incentives to set up local manufacturing bases.

"China+1 is not only for foreign companies in China. Geopolitics and international trade developments also push Chinese manufacturers to diversify their production geographically," said Anders C. Johansson, director of Stockholm China Economic Research Institute under Stockholm School of Economics, in a LinkedIn post last week.

The industry ministry said earlier this month that it had entered an agreement with four Chinese companies – Neta, Wuling, Chery, and Sokon – to establish Indonesia as an EV production hub.

Chinese electric vehicle maker BYD plans to start commercial production of EVs in Indonesia in 2026, according to local reports.

Singapore

Singapore has been "a preeminent destination" for firms looking to set up regional headquarters as well as expand across the region, according to a report by ASEAN Briefing.

"Today, this diversification has extended not just to global businesses like Apple and supply chains but also entrepreneurs and startups looking to build global businesses in the Asia-Pacific region," said Tan of Insignia Ventures Partners.

"Singapore in particular has become a destination for these entrepreneurs to headquarter global businesses, while still being able to, for example, raise money from the U.S. and employ engineers in China," Tan added.

Chinese companies including TikTok and Shein have set up regional headquarters in Singapore, which is seen as a stable base amid geopolitical headwinds.

"Singapore, with its trusted hub status in finance and regulatory infrastructure, will continue to attract companies seeking an Asian base in these uncertain times," said Lim of Monk's Hill Ventures.

Source:CNBC

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Cohen

Economic

Total revenues, which include the general public budget and the government funds budget, fell 4.1% during January-May from last year to 11.36 trillion yuan ($1.6 trillion). That’s the steepest drop since February 2023, according to Bloomberg calculations based on data from the Ministry of Finance.

The combined spending under the two accounts fell 2.2% on-year to 13.61 trillion yuan in the first five months. That leaves a fiscal shortfall of 2.25 trillion yuan, widening from January-May last year but below the level recorded during the same period in 2022.

China’s Fiscal Income Drops at Quickest Pace in More Than a Year_1

The government’s budget has been under strain as slowing economic growth weighed on tax income, while a multiyear property market downturn slashed its income from land sales. Local officials have become more aggressive in chasing companies for taxes dating back decades as they try to plug a hole in their finances caused by the housing crisis.

Authorities have expedited bond sales in recent months to raise funds, as Beijing looks to provide more support to the economy when businesses and households are reluctant to spend. Economists are increasingly calling on Beijing to increase the budget deficit and sell additional sovereign debt to maintain the recovery momentum.

“The budgeted deficit-to-GDP ratio announced during the NPC was actually lower than expected,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc, referring to the National People’s Congress meeting in March. “It is possible that the number could be raised in the coming months.”

China’s Fiscal Income Drops at Quickest Pace in More Than a Year_2

Beijing in October last year took a rare move of adjusting its budget mid-year, raising last year’s fiscal deficit to 3.8% of gross domestic product through the issuance of an additional 1 trillion yuan of sovereign bonds to aid the economy.

In March, the government set its fiscal deficit target this year at 3% of GDP, which was to be filled in part by 3.34 trillion yuan in sovereign bond issuance. Separately, it also planned to sell 1 trillion yuan in special sovereign debt to fund investment in key projects.

Yu Yongding, a former adviser to China’s central bank, wrote in an article last week that China may need to sell additional sovereign debt this year to ensure that its full-year growth target of around 5% can be achieved.

Data on Monday also showed persistent weakness in the property market. Local governments earned 227.4 billion yuan from selling land, down from 238.9 billion in April and remaining at the lowest level since May 2016.

Source:Bloomberg

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Warren Takunda

Economic

The dollar was slightly weaker on Monday but remained close to an almost eight-week high, while the yen languished near the 160 level, drawing verbal warnings from Japanese authorities as intervention fears grip markets.

The yen weakened to 159.94 per dollar in early trade, its lowest since April 29, when the yen touched a 34-year low of 160.245, leading to Japanese authorities spending roughly 9.8 trillion yen to support the currency.

The yen was last slightly firmer at 159.75 per dollar after Japan's top currency diplomat Masato Kanda said on Monday authorities will take appropriate steps if there is excessive foreign exchange movement, and that the addition of Japan to the U.S. Treasury's monitoring list would not restrict their actions.

"We will firmly respond to moves that are too rapid or driven by speculators," Kanda said, but noted authorities had no specific levels in mind on when to intervene.

The yen has come under renewed pressure after the Bank of Japan's (BOJ) decision this month to hold off on reducing bond-buying stimulus until its July meeting. It is down 1.5% in June.

"I don't necessarily think that the act of breaking the psychological level is enough (for intervention) any more," said Simon Harvey, head of FX analysis at Monex.

"Authorities have told us that they care more about the pace and disorderly moves as opposed to individual levels."

A summary of opinions at the BOJ's June policy meeting on Monday showed some policymakers called for raising interest rates in a timely fashion as they saw a risk of inflation overshooting expectations.

The yen, which is highly sensitive to U.S. Treasury yields, is down over 10% against the dollar so far this year, weighed down by the wide difference between interest rates in Japan and the United States.

Demand for carry trades, borrowing yen at low rates to buy higher yielding currencies, has also taken both the Australian and New Zealand dollars to 17-year peaks on the yen.

INFLATION TEST AHEAD

The spotlight this week will be on the U.S. personal consumption expenditures (PCE) price index - the Federal Reserve's favoured gauge of inflation - due on Friday.

Economists polled by Reuters expect annual growth in the index to slow to 2.6% in May. A soft reading is likely to bolster bets on a rate cut as early as September, which futures currently price as a 70% prospect, CME FedWatch tool showed.

The dollar index , which measures the U.S. unit against six peers, was last at 105.66, edging back from a nearly eight-week high of 105.91 it touched last week.

The focus through the week will also be on geopolitics, with the first U.S. presidential debate on Thursday and the first round of voting in the French election at the weekend.

"You're going to see a lot of defensive positioning going into the first round of the French election and U.S. presidential debate," said Monex's Harvey.

"While there is a sense of calm which is weighing on the dollar this morning, political risk is still a decent source of strength for the dollar and we expect the dollar index to finish the week higher."

The euro , which has been under pressure since French President Emmanuel Macron called a snap election earlier this month, was up 0.2% at $1.07125 but was still down 1.2% in June.

France's far right National Rally (RN) party and its allies were leading the first round of the country's elections with 35.5% of the expected vote, an opinion poll published on Sunday showed.

RN lawmaker Jean-Philippe Tanguy, who is widely seen as the most likely candidate to head the finance ministry if the party wins and forms a government, told Reuters an RN government would stick to the European Union's fiscal rules.

Meanwhile, spot yuan was trading at 7.2609 per dollar, within a very narrow range and close to its lowest in seven months, weighed by broad strength in the dollar and worries about weakness in the world's second-largest economy.

Source: Reuters

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Alex

Economic

Commodity

India’s gold reserves parked overseas dropped to a six-year low at the end of March 2024 to 47 per cent of the total. This is the lowest since the Reserve Bank of India (RBI) started accumulating the yellow metal in December 2017.

The RBI started to transfer gold from the UK to its vaults in India from May this year when it moved over 100 tonnes (1 lakh kilograms) of the precious metal.

The movement of gold last month was one of India’s largest since 1991, when part of the gold reserves was pledged to address a foreign exchange crisis.

Why RBI bringing back its gold from the UK?

A report by The Economic Times quoted data saying that the RBI started bringing the gold to India in March 2022, coinciding with Russia’s full-scale invasion of Ukraine.

The RBI, along with central banks of other nations, have turned cautious after the US froze Russian foreign currency assets after the Russia-Ukraine conflict began in February 2022.

Meanwhile, RBI Governor Shaktikanta Das said the India’s central bank is bringing back its gold as there is ample domestic storage capacity and “nothing more should be read into it."

India’s total gold holding

By the end of March 2024, the RBI’s total gold holdings amounted to 822.1 tonnes, with a significant amount reserved in foreign vaults.

Why RBI store its gold in foreign banks?

As per reports, during India’s foreign exchange crisis in 1990-91, the nation had pledged part of its gold reserves to the Bank of England to secure a $405 million loan. By November 1991, the loan was paid back, but India decided to keep the gold in the UK for convenience.

Where RBI store its gold?

Primarily, India’s gold reserves are stored in the Bank of England, which is known for its stringent security protocols. Apart from this, the RBI also stores some of its gold reserves at the Bank for International Settlements (BIS) in Basel, Switzerland, and the Federal Reserve Bank of New York in the United States.

Risks of storing gold overseas

Reserving gold overseas makes it easier for India to trade, engage in swaps as well as earn returns, but there are risks involved too.

Geopolitical tensions and war or conflict can create uncertainty about the safety of international assets. The freezing of Russian assets by Western nations recently as well as concerns over the UK economy have likely increased the Indian government’s worries about the safety of gold reserves overseas.

Source:Firstpost

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Warren Takunda

Cryptocurrency

Catching a falling knife is risky, but some crypto options traders look to be doing just that, betting on a bullish outcome in a falling market.

Ethereum's native token ether {{ETH}}, the second-largest cryptocurrency by market value, has dropped over 5% to $3,350 in one week, according to CoinDesk data. The decline follows speculation that ether ETFs could begin trading in the U.S. next month and is consistent with weakness in market leader bitcoin and other alternative cryptocurrencies.

Still, according to Amberdata data, some traders have been buying large numbers of ether September expiry call options at the strike level of $4,000 on crypto exchange Deribit.

A call option is a derivative contract that gives the holder the right to buy the underlying asset at a specified price within a predetermined time frame. When traders purchase call options, they do so with the expectation that the price of the underlying asset will rise above the strike price, that is, $4,000 in this case, before the expiry of the option.

"Looking at the block flows this week, we see a ton of buying activity for the September $4,000 calls," Greg Magadini, director of derivatives at Amberdata, said, adding it is a sign of traders betting that "if ETH gets above $4k we likely test and breakout new all-time-highs."

Block trades are large orders typically negotiated privately between two parties and listed on an exchange. They are commonly preferred by institutional investors, hedge funds, and large market participants.

Ether, which came into existence in 2015, set a record price of over $4,800 since November 2021. While BTC surpassed its 2021 early this year, ether only briefly managed to top the $4,000 mark, with the upside relatively restricted due to regulatory uncertainty and low odds of ETH getting a spot ETF listing in the U.S.

Since then, the U.S. Securities and Exchange Commission (SEC) has set the stage for a spot ether ETF approval and dropped an investigation into Ethereum 2.0, removing significant regulatory uncertainty from the market. Now, Bloomberg's ETF analyst Eric Balchunas expects ether ETFs to begin trading in the U.S. on July 2.

Perhaps traders buying $4,000 calls expect fireworks once the ETFs go live. The bullish flow is consistent with the elevated volatility expectations in the ether market. However, some observers, including JPMorgan, aren't buying the excitement.

Source: Coindesk

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Alex

Economic

The 'flash' PMI survey data for June provide an early snapshot of economic conditions in the euro area after the European Central Bank cut interest rates for the first time in five years. The survey showed a surprise cooling in the pace of economic growth, defying consensus expectations of a further acceleration in growth. Manufacturing in particular took a turn for the worse, deteriorating at a steepening rate. At the same time, however, price pressures cooled further, down to levels which historical comparisons suggest are compatible with the ECB's inflation target.

Here are our top-five takeaways from the June flash PMI data:

1. Economic growth slips in June

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, fell from 52.2 in May to 50.8 in June. Economists had been expecting a rise to 52.5.

Although signalling a fourth successive monthly increase in output, following a nine-month spell of decline, the latest reading is the weakest for three months and indicative of eurozone GDP growing at a sluggish quarterly rate of just over 0.1% (according to a simple OLS regression model based on prior PMI and GDP data alone). For the second quarter as a whole, the PMI average of 51.6 points to a GDP rise of 0.2%. Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_2

Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_2

The deteriorating eurozone growth trend was led by France, which saw output fall for a second consecutive month and at the fastest rate for five months. Companies reported that the deterioration was in part linked to heightened uncertainty and paused spending following the announcement of the snap parliamentary elections. The flash composite PMI reading for France is indicative of stalled GDP in June, and a mere 0.1% expansion for the second quarter as a whole.

However, growth also slowed sharply in Germany from the 12-month high seen in May, albeit still registering growth for a third consecutive month after nine months of decline. The June flash composite PMI reading none the less indicates no GDP growth during the month and rounds of a quarter which, as in France, points to the economy growing at a meagre 0.1% quarterly pace.

Outside of France and Germany, however, the picture was brighter. Collectively, the rest of the eurozone reported output growth for a sixth successive month in June, the rate of growth losing momentum to sit at a four-month low yet remaining above the long-run average. Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_3

Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_3

2. Manufacturing output slumps

By sector, the worsening situation across the eurozone in June was fueled by a sharp drop in manufacturing output. Having come close to stabilising in May, factory output dropped at its steepest rate for six months, extending the sector's decline into its fifteenth successive month. Production fell at increased rates in both France and Germany, hitting five- and three-month highs respectively, and showed a renewed decline in the rest of the region, dropping at the sharpest rate since December.

Fueling the manufacturing downturn was a steepening in the rate of loss of new orders, which fell for a twenty-sixth consecutive month in June - bucking the easing trend seen in prior months - in response to worsening demand indications in France, Germany and the rest of the eurozone.

Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_4

3. Service sector expansion provides offset to factory malaise

The service sector meanwhile sustained its expansion into a fifth straight month, though the rate of growth cooled to the lowest since March. The slowing was principally a reflection of lower business activity in France, often linked to political uncertainty (albeit drawing on a modest decline also seen in May). While rates of growth also lost some momentum in both Germany and the rest of the eurozone as a whole, these expansions remained encouragingly solid by recent standards of the survey. Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_5

Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_5

Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_6

4. Uncertainty hits hiring

Employment increased across the eurozone for a sixth month in a row in June after two months of marginal declines at the end of last year, but the latest rise was the smallest recorded for three months. Employment fell marginally in Germany, dropping for the first time in three months in response to manufacturing layoffs, and payroll growth hit three- and four-month lows in France and the rest of the eurozone respectively, again led by manufacturing job culls.

Hiring was hit as companies became less optimistic about prospects in the year ahead. Future output expectations fell across the eurozone in June to their lowest since February. Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_7

Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_7

Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_8

Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_9

5. Prices rise at slower rate

Average prices charged for goods and services across the eurozone rose at the slowest rate for eight months in June, the rate of increase running at one of the weakest seen since inflation took off in early 2021. The decline takes the index back down to levels that are broadly consistent with the ECB's 2% inflation target, according to historical comparisons.

Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_10

Of particular note, input costs in the service sector - which are heavily influenced by wage growth -rose at the slowest rate since April 2021, to thereby signal a cooling of core inflation (likewise down to target).

Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_11

However, while lower input costs in the service sector fed through the weakest rise in selling prices for services recorded by the survey since May 2021, June saw some further moderation of the disinflationary trend in manufacturing. Factory input costs rose in June for the first time in 16 months, resulting in the smallest decline in manufacturing selling prices seen for just over a year - a development which could put some renewed upward pressure on inflation in the coming months if sustained.

Inflation Slows Further As Economic Growth Wanes: Our Key Takeaways From The Eurozone Flash PMI_12

Within the eurozone, especially weak price growth was recorded in France, where average charges for goods and services barely rose in June, registering the smallest increase since prices began rising in March 2021. French services prices in particular increased only marginally. While price growth ticked higher in Germany, the rise remained among the lowest seen over the past three years and only marginally above the pre-pandemic ten-year average. Inflation in the rest of the eurozone as a whole, meanwhile, slowed to a six-month low.

Source:Markit

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Warren Takunda

Economic

Central Bank

Another green week on the overall market, with S&P 500 finishing up over .25%. The two big market components lagged last week with Apple and Nvidia closing the week down over 3% and 2% respectively which could have played a role in the lackluster SPY return. This also let Apple overtake Nvidia as the second-largest company by market cap, but Nvidia is still firmly over the $3 Trillion threshold.

This coming week is pretty news-heavy with PCE and GDP all due out. In addition, there are several fed speakers at some odd times which can cause some volatility in the market.

Here are 5 things to watch this week in the Market.

FOMC Speakers

Throughout this week there are several FOMC speakers, almost 1 every day, with some of them being outside of market hours and some of them being inside market hours. Whenever they speak though it's possible to get some headline volatility as they discuss fiscal policy and make statements on the conditions inside the US.

CB Consumer Confidence

On Tuesday the real news starts to arrive with the consumer confidence number coming in at 10 am Eastern. This is a marker of consumer spending and potentially about the underlying strength of the economy. This release has been trending down over the past several months and has been revised down further after the fact. If we continue to see this trend keep up we could see the market be put under pressure, at least during the release. If we beat and/or revise the previous months higher we could see the market catch a bid.

Final GDP

Arguably one of the largest measures of economic growth, the final GDP for the first quarter of 2024 is due out Thursday at 8:30 am. This has the potential to be an extremely volatile release and to set the tone for the rest of the trading day. If this release is a beat, we could see the market rally on good news, but this could put pressure on the FED to tighten rates further on continued expansion. If we miss we could see the market dip, but this could have the opposite effect in the long run, and allow the FED to loosen rates sooner.

Pending Home Sales

Also due on Thursday are Pending Home Sale. Last month was a huge miss, coming in at -7.7% vs the -1.1% estimated. If we have another miss like that we could see some heavy volatility in the market. This month they have yet to issue a forecasted value at the time of this writing.

Outside of the potential market impacts of this release, another contraction could start to help ease housing prices as it would mean that inventory is sitting longer on the market and that often means prices start to fall to attract buyers.

Core PCE

Finally, on Friday we have a big inflation release with Core PCE at 8:30. This is the Fed's main way to track inflation and a piece of data they rely on to help craft monetary policy. If this comes in with another miss, meaning it's lower than expected, we could see the market start to rally on the hope that lower inflation means lower rates. If this is a beat, meaning higher than expected, we could see some pressure on the overall market as it could mean that inflation is here to stay. These rate-related releases have moved the market a lot recently, so this is something to be aware of.