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    U.S.-China investment flows hit their lowest in 9 years as companies feel the pressure to pull out

    A symbol of TikTok (Douyin) is pictured at The Place shopping mall at dusk on August 22, 2020 in Beijing, China.
    VCG | Visual China Group | Getty Images

    BEIJING — The haggling over TikTok is the latest signal of a change in U.S.-China deal-making: rather than buying each other, companies may soon be looking to sell their cross-border holdings.
    Amid the shock of the coronavirus pandemic and escalating U.S.-China tensions in the first half of this year, the total value of foreign direct investment and venture capital deals between the two countries fell to a near nine-year low, research and consulting firm Rhodium Group said in a report Thursday. The research said the $10.9 billion in deals for the January to June period was the lowest since the second half of 2011.

    The decline continues a trend of the last three years, reversing a flurry of mergers and acquisitions by Chinese conglomerates in the U.S. that included purchases such as the Waldorf Astoria in New York.
    Both countries have had a part to play in this development. The Chinese government has sought to limit capital outflows, while U.S. President Donald Trump — who is seeking re-election in this November’s election — has increased scrutiny on Chinese purchases of American assets.
    The total announced Chinese divestitures in the U.S. have amounted to $76 billion in the last 20 years, with the bulk occurring in the last two years, according to Rhodium’s analysis.

    The latest ongoing high-profile case involves Beijing-based ByteDance, which acquired short-video app Musical.ly in late 2017. ByteDance subsequently merged the users of the U.S.-focused start-up onto one app called TikTok that has exploded in popularity worldwide. Citing concerns about data security, Trump issued an executive order in August requiring ByteDance to divest its interests in the U.S.
    After rejecting a bid from Microsoft, TikTok is expected to list its global operations publicly on a U.S. stock exchange, with U.S. software company Oracle and retail giant Walmart set to take stakes, sources told CNBC.

    Trend could last beyond U.S. election

    There will likely be more political pressure for Chinese stakeholders to sell out to American businesses.
    The Rhodium report noted the Committee on Foreign Investment in the United States (CFIUS) is stepping up its scrutiny of Chinese investments in the country to include a retroactive review of transactions that were not submitted voluntarily. 
    And companies were far from eager to pursue cross-border deals in the first half of the year.
    Completed U.S. direct investment into China fell 31% to $4.1 billion, while Chinese investment into the U.S. would have plunged if not for Tencent’s $3.4 billion minority stake in Universal Music, the report said. With the technology giant’s purchase, Chinese businesses completed direct investments of $4.7 billion into the U.S. in the first half of the year, up from $3.4 billion a year ago, according to Rhodium. 
    “Flows are unlikely to recover in (the second half) amidst persisting systemic concerns and US election politics,” the authors of the report wrote. 
    Although they expect some pressure to subside following the election, they said, “systematic concerns driving caution on Chinese investment in high technology, critical infrastructure and personal data assets will not subside.”
    “China’s new ‘internal circulation’ campaign suggests that Beijing reads the writing on the wall to mean less two-way engagement with the world, especially the US, in the years ahead,” they added.

    Some companies still picking China

    Chinese authorities are also increasing scrutiny on inward flows, according to a separate report co-released this week by the Rhodium Group.
    The quarterly review of China’s progress on economic reform is called “The China Dashboard” and released by the Asia Society Policy Institute and the Rhodium Group.
    Analysts said in the report that regulators “disproportionally targeted foreign firms in their merger reviews” in the first three months of this year.
    The share of foreign-involved deals subjected to review soared to 32% — the highest on record, the report said, adding that fewer than 10% of domestic deals faced such scrutiny. It noted that deals tied to overseas firms fell 17% year-on-year to 151, while domestic deals declined 9% year-on-year to 324 as a result of the coronavirus pandemic.
    In public, China’s top government leaders and various departments have emphasized efforts to support foreign direct investment into the country. Data from the Ministry of Commerce showed actual use of foreign capital rose 15% year-on-year in August, bringing the year-to-date change to near break-even at negative 0.3%. 
    “We had unprecedented access to the Chinese leadership over the last month,” Joerg Wuttke, president of the European Union Chamber of Commerce in China, told reporters last week. He pointed in particular to a conversation a day earlier with Hu Chunhua, a vice premier of China, along with representatives from the American Chamber of Commerce in China and other foreign business groups in Beijing. 
    American and European business associations have also noted that members generally remain keen on staying in China to access the large domestic market. 
    Rhodium’s report on cross-border flows pointed out that China’s agriculture and food sector became a new popular industry for U.S. investment this year, and many significant American deals for Chinese companies in industries such as finance and energy remain on track.
    “In particular, capital expenditure from the ongoing greenfield constructions are baked in for the next few years, so a rapid drop-off like we’ve seen in the other direction is unlikely to happen for US FDI in China,” the report said. More

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    CaixaBank and Bankia to merge, creating Spain’s largest bank

    The boards of directors at Bankia and CaixaBank have agreed to merge, which would lead to a behemoth in the Spanish banking sector
    Pierre-Philippe Marcou, Gabriel Bouys | AFP

    The boards of Spain’s CaixaBank and state-owned Bankia have approved a merger plan between the two lenders, which will create the biggest bank in the country.
    The deal terms will see CaixaBank offer 0.6845 of its shares for every Bankia share, according to a release published Friday. The newly created lender, which will keep the CaixaBank brand, will have assets of more than 664 billion euros ($786.7 billion), the companies said.

    The merger plan still needs to be approved at the General Shareholders’ Meetings of both companies.
    “With this operation, we will become the leading Spanish bank at a time when it is more necessary than ever to create entities with a significant size, thus contributing to supporting the needs of families and companies, and to reinforcing the strength of the financial system,” Bankia Executive Chairman Jose Ignacio Goirigolzarri said in a statement. More

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    Stock futures are flat in overnight trading after Dow snaps a 4-day win streak

    Stock futures held steady in overnight trading on Thursday after another sell-off on Wall Street led by major technology names.
    Futures on the Dow Jones Industrial Average rose about 20 points. The S&P 500 futures and the Nasdaq 100 futures were both flat.

    During Thursday’s regular trading session, the S&P 500 declined 0.8% for its biggest drop in a week. The Dow dipped 130 points, snapping a four-day winning streak. The tech-heavy Nasdaq Composite fell 1.3% and briefly dipped back into correction territory, down 10% from its record high. 
    “Tech inflicted a lot of the damage as that group extends the sell-off that commenced back on Sept.3,” Vital Knowledge founder Adam Crisafulli said in a note on Thursday. “The summer excess is still being wrung out of tech and the process has a bit more to run.”
    Some of the biggest technology stocks have suffered double-digit losses so far this month as investors rotated out of high-flying market leaders. Amazon, Microsoft, Facebook and Apple have all lost at least 10% this month.
    Investors also remained on edge about the outlook on further coronavirus stimulus as well as the timing of a viable vaccine. 
    Republicans and Democrats are still struggling to agree on how much aid to continue to provide in a follow-up bill to the previous $2 trillion package. President Donald Trump said Wednesday he liked “the larger numbers,” urging GOP lawmakers to go for a bigger coronavirus stimulus, but his comments left Republicans skeptical.

    Meanwhile, the path to a Covid-19 vaccine, which is critical to the economic recovery, still seems unclear. Health officials said vaccinations would be in limited quantities this year and not widely distributed for six to nine months.
    “A safe and transparent vaccination process is critical to encouraging widespread inoculations once effective vaccines are identified and tested.” Mark Haefele, UBS Global Wealth Management’s chief investment officer, said in a note. “In our central scenario, we expect widespread vaccine availability by 2Q21.”
    On Thursday, the Federal Reserve, which just began a second round of Wall Street stress tests, said it’s weighing whether to continue capping U.S. banks’ dividend payments and share buybacks.
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    Bullish market activity in 2021 will cost jobs, $7 billion money manager predicts

    Money manager Kevin Nicholson expects the stock market to stabilize and rise in early 2021.
    But the co-chief investment officer of global fixed income at RiverFront Investment Group warns it’ll come at a cost to the jobs market.

    “Companies are going to right-size their business,’ Nicholson told CNBC’s “Trading Nation” on Thursday. “This is going to create the divergence between the economy and the market.”
    According to Nicholson, it’ll be a major setback to the economic recovery from the Covid-19 due to the hit to consumption.
    “A lot of these workers who were furloughed will not end up going back to work,” he said. “They’re going to become permanently unemployed.”
    Nicholson already sees the trend unfolding in this week’s layoff announcements from Citigroup and Wells Fargo.

    ‘The pandemic pledge’

    “The pandemic pledge that a lot of companies put out there will go away as they move towards focusing on profitability,” he noted.

    As for the remainder of the year, Nicholson expects a sideways market that’s driven by volatility. His base case is the S&P 500 will be trading between 3,400 and 3,450 until January. On Thursday, the index closed at 3,357 and is more than 6% off its record high.
    He’s also bracing for more wild swings among the mega-cap technology names.
    “From the bottom of March 23 to the end of August, tech was up over 80%. So, we expect it to have such pullbacks,” said Nicholson, who manages $7 billion in assets. “The rest of the market isn’t as overvalued as tech.”
    His strategy is to pare down the year’s winners and gradually increase exposure to economically sensitive stocks such as energy and financials.
    “You want to cut down on the exposure that you maybe have in technology. Take some of the profits because technology has had a huge year,” Nicholson said. “You can use some of those profits to move into some more cyclicality into your portfolio.”
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    Stocks making the biggest moves after hours: Snowflake, Palo Alto Network, Penn National Gaming & more

    Cloud data warehouse company Snowflake is promoted at the Nasdaq MarketSite, Wednesday, Aug. 5, 2020, in New York’s Times Square.
    Mark Lennihan | AP

    Check out the companies making headlines after the bell: 
    Snowflake — Selling in the biggest software IPO continued in extended trading with shares of Snowflake down more than 1%. The cloud company dropped more than 26% in regular-hours trading after soaring 111% in its market debut Wednesday.

    Penn National Gaming — Shares of Penn National Gaming rose another 1%, extending the 7% jump during Thursday’s regular trading session. The sports betting company got a boost after Stifel hiked its price target to $85 per share from $47 per share, saying its “Portnoy Momentum Trade” still has room to run. The firm referred to Barstool Sports, a sports media company led by Dave Portnoy, in which Penn National made a significant investment earlier this year.
    Dave & Buster’s Entertainment —  Shares of the restaurant and arcade chain rebounded from steep losses in after-hours trading, up more than 2%. Earlier, the stock dropped 26% after Wall Street Journal reported the company warned of bankruptcy if an agreement can’t be reached with lenders.
    Palo Alto Network — Shares of Palo Alto Network gained slightly after the cybersecurity firm announced it has completed its acquisition of The Crypsis Group. Palo Alto Networks paid approximately $265 million in cash, excluding purchase price adjustments, to acquire the security advisory firm.
    Eastman Kodak — Shares of Eastman Kodak climbed more than 3% after jumping more than 25% in regular trading hours. The photography pioneer’s stock has soared more than 67% this week alone after an independent review cleared the company executive of insider trading allegations. However, House lawmakers on Thursday raised doubts about the internal review surrounding Kodak’s disclosure about a planned $765 million federal loan. More

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    The market isn't convinced the Federal Reserve can achieve its inflation objective

    The Marriner S. Eccles Federal Reserve Board Building in Washington, D.C.
    Jabin Botsford | The Washington Post | Getty Images

    For the past decade or so, the Federal Reserve has been quite effective in helping to create inflation, just not the kind that it normally targets.
    The Fed’s perpetually easy monetary policy, consisting of historically low short-term interest rates and trillions of dollars in bond buying, has coincided with a huge swell in asset prices, stocks in particular.

    What it has not driven is the kind of inflation central bank officials like to see – higher wage pressures, for instance, that help improve the standard of living as well as signal a vibrant economy not caught in the slow-growth trend that has persisted since the financial crisis.
    The Fed is hoping to change that with a policy that it wheeled out in late August and codified Wednesday.
    Instead of using interest rate increases to head off inflation before it hits, the Fed now will wait to hike until it sees inflation running persistently above the 2% target for an indeterminant period. While the move to “average inflation targeting” is in a respect historic for the Fed, market participants remain largely skeptical that the central bank can achieve its newly defined goal.
    “Inflation has been an enigma for the Fed for a decade,” said Art Hogan, chief market strategist at National Holdings. “Clearly, there are certainly risks of creating asset bubbles with easy monetary policy. There doesn’t seem to be much risk of actual constructive inflation.”
    Officially, the post-meeting statement “will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent.” Policy won’t change “until these outcomes are achieved.”

    However, inflation didn’t even get past 2% when the U.S. economy was running with a 3.5% pre-pandemic unemployment rate, its lowest in 50 years. So investors could be forgiven for not expecting much from an economy with 8.4% unemployment, the decline of which historically has been an inflation sign though that relationship has broken down since the financial crisis.
    None of the 17 officials on the Federal Open Market Committee see inflation breaking the 2% barrier through at least 2023. That means that the current near-zero short-term rate environment likely will persist for years before any change in the current structure would occur.
    That poses problems on multiple levels.

    Talk about bubbles

    As Chairman Jerome Powell has spelled out repeatedly and reiterated during his post-meeting news conference Wednesday, low inflation generates low expectations which generate the low rates that Wall Street loves but that the Fed fears. Powell again stressed the limitations the zero-bound rates put on the Fed, which loses its ability to ease policy during times of stress.
    Powell was asked during the news conference about the danger of asset inflation and financial instability, but expressed little concern about either at the moment.
    Still, the talk of asset inflation, and a potential bubble, against economic disinflation will continue while the Fed stays near zero and inflation is mired well beneath the target rate.
    “We know through the last 10 years that lower rates created asset inflation but not necessarily broad economic inflation. We need that component to be part of the discussion,” said Marvin Loh, senior global macro strategist at State Street. “I don’t think [a bubble] is a concern now. But it probably will be if this continues as we go into next year and probably 2022. They can look past it now given how many challenges they see in the economy.”
    Indeed, at least from a valuation standpoint Powell has wiggle room left before he has to start worrying about a stock market bubble.
    The current price-to-earnings ratio of the S&P 500, while elevated at 21.7, remains less than half the dot-com bubble levels around 46 in 2002.
    Rather, the worry may be that the Fed has little else it can do except to keep pumping up the stock market and hope the economy follows.

    Not much detail

    The market didn’t know quite what to make of the Fed’s latest messaging, rising initially Wednesday before tailing off during Powell’s remarks and then sagging Thursday as investors wondered just how strong the Fed’s commitment is to economic inflation, and whether it can be effective.
    After all, the change in approach on its face doesn’t seem that radically different from the former “symmetric” objective the Fed had to inflation, meaning it would allow for a miss on either side of the target. The difference is that this policy aims strictly for higher inflation, even if the details don’t seem to be ironed out yet.
    Powell emphasized the need for fiscal help from Congress to support the recovery, though it’s still unclear what form that ultimately will take.
    “There wasn’t much detail on how this would work,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. “There’s some skepticism perhaps on a longer-term basis that they might be able to achieve that. That would then indicate that the Fed is essentially signaling that we can stay at the zero-bound interest rate until we do.”
    Ma called it “quite a strange mismatch” that none of the Fed officials were anticipating inflation above 2% even in the longer run, though they do see the benchmark funds rate rising to 2%-3% over the long run from its current state near zero.
    “Although we have the perfect setup for inflation – deglobalization, big tech breakup, higher wages – no one knows what actually drives inflation, and no one knows how to overcome huge demographic shifts that cause low inflation,” added Jeff Klingelhofer, co-head of investments and a portfolio manager at Thornburg Investment Management.
    “The Fed’s I’ll-tell-you-when-to-stop-pouring approach to 2% inflation is just impossible,” Klingelhofer added. “Investors shouldn’t assume talk of inflation is monopolizing the Fed’s time, particularly since I don’t expect inflation to come into view until the end of 2021 at the earliest.”
    If nothing else, though, the Fed’s policy should be market-friendly, Thursday’s adverse reaction notwithstanding.
    Krishna Guha, head of central bank strategy at Evercore ISI, said the “whites-of-their-eyes” strategy on inflation is “unprecedented” and “is proof the Fed reaction function has changed. And it is bull fuel for the longer run.” More

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    Snowflake's first-day pop means IPO left $3.8 billion on the table, the most in 12 years

    One of the biggest problems with the traditional IPO process (and there are several) is that it’s impossible to say whether a deal is a success or a failure. 
    Snowflake, the cloud-based data management company that’s 2020’s biggest IPO, jumped 112% in its debut Wednesday. For investors who received allocation at the $120-per-share offering price (which, by the way, was 41% higher than the range Snowflake had initially marketed earlier in September), that’s a win. It’s also a win for earlier backers, like Altimeter Capital and Sutter Hill, who have made back multiple times their original investments. 

    “The heart’s beating a little faster right now,” said Brad Gerstner, founder and CEO of Altimeter Capital, on CNBC as he watched the stock open.
    But there’s a flip side that’s often talked about: money left on the proverbial table. This looks at the abstract concept of opportunity cost — what Snowflake could have raised if it had priced the deal as the broader market valued it. In this case, that figure is $3.8 billion (in addition to the $4 billion Snowflake raised in the IPO and concurrent private placements). Critics of the IPO process say that’s capital that could have otherwise been invested in the business. 
    “In many ways, $SNOW is the final proof of just how broken process is,” tweeted Bill Gurley, general partner at venture firm Benchmark and frequent critic of the traditional initial public offering process. 
    Snowflake’s “money left on the table” is the largest for any company listed in the U.S. since Visa’s IPO in 2008. That deal handed an additional $5 billion to Visa investors who got allocation in the IPO, rather than the company. (Note: Visa shares have soared about 1,200% since its IPO, compared with a 161% gain in the S&P 500 over that same period). 
    Snowflake’s opportunity cost also surpasses that of Alibaba, which is the record holder for the largest IPO, listed in the U.S., in 2014. However, a minority of Alibaba’s IPO comprised shares issued by the company — known as primary stock — with the rest sold by previous investors like founder Jack Ma or Yahoo. That meant, Alibaba left $3.2 billion on the table, below that of Snowflake. 

    (To be sure, Snowflake shares were dropping 10% on Thursday, meaning maybe the stock wasn’t as mispriced in the IPO as the first-day pop reflected.)

    Are SPACs better?

    So why does this matter? Well, skeptics of the traditional IPO process often point to the inefficiencies and mispricings as the reason why the route to public markets needs to be reformed. But the newer methods for IPO candidates, such as SPACs and direct listings, just do a better job of hiding the opportunity costs. 
    In direct listings — like the ones of Slack and Spotify in the past and the upcoming debut of Palantir — companies leave no money on the table because they raise no money to begin with (yet). That may soon change as the Securities and Exchange Commission approved the ability for companies to raise fresh capital through direct listings. But as of now, there’s no clear-cut way to measure their opportunity cost as pricing is determined by the forces of the market, without an initial marker by which to compare performance on day one. 
    One might argue that there’s an opportunity cost in direct listings for not being able to craft a book of investors, as takes place in traditional IPOs. Or, there’s an opportunity cost in forgoing the ability to issue stock in the deal and raise additional capital. But the exact dollar figure on these is difficult to pinpoint. 
    With SPACs, or special purpose acquisition companies, firms find a “backdoor route” to the public markets by agreeing to be acquired by a blank check shell entity. The price is agreed upon by two parties — the managers of the blank check company and the board of the start-up. Sometimes the market will bid up the value of the SPAC when a deal is announced, but it’s an indirect line as to what that says about the price by which the start-up was acquired, a deal that is voted on and closed months later.
    But maybe that’s the idea. Maybe not having the psychological “what if’s” are a large component for why the alternative processes to go public are more attractive.
    But then, should we be reframing our thinking about opportunity costs as these newer methods become more popular? 
    Because they always exist.
    — With reporting by Gina Francolla.
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