16 hours ago

Axios Markets

Dion Rabouin

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🎙 "In this country, two things stand first in rank: your flag and your mail." - See who said it and why it matters at the bottom.

1 big thing: The rise of China's financial markets

Illustration: Sarah Grillo/Axios

Ant Group's $34.5 billion IPO will make the Chinese fintech company the largest listing ever and the choice to list its shares in Hong Kong and Shanghai rather than New York City marks a pivotal moment that could see the financial industry move toward China.

Why it matters: “This was the first time such a big listing, the largest in human history, was priced outside New York City,” Ant Group founder Jack Ma told the Bund Summit in Shanghai Saturday. “We wouldn’t have dared to think about it five years, or even three years ago.”

Driving the news: Ant Group will be valued at just under $314 billion, larger than some of the biggest banks in the U.S., including Goldman Sachs and Wells Fargo and just below the market cap of JPMorgan Chase, the largest U.S. bank.

  • And that's before the so-called greenshoe option for a 15% overallotment of shares that could make it worth more than even Industrial and Commercial Bank of China, the world’s biggest bank by assets, Reuters notes.

What's happening: As a result of the Trump administration's tech war and bipartisan hostility from Congress, more Chinese firms may eschew U.S. financial markets to avoid facing increasing regulations and scrutiny.

  • And thanks to a growing movement for market liberalization and relaxation of China's government currency controls, they are having an easier time drawing investment and interest to listings on the mainland.
  • Opening China's financial markets is expected to be a top subject at the four-day plenum meeting of the Communist Party’s Central Committee this week.
  • China also is far ahead of the U.S. and the rest of the world in developing a central bank digital currency, and on Friday gave legal backing for a digital renminbi, which will more easily facilitate international transactions.

The big picture: The combination of a more freely traded currency (which has reached its strongest in two years versus the dollar), higher government bond yields and the presence of more of the world's largest and most influential companies is expected to draw considerable funds to China from international investors who currently have a minimal presence.

What they're saying: The latest developments show "the rise and the increased importance of China's renminbi as a currency," Bridgewater Associates founder Ray Dalio said in an interview Monday with my former colleague Julia La Roche for Yahoo Finance.

  • "More and more you're going to see the internationalization of the renminbi. You're going to see capital flows move in those directions."
Bonus content: More growth expected from Chinese IPO market

New IPOs on exchanges in Shanghai and Shenzhen have already reached $53 billion, 2.5 times the comparable figure in 2019, according to Deloitte.

What's next: A separate report from Deloitte notes that "stock exchanges in Shanghai, Hong Kong and Shenzhen will claim first, third and fifth positions in the global IPO ranking by total funds raised in the first nine months of 2020."

  • "Several other developments are set to sustain the prevailing trend of listings in the Chinese Mainland and Hong Kong over the rest of this year, and in the near to medium term."
  • Deloitte expects Hong Kong, Shanghai and Shenzhen to reach record fundraising levels this year with hundreds of new listings.

Don't sleep: The boost in IPOs follows the growth of mainland Chinese stocks in MSCI's emerging market and all-country world equity indexes and the inclusion of Chinese bonds in the Bloomberg Barclays bond aggregate and FTSE Russell's World Government Bond Index.

  • Such index inclusions already have spurred increased fund flows from foreign investors, including $66 billion in the third quarter.

Go deeper: Podcast: The Ant Group IPO is as much about geopolitics as it is about stocks

2. Catch up quick

Amy Coney Barrett took the constitutional oath to serve as a Supreme Court justice at a White House ceremony Monday night and will take the judicial oath on Tuesday, following the Senate vote to confirm her nomination, 52-48. (Axios)

As of Sept. 30, China had purchased just $58.8 billion of goods covered by the phase one U.S.-China trade deal. Purchases should have reached $108 billion by that time to be on track toward the full-year target. (WSJ)

German enterprise software company SAP's stock fell 20%, wiping $35 billion of value off its market cap after its third quarter earnings report, the company's worst trading day in 112 years. (CNBC)

3. Stocks may have gotten ahead of themselves, strategists warn
Data: FactSet; Chart: Axios Visuals

The behavior of U.S. stocks so far this earnings season has been unusual for both companies that beat expectations and those that missed, top equities strategists say.

What's happening: Analysts at Deutsche Bank note that "the S&P 500 is seeing a rare earnings season decline so far of (-4.2%)," compared to an average gain of 2.9% and in especially sharp contrast to the record rally of 11% in Q2.

  • And companies are seeing little stock bounce from beating their earnings estimates, "mostly flat relative to the market, instead of typical outperformance (+0.5pp historically)."

On the other hand: Companies that miss earnings expectations are being punished more severely than usual — twice as much, according to calculations from Wells Fargo, which found companies that missed consensus earnings estimates saw an average one-day decline of 4.4%.

  • That's on pace to be “the harshest quarterly punishing for missing consensus we have ever seen,” per Wells analysts, citing data that goes back to the first quarter of 2015.
  • “We suspect these post-earnings beat-downs largely are a result of equities getting ahead of themselves in prior weeks.”

The big picture: So far, a record 87% of reported companies have beaten EPS estimates, well above the historical average of 73% and prior record 84% in Q2.

  • The companies that have reported have beaten estimates by 16.3% in aggregate, just below the record 20.3% in Q2, per DB.

Yes, but: The S&P is on pace for an earnings decline of 14.6% year over year, after a 33% decline in Q2.

  • The S&P 500 is 12.5% above where it was at this point in 2019.
4. The coronavirus is starting to crush some hospitals

Axios' Caitlin Owens writes: Some states are seeing dangerous levels of coronavirus hospitalizations, with hospitals warning that they could soon become overwhelmed if no action is taken to slow the spread.

Driving the news: The Utah Hospital Association has warned that the state's situation is becoming so dire that hospitals are expecting to begin rationing care within a week or two, per the Salt Lake Tribune.

  • El Paso has issued a new stay at home order in response to overwhelmed hospitals, and additional beds are being set up in the city's convention center.
  • On Saturday, North Dakota had only 22 available intensive care beds and 247 regular inpatient beds, the Grand Forks Herald reports.
  • Idaho Gov. Brad Little announced the return of some social distancing measures yesterday, per the Idaho Statesman. “Hospitals throughout the state are quickly filling up or are already full with COVID-19 patients and other patients, and way too many health care workers are out sick with COVID-19,” he said.

The big picture: The problem is particularly acute in rural parts of the Mountain West and the Midwest, where health care workers are scarce. When they're infected by the virus or forced to quarantine after exposure, it's hard to find replacements, Kaiser Health News reports.

  • For now, hospitals are continuing on with elective procedures, the Wall Street Journal reports. The suspension of such procedures in the spring led to heavy financial losses, health care worker layoffs and worsening health conditions among non-coronavirus patients.

Yes, but: Several Republican governors continue to resist statewide mask mandates, and it's unclear how far state and local governments will go in response to the surge of cases.

  • When cases surged earlier on, “our governments reacted,” Megan Ranney, an emergency medicine professor at Brown University, told the Washington Post.
  • “We closed bars. We closed restaurants. We enforced mask mandates. And I’m not seeing a lot of that nationally right now.”
Dion Rabouin

Thanks for reading!

Quote: "In this country, two things stand first in rank: your flag and your mail."

Why it matters: On Oct. 27, 1891, Philip B. Downing patented his design for a metal box with four legs called a street letter box — the predecessor of the modern mailbox.

  • Downing, one of America's early Black inventors, also patented an electrical switch for railroads that allowed workers to turn on or off power to trains at appropriate times that was the predecessor to light switches used in the home.

The quote comes from "Gadsby," the 50,000-word novel by Ernest Vincent Wright that does not include any words that contain the letter E, the most common letter in English.