May 7, 2020

Axios Markets

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🎙 "The good and the great are only separated by the willingness to sacrifice." See who said it and why it matters at the bottom.

1 big thing: China is nowhere near meeting "phase 1" agreement
Reproduced from Panjiva; Chart: Axios Visuals

U.S. stocks fell sharply in the final hour of trading Wednesday after President Trump seemingly reignited the trade war, telling reporters the U.S. would be evaluating whether China has complied with the "phase 1" trade deal to buy an extra $200 billion a year of U.S. goods.

Why it matters: As the COVID-19 pandemic continues to choke the U.S. and global economy, Trump is threatening to tighten the vice.

By the numbers: S&P Global Market Intelligence, Panjiva, finds that not only is China not making purchases on pace for a $200 billion increase, it is now $21.2 billion behind — not even halfway to its target on a monthly basis.

  • Further, data Thursday showed Chinese exports rose 3.5% year over year in April while imports fell 14.2%, bringing China’s trade surplus for the month to $45.34 billion — well above the $6.35 billion economists had predicted.

What's happening: Most had long expected that China would be unable to meet the terms of the deal as the novel coronavirus ravaged its economy, causing the worst quarterly economic contraction on record.

  • But it was expected the U.S. would look the other way, given the economic situation.

What we're hearing: "Trump is basically trying to distract the American public from focusing too much on the unemployment rate, employment figures and so on," Keith Wade, chief economist at Schroders, said during a recent webcast.

  • "If we do reignite the trade wars, and we see the ‘phase 1’ deal fail, I think it won’t just be China that loses, it will be the U.S. as well."

Between the lines: The nascent stock market rebound also could be threatened by revived tensions between the world's two largest economies.

  • “That’s probably the number one concern in the market when we talk to investors and sell-side analysts,” Zhiwei Zhang, president and chief economist of Pinpoint Asset Management, told CNBC Wednesday.

Watch this space: The general public is starting to grow more wary of the tariffs. A new survey from CivicScience finds a record high 71% of Americans are concerned, and industry lobbying groups have ramped up messaging again opposing the trade war.

  • “Adding more tariffs during a time of economic crisis will only further punish U.S. companies, manufacturers, and farmers who are already struggling to survive," Americans for Free Trade spokesperson Jonathan Gold said in a statement earlier this week.
2. Catch up quick

The Treasury will offer $20 billion in new 20-year U.S. government debt to finance the ballooning deficit on May 20. (MarketWatch)

Senate Republicans are citing renewed concerns about the U.S. budget deficit as they pump the brakes on more coronavirus relief spending. (WSJ)

As companies around the country plan for a prolonged recovery, many are transitioning their workers from temporary layoffs to permanent ones. (Bloomberg)

3. Putting monetary policy into perspective

Reproduced from BofA Global Research; Table: Axios Visuals

"The monetary policy response to COVID-19 has been massive," Bank of America Global Research analysts write in a recent note to clients.

What's happening: Led by the Fed, which has added $2.5 trillion to its balance sheet in less than two months, all of the world's major central banks have taken extreme policy action.

  • The Bank of Japan has doubled its ETF purchase target limit and increased its purchases of commercial paper and corporate bonds.
  • The Bank of England has restarted quantitative easing and is expected to double its balance sheet holdings by year-end.
  • The Bank of Canada has launched QE for the first time.
  • The Reserve Bank of Australia has joined the BoJ in attempting yield curve control.

The big picture: BofA analysts expect total holdings among the "big six" central banks to increase from 46% of GDP at the end of 2019 to around 78% by the end of 2020.

  • In 2007, the total was just 16% of GDP.

What's next: Inflation and currency risk in the near term are not major worries, BofA argues, as developed markets could actually see their currencies rise in value as more emerging market central banks start their own forays into quantitative easing.

  • "We think the key risks to [developed markets] are 'Japanification' — sustained zero or negative policy rates, very flat yield curves and policy impotence — and distortions from the growing prominence of central banks in various markets."
4. Coronavirus could do long-term harm to the environment

Reproduced from Moody's, with April data from Refinitiv; Chart: Axios Visuals

In the short term, the coronavirus pandemic is reducing global emissions and helping clear out smog around the world, but it may end up doing more damage to the environment in the long term.

The big picture: The pandemic is helping reduce the use of fossil fuels, but it is decreasing investments in things like wind and solar power and financial assets like green bonds, says Jessica Ground, global head of stewardship at Schroders.

  • "Those longer-term issues that we need finance to solve like climate change haven’t gone away and they’re still going to be here whenever we emerge from lockdown."

Driving the news: In April, total issuance of ESG bonds — green, sustainability, and social bonds — increased by 272% year over year and was double the total from March, reaching $48.5 billion, according to data from Morgan Stanley.

  • And for the first time ever, monthly sustainability bond issuance ($19.4 billion) eclipsed green bond issuance ($16.8 billion).

What it means: ESG bonds are specifically earmarked to raise money for positive social outcomes or climate and environmental projects.

Yes, but: 76% of the total ESG issuance in April came from multilateral development banks, with the majority supporting COVID-19 relief efforts, Moody's found in a recent analysis.

  • The pandemic also is pushing more companies to issue new debt to fortify their balance sheets, crowding out green bonds and other environmentally focused financial instruments.

Where it stands: Total global sustainable bond issuance fell 32% in the first quarter from Q4 2019, and green bond volumes declined 49%, per Moody's.

  • Analysts now expect their original $400 billion forecast for total sustainable bond issuance in 2020 is no longer in reach and anticipate green bond volumes falling well below their previous estimate of $300 billion.
5. U.S. pension funds continue to lurch toward bonds

Reproduced from eVestment; Table: Axios Visuals

U.S. pension plans already were above their target allocation to fixed income before the coronavirus pandemic, and the outperformance of fixed income during the first quarter has further shifted the tide, a new report from eVestment shows.

Why it matters: Fewer people are participating in the stock market's gains and losses.

  • This new paradigm was evidenced in 2019 when investors poured a record amount of money into bond funds while pulling a record amount out of stock funds.
  • That happened despite the S&P rising by nearly 30%, and stocks broadly outperforming bonds by a wide margin.

Why it's happening: The combination of an older population nearing retirement and anxiety about a record-long bull market in stocks shifted investors toward higher allocation to bonds and movement out of stocks.

One level deeper: Based on target allocations provided to eVestment, U.S. pension plans were over-allocated to fixed income by 450 basis points at the end of the first quarter and under-allocated to equities by more than 350 basis points.

  • In fact, pension funds were under-allocated to every asset class — equities, alternatives, real assets, multi-asset strategies and other — except fixed income and cash, the data show.

Thanks for reading!

Quote: "The good and the great are only separated by the willingness to sacrifice."

Why it matters: After winning three NCAA championships, star UCLA Bruins center Lew Alcindor converted to Islam and changed his name to Kareem Abdul-Jabbar, going on to win six NBA championships and six MVPs.