Mar 6, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

Good morning! Was this email forwarded to you? Sign up here. (Today's Smart Brevity count: 1,180 words, 4.5 minutes.)

Situational Awareness: Today's jobs report will be especially watched after the Fed's emergency 50 basis point rate cut and seismic stock market volatility. Economists expect the U.S. added around 175,000 jobs last month. (Reuters)

🎙"There is no such thing as a little freedom. Either you are all free, or you are not free.” - See who said it and why it matters at the bottom.

1 big thing: The coronavirus discount

Illustration: Aïda Amer/Axios

Having already hit supply chains and led to the widespread cancellation of large gatherings and events, the COVID-19 outbreak is now causing a repricing on tourism and travel globally, as airlines, hotels and travel operators see major declines in bookings and revenue.

Why it matters: China's record low readings in February for both manufacturing and services could serve as a warning of what's to come for parts of Asia, Europe and even the U.S.

  • However, China is also where the best news about the virus can now be found.

Driving the news: Southwest, United and JetBlue have all warned that the virus will have a serious impact on profits as tourists cut back travel and companies cancel events.

  • The price of tickets is plunging as airlines attempt to offload tickets, with Bloomberg reporting that flights from New York to Miami were being sold for as low as $51.

State of play: "This is not a drill," the World Health Organization said Thursday. "This is a time for pulling out all the stops,"

  • "Countries have been planning for scenarios like this for decades. Now is the time to act on those plans."

Scientists are still trying to determine how the virus is spreading and the best ways to combat it, Maria Van Kerkhove, head of WHO’s emerging diseases and zoonoses unit, said.

  • “It’s still early days, it’s still a few weeks into this outbreak."
  • “We’re learning something new every day about this virus.”

Between the lines: The worst-hit industry may be hotels, which are marking down prices and facing what may be the worst year since the financial crisis, WSJ reports.

  • Marriott's shares have fallen by about twice as much as the S&P 500's since Feb. 19, with major hoteliers Hilton and Hyatt also badly lagging the index.

On the bright side: The number of new cases confirmed in China has consistently declined in recent days to zero outside of the Hubei province, and the country's lowest levels since the start of the outbreak. Stocks have climbed all the way back from their lows in a matter of weeks.

  • The trajectory of U.S. equities appears to be following China, which sold off immediately upon opening after the Lunar New Year holiday and erased all of 2019's gains while U.S. indexes continued to touch record highs.
  • The blue-chip China CSI 300 Index rose to a two-year high Thursday, as the country's massive stimulus efforts have helped provide a V-shaped recovery.

Yes, but: There is increasing doubt about the accuracy of China's reporting.

Bonus: Meanwhile in Europe
Expand chart

Reproduced from STR; Chart: Axios Visuals

Hotel bookings in Italy and Milan have fallen off a cliff as travelers cancel trips en masse, data from STR showed.

The details: The country has canceled major events, including Milan's fashion week and its carnival celebration. The festival was also canceled in Athens, leading to substantial hotel declines there as well.

Also: Travel analytics company ForwardKeys found that flight bookings to Italy fell by nearly 139% in the final week of February, compared with a year ago, the Washington Post reported. The company said that means the number of cancellations exceeded the number of new bookings.

  • “We have some people who are choosing to cancel going to Italy right now,” Jennifer Wilson-Buttigieg, co-owner of Valerie Wilson Travel, told the Post. “What we’re trying to message in reaction to canceling is, ‘Let’s defer, let’s postpone.’”
2. Catch up quick

Benchmark U.S. Treasury yields fell below 0.8% as traders continue to price in worsening outcomes for the coronavirus outbreak. (WSJ)

  • “The focus is very much on the spread of coronavirus outside China and really markets aren't going to settle until we see some sort of peak,” Susan Buckley, managing director for global liquid strategies at QIC Ltd., told Bloomberg. “This is going to go on longer than most of us expected.”

Local Chinese companies and officials are fraudulently increasing work resumption metrics in order to meet tough new targets as the spread of COVID-19 in China declines. (Nikkei)

OPEC reached an agreement to cut oil production by 1.5 million barrels per day to fight the decline in oil prices, which already have fallen into a bear market this year. However, Russia's participation is uncertain. (Bloomberg)

3. The coronavirus outbreak could finally sink the dollar
Expand chart
Data: FactSet; Chart: Axios Visuals

The dollar is buckling under the weight of expected rate cuts from the Fed and record-low U.S. Treasury yields.

  • It has fallen to its weakest level when valued against a group of global currencies since the beginning of the year and experts think there could be much further to go.

Why it matters: Multinational companies prefer a weak dollar because it makes U.S. exports cheaper overseas, but it also makes imported goods more expensive for American consumers and can push inflation higher.

  • Firms have shown a decreased ability to raise prices over the last decade, so a weaker dollar could instead put pressure on companies' bottom lines, hurting retailers and small businesses already reeling from the U.S.-China trade war and coronavirus outbreak.

What's happening: As Treasury yields sink further into record low territory the so-called carry trade, in which traders buy dollars to benefit from U.S. yields being higher than in other industrialized countries like the eurozone and Japan, is starting to decline.

  • The Fed's surprise 50 basis point rate cut earlier this week has triggered increased expectations for more cuts, with Fed funds futures pricing U.S. rates about 100 basis points lower than their current level.

Watch this space: Yields on benchmark 10-year U.S. Treasury notes again hit a record low, touching 0.92% on Thursday, less than 160 basis points above comparable German government debt, the European standard.

  • That's the narrowest the spread has been since July 2016. (Yields fell further Friday morning.)

Breaking it down: "There’s a belief that [U.S. and European rates] can converge or get pretty close to convergence pretty quickly because the Fed has suddenly become quite aggressive," Kathy Jones, chief fixed income strategist at Charles Schwab, tells Axios.

  • Kathy Lien, managing director of FX strategy at BK Asset Management, points out that the European Central Bank and Bank of Japan already hold negative interest rates, "so even if they do move it’ll only be by about 10 basis points, whereas the Fed can cut rates significantly from their current levels."
  • "It's all about the expectations of future policy," Lien said.
4. Wells Fargo's fake account scheme may have been widespread

The latest bank in the crosshairs of the Consumer Financial Protection Bureau is Fifth Third Bancorp, which disclosed in a securities filing this week that the CFPB is targeting the bank for “alleged unauthorized account openings,” American Banker's Kate Berry reported.

Why it matters: Wells Fargo has faced billions in fines and penalties and had been held up as a singular example of corporate wrongdoing for its account fraud scandal.

  • But the disclosure of the complaint against Fifth Third could mean that there are one or many other shoes to drop and that the practice of forcing employees to create fake accounts for customers without their knowledge may have been widespread within the banking industry.

Flashback: Wells Fargo’s account fraud scandal also began with a CFPB enforcement action.

  • After the Wells Fargo scam came to light it was revealed the U.S. Office of the Comptroller of the Currency already was investigating 40 other banks for similar actions.
  • In September, Bank of America revealed that it was also under investigation by the CFPB for "potentially unauthorized credit card accounts.
  • Fifth Third only recently converted to a national bank charter from a state charter, so it was likely not involved in the OCC's investigation of national banks.
Dion Rabouin

Quote: "There is no such thing as a little freedom. Either you are all free, or you are not free."

Why it matters: Those were the words of the legendary Walter Cronkite, who had his final broadcast, ending with the pithy, "And that's the way it is..." for the last time on March 6, 1981.