Apr 15, 2020

Axios Markets

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🎙“If you look in your dictionary you will find: Titans — a race of people vainly striving to overcome the forces of nature. Could anything be more unfortunate than such a name, anything more significant?” - See who said it and why it matters at the bottom.

1 big thing: The IMF's optimistic depression projection

Illustration: Sarah Grillo/Axios

The coronavirus pandemic will bring about the worst economic downturn since the Great Depression, the IMF predicted Tuesday in its latest World Economic Outlook — and that is its optimistic outlook.

  • The Fund admitted in a rare show of doomsaying that damage could be far worse than its projections and that while there's some chance they could be positively surprised, "downside risks prevail."

Why it matters: The organization's baseline expectation is for a recession "far worse" than the 2008 financial crisis, with global GDP contracting by 3% this year. That's a drastic downgrade from its forecast of 6.3% growth in January, and 30 times worse than the economic decline in 2008.

  • "This is a truly global crisis, as no country is spared," IMF chief economist Gita Gopinath said during a media briefing.

The big picture: Global GDP is expected to face a cumulative loss of about $9 trillion — larger than the economies of Japan and Germany combined. That is what happens in the IMF's rosy scenario in which the coronavirus is contained quickly and the world swiftly resumes economic activity.

  • "The pandemic may not recede in second half of this year, leading to longer containment periods, worsening financial conditions and further breakdowns in global supply chains," Gopinath warned.
  • "In such cases, global growth will fall even further, by an additional 3% in 2020, and if the health crisis rolls over into 2021 it can reduce the level of global GDP by an additional 8% compared to the baseline."

Where it stands: The IMF is recommending coordinated fiscal stimulus, a moratorium on debt payment and debt restructurings, and additional financing and grants for the world's poorest countries.

  • Tobias Adrian, head of the IMF's monetary and capital markets department, says the Fund already has received a record number of requests for lending and funding from developing economies, with more than half of the IMF's membership having now requested assistance.

What to watch: Finance ministers and central bank leaders from the G7 nations met again Tuesday and again announced no new coordinated measures to bolster the global economy at large.

  • That so-far-missing effort is exactly what the IMF says will be necessary to contain the economic crisis to its baseline projections.
2. Catch up quick

President Trump announced the U.S. would halt funding to the World Health Organization for 60 to 90 days over its handing of the coronavirus pandemic. (Axios)

California Gov. Gavin Newsom laid out a proposed set of rules for states when they restart their economies that includes restaurant workers wearing gloves and masks, staggered school schedules, and continued bans on concerts and sporting events. (Bloomberg)

Small businesses in Texas, California and in the construction sector have gotten the biggest chunks of money set aside for small businesses, according to documents released by the SBA Tuesday. (Axios)

The Dow and S&P 500 neared five-week highs and the Nasdaq gained 4% Tuesday, rising out of a bear market. (MarketWatch)

3. With global leadership at stake, China and U.S. both fumble

Illustration: Aïda Amer/Axios

As the U.S. embraces President Trump's "America First" mantra and steps away from its traditional global leadership role, China is aggressively looking to fill the void but has so far come up short, Axios' Bethany Allen-Ebrahimian and I write.

Why it matters: The coronavirus pandemic desperately needs a united global response, but the U.S. and China are instead upping the ante in a battle for global supremacy that could leave both countries in a worse position.

The big picture: By mid-March, with its coronavirus epidemic largely under control, plenty of cash on hand, and the U.S. having woefully mishandled its response, China seemed poised to gallop ahead on the world stage.

  • "We’re talking about relative opportunity that is tilted in favor of China because the safe haven that the U.S. represents is no longer a real safe haven" thanks to the COVID-19 outbreak, Keyu Jin, an economics professor at the London School of Economics, tells Axios.

Yes, but: While the Trump administration has dropped the ball, "the Federal Reserve has made a breathtaking expansion as basically central banker to the world," Kori Schake, director of foreign and defense policy studies at the conservative American Enterprise Institute, said during a recent media call.

  • A global shortage of dollars and panic-induced selling in financial markets at the onset of the pandemic could have bolstered China's case for the world to move away from the greenback.
  • Instead, the Fed's fast action to inject trillions of dollars into the financial system and open dollar swap lines with central banks around the world has had the opposite effect.

"This crisis has shored up and spotlighted the strength of the dollar," Joshua Meltzer, a senior fellow at Brookings Institution, tells Axios.

  • "It underscores that when there is a crisis the only asset anyone wants to hold is dollars."

What to watch: China could still draw more of the world into its orbit as COVID-19 is likely to decimate economies in much of Africa, Latin America, the Middle East and the Indian subcontinent, which already receive economic assistance from Beijing and will be looking for more.

  • But the U.S. remains the largest economy and home of the global reserve currency, uniquely positioning it to help offset the looming crisis by leading debt-reduction and aid packages.

The bottom line: China and the U.S. have stumbled but both still have powerful incentives to help dig the world out of its economic hole.

4. Big banks trade profits for coronavirus insurance

Earnings from big banks were expectedly awful on Tuesday, but much more important than JPMorgan's 69% profit drop or Wells Fargo's $0.01 earnings per share in the first quarter, were details about their cash holdings.

What we learned: JPMorgan, the largest U.S. bank, added $8.3 billion to its reserves last quarter, more than five times what it held in the same quarter last year, and Wells Fargo set aside $4 billion, an increase of $3.1 billion.

Why it matters: The holdings suggest the banks are doing more than preparing for “the likelihood of a fairly severe recession” as JPMorgan CEO Jamie Dimon put it.

  • "[T]he banks’ maneuvers to steel themselves for losses reflect their calculations that the $2 trillion economic relief bill, which includes direct payments to low-earning Americans as well as $349 billion in forgivable loans to small businesses, will not be enough to stave off widespread financial instability for everyday Americans and their employers," my former colleague Emily Flitter writes for the New York Times.

Be smart: The banks are quite literally exchanging their profits for the cash to ride out the pandemic and protect against losses on loans to customers, Flitter adds.

  • "JPMorgan’s net income fell to $2.9 billion from $8.5 billion for the last quarter of 2019 and $9.2 billion for the same period a year earlier — with the bank’s new reserves essentially the difference. Wells Fargo reported a steep drop in profit to $653 million from $5.9 billion during the same period in 2019."

The intrigue: Many of the bank's high-income customers appear to be taking similar action. Deposits rose 23% at JPMorgan during the quarter, and grew in every line of business. Wells Fargo saw deposits rise by 4% to $1.4 trillion.

5. Cruise company stocks are surging
Data: FactSet; Chart: Axios Visuals

U.S. cruise line stocks popped on Tuesday after Carnival CEO Arnold Donald said in an interview that customers are already booking trips for 2021.

Flashback: The comments mirrored what Donald told me in an interview last month for "Axios on HBO" that the company had interest from potential customers until it shut down operations.

  • "All the way up until the day we paused people wanted to cruise."

The intrigue: Carnival's stock has risen 30% so far this month.

  • The stock rose 8% on Tuesday (a week after a 20% gain) and has seen a gain or loss of less than 5% on just one trading day this month.
  • Other cruise companies also saw major surges in their stock prices Tuesday, with Royal Caribbean rising 13.4% and Norwegian Cruise Line gaining 8.7%.

But, but, but: Carnival's stock price is down 75% since the beginning of the year.

Quote: "If you look in your dictionary you will find: Titans — a race of people vainly striving to overcome the forces of nature. Could anything be more unfortunate than such a name, anything more significant?"

Why it matters: On the morning of April 15, 1912, the RMS Titanic sank near Newfoundland, losing more than 1,500 passengers.

  • The quote is from Arthur Rostron, the captain of the rescue ship Carpathia, who wrote it in his autobiography "Home from the Sea" in 1931.