Jul 15, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

Good morning! 💰Happy Tax Day!

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🎙"I exhort you to consider that now the time is come, appointed to us by God, in which ye may (if ye will) cast off the yoke of bondage, and recover liberty." - See who said it and why it matters at the bottom.

1 big thing: The existential threat to small business

Illustration: Eniola Odetunde/Axios

The coronavirus pandemic has changed the game for U.S. businesses, pushing forward yearslong shifts in workplaces, technology and buying habits and forcing small businesses to fight just to survive.

Why it matters: These changes are providing an almost insurmountable advantage to big companies, which are positioned to come out of the recession stronger and with greater market share than ever.

What we're hearing: "There is no doubt that the longer this pandemic pulverizes this economy the main victims will be small and midsized companies," Bernard Baumohl, chief economist at The Economic Outlook Group, tells Axios.

  • "We’re seeing the whole business landscape dramatically undergo massive changes and one part of this is how large companies with resources will take advantage of the troubles, the travails, the financial problems that some of the smaller companies have."

What to watch: Big companies, which have benefited far more from Congress and the Federal Reserve's coronavirus relief efforts, are expected to buy out or simply wait out smaller competitors.

The backstory: The Fed has provided nearly $3 trillion in liquidity since March to reopen credit and financial markets, and corporate titans like Apple, ExxonMobil and United Airlines have taken advantage, borrowing a record amount of money at rock bottom rates.

  • The lone lifeline for small businesses has been the Payroll Protection Program, which economists have found to be inefficient, ineffective and insufficient, largely excluding the businesses most in need of assistance.
  • In particular, businesses with Black, women and immigrant owners have disproportionately been shuttered because of the virus.

By the numbers: A recent survey by the National Federation of Independent Business found that 23% of small businesses would be able to operate under current economic conditions for no more than six months. Another 21% said no more than a year.

  • "It’s a bleak picture," Holly Wade, NFIB's director of research and policy analysis, tells Axios. "It’s terrible."

What's next: U.S. companies are making major investments in supply chain relocations out of Asia and closer to home, as well as artificial intelligence and robotics and re-skilling workforces to operate remotely and autonomously, Mohamed Kande, U.S. and global advisory leader at PwC, tells Axios.

The bottom line: "That will be a tough environment" for small businesses, Kande says.

  • "What happens when you have changes like that is you start to see a wave of consolidation. It’s hard for small companies to survive because they don’t have the balance sheets, they don’t have the capital to sustain a crisis for a long time."
Bonus chart: M&A picked back up in Q2

Reproduced from CB Insights; Chart: Axios Visuals

Big companies are quickly getting back to business as usual even as coronavirus cases continue to hit record levels.

What's happening: A recent survey of U.S. chief financial officers found the difference in outlooks between small and large firms over the next 12 months "is extreme."

  • Expectations at small businesses "have essentially collapsed," says Keith Parker, global equity strategist at UBS Research.
  • Conversely, more than 60% of large firms with sales over $2 billion expect sales growth to accelerate — 49% expect a "significant pickup."

In the world of M&A, deals started picking back up in the back half of the second quarter, data from CB Insights show.

By the numbers: VC deal activity rebounded globally and Asia saw the largest increase of the quarter, with activity rising 20%, compared to 9% in Europe and 3% in North America.

  • Deals in the U.S. rose after three straight quarterly declines and U.S. VC-backed unicorns rose to a new record of 209.
  • 69 companies raised funding rounds worth at least $100m in Q2, a new record.
  • IPO exits jumped 60% in the quarter.
2. Catch up quick

Moderna’s stock rose more than 16% in after-hours trading after the company said its potential vaccine to prevent COVID-19 produced a “robust” immune response in all 45 patients in its early stage human trial. (CNBC)

President Trump ordered an end to Hong Kong’s special status with the U.S. and signed a bill that would sanction Chinese officials responsible for cracking down on dissent in the city. (Bloomberg)

"Buyers came back to the housing market in a flood, hopeful about their own futures in the face of lingering economic uncertainty, but sellers have been slower to follow," Danielle Hale, chief economist for Realtor.com, said, noting a 107% increase in mortgage applications for the week ending July 10 over the same time last year. (MBA)

3. What a "Blue Wave" could mean for asset prices
Data: BofA Global Investment Strategy, Bloomberg, Haver; Table: Axios Visuals

More asset managers are starting to consider the "rising probability of political 'blue wave' i.e. Democrats winning White House, Senate, Congress," strategists at Bank of America write in a note.

Where it stands: The analysts note that Oddschecker.com is factoring in a 57% likelihood of a win for Joe Biden, while Real Clear Politics puts a 62% likelihood on Democrats taking the Senate. BofA's data found annualized returns for assets from 7 out of 21 "blue waves" since 1928.

  • The analysts also cite the likelihood of a "Blue Deal" fiscal stimulus in 2021 that would include infrastructure, student debt forgiveness and health care spending, which would be positive for value stocks and banks.
4. The Fed boosted big banks' bond trading profits in Q2

Tuesday's earnings reports showed how banks have reaped the rewards of the Fed's efforts to carpet bomb markets with liquidity since March.

What happened: JPMorgan's fixed-income trading revenue jumped 99% in the quarter, while fixed-income trading revenue climbed nearly 60% at Citi during the quarter.

  • Goldman Sachs and Morgan Stanley are expected to continue the bond trading bonanza when they report earnings later this week.
  • Wells Fargo's numbers lagged but it has a smaller investment bank and has trailed other banks since its fake account scandal in 2016.

Flashback: The Fed's entrance into the market with the announcement of QEinfinity and its plan to purchase hundreds of billions of dollars worth of corporate bonds led to an unprecedented surge in debt issuance.

  • "The Fed came in with its massive bazooka, addressed the liquidity concerns and it’s gone from a buyer’s market to seller’s market," Mike Collins, senior portfolio manager at Prudential's PGIM Fixed Income, told me in April.
  • "You couldn’t sell a bond before, today you can’t buy a bond."

ICYMI: "Fees for underwriting blue-chip U.S. company bonds in the first half of the year essentially doubled to more than $7 billion," Bloomberg reported Monday.

  • U.S. companies already have issued more than $1 trillion of investment-grade bonds in just a few months, with the proceeds helping buoy the banks despite putting aside billions for future loan losses.

Watch this space: Citi, JPMorgan and Wells Fargo set aside a combined $28 billion in Q2, FT notes, even more than they put aside in Q1 as the coronavirus pandemic first began wreaking havoc on markets.

Dion Rabouin

Thanks for reading!

Quote: "I exhort you to consider that now the time is come, appointed to us by God, in which ye may (if ye will) cast off the yoke of bondage, and recover liberty."

Why it matters: On July 15, 1381, John Ball, a leader of the Peasants' Revolt, was hanged, drawn and quartered before King Richard II of England.

  • The Peasants' Revolt was the first mass rebellion in English history and brought to a head the economic discontent that had been growing since the middle of the century.