Mar 21, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • Indonesia's Lion Air has begun prepping for a domestic IPO, seeking to move past an October crash that triggered the crisis surrounding Boeing's 737 MAX plane. (Bloomberg)
  • The Pentagon has launched an investigation into whether acting Defense Secretary Patrick Shanahan violated ethics rules by favoring his former employer, Boeing. (Axios)
  • Tencent posted its biggest-ever profit decline in its fourth quarter, thanks to higher spending to offset a gaming slowdown. (TheStreet)
1 big thing: A real U.S.-China trade deal is a long way away

Illustration Lazaro Gamio/Axios

President Trump roiled markets yesterday when he said his administration would likely keep tariffs on Chinese goods until he's certain Beijing is fully cooperating with the terms of a trade deal.

That could mean years of negotiation, acrimony and tariffs, given the nature of the changes being discussed.

The big picture: A trade agreement between Trump and Chinese President Xi Jinping is just one piece of a wide-ranging confrontation between the world's top economies.

Trump has shown that tariffs are his favorite weapon, and he's concurrently pushing a number of international efforts that have thus far been wildly unsuccessful.

  • Trump wants to keep countries from using Huawei equipment in their 5G networks, but has been rebuffed by Britain, Germany, India and the United Arab Emirates, who have all signaled they'll work with the Chinese telecom.
  • European countries have continued to sign onto China's Belt and Road Initiative, with Italy next week expected to become the 17th European nation to do so.

Why it matters: Trump's remarks on Wednesday played to investors' worst fears about how much longer the trade war between the 2 countries could continue. Stocks fell from their highs of the day — the S&P 500 dropped from above 2,850, which it had touched for the first time since October — after the news.

  • "The markets have priced in the trade-war resolution, so if there's any chance this gets extended, delayed or changed, this causes markets to be jittery," Gene Goldman, chief investment officer at Cetera Investment Management, told Bloomberg yesterday.

Remember, China isn't paying the tariffs. U.S. businesses and consumers are. Tariffs are "a consumption tax ... they hurt the economy," as Trump's former economic adviser Gary Cohn pointed out earlier this month.

The bottom line: While it now looks to be on shakier ground, an agreement between the U.S. and China on trade would be just the first step in a much longer negotiation process. NAFTA began as a proposal by Ronald Reagan in 1979 and was signed by President Bill Clinton.

  • The market is likely in for more surprises and more tariffs in the meantime.
2. A very reliable recession indicator
Expand chart
Data: Federal Reserve Bank of St. Louis; Chart: Chris Canipe/Axios

The U.S. 10-year Treasury note and the 3-month Treasury bill are on the verge of an inversion. The yield spread fell to 5 basis points Wednesday, the lowest level since the financial crisis.

Why it matters: "The yield curve has been a reliable predictor of recessions, and the best summary measure is the spread between the ten-year and three-month yields," the San Francisco Fed's Michael D. Bauer and Thomas M. Mertens wrote in August.

  • The spread between 3-month LIBOR and the 10-year note already has inverted.

What they're saying: BMO Capital Markets strategist Ian Lyngen notes that Wednesday was the first time the "invert that hurts," the 3-month/10-year spread, has been flatter than the 2-year/10-year spread since January.

  • The already tight spread compressed to 5 basis points after the Fed's conference. Fed funds futures prices show investors see a greater than 35% chance the Fed cuts rates this year and a 0% chance it raises them.

What to watch: The yield curve has been inverted for some time out to 5 years, with maturities from 1-month to 3 years holding higher yields than the 5-year note.

3. Brexit: A "national humiliation"

A poll Wednesday found that 9 out of 10 Britons say ongoing confusion over when, how and if their country will leave the EU is a "national humiliation."

Driving the news: The public is divided about whom to blame, though few blame the EU. One in three (34%) say the primary fault lies with the British government.

Axios' resident Brit Felix Salmon weighed in on the latest:

Every time you think the Brexit omnishambles can't get worse, it gets worse.


  • European Council president Donald Tusk said that he wouldn't agree to extend the Brexit deadline to June 30 unless Theresa May got the UK Parliament to agree to her deal.
  • Theresa May said that she wanted to extend the Brexit deadline to June 30, despite Tusk's statement, and despite the fact that the speaker of the House of Commons has ruled that she can't even put her deal to a vote (for a third time).
  • May gave no indication of what she might do if she doesn't get her desired extension.
  • Jeremy Corbyn, the leader of the U.K. opposition, refused to even participate in a meeting of party leaders trying to resolve the crisis.

May said in her statement that "we will now not leave on time with a deal on the 29th of March." Increasingly, the risk is that Britain will end up leaving on time without a deal. Enter Operation Yellowhammer.

The bottom line: 9 days before the U.K. is due to leave the EU, the range of possible outcomes is as broad as ever — from a chaotic no-deal Brexit all the way through to a repeal of Article 50 with Britain remaining a full member of the EU. Even Theresa May has no idea which outcome will end up happening.

4. Traders pile out of bank stocks
Expand chart
Data: FactSet; Chart: Chris Canipe/Axios

The financials were Fed day's biggest losers, as bank stocks saw big losses on big trading volumes, Axios' Courtenay Brown reports.

What's happening: Bank of America was the 2nd most actively traded stock in the S&P 500, with 81 million shares changing hands, per FactSet — well above the 3-month average volume of 67 million shares. The stock fell 3.4%.

Meanwhile, Goldman Sachs was the biggest decliner in the Dow yesterday. Shares fell 3.38% after the Fed said it would hold rates steady and signaled the end of rate hikes for the rest of the year.

  • More than 5.2 million Goldman shares were traded, the highest trading volume since Jan. 31. That was the day after the Fed first introduced the word "patient" in its FOMC statement.

JPMorgan and Citi also saw slightly higher trading activity than in previous days this week, with 14 million and 17 million shares exchanged, respectively.

  • Only 2 stocks in the S&P 500's financial sector closed in the green: Ameriprise Financial and MSCI.

The big picture: A low-interest rate environment is seen as negative for bank stocks.

  • "Lower interest rates ... [do] hurt banks in terms of their net interest margins and their profitability on new loans ... [and] that's probably the concern more on a bank’s earnings fundamentals in terms of potential slowing in earnings growth," Paul Eitelman, a strategist at asset management firm Russell Investments, told Bloomberg.
5. "Wear BOTH your Jean Jacket & Jeans"
Screenshot from CNBC reporter Bob Pisani's Twitter feed

The NYSE may be revising its dress code for today's Levi's IPO.

What's happening: Levi's is slated to open at $17 a share in its return to public markets.

  • The increased share price boosted Levi's valuation to the $5.8 billion to $6.6 billion range, and CNBC reports the IPO was 10 times oversubscribed.

The big picture: The IPO has NYSE excited enough to roll back the long-time ban on jeans, but apparently only if traders wear a matching jean jacket.

"Suit, sport coat or jacket should be worn, but a tie is not required. A dress, collared golf/polo shirt or turtleneck is acceptable. T‐shirts, tank tops or other casual shirts, jeans and shorts are not acceptable."
— NYSE dress code, according to WWD

Flashback: It would actually be the second time there's been a pause in the jeans ban by NYSE, which encouraged traders to wear Gap jeans for the company's 2009 IPO.

Dion Rabouin