Aug 13, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • Increasing access to basic banking services, like checking and savings accounts, could save black Americans up to $40,000 over the course of their lives, a new report finds. (Reuters)
  • The spread between the yield on 2-year and 10-year Treasury notes fell to 6 basis points, the flattest level since 2007. (CNBC)
1 big thing: The cost of the "strong" U.S. economy
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Data: Bureau of the Fiscal Service; Chart: Harry Stevens/Axios

Despite massive amounts of money being pumped into the economy by both fiscal and monetary policy, U.S. growth is slowing, not accelerating.

Why it matters: Last year Congress signed a 2-year agreement to increase spending $300 billion, in part to pull the economy out of its slow-growth malaise following the financial crisis and put the U.S. back on track for 3% annual growth or higher.

  • But 2019's slowdown in GDP growth has shown that even hundreds of billions in deficit spending combined with trillions in tax cuts and bond buying aren't enough.

Driving the news: The U.S. budget deficit rose by nearly $120 billion in July, a 27% increase over a year ago, the Treasury Department announced Monday. The fiscal year deficit through July is now $866.8 billion, higher than the entire deficit from fiscal 2018 and on pace to top $1 trillion, making it the largest U.S. deficit since 2011.

  • A new agreement signed in July to avert another government shutdown and possible debt default will add an additional $320 billion in spending over the next 2 years, but will do little to increase U.S. competitiveness and growth, experts say.

Reality check: The spending binge that has taken place during the late stages of an economic recovery has U.S. GDP on pace to grow around 2% this year, which is about the average for the previous 8 years.

What they're saying: "The direct impacts and uncertainty of tariffs, trade and other policy disruptions have mitigated the intended stimulus from the individual and business tax cuts," Steve Skancke, chief economic adviser for investment manager Keel Point and a former Treasury Department official in the Reagan administration, tells Axios.

  • Worse, Skancke points out, business investment has fallen in the first and second quarters and continued corporate buybacks show companies "lack of confidence in the outlook for the economy."
  • "So far consumer sentiment has supported growth." But "it’s hard to imagine that business and trade angst won’t spread to consumers in Q3 and Q4."

The bottom line: "America should be in a boom, with three enormous fiscal-stimulus measures in the past three years," Nobel laureate Joseph Stiglitz wrote in an op-ed for Project Syndicate on Friday.

  • "If it takes trillion-dollar annual deficits to keep the US economy going in good times, what will it take when things are not so rosy?"
2. Investors are dumping stocks and loading up on safety

Wall Street has hit the panic button and is selling risky assets like stocks at a breakneck pace while piling into safe-haven bonds and money market funds.

  • Traders are rethinking expectations that Fed interest rate cuts will be able to rescue the economy or that President Donald Trump and Chinese President Xi Jinping can come to a trade agreement.

What happened: The Dow fell 391 points, or 1.5%, to 25,896.44, with the blue-chip gauge hitting an intraday low of 25,824.94, and the S&P 500 dropped 1.2% with all 11 of its sectors ending lower.

The big picture: Monday was just the latest bout of selling. Deutsche Bank reported the largest fund outflows of the year across risk assets last week, with equity funds registering $25 billion in outflows — the most since the December stock market meltdown.

  • Emerging market equities, considered higher risk and more volatile than U.S. or European stocks, saw the largest outflows since the Chinese FX devaluation 4 years ago.

Conversely, data from Lipper showed a clear flight to safety last week with money market funds, which are effectively savings accounts, seeing $64.7 billion of inflows and municipal bond funds recording their largest weekly net inflows since Lipper began keeping track in 1992.

3. Cathay Pacific shares take a direct hit from Hong Kong protests
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Data: FactSet; Chart: Andrew Witherspoon/Axios

The unrest in Hong Kong hit the market hard Tuesday as the Hang Seng Index fell 2.1%. The territory's flagship airline Cathay Pacific saw shares tumble 2.55%, after a 4.9% slide on Monday that pushed the stock to its lowest price in a decade.

Background: Hong Kong International Airport stopped all flights Monday after protesters occupied the building for a fourth straight day as part of escalating citywide protests against a law that would allow China to extradite and try citizens from Hong Kong in the mainland.

  • On Friday, China ordered Cathay Pacific to suspend any staff who supported the protests. More than 14,000 Cathay employees had reportedly joined an effort to shut down the airport that led to the cancellation of more than 200 flights.
  • Over the weekend, Cathay's management said they would abide by the Chinese government's demands, and warned workers they could be fired for supporting protests.

Watch this space: Steve Eisman, a fund manager portrayed in “The Big Short,” says the Hong Kong protests are his biggest worry, as they could endanger the likelihood of a trade deal between the U.S. and China and hurt the global economy.

  • “I think the potential black swan ... is what’s happening in Hong Kong right now,” Eisman, a managing director and senior portfolio manager at Neuberger Berman, said in an interview on CNBC.
4. The importance of a Huawei agreement

Another major risk to a trade deal is the still-unresolved issue of Chinese telecom Huawei and its ability to do business with U.S. companies.

Why it matters: President Trump allowed companies to work with Huawei during a 90-day "truce" that ends on Aug. 19. Dec Mullarkey, managing director of SLC Management, says the date will prove to be a major "inflection point" for investors, as it could be a bellwether for the fate of a deal.

"If the U.S. decides to renew support for Huawei it should create some goodwill. However, a hard stance on both Huawei and trade tariffs will likely to polarize renewed trade negotiations in September, rather than pressure the Chinese into easy concessions.
"The collateral damage to the rest of the global economy from trade wars is real, as global manufacturing is in a recession. We are at an inflection point right now. The tone and progress on trade in the next several months will dictate the pace at which the current slowdown could migrate to a serious downturn."
5. Argentina's stock market had its worst day in decades
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Data:; Chart: Axios Visuals

The Argentine peso fell 30% and its stock market sank 37% on Monday, the worst market collapse for the country in more than 2 decades. In dollar terms, Bloomberg reported it was the second-biggest 1-day rout on any of the 94 world stock exchanges it tracks since at least 1950.

  • Some of the country's largest companies, including oil giant Pampa Energy and banking heavyweights Financiero Galicia and Banco Macro saw their shares fall as much as 47%.
  • For context, imagine the dollar losing a third of its value and shares of ExxonMobil, Bank of America and Citigroup losing half of theirs in a day.
  • The selloff was sparked by Sunday's primary election results showing challenger Alberto Fernández and former President Cristina Fernández de Kirchner beating President Mauricio Macri by a wide margin.

The market could have seen this coming: The economy has been in recession for 3 of the 4 years Macri has been president, record inflation has increased and the government has slashed subsidies for the poor and implemented sky-high interest rates, choking off business.

  • Macri also signed a $57 billion bailout deal with the IMF, the organization many Argentinians blame for the country's last economic collapse.
  • Despite polls consistently showing Fernández beating Macri, the market was surprised by the magnitude of the victory and expectations have now solidified that the Peronist candidates will win October's election.

Why it matters this much: Fund managers who have spoken to Axios over the past year say they foresee an economic collapse and wide-ranging debt defaults with Fernández de Kirchner back at the country's helm, even as vice president.

Dion Rabouin