Oct 17, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Hey! I've neglected to mention that I'm in Washington this week for the IMF-World Bank meetings. This morning is the opening press conference with WB President David Malpass and new IMF head Kristalina Georgieva (pronounced GORE-gee-eva). Let me know what questions you think I should ask.

Was this email forwarded to you? Sign up here. (Today's Smart Brevity count: 1,012 words, ~4 minutes.)

Situational awareness:

  • The British pound jumped to its highest since May after news the U.K. and EU reached Brexit deal, but it will still need British Parliament’s approval. (Axios)
  • Netflix stock jumped more than 10% in after-hours trading after it missed a subscriber target for the second consecutive quarter, but beat earnings per share estimates handily. (CNBC)
  • Americans needed to earn $515,371 in 2017 to be considered part of the 1%, according to IRS data released this week, up 7.2% from a year earlier. (Bloomberg)
  • Boston joined pension plan managers in Michigan and Philadelphia in announcing they will stop investing with Ken Fisher after lewd comments he made at a conference, bringing the total to more than $900 million pulled from Fisher Investments. (Reuters)
1 big thing: Central banks could be left behind on digital currencies

Illustration: Eniola Odetunde/Axios

Government leaders and central bankers are spending more time studying digital currencies, but don't look any closer to launching one than they were 6 months or a year ago.

  • Facebook, by contrast, appears to have a prime-time ready product — its Libra digital currency — and shows every intention of pushing forward, despite the recent abandonment by a quarter of the members of the currency's governing body.

Why it matters: "The status quo is not an option," Libra co-creator David Marcus said Wednesday at the IMF's fall meeting. "Whether it’s Libra or something else, the world is going to change in a profound way,"

Background: It's been a decade since Bitcoin emerged, threatening to replace traditional money with digital tokens that performed the most important functions of cash but did so outside the control of central banks and other governmental authorities.

  • Ten years later, the adoption of Bitcoin and cryptocurrencies has been inhibited by extreme price volatility and lack of transparency.
  • There is a race underway as private companies and sovereign governments push to develop the infrastructure and the money for the coming cashless society.

The big picture: The Fed and central banks around the world are responsible for overseeing and stabilizing the world’s money supply, but most are at risk of being left behind in this new phase.

  • 1.7 billion people have no access to digital payments, cross-border transactions carry an average transaction cost of 7%, and even sending money within a country is cost-prohibitive for people without bank accounts, Libra's Marcus says.
  • "The poorer you are, the more you’re paying for financial services."

What's happening: While a future without cash may seem distant in the U.S. — where more people write checks than use digital payments and there is a rising demand for dollars — the rest of the world is going there.

  • Countries like Kenya and India are already operating digital currency networks, and the People's Bank of China says it will release a digital currency this year.
  • Estimates show Chinese payment platforms Alipay and WeChat Pay handled $37 trillion in mobile payments last year, Fed governor Lael Brainard said Wednesday at a symposium on digital currencies held by the Peterson Institute for International Economics.

Yet the Fed is being "exceptionally cautious" in its possible development of a U.S. digital currency, Brainard, the Fed's leading financial authority — and a former undersecretary at the Treasury Department — told Axios during Wednesday's event.

  • A digital currency would have "profound implications for monetary policy transmission and potentially for financial stability," she said. "All of those things require a lot of careful consideration."
2. Global M&A expected to take a 2-year downturn
Expand chart
Data: Baker McKenzie; Chart: Naema Ahmed/Axios

The trade war and other geopolitical tensions have had a major negative effect on mergers and acquisitions activity across international borders, data from law firm Baker McKenzie and research firm Oxford Economics shows.

By the numbers: They forecast an $800 billion decline in total global M&A volume in 2020, with transactions falling from an expected $2.9 trillion this year to $2.1 trillion in 2020.

  • North America is expected to remain the epicenter of dealmaking, "defying gravity," but will still see "a pause in activity" with deals slipping from $1.5 trillion this year to $1.1 trillion in 2020.
  • That's "due to a slowing US economy, the fact that 2020 is a Federal election year — which historically brings market volatility —, continuing trade policy tensions, [sic] and a looming equity market correction," analysts said in their Global Transactions Forecast report.

Of note: The report does predict an increase in IPO volume in 2020. However, that's largely because of the slowdown at the end of 2019 and the expected debut of Saudi Aramco on public markets, which is projected to be the largest IPO of all time.

But, but, but: There is good news on the horizon, analysts say.

  • "Our analysis suggests a further softening of global dealmaking over the coming year, in an environment of heightened economic and geopolitical uncertainty. Yet, the medium-term outlook is brighter, given the underlying structural trends shaping the global economy."
3. Auto workers reach tentative deal with GM to end strike

The United Auto Workers sealed a preliminary labor deal with automaker General Motors, the union announced on Wednesday, Axios' Marisa Fernandez writes.

The big picture: The 49,000-member strike, which has gone on for a month and brought 55 GM factories across the country to a halt, will continue for now as more details are hammered out. The agreement will not be ratified until it is approved by the UAW National GM Council and voted on by UAW-GM membership across the U.S.

The union released a statement Wednesday:

"Today, after five weeks of intense negotiations, the UAW GM National Negotiators and UAW GM Vice President Terry Dittes announced the achievement of a Proposed Tentative Agreement with General Motors. The elected national negotiators voted to recommend the UAW GM National Council accept the Proposed Tentative Agreement as the agreement represents major gains for UAW workers. "

Go deeper: U.S. jobs are key issue as GM strike drags on

4. Inflation expectations drop to lowest in at least 6 years
Expand chart
Adapted from Federal Reserve Bank of New York; Chart: Axios Visuals

The New York Fed's latest consumer inflation expectations survey shows Americans see inflation rising at the slowest pace in the 6-year history of the survey, with 3-year inflation expectations dropping below 1-year expectations.

5. Retail sales turn negative for the first time since February
Expand chart

Data: Census Bureau; Chart: Andrew Witherspoon/Axios

U.S. retail sales, which had been the highest-flying piece of American economic data for most of the year, fell in September for the first time in 7 months, raising fears that the U.S. manufacturing recession may be bleeding into the consumer side of the economy.

  • Data from the Commerce Department showed the drop was a result of households cutting spending on building materials, online purchases and especially automobiles.

Of note: Online retail sales turned negative for the first time since December 2018.

6. Beige book shows declining sentiment, but benefits for workers

The Fed's latest beige book released Wednesday showed U.S. business owners remain largely bullish on the economy but are losing faith in the longer-term outlook.

What's happening: Business activity varied across the country, with the West and South more upbeat than the Midwest and Great Plains parts of the country, which are U.S. manufacturing hubs.

  • A number of districts also reported that manufacturers have "reduced headcount because orders were soft," while others are cutting hours rather than laying off workers.
  • Employers continued to note the tight labor market and said finding quality workers was still a top problem. However, that has been a plus for workers as large companies are said to be offering larger pay packages and small companies are using benefits and bonuses to compete.
Dion Rabouin