Feb 11, 2020

Axios Markets

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1 big thing: The world's factory is still shut

A sign urges visitors to wear face masks at the entrance to an empty shopping mall in Beijing. Photo: Greg Baker/AFP via Getty Images.

Foxconn employees are being told to return to work in the Chinese cities of Shenzhen and Zhengzhou, but as of Monday only about 10% of them had done so, Reuters reported.

  • The world's largest contract electronics maker, which produces Apple's iPhone, was supposed to be up and running along with much of the rest of the country on Monday.
  • However, in major hub cities, streets remain empty, factories idled, and many workers are still stuck in their hometowns.

Why it matters: It was supposed to be liftoff day in China — the day the country reopened after closures from the Lunar New Year holiday were extended because of the novel coronavirus outbreak.

  • The problems at Foxconn are emblematic of the issues that continue to plague China, and could hit U.S. companies and firms around the globe if Chinese factories don't start to open their doors soon.

What's happening: Authorities have locked down the region in central China around Wuhan, the epicenter of the outbreak, and plants for companies like Apple as well as Volkswagen, Qualcomm and Under Armour remain closed even in areas outside of that region.

  • “It’s like Europe in medieval times,” Jörg Wuttke, president of the European Chamber of Commerce in China, told the New York Times. "Where each city has its checks and crosschecks.”
  • Agilian Technology CEO Fabien Gaussorgues told WSJ he isn’t sure if he will be able to get enough of his 80-person staff back to restart his factory.
  • “We have warned our customers that air shipments might be impossible in the next three months,” Gaussorgues said. “Suppliers can’t commit to anything at this time. This is the No. 1 danger. It might force us to stop production.”

Between the lines: Apple and other multinational companies have a finite inventory of finished goods to sell, says DataTrek Research co-founder Nicholas Colas, estimating Apple's supply at "just 25–30 days" before it starts running out of iPhones if suppliers remain closed.

  • "And even if facilities do get up and running, health protocols and absenteeism due to virus worries may reduce productivity," Colas warns.

The big picture: The coronavirus death toll has risen to more than 1,000 in China with the total number of cases now above 42,000.

  • “Suddenly, an existential threat has come up, and many organizations are re-evaluating their supply chains,” said Renaud Anjoran, CEO of Sofeast Ltd., a China-focused quality assurance and engineering firm.
  • He said thousands of small and midsize Chinese factories may shut as a result of the production shocks.
Bonus: Shipments declining at U.S. ports

Traffic at U.S. ports is expected to drop significantly in February as China's slow return from the Lunar New Year holiday continues to put a damper on the global shipping industry.

By the numbers: February is forecast to decline 12.9% year over year and March is expected to decline 9.5%, according to the Global Port Tracker report released yesterday.

  • The report, by the National Retail Federation and Hackett Associates, shows forecasts for both months pared back significantly.
  • The projections call for increased shipping in April, May and June. But, there's an overall decline this year from 2019's figures, which were down from a particularly robust 2018.

What they're saying: “Projecting container volume for the next year has become even more challenging with the outbreak of the coronavirus in China and its spread,” Hackett Associates founder Ben Hackett said.

  • “It’s questionable how soon manufacturing will return to normal, and following the extension of the Lunar New Year break all eyes are on what further decisions China will make to control the outbreak.”
2. Catch up quick

Fed chair Jerome Powell will appear before the House Financial Services Committee today and the Senate Banking Committee on Wednesday. ECB president Christine Lagarde and BoE governor Mark Carney also are expected to speak today. (Bloomberg)

A judge is expected to rule in favor of the merger between T-Mobile and Sprint today. (NYT)

Four members of China’s military were indicted by the U.S. government for the Equifax hack that affected nearly 150 million Americans and stole trade secrets from the credit-reporting agency. (WSJ)

A Los Angeles federal judge denied a request by Uber, Postmates, and two drivers to halt enforcement of California's new law that classifies most workers as employees rather than independent contractors. (Axios)

With 64% of S&P 500 companies having reported Q4 2019 results, last quarter’s earnings growth is on pace to be slightly positive (+0.7%) for the first time since Q4 2018. (FactSet)

3. Tech sees increased funding ahead of IPOs
Expand chart
Data: CB Insights; Chart: Axios Visuals

Tech companies are seeing significantly more funding before they go public.

What's new: Data from CB Insights shows that in the last eight years, the median amount of funding raised has jumped by more than four times to just under $300 million as of early December.

  • That data includes IPOs or direct listings of U.S.-headquartered, VC-backed tech companies on major U.S. exchanges only.
4. Microsoft again top U.S. company
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Data: FactSet; Chart: Axios Visuals

Microsoft again became the most valuable U.S. company on Monday as its stock rose to another record high. Microsoft regained the designation after more than three months in second place, trailing Apple.

Details: The company's stock rose 2.6% to boost its market capitalization to $1.435 trillion. The last time Microsoft was the most valuable U.S. company at the market's close was Oct. 30. Prior to that, Microsoft was the most valuable for 127-straight sessions, from April 18 through Oct. 17, according to MarketWatch.

  • Year to date, Microsoft's stock has jumped by 19.7%.
5. "Tectonic shift" in supply chains already happening

Supply chains, even for companies outside of China, are in motion already as businesses rethink their strategies in a new global environment.

Driving the news: A new survey of analysts who cover more than 3,000 companies from Bank of America Securities is finding a "tectonic shift in global supply chains."

  • Companies in more than 80% of 12 global sectors, representing $22 trillion of market cap in North America, Europe and Asia-Pacific (excluding China), have "implemented or announced plans to shift at least a portion of their supply chains from current locations." (Emphasis theirs.)

What's happening: Companies say tariffs and the U.S.-China trade war have helped prompt this reassessment, but it's largely based on automation, which has made the labor-cost benefit of outsourcing and offshoring less attractive.

  • Automation was cited as a key enabler of shifting supply chains by 90% of respondents.
  • Outside of financial considerations, BofA found companies worried about national security and "ESG concerns of high carbon footprints associated with long supply chains and potentially problematic employment practices."

Watch this space: Many companies said they were considering locations in India and Southeast Asia, but companies in about half of all global sectors in North America declared an intent to "reshore" or move business back to North America.

  • "This was particularly true for high-tech sectors and industries for which energy is a key input. If borne out, this could represent the first reversal in a multi-decade trend," BofA's global research team said in the note.

What it means: The shift could mean bigger investments by North American companies at home rather than abroad, including increased spending on automation and manufacturing that "would have multiplier effects on the broader economy and be beneficial for financial services that cater to them."

6. Push back against China's latest stimulus measures

Worries are beginning to grow about China's stimulus efforts as the government has pushed new measures designed to offset the impact of the coronavirus.

The latest: Chinese regulators ordered banks to lower interest rates and allow late repayment of loans to help small and midsize companies, but there are worries the program may be ill-advised.

  • "[T]he measures are not working as intended, bankers and analysts say, as the move could heighten financial risk in the banking sector and add to small business debt," Caixin reported, citing unnamed sources.
  • "Under the latest directives, banks heeding Beijing's call to support small and midsize companies could make problematic loans to companies that might not meet standards under normal circumstances."

Of note: China’s fiscal revenues rose just 3.8% in 2019, the slowest growth pace since 1987, largely as a result of wide-ranging tax cuts in response to the country's economic slowdown. That followed 6.2% growth the year prior, according to South China Morning Post.

Why it matters: China has been working to reduce its debt for years as part of a “structural deleveraging” campaign, but had to reverse course as the trade war and now the coronavirus outbreak are pushing the government to increase spending.

In 1903, Maggie Walker convinced a local group to bring together about $9,400 to open the St. Luke Penny Savings Bank, becoming the first black woman and first woman of any race to preside over a savings institution. She served as the bank's president.

  • Bank customers deposited a nickel a week into their accounts, and by 1913 the bank had amassed $300,000 in assets. By 1920, the bank had helped to purchase 600 homes.
  • After the Great Depression, St. Luke Savings absorbed all the other local black-owned banks and become Consolidated Bank and Trust, holding assets of $400,000.
  • The bank is still headquartered in Richmond, Virginia, and Walker's home has been designated a National Historic Site.