Apr 15, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • ECB President Mario Draghi said he is concerned about political independence at central banks around the world, especially in the U.S. (Reuters)
  • Waste Management is buying rival Advanced Disposal Services for $3 billion, “as the top waste management services provider looks to expand its footprint in the eastern United States.” (CNBC)
  • Tiger Woods' win at The Masters was the most costly ever for William Hill U.S. sportsbook. One person made an $85,000 bet on Woods to win at 14-1 odds that will pay out over $1 million. "The SuperBook at Westgate Las Vegas reported a high-five-figure net loss on its Masters futures," and offshore sportsbook BetOnline.ag said Sunday was its biggest ever loss on a futures market. (ESPN)
  • In a tweet, Trump said that a fix and "rebrand" could save Boeing's embattled 737 MAX plane. (Axios)
1 big thing: Investors remain bullish in the face of IMF fears

Illustration: Lazaro Gamio/Axios

In a seemingly coordinated effort, IMF managing director Christine Lagarde, deputy managing director David Lipton and chief economist Gita Gopinath all worried aloud about the "delicate" state of the world's economies at last week's spring meeting in Washington.

On the other hand: Fund managers and analysts who were in Washington for the event seemed to largely disregard the foreboding. They're bullish.

What they're saying: "The mood is a bit too sour," Ed Al-Hussainy, senior interest rate and currency analyst for Columbia Threadneedle Investments, told Axios on the sidelines of the meetings.

Investors and analysts like Al-Hussainy say that while growth is slowing, there are no signs of a global recession or a major shock that would send markets dramatically lower.

  • "If anything, it should be a relatively contained slowdown, a relatively sweet spot. Because financial conditions should not be too volatile, we will not have monetary policy like what pushed us into the taper tantrum in 2013,” Claire Husson-Citanna, an emerging markets debt portfolio manager for Abu Dhabi's sovereign wealth fund, said during an investor presentation.
  • Further, with the Fed pausing its interest rate hiking cycle, China adding stimulus measures and the European Central Bank restarting its TLTRO loan program, there's a feeling that we're in a "Goldilocks" investment environment, said Alejo Czerwonko, an investment strategist at UBS.

So why is everyone worried?

  • "I think part of that has to do with the fact that we’re about to set a record in terms of U.S. economic expansion, and those of us who have been in and out of markets over the years, we’re paid to be contrarians and paid to look at cycles and paid to worry about what’s around a corner," said Christopher Smart, head of macroeconomic and geopolitical research at Barings. "But I think if you do look at the current cycle, things still look pretty good."

The bottom line: Deutsche Bank recently updated its U.S. economic outlook, noting that it sees last month's U.S. Treasury yield curve inversion as a "false alarm." Deutsche Bank chief economist Torsten Slok said in a note to clients that the bank does not see a recession in the next 3 years.

  • In fact, he said, "This backdrop is bullish for equities."
2. U.S. first quarter growth expectations are jumping
Expand chart
Data: Federal Reserve Bank of Atlanta; Chart: Axios Visuals

The Atlanta Fed's GDPNow forecasting tool has been steadily increasing estimates of this year's first quarter GDP. The initial reading was an unimpressive 0.3% on March 1. The forecast is updated as pertinent economic data is released.

  • The most impactful readings were the March 22 U.S. wholesale trade and existing home sales reports, which increased the expected GDP reading from 0.6% to 1.2%, and the April 1 retail trade, ISM manufacturing and construction spending reports, which raised expectations from 1.7% to 2.1%.
3. Achieving inclusive growth

Laurence Boone, chief economist at the OECD, joined IMF chief economist Gita Gopinath and World Bank chief economist Pinelopi Koujianou Goldberg for a discussion titled "Income Inequality Matters: How to Ensure Economic Growth Benefits the Many and Not the Few."

The 3 chief economists laid out the case for why income inequality is increasing and what can be done to stop it.

"The less skilled you are, the less you respect the government, and the more worried you are about their capacity to help you, which is another reason to help the lower skilled people.
"The more we undermine multilateralism, the more difficult it is going to be to reach any agreement on taxation, to understand how value chains are working, and how we can actually help people look and relocate geographically and to grasp opportunity rather than being left behind and suffering from that."
— Laurence Boone, chief economist at the OECD

Not that you asked, but: The subject was an interesting choice because the IMF and World Bank are often blamed for increasing inequality. Historically, the organizations have made loans to already indebted developing countries that are pilfered by unscrupulous officials and well-paid consultants, contractors and con men.

  • The loans often come with requirements that the country cut wages, social spending and benefits for its citizens and open its economies to multinational corporations. That has tended to result in higher, rather than lower, income inequality.

Worth mentioning: It's the first time in the history of the 3 organizations that all chief economists are women.

4. Altria's Juul acquisition hasn't been great for the stock
Expand chart
Data: Investing.com, Yahoo Finance; Chart: Axios Visuals

Rite Aid announced Thursday it will stop selling e-cigarettes and vaping products in all of its stores (more than 2,400 of them) because of concerns that they are behind the increase in tobacco use among middle and high school students.

  • Rite Aid will continue to sell regular tobacco products.

What's happening: The latest National Youth Tobacco Survey, released in January, found a 78% increase in e-cigarette use among high school students and a 48% increase in middle school students. FDA commissioner Scott Gottlieb said he would consider taking e-cigarettes off the market if companies continued marketing aggressively to young people.

Why it matters: Rite Aid's decision is the latest bit of bad news for Altria, which paid $12.8 billion for a 35% stake in e-cigarette juggernaut Juul.

  • On Jan. 22, a Morgan Stanley analyst downgraded the stock, warning that the accelerating decline in cigarette volume would negatively impact Altria. The stock fell 6.9%, according to data from Investing.com.
  • On April 3, the FDA said it was investigating 35 cases between 2010 and 2019 of people who suffered seizures after vaping. The stock fell 4.8% after a 1.8% slide the previous day.
5. Turkey's finance minister held the worst meeting ever

Berat Albayrak. Photo: Ozan Kose/AFP/Getty Images

Turkish Finance Minister Berat Albayrak held a closed-door meeting with hundreds of investors during the IMF-World Bank meetings in Washington last week, and some who attended called it the worst they've ever had with a high-ranking government official.

What they're saying:

  • "It was an absolute shit show," one emerging market fund manager who attended the meeting but was not authorized to comment on it publicly, told Axios.
  • "I've literally never seen someone from an administration that unprepared," another investor said.

Government officials typically gather with investors during the week to lay out their plans to boost economic growth and address any fears of a weakening economy or debt default. Investors say Albayrak did none of that.

Why it matters: The unimpressive performance could not have come at a worse time for Turkey. Investors are growing more anxious as the country heads toward recession and President Recep Tayyip Erdogan is seeing his popularity erode. (Albayrak is Erdogan's son-in-law and replaced 2 highly respected ministers, despite having limited qualifications.)

  • Erdogan's party lost key elections in the country's 2 largest cities, and the president is challenging the results. His government also recently imposed de facto currency controls, reportedly telling local banks not to lend the country's currency to foreigners in order to keep it stable.
  • Locals increasingly are shifting toward conducting business in hard currency — U.S. dollars and euros — and away from the Turkish lira, Michael Conelius, an EM portfolio manager at T. Rowe Price, tells Axios.

What's next: Conelius said his biggest takeaway from the week's events was that he became more pessimistic about chances for a turnaround in Turkey.

  • "Not only are the fundamentals not improving, Erdogan is doing worse, investor sentiment is very, very bearish and they still have significant refinancing needs."
  • "This could be a systemic issue for emerging markets."

Yes, but: None of the asset managers who spoke with Axios said they had immediate plans to sell Turkish assets.

  • While the lira has weakened, it has not fallen back to levels seen last year when its value sank by as much as 40% to its weakest level against the dollar in history.
  • The country's benchmark stock index also has been modestly positive this year, up more than 5%.
Dion Rabouin