Feb 7, 2019

Axios Markets

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Situational awareness:

  • BB&T is acquiring rival SunTrust Banks in a $66 billion all-stock merger, creating the 6th biggest bank by assets and deposits. (Axios)
  • PG&E has contained a natural gas leak from a pipe that exploded on Wednesday, engulfing a major thoroughfare in San Francisco in flames. (Bloomberg)
  • House Financial Services Committee Chair Maxine Waters called on the Consumer Financial Protection Bureau to rescind a new proposal easing restrictions on payday lenders just hours after their release. The Obama-era proposal would force payday lenders to ensure borrowers can afford the loans they are offered. (Politico)
  • Chipotle shares rose more than 10% after the company reported better than expected fourth-quarter earnings after the bell on Wednesday. (CNBC)
  • Twitter topped earnings and revenue expectations and added 321 million monthly active users — down from the prior year's 330 million MAUs. (CNBC)
1 big thing: The money printing press returns

Illustration: Aïda Amer/Axios

Analysts at Goldman Sachs say they expect the European Central Bank to announce it is restarting its bond-buying stimulus program as soon as March, despite having just called it off in December.

Renewed stimulus for the faltering euro zone economy, which has looked weaker with each new data release, has been expected, but Goldman's incorporation of fresh ECB stimulus as part of its market outlook could mark a watershed moment for central banks and the global economy.

What it means: The ECB's stimulus program was created to hold up failing markets in the aftermath of the European crisis that followed the 2008 U.S. financial crisis. The goal was to remove it as soon as the economy could stand on its own.

Like the Federal Reserve's quantitative easing, the ECB's TLTRO program, started in 2014, was considered an emergency, unconventional and temporary fix. It was never imagined as a program that would stay in place for 5 years or more.

Remember: For most of last year policymakers had been preparing asset managers and markets for 2019 to be the year things finally returned to normal. Central bankers said that this year:

  • The Federal Reserve would raise U.S. interest rates 3 times and continue to reduce its $4 trillion balance sheet by $50 billion a month. (Prior to 2008, the value of the Fed's balance sheet was less than 10% of U.S. GDP going back to 1956. It's currently around 20%.)
  • The ECB would end its TLTRO program of buying $17 billion of bonds a month and raise its interest rates from -0.4% to above zero, where they haven't been since 2011.
  • The Bank of Japan would slow or stop its nearly $4 billion a month asset purchasing program, which has taken the central bank's balance sheet holdings to an amount greater than Japan's entire GDP.

There's now significant doubt any of those things will happen.

1 bonus chart: Negative rates
Expand chart
Reproduced from a Deutsche Bank Securities analysis of data from Bloomberg Finance and DB Global Research; Chart: Axios Visuals

Another telltale sign that the world is again moving away from normalized interest rates is the resurgent growth of negative-yielding bonds. Having been largely unheard of before the ECB and BOJ officially set negative policy rates, by 2016 more than $10 trillion of global debt held a negative yield, meaning investors paid to hold it.

"The recent uptrend is driven by the deteriorating outlook for Europe and also Japan," Deutsche Bank Chief International Economist Torsten Sløk tells Axios. "Which again is caused by three forces: the slowdown in China, U.S. trade war, and Brexit uncertainty."

2. Exclusive: Sonos' CEO talks tariffs and big tech competition

Smart speaker company Sonos is re-examining its Chinese supply chains as a result of the U.S.-China trade war, the company's CEO tells Axios' Courtenay Brown.

  • "We are actively evaluating ways to increase the flexibility of our manufacturing footprint and supply chain, including sourcing and producing products outside of China," Sonos CEO Patrick Spence says.

Spence said it could take "up to one year" to shift manufacturing and its supply chain out of China to avoid feeling the effect from a potential escalation of tariffs. However, the impact the company has felt so far from the trade war is "financially immaterial."

The big picture: Hardware companies are in the trade war's line of fire, as Axios' Ina Fried reported last year.

GoPro, for example, "warned it would move most manufacturing of U.S.-bound gear outside of China by this summer."

Between the lines: Sonos belongs to a class of hardware-dependent companies — along with GoPro and Fitbit — whose stocks have taken a hit as Google, Amazon and Apple assert more dominance in these product areas.

  • Sonos shares have fallen 30% since its public debut last August.
  • In its earnings report on Wednesday, which topped analysts expectations for earnings and revenue and announced the departure of its longtime CFO, Sonos said it had 22.7 million products in over 8 million households globally. That's up from the 19 million products in about 6.9 million households reported in March.
  • Neither Apple, Amazon or Alphabet break out unit sales for smart speakers.

Quick take: Spence tells Axios that while "macroeconomic conditions can certainly impact consumer demand through business cycles," the 16-year-old company has survived economic downturns.

  • Still, companies that bank on a strong economy, when consumers are flush with cash, are in focus as concerns about a coming recession grow.
3. When op-eds become reality

U.S. engine maker Cummins on Wednesday reported lower-than-expected quarterly profit and forecast full-year sales below analysts' estimates, Reuters reports, playing out almost exactly as CEO Tom Linebarger warned in a July New York Times op-ed.

"These tariffs put us in a worse position now than when we started these negotiations, and we are concerned there is no end in sight. Because of this uncertainty, companies like ours are standing still, unclear on how and where to invest."
— Cummins CEO Tom Linebarger

What it means: Cummins' soft guidance further amplifies concerns of a slowdown in sales of heavy-duty trucks in North America.

  • As we noted in late January, truck shipments' year-over-year growth fell in December for the first time since 2016. Truck shipments are thought to be a leading indicator of the economy's health as they're very sensitive to market fears.

Cummins said Wednesday it expects 2019 production of heavy-duty trucks in North America to rise just 2%, a significant pullback from the nearly 30% growth the industry chalked up last year.

Don't forget: The company's stock dropped 11.5% in December and fell 24% in 2018.

4. Fitch: Venezuela will get worse before it gets better

Ratings agency Fitch warned Wednesday that Venezuela's ongoing political and diplomatic crisis raises the risks of increased near-term economic pain as well as further oil market disruptions.

  • "In the short term, new U.S. sanctions imposed on state-owned oil company PDVSA will deepen the country's economic crisis," Fitch said in a statement.
  • "Oil production will likely fall further and more quickly affecting economic output, exports and government revenues."

Driving the news: U.S. Sen. Marco Rubio (R-Fla.) said Wednesday that newly declared Venezuelan President Juan Guaidó will name a new board for U.S.-based oil company Citgo, which is owned by PDVSA. Citgo is weighing the possibility of bankruptcy and other contingency plans.

Nicolas Maduro has steadfastly held that he is the rightful president of Venezuela and shows no signs of conceding to demands from the U.S.

  • If Maduro is able to retain power, Fitch warns, "the prospects of reforms to stabilize the economy and end hyperinflation are likely to be diminished, at least in the near term."
  • "The military's position will be key to the country's political future and there is the potential for a protracted stalemate."

Maduro's regime positioned a gas tank and shipping containers on a bridge to block humanitarian aid from entering Venezuela from Colombia, Bloomberg reported.

  • "Even in the case of a political transition, a debt restructuring is likely to be a lengthy process," Fitch says. "A political transition will be complex and likely culminate in elections."

What's next? Guaidó's economic plan includes seeking financial aid from multilateral organizations, bilateral loans, restructuring Venezuela's debt and bringing private investment back into the country's oil sector. He has also called for eliminating currency controls and privatizing state assets.

  • "PDVSA would need to be restructured from the ground up and incentives put in place for private investment," Fitch continued. "Institutional capacity, rule of law and political stability will be key after years of weakening government institutions."

On the bright side: "Should a successful political transition combined with economic stabilization reforms be implemented," Fitch analysts said, "Venezuela would have significant potential."

5. When tax incentives go wrong

Illustration: Sarah Grillo/Axios

When companies promise thousands of high-paying jobs in exchange for major tax breaks and incentives, those jobs often don't show up, a new study shows. And that may have major implications for the future of Amazon's HQ2, Axios' Erica Pandey reports.

The study an examination of 164 deals in Texas since 2003 — found that about a quarter of the companies walked back on promised jobs after signing.

Why it matters: In New York, public scrutiny is triggering doubts about the future of a much-publicized $3 billion concession to Amazon to build a new headquarters employing tens of thousands in Queens.

  • Many of the companies that underdelivered had stipulations that shielded them from public scrutiny — contract clauses that allowed them to block the release of details on the deals, the study found.
  • Amazon inserted such conditions into its HQ2 contracts with both New York and Arlington, Virginia, according to the study's authors.

Now the accord is being threatened: On Monday, New York's state Legislature nominated Sen. Michael Gianaris — a vocal HQ2 opponent — to a 3-person board on which any member has the power to veto Amazon's plans.

  • In a statement Amazon said, "We expect our new headquarters to generate more than $27 billion in new tax revenues for community improvements and the people of New York."

Milwaukee has the highest-profile case yet: Foxconn got $4.5 billion in public money with the expectation that it would deliver 13,000 jobs.

  • That's the rough equivalent of Wisconsin paying 30% of Foxconn's payroll for 15 years, says Tim Bartik, a senior economist at the Upjohn Institute.

But last week, Foxconn said it wouldn't build the plant. Then, after a reported conversation with President Trump, said it would.

  • No one's certain what happens next, but in a new investigation, Bloomberg reports that the company has not delivered on such pledges in Brazil, India and Pennsylvania.

Foxconn did not respond to requests for comment.

History: Amenhotep III was the ninth pharaoh of the Eighteenth Dynasty of Egypt and one of the greatest African kings in history. He devoted himself to expanding diplomatic contacts and to extensive building in Egypt and Nubia.

His reign was a period of unprecedented prosperity when Egypt reached the peak of its artistic and international power.

Amenhotep III's palace at Thebes was the most opulent in the ancient world. He created monuments that were 70 feet high, weighed 700 tons and carved out of a single rock.

He built the most surviving statues of any Egyptian pharaoh, with more than 250 of his statues having been discovered and identified. Though he ruled in the 14th century B.C., many of his works can still be viewed today.