Sep 9, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Was this email forwarded to you? Sign up here. (Today's Smart Brevity: 1,133 words, ~ 4 minutes.)

Situational awareness:

  • WeWork is considering a valuation below $20 billion if it launches its IPO, less than half of its most recent $47 billion private valuation. (WSJ)
  • The director of MIT’s Media Lab resigned on Saturday after saying he took nearly $2 million from Jeffrey Epstein. (NYT)
  • China's GDP could be up to 3 percentage points lower than official estimates, some economists say based on an analysis of additional data. (WSJ)
  • British Prime Minister Boris Johnson plans to “sabotage” any Brexit extension, meaning today’s vote on a general election may be the “last chance” for MPs to block a no-deal Brexit. (Telegraph)
1 big thing: China leapfrogs the world on digital currencies

Illustration: Rebecca Zisser/Axios

China may be taking the lead in the next evolution of money, as representatives of the country's central bank say a state-backed digital currency could be ready this year.

Why it matters: China already is outpacing the U.S. and much of the developed world in mobile payments, and a new digital currency that authorities say would be like cash and accepted everywhere would put China miles ahead in the currency space.

  • The Fed, ECB and numerous other central banks have stepped up efforts to study digital currencies recently but remain years away from being able to produce or regulate them.
  • China also is working to move away from the dollar as the global standard for payments, and a digital currency could provide another avenue for that process. (Its central bank and others have been buying fewer dollars while purchasing historically large quantities of gold for much of this year.)

Agustín Carstens, general manager of the Bank for International Settlements, told the Financial Times in June that central banks around the world may need to issue digital currencies sooner than expected because of growing demand and increasing reliance on for-profit banks and the private sector to provide payment options.

What they're saying: “Why is the central bank still doing such a digital currency today when electronic payment methods are so developed? It is to protect our monetary sovereignty and legal currency status,” said Mu Changchun, deputy director of the People’s Bank of China’s payments department, per Reuters. “We need to plan ahead for a rainy day.”

How it would work: China's digital coin would resemble Facebook's Libra, Mu said. As proposed, the Libra would be backed by a reserve of real-world assets, including bank deposits, and overseen by a network of partners through its Calibra blockchain platform.

  • China's digital currency would be available on Tencent's WeChat and Alibaba's Alipay platforms, but would be overseen and issued by the central bank, and could function without an internet connection, Mu said.
  • That would secure the currency in case of emergencies such as a loss of power or if a private company issuing the currency went out of business.
2. J.P. Morgan takes the lead as top adviser for Saudi Aramco IPO
Expand chart
Data:; Chart: Axios Visuals

J.P. Morgan Chase is close to winning the lead advisory role for state-owned oil company Saudi Aramco's IPO, which is expected to be the largest ever at $25 billion. A final decision is expected next week, CNBC reports, citing inside sources.

What's happening: Saudi authorities reportedly plan to sell 5% of Aramco’s shares on the local Tadawul stock exchange and launch another, much larger, offering in a foreign market in the next 2 years.

  • Rumors have swirled about which location will get the much larger listing, with Tokyo most recently reported as the favored destination.
  • The exchange's CEO promised last year shares of Aramco listed on the Tadawul would be limited so as not to overwhelm the $500 billion bourse with Aramco's $2 trillion market value.

Of note: The Tadawul was recently incorporated into MSCI's emerging markets index, which has brought billions of dollars to the exchange so far this year.

  • From the start of 2019 through the end of July, foreign investors have accounted for 21% of total trading, reaching $56 billion, according to an August exchange filing.
  • The Saudi index had risen nearly 20% at its peak in May, Reuters reported.
  • However, the index has seen a steep slide since, due to geopolitical worries and the trade war, and is up 2.5% year-to-date.
3. Goldman: Stocks will rise in 2019 and 2020

Last month's weak reading for the U.S. ISM manufacturing index has analysts at Goldman Sachs bullish, as it has sent fear and shockwaves through the market, creating "an opportunity for equity investors."

What it means: Goldman is expecting the S&P to end the year at 3100, up a little more than 4% from its current level, and to finish 2020 at 3400, meaning another year of meaningful gains.

  • "Our economists expect that a US recession is unlikely during the next two years," analysts from Goldman's portfolio strategy research team said in a weekend note to clients.
  • "They highlight the lack of economic imbalances and believe that elevated consumer spending and a smaller drag from inventory accumulation should boost economic growth through the end of 2019 and 2020."

Details: The ISM manufacturing index fell to 49.1 in August, its lowest reading since January 2016, helping send markets significantly lower on the day.

  • But Goldman argues the index has been "an inconsistent predictor of US recessions during the past 40 years."
  • "In six of 11 instances since 1975 a recession did not occur despite the fact that the ISM fell below 50. ... During previous episodes when the US economy did not enter a recession despite ISM readings below 50, the S&P 500 typically rose in the subsequent six months (+6%) and 12 months (+22%)."
4. Health care keeps adding jobs
Expand chart
Data: BLS; Chart: Andrew Witherspoon/Axios

The health care industry added almost 24,000 jobs in August, helping to buoy overall employment growth amid economic fears associated with the U.S.-China trade war, Axios' Bob Herman reports.

Almost 1 out of every 9 Americans works in health care, and the industry has not seen a net loss of new jobs in any month since January 2014. But everyone's insurance premiums and tax dollars are funding this swelling workforce.

Between the lines: More than half of all health care job additions occurred in ambulatory settings, like doctors' offices, outpatient centers and home health agencies.

The bottom line: Health economist Uwe Reinhardt famously said, "Every dollar of health spending = someone else's dollar of health care income." A consistently growing workforce means it'll be that much more difficult to control the country's ballooning health care spending.

5. Facebook and Google set to face more antitrust probes

State attorneys general are expected to formally launch antitrust investigations this week into Facebook and Alphabet’s Google.

Background: These are separate from ongoing investigations by the Justice Department and the FTC, which have been looking into the 2 megacompanies since last year, plus ongoing inquiries from the FBI and SEC.

Details: The new investigations, which involve 2 large bipartisan coalitions that may include more than 40 attorneys general, is being led by Texas Attorney General Ken Paxton, according to WSJ.

  • Separately, New York Attorney General Letitia James is organizing an additional bipartisan, multistate antitrust probe into whether Facebook “has stifled competition and put users at risk,” she said in a statement last week.

Why it matters: While Google's stock has underperformed the broader stock market this year, gaining around 13% compared to the S&P 500's 18% rise, Facebook has managed to nearly double the market's return, up around 35% as it has continued to unroll solid earnings in spite of the mounting controversies.

Yes, but: Since July 2018, when early investigations into Facebook's involvement with the Cambridge Analytica scandal took off, the stock is down almost 3% compared to gains of around 9% for both Alphabet and the S&P.

Dion Rabouin