Jul 3, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Axios Markets is off July 4 and 5 (so you'll be on your own for Friday's nonfarm payrolls report). I'll be back in your inbox on Monday. Let me know what your plans are for the holiday — dion@axios.com. I'll be enjoying the fireworks in New York and catching up on some sleep.

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Situational awareness:

  • The U.S. imposed tariffs of more than 400% on steel imports from Vietnam, saying the country is trying to skirt the duties. (Bloomberg)
  • Tesla's stock rose 7% in aftermarket trading after the company set new delivery and production records. (CNBC)
  • Yields on benchmark U.S. 10-year Treasury notes fell to the lowest in more than two years. (Bloomberg)
1 big thing: The increasing importance of share buybacks

Illustration: Rebecca Zisser/Axios

Share buybacks contributed about half of S&P 500 companies’ earnings growth in the first quarter, a new report from JPMorgan shows.

  • Buybacks accounted for the highest share of EPS growth since 2007, and Q1's share was almost 8 times higher than the average from 2001 to 2018, the bank found.

Why it matters: "This is corporate executives saying, 'Rather than investing back into the business by making capital expenditures or buying equipment, I’m just going to buy my own shares,'" says David Kelly, a global market strategist at JPMorgan Asset Management, which published the report.

  • "That says a lot about your view of the long-term prospects for your business."

The big picture: S&P earnings growth has been a major worry for stock analysts this year, after 2018's blowout earnings following the passage of the Tax Cut and Jobs Act. The permanent reduction in corporate taxes was backed by President Trump and Congressional Republicans as a catalyst for a boost in wages and long-term investment.

  • While companies have slightly raised compensation and increased spending on business infrastructure and R&D, the overwhelming majority of tax cut savings has been spent by firms to buy back their own shares.
  • The trend has gotten so strong that Moody's warned in May companies were spending more on buybacks and dividends than they were paying in taxes before the cut.

Remember: Stock prices typically are tied to salaries and job performance reviews for top executives and boards, the very people making the spending decisions.

  • Companies spent more than $1 trillion buybacks last year and are on pace to spend more in 2019.
  • Earnings also were particularly low in Q1, Axios' Felix Salmon points out, making the increased level of buybacks an even larger percentage.

The last word: JPM's Kelly says the rising level of stock buybacks is one major reason he and other market analysts are worried about continued growth of business output, stock prices and the broader economy.

  • "This is probably one of the bigger issues that we’ve been talking about."
  • "It could perpetuate the slower growth environment we’ve seen in this expansion."
2. The ECB gets a new dove

International Monetary Fund head Christine Lagarde will be the first woman to run the European Central Bank — and the first without central banking on her resume — after being nominated today to replace Mario Draghi at the end of October.

Why it matters: The eurozone is already running negative interest rates, with the prospect of more stimulus coming, Bloomberg notes.

  • "Lagarde will bring the star quality of a politician. ... In an age where the EU establishment is frequently derided by citizens, her skills could help repair the image of central bankers."

Between the lines: "The choice of Ms. Lagarde will be a surprise to many," WSJ reports.

  • "Speculation in recent months has centered around German central bank head Jens Weidmann, French ECB members Benoît Coeuré and François Villeroy de Galhau and former Finnish central banker Erkki Liikanen."

My thought bubble: Her warnings about the global economy's "delicate" health at this year's IMF spring meetings and continued insistence that Europe and the rest of the world are in need of TLC make Lagarde a natural fit to replace Mario "Whatever it takes" Draghi at a time when eurozone growth is slowing and markets are expecting more stimulus.

Bonus: German Defense Minister Ursula von der Leyen was nominated to be the next head of the European Commission. If approved by the European Parliament, this would mark the first time women have led both institutions.

3. Not all of Europe is struggling with growth

Overall growth in the big, developed eurozone markets has been stunted at around 1% or less for much of the year, and the bloc may even fall into recession this year. But Central and Eastern Europe's economies have been growing significantly, recent research from Capital Economics shows.

  • Romania's construction boom and strong consumer spending have helped put GDP growth on pace for 6%.
  • Poland's GDP is expected to grow at around 5% this year.
  • Hungary is benefiting from strong industrial production and retail sales growth, helping its economy expand at nearly 5%.
4. Sprint's stock rallies again on merger news
Expand chart
Data: FactSet; Chart: Harry Stevens/Axios

The $26.5 billion merger between T-Mobile and Sprint may just happen after all.

Driving the news: T-Mobile is near a deal with Dish Network that would prop up Dish as a new fourth U.S. wireless competitor, likely giving it cover for DOJ approval, CNBC reports.

Flashback: The companies have been working on a tie-up for years, and the FCC has paused its review of the merger three separate times to examine "new information" related to the deal (and because of the government shutdown in January).

  • Sprint's stock price has gone through a whirlwind of investor emotions over the course of the proposed deal's life and as of Tuesday it is 33 cents above the price at which T-Mobile originally agreed to purchase shares.
5. Six Flags could be making a comeback
Expand chart
Data: FactSet; Chart: Axios Visuals

Shares of Six Flags rose another 1.3% on Tuesday after jumping nearly 5% Monday, following an upgrade to Outperform by KeyBanc over the weekend, with a $62 price target. The price target represented a 25% premium to the stock's Friday levels.

  • KeyBanc analyst Brett Andress says there are a number of improving trends in the second quarter expected to boost the company's stock prospects and is forecasting an 8% increase in attendance in Q2.
  • Six Flags also should benefit from improved weather this year, as last year's Q3 weather impacted about 500,000 potential guests, Andress said. The company also recently met with local officials in China, increasing the prospects for international expansion.
6. Trump announces 2 new nominees for Federal Reserve board

Axios' Courtenay Brown writes: President Trump announced on Twitter Tuesday that he intends to nominate Christopher Waller of the St. Louis Fed and Judy Shelton, an economist and Fed critic to the Federal Reserve Board of Governors.

Why it matters: Trump has been urging the Federal Reserve to lower interest rates and his new nominees seem to favor that view.


  • Waller works for St. Louis Fed President James Bullard, who has advocated for more dovish monetary policy and, more recently, a rate cut. The White House approached him last month about the joining the central bank, a St. Louis Fed spokesperson told Axios.
  • Shelton has repeatedly endorsed a return to the gold standard and recently told the Wall Street Journal that the Fed should cut rates.

What's next: Both Waller and Shelton will need to be confirmed by the Senate. Waller is a former economics professor who has been at the Fed for 10 years. He recently defended the St. Louis Fed's opposition to interest rate hikes in an interview with Bloomberg.

  • Shelton was already confirmed for a different position, but Fed watchers suspect she might face difficulty, given her recent shift from criticism of low rates to support for rate cuts.

Of note: Trump's last 3 picks for the Fed board — Nellie Liang, Herman Cain and Stephen Moore — all withdrew from consideration.

Dion Rabouin