Jul 1, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • The S&P 500 has risen 17% for the year, its best first-half performance since 1997, and the yield on the 10-year U.S. Treasury closed the quarter at 2%, nearly a half-percentage-point drop from the end of Q1. (WSJ)
  • Kim Jong-un and President Trump agreed at their meeting Sunday to designate nuclear negotiating teams to start work in the coming weeks. (Reuters)
  • The U.S. lifted some restrictions on Huawei, a key element of the agreement reached between Trump and Chinese President Xi Jinping to reopen stalled trade negotiations. (Reuters)
1 big thing: Jean-Claude Juncker and the resurrection of free trade

Illustration: Lazaro Gamio/Axios

As the U.S. has abandoned its role as a champion of global free trade, European Commission President Jean-Claude Juncker has quietly been cutting deals around the globe, bolstering free trade pacts and international cooperation many feared (or hoped) were dying in the age of Trump.

What's happening: At this weekend's G20 summit all eyes were on Trump and Xi's agreement to relax further trade war escalation. But perhaps lost in the shuffle was the official announcement of 2 major trade deals by the EU, with Vietnam and the Mercosur alliance, a bloc that includes Brazil and Argentina, South America's largest economies.

Details: The agreements with Vietnam and Mercosur follow recent accords the EU has signed with Canada, Japan, Mexico and Singapore.

  • The deals cover trade of goods and services valued at nearly $600 billion a year, which is about half the value of trade between the EU and U.S.

"This deal is a real message in support of open, fair, sustainable and rule-based trade," Juncker said of the Mercosur agreement during a news conference on the sidelines of the G20.

  • The EU had been in negotiations with Mercosur over this agreement for 20 years.
  • New deals with Vietnam and Singapore will give Europe a major footprint in Asia and serve as a stepping stone for a regional agreement, Juncker said.

What's next? There is a good chance for the EU to ink an agreement with the Pacific Alliance, Latin America's other major trading coalition that includes Mexico (with whom the EU has a separate deal) as well as Peru, Colombia and Chile.

  • Mercosur and the Pacific Alliance account for 93% of Latin America's GDP.

The big picture: The EU also is in prime position to supplant the U.S. in the abandoned Trans-Pacific Partnership, having now secured trade deals with the agreement's major players. TPP was picked up by Canada and Japan, re-labeled TPP-11 (or TPP-minus-the-United States), and signed in December, but lacks a major world power.

  • The deal was intended to strengthen ties between Pacific countries from Asia to Latin America with the U.S. to curtail China's growing dominance.

The bottom line: With the world's 2 largest economies weakening each other through a potentially protracted trade war, Juncker's dealmaking has put the EU in position to take the reins on the future of global trade, and given fresh legs to hopes for globalization and liberalized international trade.

2. The world now has $13 trillion of negative yielding bonds
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Bloomberg, Institute of International Finance; Chart: Andrew Witherspoon/Axios

The amount of bonds with negative yields has grown to more than $13 trillion, data from the Institute of International Finance shows, and unlike in 2016 the amount of debt below zero look poised to grow.

What's happening: Since ECB president Mario Draghi's latest news conference signaling the central bank is poised to further ease its already negative interest rate policy, bond yields have been dropping below zero across Europe.

Investors are trying to find other places to stash their cash. Interest in so-called alternative assets is pushing banks to launch brand new hundred-billion-dollar divisions, and institutional holdings of money market funds have surged in recent weeks to a record high of $1.68 trillion, IIF notes.

  • But money is still piling into the bonds that charge instead of pay bondholders interest.

The intrigue: Negative yields are primarily on government bonds from Japan and various European countries, but the stock of corporate bonds and securitized instruments with negative yields also has increased, topping $500 billion and $1 trillion, respectively, according to IIF's data.

3. Tesla's rebound may not last

Tesla's stock is beginning to recover after a brutal start to the year, rebounding about 25% from its June nadir as optimism about second-quarter vehicle deliveries has picked up steam.

  • CEO Elon Musk's message to shareholders that there is "not a demand problem," and June 25 email to employees saying Tesla is "on track to set an all-time record" for deliveries have also helped stabilize the stock.

But investors would be wise to sit out any celebration, Charley Grant at WSJ writes.

  • "For starters, record deliveries would hardly guarantee a profit. Tesla managed a net profit margin of less than 2% in the fourth quarter of 2018.... [T]here is reason to believe margins have shrunk since then."
  • "We believe that Tesla has an incentive … to 'move the metal;' in other words, prioritize deliveries over margins and pricing, which it appears to have done this quarter," Barlcays analysts wrote last week.

Tesla also now faces more competition on its higher-end Model S and Model X cars, which have much higher profit margins than the mass market Model 3, from Jaguar and Audi.

  • Further, Grant notes, U.S. federal tax credits for Tesla buyers will be reduced again in the U.S. starting today to just $1,875, compared with $7,500 last year.
4. Green bonds see back-to-back months of record inflows
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Data: Bloomberg, Institute of International Finance; Chart: Axios Visuals

New sustainable debt instruments, like green bonds and green loans, are seeing a significant pickup in investor interest.

  • While it's still a de minimis fraction of the global debt market, green bonds saw explosive growth in the second quarter. Dedicated green bond ETFs attracted some $2 billion of net inflows in Q2, including $1.1 billion in June, data from the Institute of International Finance shows.
  • June's green bond inflows were more than triple the $300 million of inflows recorded in all of Q1 and larger than inflows from any year prior to 2019.
5. 1 🦙 thing

Tami Lash of Michigan won a ribbon at a big llama show in Iowa this weekend. Photo: Jennifer A. Kingson

Roughly 280 llamas, plus a few alpacas, convened in Cedar Rapids, Iowa, this weekend for one of the biggest llama shows of the year picture the Westminster Dog Show, only with camelids, Axios' Jennifer Kingson writes.

The details: People from around the country who own herds of llamas regularly travel long distances to participate in shows like this one, sponsored by the International Lama Registry.

  • The llamas are shampooed and groomed, then compete in obstacle courses.
  • They are also judged by the quality of their fleece and their conformation to breed standards.
  • A llama auction was also held, with one female fetching $11,000. (Males could be purchased for far less.)

One contestant, Lauren Wright, drove 1,350 miles from Sarasota, Fla., to show 10 of her animals. "They each have their own personality," she said.

Between the lines: The excitement surrounding the weekend's show is evidence that while the bubbling llama market has calmed, it has not been fully extinguished.

  • As NBC News reported earlier this year, the llama business — "once an industry that included high-rolling celebrities and athletes — quietly crashed" after a boom from the 1980s into the 2000s.
  • "The llama financial bubble burst slightly after the real estate market crashed in 2007, as people no longer had expendable income to feed this speculative industry. Without an economy around breeding and without a huge market for their meat or their fiber, llamas essentially became the equivalent of Bitcoin or Beanie Babies."
Dion Rabouin