Mar 4, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

Good morning! Was this email forwarded to you? Sign up here. (Today's Smart Brevity count: 1,324 words, 5 minutes.)

🎙"In many ways, it is hard for modern people living in First World countries to conceive of a pandemic sweeping around the world and killing millions of people, and it is even harder to believe that something as common as influenza could cause such widespread illness and death.” - See who said it and why it matters at the bottom.

1 big thing: Investors wonder what the Fed knows that it's not saying

Jerome Powell. Photo: Mark Makela/Getty Images

Investors and President Trump want the same thing after Tuesday's surprise 50 basis point cut by the Fed: more cuts.

  • In response to yesterday's announcement, the president tweeted and Fed fund futures contracts began pricing in what would be crisis-level spending from the Fed.

Driving the news: The Fed's rate cut announcement at 10 am and chair Jerome Powell's 11 am press conference seemed choreographed to soothe the market but instead created more uncertainty.

Buzz: The announcement, two weeks to the day before the beginning of the central bank's scheduled March 17–18 policy meeting, has investors scratching their heads.

  • "The Fed pulled the fire alarm without telling anybody why," Bernard Baumohl, chief global economist at the Economic Outlook Group, tells Axios.
  • "There is something else going on here that triggered this cut and everybody is struggling to understand what the Fed saw."

Between the lines: Baumohl posits that it could be what the Fed's contacts at various U.S. businesses have reported about the impact of the coronavirus on demand, or an advanced copy of Friday's jobs report that shows a particularly weak number.

The intrigue: Fed fund futures prices show traders now see an additional rate cut at March's meeting and another priced in for April, with that month's contract suggesting the Fed could cut rates by an additional 50 basis points, Ben Jeffery, interest rate strategist at BMO Capital Markets, tells Axios.

"It’s remarkable," Jeffery says. "The surprise rate cut cemented the idea that [the coronavirus outbreak] will be a substantial issue for the economy going forward."

  • Deutsche Bank chief U.S. economist Matthew Luzzetti sees the Fed cutting another 50 basis points at its meeting in two weeks, "a move that would be consistent with the historical experience of inter-meeting actions."

The big picture: Lower rates and more central bank stimulus are now expected around the globe, Mark Haefele, global CIO of UBS Global Wealth Management, said in a note.

  • "We also believe the Fed's rate cut is likely to pressure other leading central banks, including the Bank of England, the European Central Bank, and the Swiss National Bank to act."
  • "Meanwhile, we expect China's fiscal support to exceed 2% of GDP this year, after already having announced corporate tax cuts and emergency spending worth 1.2% of GDP."

Quick take: Investors and economists have said for days that monetary policy is unable to combat the underlying problem and central banks now risk wasting what little ammunition they have.

Bonus: Record low U.S. Treasury yields expected to keep falling
Expand chart

Data: FactSet; Chart: Andrew Witherspoon/Axios

The yield on the U.S. 10-year Treasury note fell below 1% for the first time ever after the Fed's unexpected rate cut.

Why it matters: Yields on the benchmark 10-year note have fallen by more than 90 basis points in just over two months in 2020, as bond market investors have priced in bad news all year.

  • "We’ve had one external shock after another," Baumohl tells Axios, pointing to doubts about the phase one U.S.-China trade deal and the targeted killing of Iranian Gen. Qassem Soleimani that preceded the coronavirus outbreak.

The bottom line: While the U.S. stock market has vacillated erratically between scaling all-time highs and record sell-offs, the bond market has been consistently bearish on the state of the economy.

  • "We expect Treasury yields to remain low and perhaps fall even lower," Charles Schwab chief fixed income strategist Kathy Jones wrote.
  • "Even though interest rates are already low, there is room for them to fall further. U.S. 10-year Treasury yields are still significantly above those in Europe and Japan, which implies that rates could converge longer-term."
2. Catch up quick

China Caixin services PMI plummeted to a record low of 26.5 in February from 51.8 in the prior month, the first time China's services sector has ever contracted in the report's 14-year history. (MarketWatch)

Japan's services PMI also fell into contraction last month, dipping to 46.8 from 51.0, the weakest level since April 2014. (Reuters)

The Supreme Court looks likely to back the SEC's power to use federal courts to force defendants to surrender profits obtained through fraud. (Reuters)

The IMF and World Bank will hold this year's spring meetings in a "virtual format," canceling the in-person gathering that typically draws more than 10,000 to Washington, D.C., because of coronavirus fears. (IMF)

3. Travel to the U.S. to see largest decline since financial crisis

Foreign travel to the U.S. is slated to tumble over the next six months, according to the latest data from the U.S. Travel Association.

What's happening: The USTA's three-month Leading Travel Index (LTI) projects international inbound travel will fall by 6% year-over-year, "as the coronavirus outbreak continues to roil the global economy," the agency said in a release Tuesday.

  • "The latest Travel Trends Index (TTI) captures data from January, when awareness of coronavirus began to ramp up and China — one of the biggest travel markets to the U.S. — implemented aggressive measures to curb travel out of certain cities."

Why it matters: The predicted drop of 6% over the three-month period is the sharpest in the five-year history of the TTI, and would be the largest decline in international inbound travel since the 2007–2008 financial crisis.

Be smart: “There is a lot of uncertainty around coronavirus, and it is pretty clear that it is having an effect on travel demand — not just from China, and not just internationally, but for domestic business and leisure travel as well," USTA president and CEO Roger Dow said in a statement.

  • However, he adds that "it’s important to keep in mind that the restrictions and warnings are highly specific to countries where there have been pronounced outbreaks. Right now there is absolutely no official guidance that people need to be reconsidering travel in the U.S.”
4. S&P 500 futures rise after Biden's strong Super Tuesday

U.S. stock futures pointed jumped on Tuesday night as early results from Super Tuesday showed former Vice President Joe Biden claiming key victories in Southern states.

Why it matters: Biden's strong showing on Super Tuesday, backed by endorsements from Pete Buttigieg and Amy Klobuchar, reassured investors of his place as a top candidate in the Democratic primaries, suggesting a centrist candidate is still in the running to take on President Trump in November.

What happened: Dow futures jumped as much as 320 points at the open and the S&P 500 jumped as much as 2%. Stocks began rising at around 7 pm as TV networks called Virginia for Biden.

What they're saying: “If Super Tuesday goes well for Biden, the areas with the most negative assessments may experience some relief," RBC Capital Markets head of equity strategy Lori Calvasina wrote in a Tuesday note to clients.

  • "We think this is particularly true for Health Care, where performance has had a decent relationship with Biden’s odds in the betting markets for quite some time."

Of note: Elizabeth Warren and Michael Bloomberg had unimpressive showings, with Warren finishing third in her home state, and Bloomberg's only victory being American Samoa.

5. Another fiasco for Robinhood

Illustration: Sarah Grillo/Axios

Axios' Felix Salmon writes: The founders of Robinhood, a fast-growing stock-trading platform that inexplicably faceplanted on a day when trading volume surged and the stock market rose by 4%, issued an explanation and apology Tuesday night.

  • Millions of stock and options traders were effectively shut out of the market for all of Monday as well as two hours of early trade on Tuesday.

Driving the news: On Tuesday night, the company's founders issued a statement, blaming "stress on our infrastructure — which struggled with unprecedented load," as well as "highly volatile and historic market conditions; record volume; and record account sign-ups."

Why it matters: Robinhood was valued during its last fundraising round in July at $7.6 billion, based on the thesis that bringing Silicon Valley's disruptive norms to Wall Street would help the company capture an audience of fast-twitch millennials.

  • This week's news is a reminder of why old-fashioned trustworthiness has its merits.

The big picture: Robinhood's unbeatable price of $0 for stock trades ultimately prompted all its major competitors to follow suit. That in turn begat megamergers: Morgan Stanley is buying E*Trade, while Charles Schwab is buying TD Ameritrade.

Flashback: Robinhood is known for overreaching. At the end of 2018, it announced a checking account, and was then forced to ignominiously unannounce it. In 2019, users found a glitch that gave them "infinite leverage," and Robinhood was also fined $1.25 million for not giving its users the best prices on stocks.

  • The outage this week is Robinhood's worst blunder yet, and only serves to reinforce the impression that the brokerage is not robust enough to stand up to the giants in the space.

The bottom line: Wall Street is built on trust. It's hard to see why any of Robinhood's customers should trust it at this point.

Dion Rabouin

Quote: “In many ways, it is hard for modern people living in First World countries to conceive of a pandemic sweeping around the world and killing millions of people, and it is even harder to believe that something as common as influenza could cause such widespread illness and death.”

Why it matters: The first person to be reported ill from the Spanish flu was recorded on March 4, 1918, at Funston Army Camp in Kansas. It was the start of the worldwide pandemic that killed 50 million to 100 million people.