Sep 3, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • The U.S. and China have yet to agree on basic terms to even begin discussions on a trade deal this month, with mistrust on both sides. (Bloomberg)
  • Hurricane Dorian is likely to cause $25 billion in losses to insurers, UBS estimates, making it the most expensive storm for the industry in 2 years. (Bloomberg)
  • An armed group of people rushed a Popeyes' entrance in Houston Monday night demanding chicken sandwiches the restaurant has said are sold out nationwide. (ABC13-Houston)
1 big thing: Despite Trump's promises, U.S. trade deficits only grow
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Data: U.S. Dept. of Commerce; Chart: Chris Canipe/Axios

Axios' Neal Rothschild writes: President Trump's trade war has led to an even bigger trade deficit with China, even though it was intended to improve the trade balance. But it's not just China — deficits have increased with most of our other major trade partners, too.

Why it matters: While economists agree that trade deficits aren't a good way to measure a trade relationship, they are the metric Trump fixates on, makes campaign promises about, and uses to evaluate relationships with other countries.

  • Throughout his campaign, Trump vowed that he would wipe away the U.S.' trade deficits: "You will see a drop [in the trade deficit] like you’ve never seen before.”

Reality check: Among the U.S.' 15 biggest trading partners, the trade balance has moved in the wrong direction for Trump in 10 of those countries between 2016 and 2018, while the aggregate trade deficit has jumped from $503 billion to $628 billion.

  • While Trump can explain the deficit spike with China as a short-term sacrifice for long-term benefit, it doesn't account for the wider trend.

The latest: The U.S. trade deficit in the first 6 months of 2019 is even bigger than in the last two years.

What's going on: Trump's tax cuts are as much to blame for the increase in the trade deficit as anything else.

  • More money in Americans' pockets leads to more consumption, often of Chinese-made goods.
  • The tax cut helped boost the value of the dollar, which makes imports to the U.S. relatively cheaper.

The big picture: Trade deficits mean we buy more from a country than they buy from us, but that doesn’t necessarily mean the relationship is unfair, writes Axios business editor Dan Primack.

  • For example, you have a “trade deficit” with your local grocery: You give them money and get food in return.

Between the lines: Despite the dubious merit of the trade deficit as a useful barometer of the health of a trade relationship, Trump's obsession with the number has led to strained relations with key allies.

  • As Axios' Jonathan Swan reported in 2018, the trade deficit is one of the items he always wants to be briefed on before meeting with a foreign leader.
  • Trump picked a fight with Prime Minister Justin Trudeau over the trade balance, later acknowledging that he made up numbers in arguing that the U.S. has a trade deficit with Canada. It has a surplus.
  • Coupled with immigration, the trade deficit has been a major source of Trump's animus toward Mexico.
  • It led Trump to threaten auto tariffs on Europe.
2. The cigarette market Altria and Philip Morris can't touch
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Reproduced from a Wall Street Journal chart; Data: Euromonitor International; Chart: Axios Visuals

The share prices of Philip Morris and Altria have continued to fall since news of their possible merger, but that's not because traders are bearish on cigarettes.

What's happening: The cigarette business is booming, just not in markets where Philip Morris — the international leader outside China that spun off in 2008 — has a major footprint.

The intrigue: China is the world’s largest tobacco market by far, outselling just about every other market on the planet combined, according to data from Euromonitor International.

  • Almost all of the cigarettes made and sold in China come from China National Tobacco, or CNTC.
  • Investors are trying to get into the Chinese cigarette market, but their only option "is a very poor proxy for the Chinese cigarette industry," Jacky Wong writes for WSJ.

Go deeper: China’s red-hot tobacco stock is cooling (WSJ)

3. Tariffs start to dent consumer sentiment
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Data: University of Michigan Surveys of Consumers; Chart: Axios Visuals

Consumer sentiment fell to its lowest level since October 2016 and dropped by the most since December 2012, according to a survey by the University of Michigan released Friday.

Why it matters: The decline in sentiment was attributed largely to negative references to tariffs and the U.S.-China trade war, said Richard Curtin, the survey’s chief economist. Tariffs were mentioned "spontaneously" as a negative force by 1 in 3 respondents.

What they're saying: “The August data indicate that the erosion of consumer confidence due to tariff policies is now well under way,” Curtin said.

  • “Compared with those who did not reference tariffs, consumers who made spontaneous negative references to tariffs also voiced higher year-ahead inflation expectations, more frequently expected rising unemployment, and expected smaller annual gains in household incomes."
  • “This could result in a much slower growth in consumption and the overall economy.”

Of note: Michigan's data remains at historically high levels but has been falling consistently since May, while a measure of consumer confidence conducted by the Conference Board has been much more resilient.

4. TMC: The Macrisis Continues

With the re-imposition of currency controls, Argentine President Mauricio Macri has essentially returned the country to what it was under former Peronist President Cristina Fernández de Kirchner, just in much worse shape.

The backdrop: Macri came to office as a center-right market pragmatist in 2015 riding a wave of investor enthusiasm and pledging to unleash the economy after years of government intervention, like capital controls, that it had seen under Kirchner.

He issued billions of dollars in new sovereign debt, including a 100-year bond investors at the time said was largely the result of hubris, and is now looking to write off some of that debt in a process his administration has termed “voluntary reprofiling” that's eerily similar to Kirchner's proposals.

  • During his presidency, inflation has skyrocketed, poverty has increased and the economy has been mired in recession for 3 of his 4 years in office.
  • The peso, trading at around 13-to-1 with the U.S. dollar when his term began, now trades at around 60-to-1.

What they're saying: “Argentina is in a virtual, hidden default," leading presidential candidate Alberto Fernández said in response to the government's measures and market's reaction.

  • Last week, ratings agency Fitch concurred, cutting Argentina's debt ratings to RD (restricted default).
  • Credit default swaps are pricing in more than a 90% chance of a full default within 5 years.
  • Argentina’s sovereign bonds are now trading below 40 cents on the dollar, around the level associated with default.
5. Pushing the pound toward parity with dollar

U.K. Prime Minister Boris Johnson looks set to call for a snap general election on Oct. 14 if he loses a no-deal Brexit vote in Parliament this week, Bloomberg reports, citing a senior U.K. official.

Why it matters: It's the latest in the litany of Brexit back-and-forth that has left the market reeling and most of Britain uncertain about the future.

What happened: The pound fell nearly 1%, near its lowest level in a year, and is again testing its early August lows when it reached the weakest against the dollar since 1985.

  • Sterling has fallen more than 7% in the past 3 months, the worst performance among major developed-market currencies.

The big picture: The British pound also has been hit by a wave of negative data about the U.K. economy.

  • Most recently a major manufacturing survey showed the industry is solidly in contraction. The IHS Markit/CPS manufacturing PMI dropped to 47.4 from 48.0 in July, a full point lower than the median forecast in a Reuters poll of economists.
  • Britain’s economy shrank overall last quarter, largely based on companies stockpiling goods in advance of the original March Brexit deadline and a slowdown in manufacturing and business output.
  • If the economy shrinks again this quarter the country will officially be in recession.

What's next: The combination of Brexit uncertainty and the economic weakness has a growing number of fund managers betting sterling will continue falling until it hits parity with the dollar.

  • BlackRock's Rupert Harrison recently said he sees the pound hitting 1-to-1 with the greenback, following a similar parity call from Morgan Stanley in July.
Dion Rabouin