Was this email forwarded to you? Sign up here.
- A judge ruled Qualcomm "strangled" competition and used its dominant position to demand excessive licensing fees, violating the law. (WSJ)
- The U.S. is considering adding Hikvision and several other Chinese tech companies to a blacklist that bars them from U.S. components or software. (Bloomberg)
- Judy Shelton, a former economic adviser to President Trump and a potential Fed nominee, said she would like to see the market play a bigger role determining U.S. interest rates. (WSJ)
- The threat of nuclear war is at its highest since World War II, a senior UN security expert said on Tuesday. (Reuters)
1 big thing: Investors buy the trade war dip
Despite warnings from economists that the U.S-China trade war could cause a global economic recession, investors have been buying rather than selling.
What's happening: Both institutional investors and hedge funds have gone bargain-hunting in the weeks since President Trump reignited the trade war by increasing tariffs on Chinese imports to 25%. Investors remain largely convinced that the public squabble between the 2 countries is bluster, and that a deal is likely sooner rather than later.
Details: Bank of America-Merrill Lynch equity analysts said Tuesday its clients "bought the dip" for the second straight week, with $2.2 billion worth of cash flows to stocks, "which may suggest optimism that a deal will be reached and global growth will continue to recover," Jill Carey Hall, an equity and quantitative strategist at BAML, wrote in a note to clients yesterday.
- To wit, the bank's data shows 85% of investors expect a deal on trade while just 10% expect further escalation. Investors' survey responses imply only a 17% probability of a recession in the next 12 months.
The intrigue: Even at the height of selling, when the market sank 5%, investors were not panicking. Data from Deutsche Bank found that net long positions in equity futures — which were at the top of their historic range before the selloff — have only fallen modestly and remain above average levels.
- The selloff was even weak compared to traditional pullbacks after a long stock rally, like the one the U.S. market has seen for much of 2019.
- That leaves the market "vulnerable in the near term," Deutsche Bank Research strategist Parag Thatte said in a note.
But data shows that investor confidence may be misplaced, as tariffs are already starting to make an impact. Goldman Sachs analysts note that U.S.-China trade is showing significant slowing in items hit by initial tariffs on steel and aluminum imposed by Trump in early 2018.
Even so, fund managers remain bullish and hedge funds have significantly cut back on defensive positioning, Masanari Takada, a quantitative strategist at Nomura, said in a note to clients.
- "It would appear that the majority of hedge funds do not expect another sharp rise in volatility, and that they have concluded that the correction has run its course."
Bonus: The market's tailwinds
Stock buyers have a number of reasons to be bullish beyond an inured belief that Trump is a studio gangster.
- Fed funds futures prices show investors see a 66% chance the central bank will cut U.S. interest rates at least once by December, with chances of a rate cut at its June meeting recently rising above 10%.
- U.S. companies also are increasing stock buybacks, with BAML's data showing corporate clients bought 23% more of their own shares than at the same time in 2018, which was a record high year for buybacks. The week's buyback buying totaled the 8th largest increase in the bank's data history.
- On China's side, economists expect the People's Bank of China and its politburo to approve more stimulus to help buoy the economy. MSCI's Asia Pacific Index posted its first back-to-back gain in a month Tuesday, led by a more than 1% rally in China.
2. Existing home sales disappoint again
The April reading of U.S. existing home sales missed expectations on Tuesday, adding another losing month to a long trend on a year-over-year basis.
The big picture: After sales fell by almost 5% month-over-month in March, which was the biggest drop since November 2015, there was hope April would show a major pickup. That didn't happen, but LendingTree chief economist Tendayi Kapfidze tells Axios it's still too early to panic.
- "In many ways a slowdown was inevitable given the affordability challenges in the market. Home prices have risen about 3 times the pace of incomes since 2012, which can’t go on forever."
Mortgage rates fell for the 4th straight week, with the 30-year fixed rate mortgage hitting its lowest level since January 2018, the Mortgage Brokers Association reported this morning. That should help boost next month's reading, Kapfidze added.
- "Mortgage rates have been falling since November 2018, while prices have moderated. And yet the figures might not match the analysts' optimism."
3. The diamond market gets cloudy
Aside from oil and lean hogs, 2019 has been a tough year for commodities. Coffee prices have fallen 9%, natural gas is 11% lower and soybean prices have fallen 7% to name just a few. The diamond industry is also in a slump, Bloomberg reports.
- De Beers revealed Tuesday its diamond sales fell to a 2-year low, underlining a slump in the industry worldwide.
- Sales fell 25% from a year ago and were down 29% from an offering last month.
What's happening: "Diamond miners are struggling across the board, especially those producing cheaper and smaller gems where there is too much supply," writes Bloomberg's Thomas Biesheuvel.
- Diamond miners also have been hit by a shortage of financing for buyers and stagnant end demand.
- The Indian rupee's weakness against the dollar has made gems more expensive for Indian manufacturers, who cut or polish about 90% of the world’s stones.
4. Female CEOs gain little ground in "developed" countries
Companies made progress in hiring women as CEOs in 2018, but those companies were mainly located in emerging markets. Developed world countries, especially North America and Japan, showed little to no pickup in hiring women at top positions, data from PwC shows.
- Women made up less than 5% of incoming company CEOs globally last year, which was down from a record high of 6% in 2017.
The utilities industry had the largest share of women CEOs at 9.5% followed by Communication Services and Financial Services at 7.5% and 7.4% respectively.
5. Fitch issues a warning on shadow banking
Banks are healthier and taking on less risk, but that doesn't necessarily mean that the financial system is safe. The risk has largely just moved outside the banking system to the so-called shadow banking industry, ratings agency Fitch said Tuesday.
What it means: Shadow banks are financial institutions outside the traditional banking sphere that aren't governed by U.S. banking regulations.
- "Shadow banking's ascension may signal growing systemic risks."
- "Shadow banking [is] exhibiting notable post-crisis growth, driven by bank regulation, low interest rates, the favorable economic backdrop and the growth of financial technology."
Why it matters: The risks could include "direct and indirect exposures faced by banks, insurance companies and pension funds, reduced financing availability for banks and non-financial corporate borrowers, and increased asset price volatility," Fitch analysts note.
- The shadow banking industry held $52 trillion globally, 13.6% of total financial assets, at the end of 2017. That's up from $30 trillion at the end of 2010, according to the Financial Stability Board.