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- Visa, Mastercard and other financial partners that signed on to help build Facebook's Libra payments network are reconsidering their involvement after a backlash from government officials. (WSJ)
- J&J reached a $20.4 million settlement with 2 Ohio counties ahead of the opioid trial scheduled to start later this month. (CNN)
1 big thing: The bears are in control now
For much of the year, equity bulls bought stocks on even the faintest hint of good news about companies or the economy, pushing U.S. indexes to new all-time highs despite a slowing economy and negligible earnings growth.
- But with the S&P 500 approaching 20% gains for the year and no real signs of growth to be found, a spirit of pessimism and increased caution looks to be gripping the market.
What's happening: Stocks have been driven higher by 3 main catalysts: hope for a resolution of the U.S.-China trade war, expectations for easier central bank policy and a strong American consumer. It's still possible that all 3 come through to boost asset prices this year, but downside risks have come to overpower optimism in recent weeks.
- The trade war is having a clear impact on not just manufacturing, but business and consumer confidence as well as capital expenditures and investment.
- Data shows countries around the globe are seeing slowing GDP growth, with some going into reverse, including in Germany and the U.K., 2 of the world's 5 largest economies.
- Extremely loose global central bank policy is failing to offset the negative impacts of slowing trade, growing uncertainty and weakening population demographics.
What they're saying:
- "The disappointing data is only fanning long-standing fears of slowing global growth," Alec Young, managing director of global markets research at FTSE Russell, wrote in a note to clients.
- "And with U.S.-China trade expected to produce little in the way of near-term breakthroughs, investors continue to favor countercyclical, defensive stocks with high dividend yields as weak data pushes interest rates ever lower," Young said.
- “Fed rate cuts are not likely to fuel equities higher as they did in the 1990s,” UBS equity strategist Francois Trahan said in a note.
- “The Fed-easing rallies of the 1990s were made possible by a strong inverse correlation between interest rates and [price-to-earnings ratios]. This relationship no longer exists today,” Trahan added.
The big picture: While most economists caution they are not expecting a global or U.S. recession in the next year, there is little on the horizon in the way of good news.
- Third quarter corporate earnings are expected to be negative for the second quarter in a row and likely will slump again in the fourth, analysts say.
The bottom line: U.S. equity investors are now seeing a brand new stock market. In this market, traders sell companies with bad balance sheets and no profitability plans, and the market goes down when leading economic indicators point toward recession.
Bonus: "The recession risk is real"
As Axios Markets readers know well, the U.S. manufacturing sector has been in recession all year, which continues to worsen with Tuesday's data from the Institute for Supply Management showing manufacturing activity fell to its weakest level since June 2009.
- The new export orders index tanked, falling to 41.0 in September, which is the lowest level since March 2009 in the throes of the Great Recession.
Why it matters: "ISM at 47.8 is bad but new export orders at 41 is even worse," Deutsche Bank Securities chief economist Torsten Slok said in a note. "There is no end in sight to this slowdown, the recession risk is real."
2. Commission fees fall, taking stock prices with them
After seeing its stock price plunge 26% in Tuesday trading, brokerage firm TD Ameritrade announced it would offer free stock, ETF and options trades, starting Thursday.
- Charles Schwab — the largest of the publicly traded brokers with 12 million customers — made the same offer to clients earlier in the day, sparking a massive selloff among the top brokerage firms.
- Interactive Brokers cut fees to zero on stocks and ETFs last week.
Threat level: Investors are worried that the race to the bottom, now clearly in full swing, will blow a hole in the profitability of online brokerage companies. Shares of the companies already were struggling this year.
By the numbers:
- Schwab's stock fell 9% on the day.
- E-Trade's stock dropped 16%.
- Interactive Brokers' stock lost 9%.
Of note: TD Ameritrade makes a particularly large (25%) share of its revenue from commission fees, according to analysts at investment bank JMP Securities.
Flashback: "Your mama pays full commission."
3. Investors already have pulled back from China
Investment in Chinese assets fell significantly this year as a combination of the trade war and increasingly attractive opportunities elsewhere spread money across a variety of locations in the emerging world.
- While the economies of many emerging countries are feeling the pressure from China's slowdown and reduced global trade, foreign investment has picked up notably this year from 2018.
Why it matters: The White House has reportedly floated the idea of cutting off U.S. investors' access to some Chinese investments, but data shows President Trump's trade war has already significantly reduced the level of Chinese securities purchased by foreigners.
What they're saying: The flow of funds out of China has largely gone to other emerging countries, particularly Saudi Arabia.
- Having just this year joined emerging market indexes, Saudi Arabia has attracted $21 billion in foreign portfolio equity inflows, "becoming the top equity investment destination among emerging markets," Jonathan Fortun, an economist at the Institute of International Finance, told Axios.
- Nigeria and Ukraine also have seen significant inflows as investors pull back on Chinese assets, Fortun said.
Yes, but: Chinese investments bounced back in September when emerging market stocks and bonds registered nearly $38 billion of inflows, according to IIF data released Tuesday.
- That was one of the strongest months this year, and Chinese stocks drew $9.2 billion, a substantial increase over August's $1.6 billion inflows.
4. Buckle up: GM, Michigan and 2020
Axios' Joann Muller writes: The UAW strike against GM is now in Week 3, and the longer it lasts, the worse Michigan's fragile economy becomes — with huge potential consequences for the 2020 presidential race.
Why it matters: Michigan, which voted twice for Barack Obama then narrowly flipped to Donald Trump in 2016, will be a key battleground state in next year's election. A loss in Michigan would raise the stakes for Pennsylvania or Wisconsin. Meanwhile, other states with large auto-worker populations are watching.
- "If the strikes goes on, the economic ripples will threaten Trump’s presidency," says Anderson Economic Group CEO Patrick Anderson, who has been studying the effect of local pocketbook issues on national elections since 2004.
Where it stands: The GM strike is now 17 days old, and the pain is starting to spread across Michigan — home to about half the 46,000 striking auto workers — and beyond.
- Workers faced their first payday without a check last Friday, but $250 in weekly strike benefits kicked in this week.
- Employees at some supplier companies as well as GM plants in Canada and Mexico have been laid off due to parts shortages.
- GM is losing an estimated $25 million a day, and $113 million in profits to date.
"Workers who are on strike pay are not yet pushed to the wall, but they're certainly not going to go out to dinner and a movie right now."— Charles Ballard, economics professor, Michigan State University
Catch up fast: The strike is the first at GM since 2007 and the longest since 1998.
- Unresolved issues include wage increases, health care contributions, job security and the use of lower-paid temporary workers.
The bottom line: Workers argue that they gave up a lot to help GM through bankruptcy a decade ago and haven't gotten their share of the company's record profits since.
What to watch: Trump promised Michigan in 2016 that he'd bring manufacturing jobs back to the U.S., a promise largely unfulfilled.
- Faced with industry disruption and a looming cyclical downturn, it’s not clear he can do anything to stop it — and 33% of UAW workers voted for Trump in 2016.