Sep 5, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • A federal judge approved CVS Health's acquisition of Aetna, writing in an opinion that the companies' settlement of selling off Medicare drug plans "is well 'within the reaches' of the public interest." (Axios)
  • Mortgage refinance applications fell for the second straight week, dropping 3.1% last week and down 7% in the last 2 weeks, despite record low U.S. interest rates. (CNBC)
  • At least a dozen partners at Goldman Sachs are negotiating exits that are likely to be announced in coming weeks. (WSJ)
  • “The consumer is now carrying all of the weight, or much of the weight" of the U.S. economy's growth, New York Fed president John Williams said. (Bloomberg)
1 big thing: Recession fear is making companies more responsible

Photo: Getty Images

Fears of a global recession are scaring U.S. companies, pushing them to use excess capital to reduce debt and add to cash reserves, rather than levering up and making risky bets as they have in the past.

Why it matters: This newfound corporate responsibility, motivated largely by fear, could help insulate the economy from another damaging recession.

Driving the news: A "floodgate" of $25.5 billion of investment grade corporate debt unrolled yesterday, representing the highest number of issuers and the second highest amount of debt ever issued in a single day, according to Bank of America Merrill Lynch data.

  • The recent bond rush has been led by Apple, Deere and Disney, which each issued 30-year bonds with yields below 3%, a first for the corporate bond market
  • The record low yield on long-term U.S. Treasuries has companies bringing new debt to market, particularly well-known companies that can price bonds with historically low interest rates.

Between the lines: The difference between Wednesday and previous high issue days is many companies are using the new issues to refinance existing debt rather than make new purchases or spend, BAML notes.

  • "The bond boom is the corporate version of the refinancing rush that hit the mortgage market last month as homeowners moved to lock in cheaper loans," per WSJ.

Details: The investment bank's data also shows S&P 500 companies, especially in tech, have slowed the pace of stock buybacks this year, with share repurchases in the third quarter down 12% year over year so far.

  • The kind of profligate spending that was prominent ahead of the global financial crisis has been pared back significantly in recent months, with companies preparing for the economy to slow, Bernard Baumohl, chief global economist at the Economic Outlook Group, told Axios in August.

Don't forget: The Business Roundtable, an association of CEOs of the biggest companies in the U.S., recently issued a statement on “the purpose of a corporation,” arguing that companies should no longer advance only the interests of shareholders. Rather, they must also invest in their employees, protect the environment, and deal fairly and ethically with their suppliers.

The bottom line: The combination of lower debt, higher cash balances and less risky investments may not be exciting news for the stock market, but could well give the U.S. economy another leg to stand on in the face of rising global uncertainty and weakening growth.

2. Ditching ammo is likely to pay off for Walmart
Expand chart
Reproduced from CivicScience; Chart: Axios Visuals

Walmart announced Tuesday it will stop all sales of handgun and short-barrel rifle ammunition, while prohibiting customers who are not law enforcement officials from openly carrying guns in the store.

  • The decision was met with positive reviews on Wall Street, where its stock climbed more than 1% on Wednesday, and data suggests it may have more room to run.

By the numbers: Research firm CivicScience's survey of 1,986 U.S. adult Walmart shoppers found that under the change to its open carry policy...

  • 29% are more likely to shop in Walmart stores.
  • 22% are “much more likely” to shop there.
  • 19% said they are less likely, including 14% who said they are “much less likely” to do so.
  • Meanwhile, a second survey question asked to 1,471 Walmart shoppers about the ban on ammunition sales found nearly identical responses.

The intrigue: The data shows an improvement from the generally positive results of a similar survey of Dick's Sporting Goods customers conducted in March after that company announced it would no longer sell firearms.

The results: In August, Dick’s announced its strongest quarter since 2016 and raised its full year guidance, after unimpressive sales immediately following the announcement.

  • "Initial reaction to the policies is a clear net positive for Walmart, particularly given what we know about the demographic and socio-political orientation of Walmart shoppers at large," CivicScience CEO John Dick said in an email to research clients.
3. The world is drowning in plastic

More companies are starting to turn away from plastics as calls grow for more sustainable accountability from the world's top corporations.

What's happening: Marriott International, the world’s largest hotel chain, said last week it would stop stocking small plastic bottles of shampoo, conditioner and bath gel in its hotel rooms around the world by December next year.

  • The announcement follows a similar move in July by IHG, which owns Holiday Inn, Kimpton and other brands, to eliminate about 200 million tiny bottles from its hotels each year by 2021.
  • Disney also said it would replace small plastic shampoo bottles at its resorts and on its cruise ships last year and smaller companies have also pledged to take similar action.

Details: "Around the world, almost 1 million plastic bottles are purchased every minute," report Reuters' Simon Scarr and Marco Hernandez as part of a visualization project titled "Drowning in plastic" that details the swelling volume of plastics globally.

  • "As the environmental impact of that tide of plastic becomes a growing political issue, major packaged goods sellers and retailers are under pressure to cut the flow of the single-use bottles and containers that are clogging the world’s waterways."
  • "Plastic production has surged in the last 50 years, leading to widespread use of inexpensive disposable products that are having a devastating effect on the environment. Images of plastic debris-strewn beaches and dead animals with stomachs full of plastic have sparked outrage."

Go deeper: Drowning in plastic — visualizing the world's addiction to plastic bottles (Reuters)

4. Bankers fight negative interest rates

Europe’s top banking executives are joining politicians in a wide-ranging pushback against negative interest rates ahead of this month's ECB meeting.

Driving the news: Deutsche Bank CEO Christian Sewing on Wednesday warned that further reducing interest rates, as the central bank is widely expected to do next week, will "ruin the financial system" and have “grave side effects” for the region.

  • UBS CEO Sergio Ermotti also joined the chorus speaking out against negative rates, asserting that they are hurting social systems and savings rates.

The big picture: Ermotti and Sewing’s comments add to growing concerns across Europe that the ECB’s monetary policy is threatening the business of banking altogether and inducing people to stuff money in their mattresses rather than holding it in bank accounts.

  • The CEOs join financial authorities from Germany, Denmark and Norway who have recently spoken out against the deleterious effects of negative interest rates on Europe's banks.

What to watch: The disquiet has even reached the ECB's expected next president, Christine Lagarde, who promised Wednesday to review the costs and benefits of negative interest rates and bond purchases, though most expect her to continue the policies.

  • In an address to EU lawmakers this week, Lagarde said that while the impact of the ECB’s unconventional tools on Europe’s economy “continues to be positive, we need to be mindful about their potential side effects, and we have to take the concerns of people seriously.”
Dion Rabouin