Feb 5, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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1 big thing: China's central bank steps in first

Illustration: Aïda Amer/Axios

Little has changed about the fundamentals since last week's selloff that was the worst in months, but bullish stock traders have bid back all of the the S&P 500's losses and sent the Nasdaq to a new record high.

What's happening: The market continues to bet on generous central banks providing stimulus to help the global economy recover from the novel coronavirus outbreak that has stalled supply chains, closed businesses and quarantined millions of people.

  • The People's Bank of China has obliged already, cutting banks’ reserve requirement ratios and pumping hundreds of billions of dollars into markets to help stabilize the Shanghai and Shenzhen stock exchanges, which fell to their lowest levels in a year on Monday.

More is expected from China in the coming days. The PBOC is seen lowering its key lending rate and continuing to pump cash into the banking system.

On the other side: Most commodity prices have seen no such rebound thus far, with oil falling by 20% from its last high and now in a bear market. Metals like nickel, aluminum and lead also have continued to fall.

  • Copper prices, seen as a proxy for expected global growth, rose by 1% on Tuesday, but are down 8.5% year to date.

Why it matters: There are not yet signs global growth will recover from the coronavirus shock, yet the Dow is trading at a price-to-earnings ratio of nearly 20 and the Nasdaq's P/E ratio is over 29, according to FactSet data.

  • Both figures are well above historical averages and even higher than earlier this year when top investment strategists warned that valuations had gotten especially high and looked poised for a pullback.
  • Stocks will likely need strong economic growth to live up to their current valuations.
Bonus: The Baltic Dry Index is sinking
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Data: Baltic Exchange: Chart: Axios Visuals

The Baltic Dry Index, a bellwether of the maritime shipping industry, continues to sink and a main component has fallen below zero to new record low, the WSJ reported.

What's happening: The Baltic Exchange’s capesize index, a component of the Baltic Dry Index that tracks the world's largest dry-bulk carriers, dug deeper into negative territory Tuesday, after going negative for the first time ever on Friday.

Why it matters: The Baltic Dry Index is seen as representative of demand for raw materials, which can be an early indicator of increasing or decreasing global growth. The index fell by more than 90% in just a few months in 2008.

Yes, but: The index is "much more complicated than the guys on CNBC or the WSJ would have you believe," a spokesperson for the Baltic Exchange tells Axios.

  • "This is an index of freight rates. ... It’s based on the assessment at a specific time by brokers who are specialists in the various routes."
  • "It's important to remember we’re neither in the Baltic, nor an exchange."

Fun fact: The capesize index is so named because it tracks only ships too large to fit through the Suez or Panama canals that must pass through the Cape of Good Hope or Cape Horn.

2. Catch up quick

Visa is making its biggest changes in more than a decade to the fees that merchants pay when customers use their cards. (Bloomberg)

Disney beat earnings and revenue expectations and announced its Disney+ streaming service had drawn 28.6 million subscribers as of Monday, up from 10 million in November when it launched. (WSJ)

A takeover bid for eBay was made by the owner of the New York Stock Exchange, Intercontinental Exchange, valuing the company at more than $30 billion. (WSJ)

Macy's plans to close 125 stores plus its Cincinnati headquarters while cutting around 2,000 jobs. (CNBC)

Pete Buttigieg led the Iowa caucuses in delegates with 71% of votes counted. (Axios)

3. Skull analysis technique shows 70% chance of recession in 2020

There is a 70% chance of recession within the next six months, according to a new recession indicator that examines the economy using a method previously used to analyze the resemblance of human skulls.

What it means: The new indicator comes from researchers at State Street Associates and MIT's Sloan School of Management who applied the principle of Mahalanobis distance to create a predictor of economic booms and recessions they call the KKT Index of the Business Cycle.

  • "This index offers a precise probability of recession or robust growth ... by comparing key variables to the patterns that prevailed during historical episodes," the study's co-author William Kinlaw, senior managing director at State Street Associates, tells Axios.
  • It creates the new business cycle metric by incorporating U.S. data including industrial production, nonfarm payrolls, stock market return and the slope of the Treasury yield curve (10-year rate minus the federal funds rate).

What's happening: The latest reading shows that recession is more than twice as likely as high growth in the next six months. When the probability of recession last reached these levels, a recession occurred 70% of the time.

  • "This level is driven primarily by two factors: weakening industrial production and the slope of the yield curve," Kinlaw says.
  • "By comparison, the unconditional likelihood of a recession occurring in any six-month period is only 17%."

Why it matters: Going back to 1916, the KKT Index has risen "leading up to every recession so that the combination of its trajectory and level provides a reliable indicator of the likelihood of recession," the study finds.

4. S&P predicts coronavirus will stabilize by April

The novel coronavirus outbreak has continued its global rampage, but experts are beginning to see signs of improvement in detection and treatment on the horizon.

Driving the news: S&P Global announced Tuesday it expects the crisis will "stabilize globally in April 2020, with virtually no new transmissions in May. Our worst-case projection holds that the virus stops spreading in late May, and optimistically in March."

  • "Growth should stabilize later in 2020 and recover through early 2021 as the temporary effect on activity wanes."
  • "Relief measures including tax cuts and subsidies are likely. "

Yes, but: S&P analysts caution "if the disease is not swiftly brought under control, slower economic growth would exacerbate already weaker fiscal performance in many parts of the Asia-Pacific."

  • "Risk aversion and tighter financial conditions could amplify the impact, including on investment."

The big picture: Sectors impacted by the outbreak include banking, property, gaming, hotels, retail, tourism, and transport.

Don't sleep: Expectations for the outbreak's peak have already been moved back. Zhong Nanshan, who leads the special committee of China's State Committee on Health and is the epidemiologist who discovered the SARS coronavirus in 2003, predicted in January that coronavirus cases would hit their peak within 10 to 14 days of the initial outbreak.

Go deeper: What's happening with the coronavirus

5. Tesla's stock surge defies rational explanation
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Data: FactSet; Chart: Axios Visuals

Axios' Dan Primack writes: Tesla is in the midst of what might be the most lucrative one-week run in stock market history, on Tuesday gaining another $19.3 billion in market value. Since the close of trading last Tuesday, it's up another 50%.

But, but, but: Tesla also fell around $80 per share in the last five minutes of trading yesterday.

Driving the news: At this point, no one is really sure. No amount of product announcements, analyst upgrades or bullish investor predictions can satisfactorily explain this sort of meteoric rise. Nor the plummet into market close.

Dion Rabouin

Scientist George Carruthers created the ultraviolet camera, or spectrograph, which was used by NASA in the 1972 Apollo 16 flight.

  • Carruthers built his first telescope at the age of 10, and in 1964 became one of the first African Americans to earn a Ph.D. from the University of Illinois in aeronautical and astronautical engineering.
  • His spectrograph and image converter were used to identify molecular hydrogen in space.