Jun 19, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • California's PG&E agreed to pay $1 billion to 14 local governments to cover damages from the deadly wildfires caused by its downed power lines, a sliver of the more than $30 billion in potential damages it faces. (AP)
  • Japanese companies think Japan's economy will likely stop expanding this year and next, with most calling for fresh stimulus to prop up growth. (Reuters)
  • CBS is preparing to make an offer for sister media company Viacom in the coming weeks. (WSJ)
  • The Fed will announce its decision on U.S. interest rate policy today, on the heels of news President Trump wanted to fire or demote Chairman Jay Powell. (CNBC)
1 big thing: Despite big headlines, IPO activity has slowed in 2019

Stock information is displayed on a monitor at Nasdaq's office in Times Square. Photo: Drew Angerer/Getty Images

Multibillion-dollar stock market debuts from companies like Zoom, Uber and Pinterest have grabbed headlines in 2019 with eye-popping numbers, but new data shows IPO activity actually declined significantly this year, globally and in the U.S.

What's happening: Capital raised for both domestic and cross-border IPOs fell by 37% year-over-year, with volume down 34%, multinational law firm Baker McKenzie reports.

  • The decline from 2018's first 6 months was sharper than expected, with a total of $69.8 billion raised through June across 514 deals, the lowest for both measures since 2016.
  • Cross-border IPO activity fell particularly hard, with a 16% drop in volume and a 55% drop in value compared to 2018.
  • One asterisk to the numbers: the prolonged government shutdown that froze IPO filings for much of January.

Why it matters: A global slowdown in mergers and acquisitions, manufacturing and now capital generation and IPOs shows that 2019 has been an especially tough year for business.

  • The drop in cross-border IPOs may reflect yet another way commerce is being slowed by growing nationalism and fading globalization.

On the other hand: While 2019 has hardly been the best of times, Tom Rice, partner at Baker McKenzie, expects the second half of the year to show "some rays of light."

  • Rice says the U.S. stock market selloff in December coupled with the government shutdown — the longest on record, shuttering the SEC for more than a month — played a major role in the decline of both the number of IPOs and the amount of cash raised by businesses.

What's next? With those disruptions now in the rear-view mirror, Rice is confident the IPO market has strong momentum heading into the second half of the year, especially with the S&P 500 again nearing all-time highs and recent IPOs from companies like Fiverr, Beyond Meat and Chewy riding waves of bullish investor sentiment.

  • "Tensions with China may result in some slowing and more cautious activity in terms of capital formation by Chinese-operated companies looking to list in places like the U.S., but that’s only one piece of the action."

Watch this space: The one part of the world for which Rice does not have high hopes this year is Europe, where business remains paralyzed because of Brexit and the deteriorating economic environment.

Bonus: Hoping for a better second half
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Data: Baker McKenzie; Chart: Harry Stevens/Axios

Baker McKenzie notes that by the second quarter of 2019, domestic IPO transactions increased 13% from the first quarter and cross-border IPO listings increased by 7%.

  • "While geopolitical and pricing concerns have impacted markets globally, the U.S. is set to experience a burst of activity running right into the start of 2020," said Christopher Bartoli, head of North America Capital Markets for Baker McKenzie. "What we can expect to see though, is more conservative pricing among issuers in an attempt to safeguard IPO performances."
2. United Technologies' move casts doubt on tax incentives

As part of its merger with Raytheon, United Technologies expects to move its headquarters to the Boston area and out of Connecticut, the state it has called home for nearly a century.

Why it matters: A new research paper from the right-leaning Yankee Institute says it's just the latest piece of evidence that the mix of higher taxes and "economic development incentives" don't work.

What they're saying:

  • The incentives, "spend more of the state's income every year than is raised by the administration's 2015 corporate tax increases the increases that drove away General Electric and other major Connecticut corporations," Suzanne Bates, a Yankee Institute senior fellow, and Mark Gius, professor of economics at Quinnipiac University, write.
  • "The results, meanwhile, appear ineffectual: even the corporation that received the most of such incentives has recently announced plans to leave the state."

What happened: Bates and Gius' study finds that the combination of higher taxes and development grants ended up costing Connecticut taxpayers $35 million.

  • The tax increases were estimated to generate $481 million in receipts from corporations for the 2-year period, but produced just $323 million — about one-third less than projected.
  • On the other side, the state's developments grants awarded nearly $358 million in grants or loans to businesses to either move to Connecticut or to remain in the state.
3. More spent on S&P 500 buybacks than all 2018 R&D
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Data: S&P Global, Federal Reserve Bank of St. Louis; Chart: Axios Visuals

Total research and development spending in the U.S. last year totaled $608 billion, according to data from the Federal Reserve, while corporations in the S&P 500 spent $806 billion buying back their own stock. The total for all companies was well over $1 trillion.

What it means: In 2018, the 500 biggest U.S. companies spent 33% more on their stock buyback programs than the country is investing in research and development.

  • The trend looks to be continuing this year as the U.S. is on pace to spend $642 billion on R&D in 2019 and poised to surpass last year's $1.085 trillion total in buyback spending.
4. The most bearish since the financial crisis

Bank of America-Merrill Lynch latest fund manager survey shows investors are flying to safety.

What's happening: Professional investors' stock holdings saw the second-largest one-month drop on record, and the lowest investor allocation to equities since March 2009, while cash holdings jumped by the most since the 2011 debt-ceiling crisis.

  • The survey also showed global growth expectations fell by a record amount from May's survey, with net 50% investors surveyed expecting global growth to weaken over the next year.
  • A record 87% of investors surveyed say the global economy is in the late cycle.
  • A net 41% of investors said they expect earnings per share to deteriorate in the next year, the second biggest one-month collapse in the 23-year history of the survey.
  • Just 9% of fund managers expect higher global CPI in the next year, down 30 percentage points from last month and the most bearish inflation outlook since August 2012.

The bottom line: Safe-haven U.S. Treasuries, considered the risk-free asset, have become the "most-crowded trade" among BAML's surveyed managers, with 27% of those surveyed buying.

5. Draghi sends bond yields negative all over Europe
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Data: Investing.com; Chart: Axios Visuals

European Central Bank President Mario Draghi signaled that more stimulus is coming for the eurozone in a speech Tuesday morning. The new measures are likely to include the central bank lowering interest rates below the current -0.4% interest rate that already means some depositors pay the ECB to loan it money.

  • Yields on Europe's benchmark, German 10-year government bonds, fell to a new record low of -0.32% following the comments.

Interestingly, yields on 10-year French government bonds fell below 0 for the first time ever, and yields turned negative for 10-year government bonds in eurozone members Austria and the Netherlands.

More interesting, bonds are turning negative for European countries that aren't even overseen by the ECB.

  • Sweden, an EU member with its own central bank, saw its rates turn negative for the first time ever. Denmark also now has negative interest rates, as does Switzerland, which is not even a member of the EU.

What to watch: "It is important to remember that Draghi is on the way out as his term as bank President ends this fall, so it is not clear that he will preside over additional cuts before he is done," DRW Trading market strategist Lou Brien wrote in a note to clients, "but he has indeed thrown down the gauntlet to his successor, who may or may not appreciate it."

Dion Rabouin