Sep 24, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Was this email forwarded to you? Sign up here. (Smart Brevity count: 1,042 words, 4 minutes.)

Situational awareness:

  • The U.K. Supreme Court in an unanimous ruling declared Prime Minister Boris Johnson's decision to suspend Parliament until mid-October unlawful. (Bloomberg)
  • Anheuser-Busch InBev is pushing forward with the IPO of its Asia-Pacific business at the lower end of the latest projected range between $3–$4, and raising about half of what it projected when it tried to list the unit in July. (FT)
  • France, Germany and the U.K. officially accused Iran of conducting last week's attack on Saudi Arabian oil facilities. (Reuters)
  • Facebook acquired CTRL-labs, a New York startup that specializes in allowing humans to control computers using their brains in a deal said to be between $500 million and $1 billion. (CNBC)
1 big thing: The eurozone economy is getting worse
Expand chart
Data: Investing.com; Chart: Lazaro Gamio/Axios

ECB president Mario Draghi and a spate of data releases from IHS Markit on Monday painted an incredibly somber picture of the economic situation in the eurozone.

What they're saying: “Recent data and forward-looking indicators — such as new export orders in manufacturing — do not show convincing signs of a rebound in growth in the near future,” Draghi told the European Parliament’s Committee on Economic and Monetary Affairs.

  • It was a far cry from "Whatever it takes," the 3-word mantra that Draghi is best known for saying in the midst of Europe's 2012 downturn.

What they're (really) saying: Phil Smith, an economist at IHS Markit, which compiles the reports on manufacturing and service sector activity, was far less kind.

  • “The manufacturing numbers are simply awful," he said in a statement accompanying the release.

Why it matters: The eurozone looks like it's headed for recession, if it isn't in one right now. And, as Draghi pointed out, there's little on the horizon that gives much hope for the future.

  • “The longer the weakness in manufacturing persists, the greater the risks that other sectors of the economy will be affected by the slowdown."

The big picture: The ECB has cut interest rates to -0.5% and will begin pumping around $22 billion a month into the economy through its bond buying program, but its president has used his last 2 public appearances to warn that it's not enough.

  • “We need a coherent economic strategy in the euro area that complements and enhances the effectiveness of monetary policy,” Draghi said.

Between the lines: The data back up his point. The eurozone as a whole had its worst reading on manufacturing in 7 years in September while Germany's manufacturing sector showed its worst reading in a decade. The services sector is also starting to slip.

  • "All the uncertainty around trade wars, the outlook for the car industry and Brexit are paralyzing order books, with September seeing the worst performance from the sector since the depths of the financial crisis in 2009,” Smith added.
  • “With job creation across Germany stalling, the domestic-oriented service sector has lost one of its main pillars of growth. A first fall in services new business for over four-and-a-half years provides evidence that demand across Germany is already starting to deteriorate.”
2. Money managers fear recession is coming, but still like stocks

More than half of money managers think a global economic downturn is likely next year, a survey of 200 institutions that oversee $4.1 trillion in assets found.

  • It was the first time the survey conducted by Absolute Strategy Research has shown a recession likelihood greater than 50% since the survey began in 2014.

Why it matters: “People have definitely bought into the bearish macro view,” said ASR's head of research David Bowers, according to the Financial Times. “When you look at the pattern over the past four or five years, it is definitely quite an important inflection point.”

  • However, the survey also suggests investors are betting that monetary policy will help calm the waters and have continued to buy risky assets like stocks.
  • “They haven’t gone maximum defensive,” Bowers said. “People are thinking the cavalry is going to come quickly to create stimulus to provide that turnaround.”
3. EM debt trading drops in Q2

Investors soured on emerging markets debt in the second quarter, data from trade association EMTA shows.

By the numbers: EM debt trading volumes fell to $1.211 trillion in Q2, down 12% from their Q1 levels and 9% lower than trading volumes in the second quarter of 2018.

What's happening: The decline is due largely to selling in local currency bonds, which have performed poorly as most EM currencies have struggled against the dollar so far this year, Eric Fine, managing director and portfolio manager at Van Eck, said in the report.

  • Trading in EM bonds that are issued in dollars, euros and other so-called hard currencies saw increased flows, as investors continued to search for yield in the face of negative interest rates in many developed markets.
4. Turks are hoarding lids
Expand chart
Data: Investing.com; Chart: Axios Visuals

Turkey’s new central bank governor has cut the country's interest rates by 7.5 percentage points in the past 2 months and the Turks are behaving as if the country is headed for another bout of strong inflation.

The intrigue: The uncertainty in the country is growing such that supermarkets can't keep lids on their items.

  • Lids are becoming so hard to find that people are literally stealing them off the shelves, Bloomberg's Taylan Bilgic reports. In fact, they are becoming a "black market item," according to supermarket workers in Istanbul's working-class Gungoren neighborhood.

What's happening: "As Turks hunker down for the winter, a time of higher food prices, they've traditionally turned to home canning to stretch the summer harvest, cooking vegetables and fruit and pickling them to stock up for the colder months," Bilgic writes.

  • "An unprecedented shortage of lids, used to keep a tight seal in place, is giving a glimpse of the urgency that many Turks feel about the task this year."

What they're saying: "People think prices will surge in the winter, so they take precautions," Ibrahim Bilici, the owner of a dollar store, told Bilgic.

  • "I've been doing this job for almost 30 years. I've never seen anything like this."
  • Still seared in people's minds are memories of a spike in the cost of fresh fruit and vegetables, whose annual price increases peaked at almost 73% in April.
5. Gold miners shun big projects

Add gold mining companies to the list of industries wary of spending in this economy.

  • The trade war has dented CEO confidence and many companies are holding off on capital expenditures and large investments, but gold mining companies have typically splurged when prices of the precious metal have risen.

What's happening: Gold prices rose to a 2-week high on Monday, as the awful manufacturing and growth numbers from the eurozone urged investors to buy safe-haven assets, and the commodity is again rising toward an all-time high. But gold mining companies are being cautious. WSJ's Alistair MacDonald writes...

  • "Gold miners say they aren’t planning the same sort of megaprojects and acquisition sprees that characterized the last ramp up in prices in the years ahead of 2011. Instead, wary of volatile prices, they plan to pay down debt and return money to shareholders."
  • "Many companies, including the world’s largest gold miner, Newmont Goldcorp Corp., say they will only approve new projects if they can make money with gold at $1,200, about 20% below where the metal currently trades."
  • "Gold prices also have spent the majority of the eight years since 2011’s bust trading above that level, underscoring how conservative companies have become."
Dion Rabouin