Mar 18, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • Deutsche Bank confirmed merger talks with Commerzbank for a deal that would combine Germany's 2 largest banks. (Bloomberg)
  • A day after demanding that General Motors keep open a plant in Lordstown, Ohio, President Trump asked CEO Mary Barra to sell the plant or "do something quickly." (Axios)
  • The U.S. saw the largest annual increase in commercial and multifamily mortgage debt in 2018 since the Great Recession and the largest increase in multifamily mortgage debt on record. (CREHerald)
1 big thing: Mixed signals on trade

Illustration: Lazaro Gamio/Axios

As the world economy has slowed economists are beginning to look for signs of whether it's headed toward recovery or recession. One of the most popular metrics is global trade, which unfortunately is flashing divergent signals.

On one hand: Torsten Slok, chief international economist at Deutsche Bank, argues that global trade is rebounding.

The Harpex and Dry Baltic shipping indexes, which track global container and raw materials shipping, both suggest global trade bottomed toward the beginning of the year and started improving.

  • "A pre-condition for being bullish U.S., European, and Asian growth later in 2019 is that we need to see a stabilization in world trade volumes," Slok wrote in a note to clients.
  • "So the question is to what degree the observed move higher in prices is enough to signal a coming stabilization in volumes."

On the other hand: The shipping numbers are contradicted by the worsening picture in manufacturing around the world. As we detailed Friday, Germany's manufacturing numbers have been ugly and the same is true for much of the euro zone.

Globally, it's the same story. In February, IHS Markit released its most recent report on global PMI numbers, titled, "Worldwide manufacturing growth close to stalling as trade flows deteriorate."

  • The tracker fell to a 33-month low, after hitting its lowest in 27 months in January.

"The economy is spinning its wheels and not gaining any traction yet in this soft patch produced by trade wars and stock market turbulence and the government shutdown," Chris Rupkey, chief economist at MUFG, told Reuters.

Bloomberg's PMI tracker, which follows every region in the world, shows data have slowly moved two levels down from "improving" for much of 2018 to "neutral" at the start of 2019.

  • The PMI slump is "alarming in Japan, Korea and Taiwan," and "appears to reflect a disruption in global trade that may relate to US tariff policy," Greg Gibbs, analyst at Amplifying Global FX Capital, said, according to FXStreet.

U.S. PMI fell to its lowest in 18 months. Manufacturing output fell for the second consecutive month in February, the first back-to-back decline since 2017.

China, the No. 1 trading partner with most of the world, saw its PMI fall into contraction in February and record the weakest reading since February 2016.

Bonus: The Harpex
Expand chart
Data: Harpex Index; Chart: Axios Visuals

Some economists have come to prefer the Harpex Index, developed by Harper Petersen & Co., over the more well-known Baltic Dry Index (BDI) as a metric for global shipping because it follows changes in freight rates for container ships and tracks mostly finished goods.

BDI tracks freight costs for ships that typically carry bulk cargoes and raw materials like coal, ore and grain, which can be less elastic or responsive to changes in demand.

2. Lyft may draw $25 billion market cap

Photo: Igor Golovniov/SOPA Images/LightRocket via Getty Images

Lyft will begin its roadshow today, expecting to draw a fully-diluted valuation between $23 billion and $25.3 billion for its IPO.

Why it matters: That's as much as $10 billion more than its most recent private valuation in early 2018. The range will likely put the price between $62 and $68 a share, but could change by the time of the IPO.

  • If Lyft can price at the high end of the range, the newly public company would have a higher market cap than Kroger, Kellogg, Tiffany, Expedia, CBS, American Airlines, Macy's and Cintas, among others.
3. What we're learning from the Ethiopian Airlines crash

Headlines for Boeing continued to worsen over the weekend.

Driving the news: The FAA delegated the task of safety assessments for Boeing's 737 MAX jets to the company itself, which came back with several crucial flaws in an effort to catch up to Airbus and certify the planes, according to a Seattle Times report.

  • As Bloomberg notes, investigators have determined that the Ethiopian Air Boeing 737 MAX crash had similarities to the Lion Air plane that went down off the coast of Indonesia about 5 months ago.

What you may not have heard: While Boeing and its MCAS flight control system have rightfully been much of the focus, Abdi Latif Dahir of Quartz writes that the tragic incident also "showcased the significance of the Addis Ababa-Nairobi route as a vital economic and trade corridor."

  • Before the crash, the flight was seen as "a busy diplomatic track, [emblematic of] the deepening connection between two of Africa's biggest and busiest airports."
  • "The ill-fated airline also underscored how much Addis Ababa's Bole international airport has become a key gateway into Africa. Last year, the airport, which recently tripled in size, overtook Dubai as the key transfer hub for long-haul travel into the continent."
  • "In [the crash's] wake, Ethiopia was one of the first airlines globally to ground its Boeing 737 Max 8 planes."
4. Tesla's least popular unveiling yet
Expand chart
Reproduced from a Bloomberg table; Table: Axios Visuals

Investors have never responded as negatively to a debut of a new Tesla product as they did after last week's Model Y event, Axios' Courtenay Brown writes.

  • Shares fell 5% on Friday — the worst ever post-event performance for Tesla, Bloomberg reports.

What they're saying: Deutsche Bank analyst Emmanuel Rosner called the event "somewhat underwhelming with no major surprises."

Jeffrey Osborne, an analyst at Cowen, said the Model Y wouldn't ignite "elevated demand or enthusiasm for the Tesla brand."

Between the lines: Tons of questions remain about the Model Y — none of which were acknowledged at the event.

  • As Axios' Joann Muller points out, Tesla said "nothing about where it will build the Model Y or how it will afford the capital investment the new model will require."

There are also concerns the problems that plagued previous Tesla vehicles will hit the Model Y.

  • The [manufacturing] is "similar to the original timeline for the Model 3 ramp, which was ultimately delayed by 9-12 months," Bernstein analyst Toni Sacconaghi wrote in a note.
5. Trump hates "crazy" driverless cars

In President Trump's view, self-driving cars are a menace to society, Axios' Jonathan Swan writes.

Why it matters: Most Americans share Trump's perspective: 71% of U.S. drivers would be afraid to ride in a self-driving vehicle, per AAA. Yet his own administration is encouraging AV development by removing barriers and issuing voluntary guidance instead of regulations.

Behind the scenes: In conversations on Air Force One and in the White House, Trump has acted out scenes of self-driving cars veering out of control and crashing into walls. He's said he doesn't think autonomous vehicles make sense, according to four sources who've heard him discuss the subject.

In one of the early 2017 meetings with CEOs in the Roosevelt Room of the White House, Elon Musk and Trump shared a lighthearted exchange about Tesla's "Autopilot" technology. Trump told Musk he preferred traditional cars, according to a source who was in the room.

While Trump is in no hurry to see automated vehicles, Chao is actively promoting the technology.

  • Last Tuesday at the SXSW conference, Chao announced a new regulatory body to speed up the adoption of cutting-edge transportation technologies like hyperloop tunnels and self-driving cars.
  • Then on Friday, the National Highway Traffic Safety Administration said it would seek the public's opinion on an unprecedented idea: Should decades-old motor vehicle statutes be changed to allow cars with no steering wheels, pedals or gear shifts?

The bottom line: Currently, there are no federal regulations on self-driving cars — just a hodgepodge of state rules.

Between the lines: A source who has discussed autonomous vehicles with Trump says he thinks it wouldn't take much for the president to rapidly reverse his administration's hands-off approach to hands-free vehicles. Trump already calls self-driving cars out-of-control death traps, so any news fueling that fear could jolt him into action.

Dion Rabouin