Jun 17, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • India announced it's imposing higher tariffs on 28 U.S. products after Washington withdrew the country's preferential trade status. (Axios)
  • The FAA could start flight trials of Boeing's proposed 737 MAX safety enhancement as early as this week. (WSJ)
1 big thing: Waiting for confirmation

Federal Reserve Board Chairman Jerome Powell walks up to speak during a news conference. Photo: Mark Wilson/Getty Images

The market has stopped paying much attention to Fed Chair Jerome Powell's long-range forecasts and the Fed's future guidance and will merely be looking for confirmation of its expectations at this week's Fed meeting.

  • Markets are now looking to data — including the value of the stock market — rather than central bank predictions as the road map for policy.


  • When Powell and the Fed predicted they would raise rates 3 times this year in November, the market priced in a 20% chance of it happening and had written that down to 7% by the end of the month, CME Group's FedWatch tool shows.
  • When the Fed lowered that prediction to 2 rate hikes in December, the market priced in a 9% chance of 2 hikes and by month end had cut the probability to 0.5%.
  • Powell has stressed at every meeting in 2019 that the central bank will be "patient" and "on hold" this year, but the likelihood of that being the case peaked in March at 96% and has fallen since.
  • Fed fund futures prices show investors see just a 1% chance interest rates remain in their current 2.25%–2.50% range by the end of December.

The big picture: Not only does the market see virtually no chance the Fed continues to hold, futures prices show investors see it as more likely that Powell and company cut rates at every meeting this year than that rates stay at their current level.

Why it matters: Though no rate changes are expected, with meetings this week from the Fed, Bank of England and Bank of Japan, investors are expecting that central banks will again pivot and signal another round of coordinated global policy easing is coming to flood the world with more capital and liquidity.

  • At this time last year, the market was expecting global coordinated tightening to slow speculation and rein in asset bubbles.
  • There's also growing worry that monetary policy is losing its effectiveness and an expectation that central banks will be forced to resort to more extreme and unusual measures to stimulate the weakening economy.

Go deeper: From April — The Federal Reserve looks to be laying the groundwork for interest rate cuts

Bonus: Rate cut bets
Expand chart
Data: CME Group's FedWatch Tool; Chart: Chris Canipe/Axios

Fed fund futures prices show investors see a rate cut by year end as a virtual certainty.

  • Expectations that the Fed will cut rates twice by December have risen to almost 90%, up from a little more than 30% in early May.
  • Bets on 3 or more cuts have increased to around 55%, up from just 7% a month ago.
  • Chances of a cut at this week's policy meeting are almost 20% and the likelihood of a cut next month has risen to 69%.
2. Emerging countries issue a flood of new bonds

Ukraine sold 1 billion euros of 7-year bonds in its first offer to international markets under new president, and former comedian, Volodymyr Zelensky who was elected in April.

  • The bonds came with a coupon on 6.75%, a far cry from the 10.5% yield on 7-year issues in January.

The bond issue could not have come at a better time. Ukrainian bond yields spiked last year as emerging-market debt sold off broadly, and as Zelensky rose in polls, because of uncertainty about his economic strategy and ability to deal with Russia.

Why it matters: Ukraine's latest offering comes amid a flurry of new bond issuance, particularly from emerging markets, as declining interest rates in the U.S. and Europe (where German government bond yields have hit all-time lows) are encouraging countries to load up on new debt.

  • Last week Indonesia, Croatia, Lithuania, Ukraine, Peru and Serbia all announced plans to issue new bonds, with the first 4 successfully completing debt sales. Ecuador is said to be in talks to issue new bonds as well.

The big picture: Emerging market countries and corporate entities have already issued a record amount of debt and look poised to increase the total further this year. Higher debt will put increased stress on balance sheets in the event of a global economic downturn.

3. Investors are dubious of Africa's new cocoa cartel
Expand chart
Data: Investing.com; Chart: Axios Visuals

Investors aren't buying the idea of a potential Organization of Cocoa Exporting Countries, and cocoa prices sank late last week after rallying to an 11-month high.

Driving the news: Ghana and Ivory Coast reached an agreement not to sell cocoa for less than $2,600 a ton for the harvest that will begin in October 2020. The two African nations account for 60% of the world's cocoa production. That sent cocoa prices to $2,552 Wednesday.

  • But investors aren't convinced the agreement will hold and Ivory Coast's strong planting season this year has markets convinced the world will be flush with enough cocoa to drag prices lower.
  • Cocoa prices were well above $3,000 a ton for most of the period from 2014 to 2016, but have fallen since.

What's next? Ivory Coast and Ghana say they are setting the price floors to improve pay in the industry, but to make a real impact, Ivorian President Alassane Ouattara and Ghana's Nana Akufo-Addo should focus on processing cocoa, rather than just growing it, Reuters' Ed Cropley writes for Breaking Views.

  • "Of the $100 billion spent annually on chocolate, the African Development Bank reckons the continent keeps just $5 billion. As with other commodities like diamonds or crude oil, the labour-intensive work happens elsewhere. According to International Cocoa Organization figures, Ivory Coast ground just 559,000 tonnes of beans last year less than the Netherlands.
  • "Building a processing sector requires lots of investment and expertise, but Indonesia shows what is possible. In 2010, 80% of its 500,000 tonnes of cocoa exports were beans, according to an analysis by Fitch Solutions. In 2017, that proportion had fallen to 5% as production of cocoa butter, paste and powder soared. Making a similar switch in West Africa really would be sweet."
4. The latest on the U.S.-China trade war

UBS placed the chief economist of its Wealth Management division on leave after a Chinese financial group suspended business with the bank because of comments about swine flu in China. No one is quite sure what about the remarks was offensive and the man leading the charge that they were "distasteful and racist" refused to explain how.

Ford is looking into building more cars in China, instead of exporting them from the U.S., as tariffs on imports of U.S.-made vehicles to China reach 40%.

The stock market has lost about $3 trillion of value because of the trade war, J.P. Morgan’s global head of quantitative and derivatives strategy Marko Kolanovic says. He argues that stocks were rising at an above-trend pace, but have stalled for 18 months. "If one takes that the average annual return of U.S. equities was around 7%, the estimated cost of the trade war so far is about $3 trillion…the market damage is about 100 times the tariffs collected, so it’s clearly not making the country richer."

5. Puerto Rico's debt gets a big haircut

Puerto Rico reached an agreement with bondholders on restructuring around $35 billion of its debt, which accounts for close to 50% of the bankrupt island’s total.

Details: The agreement calls for forgiveness of more than a 60% for all $35 billion, a 36% haircut on pre-2012 general obligation or “GO” bonds and a 27% haircut on public authority bonds that carry a constitutional payment guarantee.

  • The plan would reduce Puerto Rico's related bonds outstanding to less than $12 billion, according to an announcement from the Financial Oversight and Management Board for Puerto Rico.
  • "The agreement is an important element of a plan of adjustment that would allow Puerto Rico to emerge from bankruptcy early next year," the announcement said. "The Oversight Board expects to file that plan of adjustment for the Commonwealth within the next 30 days."

But, but, but: Puerto Rican Gov. Ricardo Rosselló's top finance adviser, Christian Sobrino, tells the Wall Street Journal that the government doesn't support the proposal because it's based on a fiscal plan that cuts pension benefits.

Dion Rabouin