Oct 10, 2019

Axios Markets

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Situational awareness:

  • Fidelity Investments eliminated trading commissions on stocks, ETFs and options, becoming the latest online brokerage company to do so. (WSJ)
  • The White House is considering rolling out a currency pact with China as part of a limited deal that would suspend tariff increases set to begin next week. (Bloomberg)
  • PG&E shares fell by as much as 28% after a ruling from a California judge opened the door to a fight over the best path out of bankruptcy, pitting the troubled utility against bondholders led by Elliott Management. (Reuters)
1 big thing: The end of stock market corrections

Illustration: Eniola Odetunde/Axios

Normally the health of business in a country is what drives its asset prices, but that's not what's happening at the moment, according to Deutsche Bank Securities chief economist Torsten Slok.

What's happening: The S&P 500 has risen by around 20% so far this year, despite weakening U.S. economic data and a slowing labor market. Earnings growth, typically the bread and butter of equity market returns, was negative in the second quarter and is expected to be negative in the third and fourth quarters as well.

  • U.S. GDP growth is expected to be lower in the second half of the year than in the first and lower still in 2020, a negative picture for the country's growth outlook and that of its public companies.

What we're hearing: Slok, a typically even-handed economist, expressed his disbelief at the decoupling of asset prices from growth in a recent note to clients.

  • "Perhaps the answer is that equity and credit markets are no longer driven by fundamentals, but instead by Fed and ECB promises of lower rates, more dovish forward guidance, and QEternity."
  • "In short, because of unlimited central bank safety nets — including in the new MMT form of aggressive fiscal policy — S&P500 may not decline, and credit spreads may not widen next time we enter a recession."

Why it matters: This isn't the way public markets are supposed to function.

The big picture: In an email exchange, Slok asserted that there were 3 reasons "this time is different" from other Fed "puts," or bets by investors that central banks will step in to lower rates if stock prices get too low.

  1. The Fed is actively responding to asset prices. "This shows that the Fed is directly trying to ease financial conditions" and "trying to limit declines in the stock market and widenings of credit spreads."
  2. The ECB has re-started QE which is also aimed at boosting prices of risky assets."
  3. Central banks are effectively "promising" fiscal expansion, which is "a whole new narrative" in markets. "This has introduced a new safety net under risky assets. Put differently, why would I sell equities today if governments and central banks are about to do a big fiscal expansion financed partly by the central bank balance sheet."

The bottom line: Asset managers and economists have long suggested the Fed and other central banks are overly concerned with stock prices. But, as the chief economist at a major investment bank, Slok is one of the first in his position to allege stock prices could be this influenced by central bank policies.

2. Hedge funds continue to underperform
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Data: eVestment; Table: Axios Visuals

Hedge funds saw overall negative returns for the second month in a row in September and ended the quarter slightly negative, underperforming both the S&P 500 and a fund tracking 50% stocks and 50% bonds from around the globe, per eVestment data released Wednesday.

The big picture: Diversity within hedge funds continued to be a major theme, as fixed income and credit funds delivered positive gains last month, but broad financial derivatives funds returned losses of nearly 4%, dragging down the overall industry figures.

  • Size was a major diversifier again, with the 10 largest hedge funds generating solidly positive returns, and the 10 largest long/short funds turning in the best overall performance by size during the month.

Of note: Russia and China-focused funds have been the best performing funds of all types tracked by eVestment so far this year, delivering returns of nearly 16% and 15%, respectively.

3. U.S. retail imports are surging ahead of new tariffs
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Data: National Retail Federation, Hackett Associates; Chart: Axios Visuals

Ahead of expected tariff increases on consumer goods from China, imports at the nation’s major retail container ports are expected to hit their highest level of the year again in November.

  • This year also is expected to top 2018's record high for retail imports, according to a report from the National Retail Federation and Hackett Associates.

Why it matters: The report is the latest data point to show that President Trump's trade war is spurring an increase, rather than a decrease, in buying from China and other foreign exporters. The pace of imports at retail container ports has consistently risen during Trump's time in office.

What they're saying: “This is the last chance to bring merchandise into the country before virtually everything the United States imports from China comes under tariffs,” Jonathan Gold, NRF VP for supply chain and customs policy, said in a statement.

  • “Retailers are doing all they can to mitigate the impact of tariffs on their customers. The effect on prices will vary by retailer and product during the holiday season, but ultimately these taxes on America businesses and consumers will result in higher prices.”

The bottom line: New tariffs on a range of Chinese goods took effect at the beginning of September and are scheduled to be expanded on Dec. 15 — covering nearly every good traded between the 2 countries.

  • The Trump administration also plans to increase tariffs on $250 billion worth of imports already imposed over the past year to 30%, from 25%, on Oct. 15.
4. The Fed's September rate cut now looks even more controversial

Minutes from the Fed's September policy meeting were released Wednesday, showing there was likely more opposition to its rate cut than just the 2 dissenting votes that were cast.

Details: The minutes showed debate had grown about when the Fed should stop cutting rates and "several members" wanted to keep rates on hold.

  • The term "several" also was used to describe the number of officials who believed recent data showed inflation was nearing the Fed's target.
  • "A few" officials said they believed the market was pricing in too much policy easing from the Fed.

Be smart: One thing has become abundantly clear after the release of the Fed's minutes and Chair Jerome Powell's speech in Denver on Tuesday: the Fed is going to start buying U.S. Treasury bills.

  • "Bill purchases seem like a near certainty, and the size of the net buying could be in the hundreds of billions of dollars over the next year and a half," Bob Miller, BlackRock’s head of Americas fundamental fixed income, said in a note.
5. Job openings and hiring both slowed in August
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Data: U.S. Bureau of Labor Statistics; Chart: Axios Visuals

The U.S. job market remains strong, with more job openings than unemployed people seeking a job, but companies are starting to put some hiring plans on hold.

The big picture: The U.S. had 7.05 million job openings at the end of August, the Labor Department reported on Wednesday, but after torrid increases over the past 2 years, the number of jobs businesses have to offer is beginning to turn lower, but not because firms are filling the positions.

  • The Labor Department's job openings and labor turnover survey, or JOLTs, showed the number of job openings was 4.4% lower than it was a year earlier, falling for the third straight month.
  • The total number of workers hired to new jobs also was lower in August than in the same month in 2018.