Aug 18, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙 “Hurrah and vote for Suffrage and don’t keep them in doubt. ... Don’t forget to be a good boy and help Mrs. Catt with her 'rats.' Is she the one that put rat in ratification?” - See who said it and why it matters at the bottom.

1 big thing: The war against the dollar is heating up

Reproduced from Bloomberg via Bank of Russia; Chart: Axios Visuals

Experts are again sounding the alarm that the dollar could lose its role as the world's reserve currency. This is a frequent and historically unconsummated concern — but things may actually be different this time.

What's happening: New data from the Bank of Russia show the country now receives more euros than dollars for its exports to China, with the share of goods purchased in euros rising from 0.3% at the start of 2014 (and just 1.3% in the second quarter of 2018) to nearly 51% at the end of Q1 this year.

  • The share of euros Russia receives for exports to the European Union increased to 43% from 38% at the end of last year, the data show.

Why it matters: The euro is the dollar's strongest competitor, making up the second largest percentage of global currency reserves — 20% of central bank holdings versus around 60% for the dollar, according to the IMF.

Flashback: As I wrote last week, more speculators are lining up bullish bets that the euro will rise and that the dollar will fall than at any time in history, according to CFTC data.

Don't sleep: A growing chorus of investors, including billionaire hedge fund manager Ray Dalio, has worried openly in recent months that the U.S. response to the coronavirus pandemic — trillions in balance sheet expansion from the Fed and trillions in government spending while still having the world's worst outbreak — is further undercutting the dollar's supremacy.

  • Goldman Sachs currency strategists have pointed to the rising value of gold as evidence that the U.S. could be "debasing" its currency and creating “real concerns around the longevity of the U.S. dollar as a reserve currency.”
  • Instead of dollars, many central banks have increased purchases of gold, especially those in China, Russia, India and Turkey in recent years, with 2018 and 2019 the first and second highest years for annual purchases on record.

The big picture: There has been a long-term concerted effort by Russia and China to move the world away from the dollar — this is now aligning with the coronavirus pandemic, the eurozone's unification, and a moment of weakness for the United States.

2. Catch up quick

Senate Republicans plan to introduce a scaled-back stimulus bill that includes $300 in enhanced weekly unemployment benefits, more money for PPP and the U.S. Postal Service, and liability protections that could be attached to a resolution funding the government past the Sept. 30 deadline. (Politico)

Robinhood announced its third major cash injection in just four months with a $200 million funding round from D1 Partners that lifted its valuation to $11.2 billion from $8.6 billion. (CNBC)

Tesla CEO Elon Musk became the world’s fourth-richest person after the company's shares surged 11% on Monday, closing at a record high and boosting Musk’s net worth to $84.8 billion. (Bloomberg)

The Commerce Department announced restrictions on any foreign semiconductor company from selling chips developed using U.S. software or technology to Chinese telecom Huawei. (CNN)

3. NY Fed's weekly gauge jumps after jobless claims
Data: New York Fed; Chart: Axios Visuals

The New York Fed's index of real-time economic data showed a significant rise in its first revision for the week of Aug. 8. Based on economic reports released before Thursday, it rose from -6.4% to -5.5%.

What happened: The increase in the WEI for the week of Aug. 8 was due to a decline in initial unemployment insurance claims and increases in rail traffic and fuel sales.

  • Weekly traditional initial jobless claims held under 1 million for the second week in a row, with the number of people receiving traditional and pandemic-specific unemployment benefits down by 3 million from the prior week.
  • The Association of American Railroads reported U.S. rail traffic for the week ending Aug. 8 was down 6.7% compared with the same week last year, but rail traffic has consistently trended upward in recent weeks as well as for the past three months.
  • Total weekly rail traffic was down 9.9% in the previous week compared with the same week in 2019.
4. The American real estate conundrum

Reproduced from CivicScience; Chart: Axios Visuals

The housing market has been a solidly bright spot in the U.S. economy in recent months.

  • But there remain serious questions about what the next phase for the market will be as the coronavirus pandemic has created an enormous amount of uncertainty about where and how people will live.

Driving the news: The National Association of Home Builders reported that confidence among builders jumped to its highest level ever this month, as Americans have rushed to take advantage of record low interest rates

  • “The demand for new single-family homes continues to be strong, as low interest rates and a focus on the importance of housing has stoked buyer traffic to all-time highs as measured on the HMI,” NAHB chairman Chuck Fowke said in a statement.
  • “However, the V-shaped recovery for housing has produced a staggering increase for lumber prices, which have more than doubled since mid-April. Such cost increases could dampen momentum in the housing market this fall, despite historically low interest rates.”

Be smart: Average home prices have risen to record levels, concerning economists who worried prices were already unsustainably high.

On the other side: Commercial rents and property values are declining and significant uncertainty hangs over the market.

  • The Green Street Commercial Property Price Index has declined by 15 points since February with average prices falling by around 10%, says Peter Rothemund, managing director at Green Street Advisors.
  • "[I]t’s pretty clear that the range of outcomes is going to be wide," Rothemund said in a recent blog.
  • "Record-low interest rates mean properties with a stable top-line outlook will hold up well. Those with some risk, say multitenant office, probably see something like a 10% hit on average. And those with a lot of hair, like lodging and some retail, lose even more.”

One level deeper: Investment in commercial real estate in the Americas region saw a 70% decline year over year to $43 billion in the second quarter, the lowest since 2010, according to CBRE.

What to watch: While realtors say home buyers are flocking to the suburbs, new surveys from CivicScience find that suburbanites are just as likely as city dwellers to be considering a new residence.

  • Ultra-expensive cities like New York and San Francisco are seeing inhabitants depart and rents decline. Economists expect more young people to settle in less expensive cities, but none have yet emerged as the clear destination for the expected work-from-home exodus.
  • 32% of respondents said they would move to a different city if offered the opportunity to permanently work remotely, but 30% were unsure and 38% said they would not move.
5. The danger of August

Further complicating matters for real estate and financial markets is the unprecedented scale of job losses and the uncertainty of congressional stimulus, which has upheld U.S. consumer spending since March.

What we're reading: "US economic data continue to paint a resilient picture, with July activity withstanding the negative impacts of the covid resurgence and declining fiscal support," U.S. economic analysts at Jefferies wrote in a note to clients.

  • "August will be an even bigger test, as the expiration of enhanced unemployment benefits is likely to shave nearly 3% from disposable income."
  • "The hit is occurring at the time when seasonal adjustments expect a surge in retail activity related to back-to-school shopping. Needless to say, there is near-term downside risk."
Dion Rabouin

Thanks for reading!

Quote: “Hurrah and vote for Suffrage, and don’t keep them in doubt. ... Don’t forget to be a good boy and help Mrs. Catt with her 'rats.' Is she the one that put rat in ratification?”

Why it matters: On Aug. 18, 1920, Harry Burn, a 24-year-old representative from East Tennessee, cast the deciding vote in the ratification of the 19th Amendment to the U.S. Constitution — “[t]he right of citizens of the United States to vote shall not be denied or abridged by the United States or by any State on account of sex.”

  • He did so in large part because of a note from his mother, Phoebe Ensminger Burn, who referenced suffragist leader Carrie Chapman Catt.

Background: Leading up to Tennessee's vote, 35 states had ratified the amendment, bringing it one vote short of the 36 required for passage. The state's House was deadlocked at 48-48 when Burn reversed his previously anti-suffrage stance and voted "aye."

  • He literally fled after casting his vote and hid in the Tennessee statehouse attic. The next day Burn explained, “I know that a mother’s advice is always safest for her boy to follow, and my mother wanted me to vote for ratification.”