Aug 29, 2019

Axios Markets

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Situational awareness:

  • For the first time in his presidency, a greater number of voters say the economy is getting worse under President Trump (37%) than say it's getting better (31%), per a poll of 1,422. (Quinnipiac)
  • Issuing ultra-long U.S. bonds is “under very serious consideration" by the Trump administration, possibly setting up a move that would mark a historic revamp of the Treasuries market. (Bloomberg)
  • Forever 21 is preparing to file for bankruptcy as the fashion retailer’s cash dwindles and turnaround options look scarce. (Bloomberg)
1 big thing: A new era in the war on savers

Illustration: Lazaro Gamio/Axios

Stocks may be the safe asset now.

  • With U.S. Treasury yields in a free fall and the corresponding decrease in U.S. bank savings and money market rates, the S&P 500 dividend yield now pays more than both the 30-year U.S. Treasury bond and the average online savings account, data shows.
  • The result: Investors get a better automatic return holding stocks than they do putting money into historically less risky assets.

What's happening: Expectations for further central bank easing have pushed yields on long-term U.S. Treasury bonds to near all-time lows.

  • Worried about the state of the economy, investors have been shoveling money into safe-haven bonds and savings accounts for much of the last year.
  • But the actions of global central banks and traditional banks are now making that prospect much less attractive.

The Fed's 25 basis point cut last month means savers have seen the interest they earn from online banks fall by approximately 15 basis points to around 1.9%, according to data provided to Axios from savings fintech platform MaxMyInterest.

The intrigue: With the recent plunge in yields pushing the 30-year Treasury bond to a record low of 1.905%, and the 10-year yield below 1.5%, bonds are now riskier than stocks, argues Dev Kantesaria, portfolio manager and founder of Valley Forge Capital Management.

  • "Despite recession fears ... U.S. equities currently offer the best risk/reward opportunity in the marketplace," Kantesaria tells Axios in an email.
  • "The benefits of holding bonds at current near zero interest rates doesn’t compensate investors for the risk that interest rates could rise even modestly from here and cause loss of principal."

The big picture: Online savings accounts currently pay about 20 times more than the average from brick-and-mortar bank savings accounts, and even that is now less than what investors receive from the dividend on S&P 500 stocks.

  • With more than 30% of global bonds paying negative yields, cautious investors are running out of places to hide.
2. Investors think Johnson is bluffing about no-deal Brexit
Expand chart
Data:; Chart: Axios Visuals

Prime Minister Boris Johnson got his request to shut down British Parliament for several weeks approved by Queen Elizabeth, leaving less time to avoid a "no deal" Brexit. But investors don't appear overly concerned — at least for now.

By the numbers: The British pound fell by as much as 1.1% against the dollar on the news, but ended the day just over half a percent lower.

  • Equities were unbothered, as the S&P 500 rose 0.65% on the day and Britain's internationally focused FTSE 100 finished up slightly, while the domestically focused FTSE 250 was marginally down. 

What they're saying: "The dip in the currency is in line with normal Brexit volatility," Dec Mullarkey, managing director at asset manager SLC Management, says in an email.

  • "This implies that while the move pinches Parliament's efforts to constrain Johnson, it doesn’t significantly raise the probability of a no-deal Brexit."

Be smart: The pound weakened after Johnson's proposal but remains comfortably above its lows from earlier this month when it fell to the lowest versus the dollar since early 1985. That the pound hasn't retested those levels shows the move is more political wrangling than genuine threat, Mullarkey adds.

  • "If markets felt that Johnson’s gambit was going to result in a crash out of the EU, equity markets would be revolting as they price in severe growth setbacks.
  • "Right now they are taking it in stride assuming that Parliament can offset Johnson’s gamesmanship."
3. Facing Hong Kong fears and the trade war, investors buy the dip
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Data:; Chart: Axios Visuals

Tiffany & Co.'s stock went on a wild ride Wednesday, after the company released its earnings results, with investors pushing it 5% lower after the opening bell and then taking it as much as 5% higher in morning trade.

  • It ended the day up 3% as the market took solace from better-than-expected Q2 earnings over fears from sales that missed Wall Street forecasts and a cautionary outlook.
  • The company attributed the sales miss to lower spending by Chinese tourists in the U.S. and political unrest in Hong Kong.

The big picture: Tiffany warned its full-year revenue guidance was at risk if protests in Hong Kong continue.

  • The company also said it lost 6 selling days in Q2 due to unplanned store closures in the territory — its fourth-largest market and one that makes up a “mid-single digit” proportion of total annual sales of about $4.4 billion, Financial Times reports.
  • “If the situation would deteriorate even further or if the current level of unrest was maintained for the balance of the fiscal year, we may find ourselves at the bottom end of our ranges,” CFO Mark Erceg said of the company’s full-year sales and earnings forecasts, according to FT.

The bottom line: Tiffany looks to be a company caught between a rock and a hard place, facing the twin headwinds of the U.S.-China trade war and mounting rebellion in Hong Kong, but investors showed they are still willing to buy the dip.

4. How little we know about Puerto Rico's economy

Illustration: Sarah Grillo/Axios

Even as it prepares to recover from another devastating storm, Puerto Rico is the only U.S. territory whose economic data isn't fully measured by the Commerce Department, Axios' Courtenay Brown writes.

Why it matters: It remains impossible to quantify how much the island's economic growth was stunted by Hurricane Maria's massive destruction 2 years ago — and it won't be easy to gauge any comparable impact from Hurricane Dorian.

  • The latest reports show Puerto Rico was spared the full force of Dorian, but its islands of Vieques and Culebra experienced widespread power outages and flooding.

Context: The Commerce Department has been grappling with Puerto Rico's data-gathering practices.

  • In March, Commerce said its Bureau of Economic Analysis would "produce new economic data for Puerto Rico this year that could lay the groundwork for later estimating the island’s gross domestic product."
  • So far, everyone has been relying on numbers generated by the island's government, which haven't "been updated for many years and do not follow the latest international guidelines for producing national economic accounts," Commerce said.

Driving the news: President Trump, whose track record on hurricane response to Puerto Rico has been heavily criticized, approved an emergency declaration for the island this week.

  • On Wednesday, as Hurricane Dorian approached Puerto Rico, the president tweeted that the island was "one of the most corrupt places on earth."
  • Trump added, without offering evidence: "Congress approved Billions of Dollars last time, more than anyplace else has ever gotten, and it is sent to Crooked Pols. No good!"

To be sure, Puerto Rico has been the center of massive government corruption, compounded by bankruptcy, instability and piles of debt — all made worse by natural disasters the island hasn't been able to bounce back from.

  • Commerce now says it plans to compile the components that would potentially make up an estimate of Puerto Rico's GDP, paving the way for an official GDP number sometime down the line. But it's not clear when, as the Miami Herald reports.