Nov 4, 2019

Axios Markets

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Situational awareness:

  • McDonald's CEO Steve Easterbrook was fired because of a consensual relationship with an employee. His tenure included battles with franchise owners over mandated capital investments and changes. (WSJ)
  • Saudi Arabia has filed paperwork for the IPO of state oil giant Aramco, but some banks involved in the offering estimate it may be worth as little as $1.2 trillion, well below the kingdom's hopes for at least $2 trillion. (Bloomberg)
  • The Justice Department and SEC are investigating Under Armour's accounting practices, examining whether the company shifted sales from quarter to quarter to appear healthier. (WSJ)
  • Microsoft Japan tested 3-day weekends in August and labor productivity (sales per employee) increased 40% year-over-year. (Nikkei with English translation)

(Today's Smart Brevity count: 1,130 words, ~ 4 minutes.)

1 big thing: It may be time to get bullish about the trade war

Illustration: Lazaro Gamio/Axios

All is calm on the trade war front and investors are starting to believe that things may just get better.

What's happening: Goldman Sachs research analysts said in a note Sunday evening that they now believe "tariffs on imports from China have likely peaked" and are shifting their view thanks to "recent developments and apparent progress in US-China negotiations."

Background: China ended its Fourth Plenum meetings without any negative trade war headlines last week and "constructive" talks between top-level American and Chinese negotiators took place.

  • "In the phone talks, the two sides had earnest and constructive discussions on properly addressing each other's core concerns, and reached principled consensus," China state news agency Xinhua reported.
  • President Trump is reportedly now considering Iowa, Alaska, Hawaii and some locations in China as the location for the phase one trade deal to be signed.

The big picture: There remains little hope of real structural change being implemented in China, but there's growing confidence that further escalation can be avoided.

What they're saying: Tim Stratford, chairman of American Chamber of Commerce in China, said he believed the “phase one” deal, which is expected to be signed this month, could prevent a further “downward spiral."

  • However, with an election next year he believes Trump is likely more interested in helping his re-election chances than continuing to take a hard line.
  • “It seems to fit the political goals of the president,” Stratford told the South China Morning Post. “But it’s not addressing the systemic trade issues that the business community would be concerned about on a long-term basis.”

What it means: That's good news for the stock market, where investors are more interested in the removal of tariffs than just about anything else.

  • Since the announcement of the phase one deal on Oct. 11, the S&P 500 has rallied by more than 4% and set three record high closes, including on Friday when the index rose 1% after a stronger-than-expected U.S. jobs report.
  • The S&P has risen 22% in 2019, and analysts from Goldman Sachs said in a note last month that a 30% gain by year-end is realistic.

What's next: With the Fed having cut U.S. interest rates for the third time this year, all eyes are on the trade war.

  • “Trump’s trade policy has definitely softened the U.S. economy and the Fed responds with three cuts and says it’s back in Trump’s court, therefore everyone is looking at what happens now with this trade deal,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, told CNBC.
2. Chinese manufacturing is pushing higher while the U.S. is sinking
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Data: Caixin, Institute for Supply Management; Chart: Andrew Witherspoon/Axios

Manufacturing industries in the U.S. and China seem to be moving in opposite directions.

  • In October, a private company survey of China's factory activity shows it expanded for a third consecutive month, while U.S. manufacturing contracted for the third month in a row.

Why it matters: October was the largest deficit the U.S. manufacturing industry has had with China's in the nearly eight year history of the Caixin survey.

What happened: The Caixin China manufacturing index posted its highest reading since February 2017, beating economists' expectations, while the U.S. ISM manufacturing index barely edged up from its September level, which was the weakest in 10 years.

  • Caixin's survey found that the total amount of new work received by Chinese producers rose by the highest rate in about six years, prompting manufacturers to expand production. Export orders also rose by the most in five months.
  • That was likely due to the U.S. exempting hundreds of Chinese products from tariffs during the month, Caixin said in the survey.

Yes, but: Caixin's survey is mainly based on responses from 500 smaller private factories, while China's official index, which focuses on 3,000 larger manufacturers, was in contraction during the month.

Of note: A separate index that tracks U.S. manufacturers largely located in the American Midwest had its weakest reading in four years last month and the second lowest in a decade.

3. The Chinese yuan could move back below 7 per dollar soon
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Data:; Chart: Andrew Witherspoon/Axios

The Chinese yuan has weakened significantly against the dollar since Trump announced the U.S. would add 10% tariffs on $300 billion worth of Chinese imports, in addition to the 25% already levied on $250 billion worth of Chinese goods on Aug. 1.

  • The yuan broke through the psychologically important 7-per-dollar barrier soon after, as China's central bank stopped defending it and allowed it to fall to its weakest level against the dollar since 2008 in late August.
  • But since the "phase one" trade deal, the yuan has strengthened and is close to falling back below 7-to-1 versus the dollar.
4. Investors more bullish on good earnings and less bearish on bad

U.S. stock market investors are showing their bullish bias this earnings season, buying big on companies that beat expectations and going easy on selling companies that miss.

What's happening: "Shares of companies that topped forecasts rose an average of 2% in the two days after reporting results, beating the five-year average of 1%, according to data compiled by FactSet. Those that fell short have averaged a 2.1% pullback, below the half-decade average of 2.6%," WSJ's Michael Wursthorn reports.

  • "So far, the winners are outpacing the losers. More than three-quarters of the 358 companies in the index that reported through Friday have beaten estimates. And 66% have risen in subsequent trading sessions, a five-year high."

Watch this space: The enthusiasm has come despite FactSet data showing overall S&P 500 earnings are on pace to decline by almost 3% in Q3, falling for the third quarter in a row.

5. N.Y. Fed forecast: U.S. Q4 GDP to fall to 0.8%
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Data: Federal Reserve Bank of New York; Chart: Andrew Witherspoon/Axios

The New York Fed's GDP projection model predicted U.S. growth would slow to 0.8% in the fourth quarter.

Why it matters: If correct, it would be the weakest quarter since Q4 2015 and put the economy well off the pace of 2018's 2.9% annual growth.

  • However, prior to Q3's on-the-nose prediction of 1.9% quarterly growth, the N.Y. Fed's nowcasts haven't been especially accurate.
6. Unprofitable company IPOs are a big 0 this year

After being on pace to beat the overall market earlier this year, Reuters' April Joyner reports that a Reuters analysis finds "[u]nprofitable U.S. companies holding IPOs this year have had a median stock return of 0%."

  • This is likely because Beyond Meat is now profitable and its 228% stock increase this year is no longer counted among the returns of unprofitable companies.
  • Adding to that, companies like Lyft, Uber, Peloton and Slack have floundered on the public market.
  • Unprofitable IPOs have beaten the market about 47% of the time, according to Bloomberg.

On the other side: Apple shares have surged 62% year-to-date, Microsoft stock is up 41%, and the overall S&P tech sector index has risen 36% YTD.

7. The most interesting thing this week: Watch Europe

With the eurozone on the brink of recession and its economic engine, Germany, likely already in one, data this week out of Europe will be closely watched.

  • This week will bring the release of German factory orders and industrial production data as well as the European Commission's forecasts for eurozone growth.
  • The Bank of England’s Monetary Policy Report also will be released on Thursday.

Of note: Central banks in Poland, Romania, the Czech Republic and Serbia all will announce policy decisions, with each one expected to keep rates on hold. Globally, central banks appear to be following the Fed's lead and holding off on more rate cuts and further policy easing.