Apr 22, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • Stop & Shop Supermarket reached an agreement with workers' unions, ending an 11-day strike by more than 30,000 employees. Stop & Shop said the deal includes a pay raise and revisions to health insurance and retirement benefits. (NBC News)
  • Oil prices rose to their highest levels since November as the State Department is expected to announce the end of waivers for countries to import Iranian oil on Monday. (Reuters)
  • Car­los Ghosn was indicted on new charges that he misappropriated funds meant for a Nis­san Mo­tor dis­trib­u­tor, following his 4th arrest in 7 months. (WSJ)
  • In its first ever quarterly financial report, Huawei said revenue rose 39% from a year earlier to $26.8 billion, despite political pressure from Washington. Huawei says its Q1 revenue jumped 39% despite political pressure (CNBC)
1 big thing: The dollar is too strong for U.S. companies

Illustration: Lazaro Gamio/Axios

The strength of the dollar is creeping in as a major worry for business leaders, and it's looking poised to grow stronger.

  • The dollar index, which measures the greenback's strength against currency peers like the euro, yen and British pound, is rising toward its highest level since 2017.

Why it matters: On earnings calls so far in the first quarter, FX and currency worries, aka the dollar's strength, has been the most cited negative by S&P 500 companies.

  • A strong dollar makes U.S. exports less competitive and eats away at profits for U.S.-based multinational firms.

The dollar also has been strengthening against the currencies of emerging countries, like China, where many American businesses generate significant revenue.  

Companies generally don't change prices because of currency fluctuations, so a hypothetical 20-yuan Big Mac could translate to $3 when the dollar is weak, but only $2.90 when it's strong. McDonald's sells over 1 billion Big Macs a year in China, so that number makes a big difference.

  • "The dollar rally is back on track as the divergence theme re-emerges," Win Thin, global head of currency strategy at Brown Brothers Harriman, wrote in a note to clients. "For EM, that has translated into broad-based losses this past week ... and we see further EM losses ahead."

Unfortunately for nervous executives, even though the Fed has paused its interest rate hiking cycle, U.S. rates are among the highest in the developed world and other central banks are taking measures likely to weaken their currencies.

  • The European Central Bank looks poised to institute more stimulus measures to support sputtering growth in Germany, Italy and Sweden.
  • Economists increasingly expect the Bank of Japan to add stimulus, according to a Bloomberg poll.
  • The Bank of England is likely on pause until a resolution is found for Brexit and the central banks of Australia and New Zealand have both been sending dovish messages, suggesting rate cuts may be coming soon.

The bottom line: Investors buy the dollar when they are worried about global growth and when U.S. economic data is strong. After weak manufacturing readings in Germany and Japan and strong U.S. retail sales and 50-year-low initial jobless claims data last week, both themes look fully in force.

2. The Fed stopped raising rates, but credit card companies haven't
Expand chart

Data: Reproduced from a Magnify Money chart; Chart: Axios Visuals

The Fed hasn't raised interest rates this year and isn't expected to do so any time soon, but interest rates on credit cards are still increasing.

Why it matters: U.S. card holders are expected to pay $122 billion in interest charges in 2019. That's 12% more than what they paid in 2017 and 50% more than what they paid as recently as 2014.

  • Credit card interest rates tend to move in concert with U.S. overnight interest rates, controlled by the Fed. LendingTree's Magnify Money website found that between December 2015 and December 2018 the Fed had increased rates by 2% while credit card interest rates had increased by 2.16%.
  • The average credit card assessed interest rate is now 16.91%. It was 13.14% in the first quarter of 2014.
3. The market is losing faith in Zillow's iBuying
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Data: Money.net; Chart: Axios Visuals

Zillow's stock jumped almost 25% after the company announced it was doubling down on its iBuying initiative, which enables the company to essentially flip houses. But WSJ's Laura Forman notes that boost has largely worn off as investors grow weary of the program's ability to generate major returns in the near term.

  • Barclays analysts downgraded the company to Underweight last month, expecting inventory to weigh on its margins.
  • Other companies are also beginning to enter the space, including Redfin, which said it generated 9% of its business from iBuying last year. Zillow also faces competition from Opendoor, which recently raised $300 million at a reported valuation of $3.8 billion; Knock, which is led by founding members of Trulia; Offerpad; and Perch.
4. China's policy shift could be bad for global markets

China's growth so far this year has been better than expected and it will begin a shift away from stimulus and towards reform and restructuring, according to China's 25-member ruling body headed by President Xi Jinping. The news was reported by state news agency Xinhua.

Why it matters: China's stimulus has been a major source of relief for Chinese and global financial markets, and the government now looks to be shifting gears.

Background: China ratcheted up stimulus in 2018, including tax and fee cuts amounting to nearly $300 billion, and 5 separate cuts to banks' reserve requirement ratios to spur lending.

  • Economists, including IMF Managing Director Christine Lagarde, as well as buy- and sell-side analysts had largely credited this stimulus with righting China's economy. (And as a potential savior for Europe's wilting growth.)

What it means: The statement from the politburo came days after China reported better-than-expected 6.4% annual growth in Q1, defying expectations of a slowing economy.

  • The meeting statement removed the so-called six stabilizations from policy objectives: employment, finance, trade, foreign investment, investment and expectations.
  • Analysts at Goldman Sachs said in a research note that the politburo's findings signaled a "less dovish policy stance."

Yes, but: Morgan Stanley analysts point out that while acknowledging growth improvement in Q1, "policymakers remain cautious in light of still rising external pressures and downward pressures on growth."

The bottom line:

  • "The stimulus will be weak and the reform will be strong," Liang Zhonghua, chief macro analyst at the Research Institute of Zhongtai Securities, told the South China Morning Post. Liang said senior leaders sent a signal that economic growth was no longer policymakers' top goal.
5. 1 fee thing: Welcome to Axios Capital

Illustration: Lazaro Gamio/Axios

D.E. Shaw & Co. is reverting back to its 2000s-era fee model, with a 3 and 30 structure. Next year, the hedge fund will charge clients a 3% management fee and take 30% of profits, up from 2.5% and 25% respectively.

Why it matters: D.E. Shaw’s fees are moving in the opposite direction of the industry. As Bloomberg notes, hedge fund fees now average 1.45% for management and 17% for performance.

  • The backdrop: Hedge funds have been cutting fees and "offering more concessions to investors over the past decade."
  • D.E. Shaw's flagship fund rose 11.2% last year — beating the S&P 500 — and 3% in the first quarter.

What's next? Axios editor-in-chief Nicholas Johnston and I will be starting our own hedge fund based on a truly game-changing management structure: 11 and 110.

  • We will charge an 11% management fee, take 100% of profits and then send clients a bill for a 10% surcharge on top of profits. That's what true Alpha should cost.
  • We will disrupt the status quo of active management with our proprietary blockchain AI algorithmic forecasting model.

This is thought leadership. This is Axios Capital.

Dion Rabouin