Apr 12, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • Chevron is buying oil and gas producer Anadarko Petroleum in a cash and stock deal valued at $33 billion. (Axios)
  • JP Morgan topped profit expectations, while revenue and its bond trading unit also surpassed Wall Street’s expectations. (JP Morgan)
  • Uber's IPO filing says the company expects its operating expenses to “increase significantly in the foreseeable future” and it “may not achieve profitability” ever. (Reuters)
  • Herman Cain's candidacy for the Fed is collapsing after a 4th Republican senator announced opposition to his possible nomination. (Axios)
1 big thing: Why investors may ignore earnings this earnings season

Illustration: Aïda Amer/Axios

The story this earnings season won’t be about falling corporate profits; it’ll be about recession fears, Axios' Courtenay Brown reports.

The backdrop: Investors are looking for hints of an economic slowdown as companies begin reporting first quarter earnings. (Economists overwhelmingly predict GDP growth slowed during the first 3 months of the year.)

  • As we’ve reported, the market isn't punishing companies as much as it typically does for less-than-stellar results.
  • Analysts say earnings will fall 3.9% from their Q1 2018 level, yet the S&P has risen 13% in the year's first 3 months and more than 20% from its December low.

Why it matters: "Corporate profits have been the key driver of the stock market in the last 10 years," James Liu, founder of research firm Clearnomics, wrote in a recent note to clients. But the market has completely ignored predictions of declining earnings growth in the first quarter.

  • There's been an acceptance that earnings growth was bound to decelerate this year after getting a boost from the tax cut in 2018.
  • Profits aren't falling because of declining sales, but margins are shrinking thanks to higher labor and material costs.

For first time in a decade, U.S. companies are expected to report lower profits, but also report higher revenue, Reuters reports.

Be smart: Nick Raich, founder of research firm Earnings Scout, tells CNBC "the market could be very sensitive to macro events like tariffs or slower global growth," rather than falling earnings.

Of note: We've seen investors react to how companies are talking about a potential recession, for fear that signals — like the yield curve inversion, a potentially less-hot labor market and slowing growth around the world — are also showing up on executives' radars.

  • One example: Shares of JP Morgan fell 1.7% when CFO Marianne Lake said that "recessionary indicators ... are not flashing red, but they are off the floor" in February, as Reuters points out.

What to watch: JP Morgan and Wells Fargo will field questions from analysts later this morning, after reporting earnings.

  • In a press release alongside its earnings announcement, JP Morgan CEO Jamie Dimon reiterated his confidence in the economy, despite global geopolitical uncertainty.
2. Currency markets have been eerily calm for 6 months
Expand chart
Data: Cambridge Global Payments, Refinitiv; Chart: Axios Visuals

Currency markets have been remarkably placid over the past few months, with implied volatility levels near all-time lows.

Since late last October trends have vanished from the FX markets, Joseph Trevesani, senior analyst at FX Street, writes in a note to clients. "There seems to be a new law of foreign exchange markets: Every sustained movement will be met by an equal and opposite reversal."

The intrigue: Between the end of October and the beginning of March, the euro traded in a range against the dollar of just 3 cents, from 1.15 to 1.12, Trevesani notes. The range has contracted to 1.12 to 1.14 since. The British pound has been in much the same boat. On Nov. 1, it closed at $1.302 against the dollar and was at $1.307 late Thursday.

  • The Japanese yen, Swiss franc and Australian and New Zealand dollars have all shown much the same patterns.

What it means: Karl Schamotta, chief market strategist at Cambridge Global Payments, tells Axios in an email that the low volatility is the result of traders having zero fear of currencies either rising or falling unexpectedly to any significant degree.

  • "Tail risks on both ends of the spectrum have been mitigated — on the downside, by central banks expressing a willingness to step in to support markets, and on the upside by continued weakness across a major swath of the global economy."
  • "This is a situation in which an exogenous catalyst could easily shift market expectations enough to touch off a new round of volatility in currencies. Stability creates instability, as Minsky would say."
3. Disney’s streaming play

President of Walt Disney Distribution Franchise Management, Business & Audience Insights Cathleen Taff. Photo by Gabe Ginsberg/WireImage/Getty Images.

We now know what Disney's highly anticipated family streaming service, Disney+, will look like, Axios' Sara Fischer writes. On Thursday, executives touted an array of new and old programming that will be available exclusively on the app, as well as its plans to launch the service.

Bottom line: Disney is banking on its streaming plans to compete with tech giants like Netflix and Amazon for the world's attention and entertainment budgets.

The big picture: Disney's main message to investors was that it's better than anyone at making great movies and series, and now it's ready to take on Netflix to distribute that content. The price tag: $6.99 a month or $69.99 a year.

Between the lines: With its acquisition of 21st Century Fox's entertainment assets this year, Disney now owns a sizable content library, as well as a majority stake (60%) in Hulu. The company said it will push Hulu internationally (it's currently only available in the U.S. and Japan) and touted Hulu's success as a digital ad platform.

The (market) details: Reuters reports that Disney "set a target of luring between 60 million to 90 million subscribers and achieving profitability in fiscal year 2024. It plans to plow a little over $1 billion in cash to finance original programming in fiscal 2020 and about $2 billion by 2024."

4. The risk of the Fed getting politicized is greater than we think

Daleep Singh, Partner and Chief U.S. Economist, SPX U.S.A., on Thursday during IIF's Washington Policy Summit:

"The way I think about it is: Trump has every political incentive to do so. It’s his go-to alibi for why the economy is slowing back down to 2%.
"He has all the executive authority he needs. You can look back to the Reagan years. You had the gang of four political appointees overruling Volcker for a rate cut. A year later Volcker was out as Chair.
"We know Powell’s term is over January 2022. We know [Trump] has a couple of nominees. Even if they don’t get through, I can imagine there are plenty of other loyalists who could be right behind them.
"And then I just don’t see any serious institutional defenses the Fed could muster. The Fed is not mentioned anywhere in the Constitution. It’s purely subordinate to Congress. Congress has amended the Federal Reserve Act, I think, no less than 20 times in the past 100 years, most of the time not to the liking of the Fed.
"I don’t think the public understands the Fed very much and what they do understand they don’t like. It was polling below the IRS after the crisis.
"So I think we’ve got a problem.
"While I don’t think politics are influencing the Fed now, I can easily imagine in a year or two things will be very different and we really haven’t been there in recent memory and I don’t know what will happen in terms of how markets appraise risk premium of dollar assets if and when we get there.
"But that worries me. "
5. Rich Clarida plays himself to the stage
A screenshot of Fed Vice Chair Richard Clarida's album cover from Youtube

Fed Vice Chair Richard Clarida spoke at the Institute of International Finance's Washington Policy Summit yesterday and was introduced with his own music.

While other guests came out to the sounds of ambiguous EDM fusion, Clarida was played to the stage by a snippet from "Time No Changes," his 2016 album on which he plays guitar and sings.

Scoop: Sources have confirmed Clarida did not sing live or play air guitar during the introduction. An IIF spokesman tells Axios no footage of the event is currently available, but that may change.

Background: Clarida teamed up with Fed Chair Jerome Powell at the central bank's holiday party in December with Powell on guitar and Clarida on vox, according to WSJ's Nick Timiraos.

  • The chair-vice chair duo known as Jay+Rich "performed the Barenaked Ladies’ acoustic-alternative medley of 'God Rest Ye Merry Gentlemen' and 'We Three Kings' inside the marble atrium of the central bank’s historic Eccles Building."

As for his day job: Clarida said the U.S. economy is "in a good place" but also noted "economic growth is slowing somewhat from 2018's robust pace."

Listen to Richard Clarida's "Just Can't Wait" on Youtube. It's available on Spotify, Apple Music and Tidal.

Dion Rabouin