May 13, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • Pakistan will take a $6 billion bailout from the IMF, the country announced Sunday, to help offset a worsening debt and current account deficit. (NYT)
  • White House economic adviser Larry Kudlow acknowledged that China doesn't directly pay tariffs on U.S. imports, which is a known fact but contradicts President Trump's claims. (CNBC)
  • The market's Goldilocks conditions are coming to an end, analysts at Morgan Stanley say, with consequences for U.S. assets in the second half of the year. (Bloomberg)
  • China's largest home-grown coffee chain, Luckin Coffee, is looking to raise as much as $560 million in a Nasdaq IPO that could value the company at up to $4 billion. (WSJ)
1 big thing: Advisers may be forced to look out for clients again

Photo: Getty Images

The Obama-era rule that financial advisers must give advice in the best interest of their clients rather steering them toward products that pay kickbacks to the adviser will return — at least in some form.

It died in court last year after the Trump administration declined to defend it. But in a congressional hearing last week, Labor Secretary Alexander Acosta said the agency plans to revive it.

Why it matters: Since the rule was rescinded in June 2018, "[s]ales of potentially questionable investment products have soared, and retirees stand to end up billions of dollars poorer," says Ethan Schwartz, an investment manager who worked in the Clinton administration Treasury Department, in an editorial for Bloomberg.

Schwartz points to a clear uptick in the number of annuity plans, which fiduciaries and many financial advisers bemoan as hard to understand, overly costly and delivering poor returns.

What's next? The SEC has taken the lead in writing the new fiduciary rule and is expected to issue regulations by September.

  • Critics argue the measures currently being discussed are far too weak and should reflect regulations being considered in states like Nevada and New Jersey.
  • They also worry Trump's handpicked SEC chairman, Jay Clayton, who as a lawyer represented the likes of Deutsche Bank, UBS, Volkswagen and The Weinstein Company, and helped bring Alibaba's 2014 IPO to market, will be looking out for corporations' rather than retirees' interests.

The bottom line: Clayton, who has made the well-being of retail investors a pillar of his platform as chairman, said the SEC has spent 2 years working on the rule and will look to provide "clarity" and "appropriate protection" for investors at a gathering for the asset management industry in Washington earlier this month.

  • "Is there a silver bullet?" he said. "Probably not. There never is."
2. Yelp's stock erased its entire 2019 gain in one day
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Data: Investing.com; Chart: Axios Visuals

Yelp posted solid earnings for the first quarter but its forward guidance was unimpressive and led to a rout in its stock price to end last week, erasing all of its 2019 gains.

Details: The company said it anticipates revenue will rise 4%–6% year over year, short of the roughly 6.6% increase investors were expecting. It's also not on pace for the 8%–10% annual increase Yelp predicted in its full year guidance and well short of the mid-teens percentage growth Yelp pegged for 2019-2023.

  • Having been a public company since 2012, investors are growing impatient with Yelp's inability to break into the mainstream and grab major chunks of online advertising revenue.

What they're saying:

  • Research firm B. Riley downgraded the stock from Buy to Neutral after the earnings report.
  • Morgan Stanley, saying there are "not enough customers," reiterated its underweight position.
  • UBS called the company "a work in progress" and maintained a less constructive outlook.
  • In January, SQN Investors, a major shareholder, urged Yelp to shake up its board of directors, saying their patience had "worn out."

The kind of people who use Yelp are more likely than the average consumer to be influenced by online advertising, research firm Civic Science notes.

"That means, if Yelp's ad business grows to any measurable scale, they should be able to demonstrate superior effectiveness compared to other platforms," John Dick, the firm's founder and CEO said in a note to clients.

The bottom line: However, the firm also notes in a recent post that Yelp is falling short. "Only 1/3 of Yelp fans say online advertising (in general) guides decisions. When looking at favorability among business owners- more than 1/4 have a negative opinion of Yelp."

3. Free trade comes to Africa
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Adapted from World Economic Forum; Map: Axios Visuals

Axios' Felix Salmon writes: It's the largest free trade area in the world, both by area and by population. It's formally going to come into effect on May 30, now that Gambia has become the 22nd country to formally ratify the Africa Continental Free Trade Area, or AfCFTA.

  • Africa has 1.2 billion people — more than double the EU or NAFTA. Almost every African country has signed the treaty; the one big exception is Nigeria.

AfCFTA came together in record time, after first being proposed by Rwandan President Paul Kagame in March 2018. As a result, a lot of the implementation details are a bit fuzzy. "What's been really impressive is how quickly they've agreed to and then ratified the deal," says Grant Harris, the CEO of Harris Africa Partners. "Now the real world begins in terms of how issues are worked through in practice."

Reality check: Africa's trade problems won't be solved overnight. The continent needs some $50 billion per year in infrastructure investment, and truckers are still likely to spend hours or days idling at international borders.

  • By the numbers: The World Bank's Paul Brenton calculated in 2012 that passenger traffic between Brazzaville and Kinshasa — on opposite sides of the Congo River — was just 20% of the amount of traffic between East and West Berlin before the wall came down.

Why it matters: Almost every African country exports more outside the continent than it does within it. African supply chains are extremely weak, and the amount of prosperity that could be generated by strengthening them is enormous. AfCFTA, on its own, is not sufficient to create a booming market in intra-African trade. Still, it's an extremely important milestone on the way there.

4. JD.com's earnings present questions about China's growth

Despite rape allegations against its CEO, China's second-largest e-commerce company, JD.com, posted record quarterly earnings Friday with a $1.1 billion profit after a $364.6 million loss last year.

The Nasdaq-listed company's stock got a major boost after reporting earnings but investors are starting to worry about its long-term health.

The big picture: As Axios' Erica Pandey reported, the 21% revenue growth posted by Chinese e-commerce giant was its slowest on record, signaling that the rush of new Chinese customers is starting to plateau. JD's chief rival, Alibaba, has also reported slowing growth.

Why it matters: The e-commerce companies experienced massive booms in earlier years as millions of new Chinese users entered the urban middle class and became customers. Now, the pace of growth for that user base is slowing down, forcing both JD and Alibaba to expand into other Asian markets to add shoppers.

My thought bubble: A big key to bullish expectations for China is that the country still has significant room to grow because of the number of rural citizens who could move into higher earning urban areas and occupations.

  • Together, India, China and Nigeria are expected to account for 35% of the projected growth of the world's urban population between 2018 and 2050, with China adding 255 million urban dwellers.

The bottom line: The dramatic slowing in revenue growth for JD and Alibaba suggest that growth may have hit a snag. That could have wide-ranging consequences for China and its trading partners.

Go deeper: JD.com makes 90% of its Chinese deliveries within 24 hours

5. Bitcoin is bubbling again
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Data: Yahoo Finance; Chart: Axios Visuals

The cryptocurrency has risen to over $7,000 per coin and is up almost 80% year-to-date.

Buyer beware: Bitcoin remains well below its highs at the end of 2017 when it raced near $20,000 per coin. Bitcoin bull Yves Lamoureux, president of behavioral research firm Lamoureux & Co., told Axios on May 2 he had completely exited his Bitcoin position and said Sunday he is now holding short positions on some digital currencies.

6. Central banks come to the market

A monitor on the NYSE floor displays Federal Reserve chairman Jerome Powell. Photo: Drew Angerer/Getty Images

Central bank guidance is increasingly falling on deaf ears in the market as more investors position for looser monetary policy no matter what policymakers say. And as the year has progressed, central banks all over the world have moved towards those dovish expectations.

Why it matters: The idea behind forward guidance is it allows central banks to influence market expectations without taking action.

  • But the market has lost faith in the forward guidance of the Fed, ECB, BOJ and central banks from Mexico to Sweden.

This is a major problem given that credibility is a foundational bedrock of central banks' ability to execute their primary function — maintaining price stability.

What to watch: Not a single major central bank has raised interest rates so far this year and the Reserve Banks of India and New Zealand have cut rates by 25 basis points, notes Capital Economics Head of Global Economics Service Jennifer McKeown.

  • "We still believe that central banks in the advanced economies will need to do more than make pledges if they are to stand any chance of reinvigorating their economies and hitting their inflation targets."
Dion Rabouin