Mar 12, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • U.K. attorney general says Theresa May's revised Brexit deal reduces but doesn't eliminate risk that Britain could be tied to EU indefinitely. (AP)
  • The New York attorney general's office issued subpoenas to Deutsche Bank and Investors Bank for records relating to the financing of Trump Organization projects and an unsuccessful effort to buy the Buffalo Bills. (NYT)
  • After introducing a $15-an-hour minimum wage following its acquisition by Amazon, Whole Foods significantly cut its workers' hours. (The Guardian)
  • Exclusive: Attorneys general are drawing more attention to Johnson & Johnson's role in the global opioid market. (Axios)
1 big thing: What Wall Street wants from Wells Fargo

Illustration: Sarah Grillo/Axios

Wells Fargo CEO Tim Sloan will likely face a grilling today when he testifies before the House Financial Services Committee, led by Rep. Maxine Waters, but if history is any guide the hearing will make little difference to Wall Street.

What it means: It's the company's fourth appearance on the Hill since the bank's cross-selling scandal came to light in 2016. Previous hearings haven’t moved its share price to the downside, Axios' Courtenay Brown writes.

  • For example, when now-ousted CEO John Stumpf testified before the Senate Banking Committee in 2016, shares finished the day higher by 1.2%. When Sloan faced the same group of lawmakers a year later, shares closed up then too.
  • "The only thing [Wall street] wants to hear is silence. What they want to see is Wells Fargo going back to delivering the goods and no more headlines," Christopher Whalen, veteran banking analyst and founder of the Institutional Risk Analyst, tells Axios.

Wells Fargo has missed out on the broader bank industry's stock rally, thanks to a snowball of bad news and lost confidence in the company over the past few years, though Wells has outlined plans to clean up its act and improve company culture.

The big picture: But Wells' biggest obstacle has been the revelation in January that it will have to operate under the Fed's mandated asset growth cap for the rest of this year, longer than initially estimated.

  • That's a key issue Wall Street is watching and it's sure to come up in the hearing, but no new news is expected on that front.

Of note: Almost all of Wells Fargo's businesses are under investigation by a government agency, as the Wall Street Journal points out.

The bottom line: The appearance before Congress will likely be contentious, and that will probably be the case when Sloan testifies again next month alongside the other big bank CEOs.

  • Bonus: Wells Fargo isn't apologizing this time in its opening statement. Unlike in previous testimonies by Sloan and his predecessor, the words "sorry," "apologize" and "regret" are notably missing from today's planned remarks to Congress.
Bonus: The cost of lost trust
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Data: FactSet; Chart: Harry Stevens/Axios

Sloan released a statement ahead of his Tuesday congressional testimony, detailing significant progress in Wells Fargo's "transformation." In the statement, he says that above all the bank "is committed to making things right for our customers and earning back the public’s trust."

2. Boeing's back-to-back crashes could be a nightmare for the market

The crashes of 2 brand new Boeing 737 MAX 8 aircraft during the past 6 months, including the latest on Sunday outside Addis Ababa, Ethiopia, that killed all 157 aboard, present a major challenge for Boeing, Axios' Andrew Freedman writes.

Why it matters: The Chicago-based company has bet much of its future on the success of the Boeing 737 MAX series, which are the newest versions of the best-selling jet of all time. However, the stakes for Boeing couldn't be higher, as the loss of 2 brand new aircraft in 6 months has no precedent in modern aviation history.

The big picture: The aircraft is aimed at countering competition from Airbus for the lucrative single-aisle jet market. According to Boeing, the company has already notched more than 4,700 orders.

Context: The investigation into the Lion Air crash near Jakarta, Indonesia, on Oct. 29 has centered on an angle-of-attack sensor that juts out from the plane's fuselage near the nose.

  • A preliminary investigation shows the sensor may have provided erroneous readings to the plane's flight control system.
  • A flight computer system known as MCAS pushed the plane's nose forward to avert the stall.

A final cause of the crash has not yet been determined. However, in the wake of the crash, Boeing issued guidance to airlines about how to disable the MCAS system.

Backstory: In developing the 737 MAX 8, Boeing worked to minimize training costs for airlines. Pilots did not receive special training on the MCAS in particular.

  • The Ethiopian Air crash bears initial, eerie similarities to the Lion Air disaster.
  • While the cause of the latest accident won't be known for months, the possibility that the accident is also the result of the MCAS system has prompted China, Indonesia and Ethiopia, along with Ethiopian Airways and Cayman Airways, to temporarily ground the planes.
  • Singapore and Australia announced they would also ground all 737 MAX airplanes in their countries.

The big picture: Boeing is the most influential stock in the oft-cited Dow Jones Industrial Average, which gives the heaviest weighting to the company with the highest share price, Courtenay points out.

  • A continued sell-off in Boeing's shares — which accounted for about 25% of the Dow's rebound this year — would drag the index down with it.
  • "The accidents could lead to near-term uncertainty with regards to utilization and deliveries ... If we assume there is no catch up and a 2-month pause, the impact would be $5.1B of revenue (5% of 2019 revenue)," notes Sheila Kahyaoglu, an analyst at Jefferies.

The bottom line: Right now, 3 U.S. airlines operate a 737 MAX: American, Southwest and United. Some international airlines, such as Norwegian Air and Icelandair, also are flying long-range routes across the Atlantic.

3. Straight to the bank
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Data: National Retail Federation survey conducted Feb. 5–13, among 7,657 U.S. adults. Total margin of error is ±1.1 percentage points; Chart: Axios Visuals

Americans are getting thriftier with their tax refunds.

The National Retail Federation says the percentage of Americans planning to put their tax refund toward savings is the highest in the 12-year history of the survey.

  • That's in stark contrast to the percentage of survey respondents who say they're going to use the money to pay down debt, which was in line with last year's total but far below the 48% of respondents who said they would do so in 2009.
4. Jay Powell's charm offensive
Text from the Federal Reserve Board's transcript of Powell's at the "Just Economy Conference" sponsored by the National Community Reinvestment Coalition.

Fed Chair Jerome Powell on Monday doubled down on his comments from Sunday's episode of "60 Minutes," lamenting the unequal nature of the economic recovery the U.S. has enjoyed since 2009 in a speech to the National Community Reinvestment Coalition.

What it means: While Powell's appearance on the news magazine didn't break any new ground, his focus on matters beyond monetary policy and his efforts to communicate to people who don't closely watch financial markets is more akin to a politician than a Fed chair.

The big picture: It follows an interesting string of behavior from the chair who has put much more emphasis than any of his predecessors on boosting the Fed's reach and appeal.

  • Powell had 98 personal phone calls and meetings with Congress members last year — nearly 4 times as many as Yellen, over the same period during her first year. Powell also spent his birthday having dinner with Trump.
  • In November, Powell gave a speech at Mississippi Valley State University, a historically black university that sits outside a rural town of around 2,000 residents. He made many of the same points during that speech as he did to the NCRC on Monday.
  • Powell has scheduled press conferences after every one of the Fed's policy setting meetings, meaning he will speak to the public far more than any Fed chair in the past.
5. The other Jay's Brexit warning

With 17 days until the U.K. is slated to trigger Article 50 and leave the EU, SEC Chairman Jay Clayton told a group of international bankers to brace for price volatility.

In the event of a hard Brexit, "there will be friction, there will be price volatility, there will be problems," Clayton said.

"Volatility is a part of market functioning. We don't intervene in the markets. Is the ECB preparing? Is the Bank of England preparing? Yes. They do engage in market intervention. The SEC's mandate is to make sure price discovery is fair. We're going to have volatile price discovery if we have a hard Brexit."
— SEC Chair Jay Clayton, as reported by MarketWatch

What to watch: U.K. Prime Minister May will put the new deal she negotiated with the EU up for a vote today.

Go deeper: May's desperate push to avoid another Brexit defeat

Dion Rabouin