Jun 1, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙 “Lurid flames roared and belched and licked their forked tongues into the air. Smoke ascended the sky in thick, black volumes and amid it all, the planes — now a dozen or more in number — still hummed and darted here and there with the agility of natural birds of the air.” - See who said it and why it matters at the bottom.

1 big thing: The inexplicable Teflon market

Traders work on the floor of the NYSE. Photo: Spencer Platt/Getty Images.

U.S. equities were on pace to open higher following big gains in Asia and Europe and a risk-on bid in currency markets.

Why it matters: Stock markets could continue to rise despite an unprecedented global pandemic, violent protests over police violence in the U.S. not seen since the 1960s, and spiking tensions between the world's two largest economies.

What's happening: “Given everything that happened over the weekend, that’s a pretty bullish open,” Max Gokhman, Pacific Life’s head of asset allocation, told Bloomberg of the start to trading in Asian markets.

  • “We’ve had riots that forced many major cities to impose curfews and send in the National Guard. We can reasonably expect that this won’t help the coronavirus curve bend in the right direction.”

The big picture: Violent protests have taken place for six straight days in dozens of cities, forcing the closure of some of the largest U.S. retailers, including Target and Apple, right as they were reopening after COVID-19 shutdowns.

  • Amazon announced it would scale back deliveries and shut down delivery stations in cities like Chicago, Los Angeles and Portland.

What they're saying: Billionaire investors and top market analysts at institutions including Goldman Sachs and Bank of America have warned for weeks that the stock market's rally looked overdone and have written down expectations for the rest of the year.

  • Late last week, JPMorgan equity strategist Marko Kolanovic reversed course on his bullish March call, warning that reopening efforts looked insufficient and that the threat of supply chain and international trade breakdowns, primarily between the U.S. and China, "would justify equities trading drastically lower.”

On the technical side: Bespoke Investment Group wrote in a note to clients that just over 74% of stocks in the S&P 500 are now overbought, and that there is not a single oversold stock in the index — the first time this has happened in the history of its database going back to 2007.

One level deeper: Goldman Sachs warns that the S&P's return on equity in the first quarter plunged to "the lowest level since 2017." Further, a 150 basis point decline in margins from the fourth quarter of 2019 to the first quarter of 2020 "was the largest quarterly decline since 1970."

Yes, but: None of that has mattered so far. The S&P 500 broke through 3,000 on Thursday and rose again Friday, up 38% from its March 23 low.

  • “It’s tough to be a bear at the moment and the path of least resistance for risk remains to the upside in my opinion,” Chris Weston, head of research at Melbourne brokerage Pepperstone, told Reuters.
2. Catch up quick

Executives at the biggest U.S. banks, including JPMorgan, Citi and Wells Fargo, decried racism and called for change in letters to employees after the police killing of George Floyd. (Bloomberg)

President Trump announced Friday the U.S. would begin rolling back Hong Kong's special trading privileges and examine listing requirements for Chinese companies on U.S. stock exchanges. (WSJ)

China responded by telling major state-run agricultural companies to pause purchases of some American farm goods including soybeans. (Bloomberg)

Italy's health minister confirmed the country can move forward with plans to start allowing travel across the country next week. (Bloomberg)

3. Oil prices rose by nearly 90% in May
Data: FactSet; Chart: Axios Visuals

Oil edged lower in overnight trading after five straight weeks of gains, including a 5% rise on Friday, pausing after a record 88% increase from its low point in May.

What happened: Last month's surge brought oil back from negative pricing thanks in large part to increasing expectations for consumer demand to return and a deal to cut production by the Organization of the Petroleum Exporting Countries and major producers like Russia.

  • OPEC is now considering extending production cuts by one to three months.

Where it stands: U.S. West Texas Intermediate crude prices have remained above $35 a barrel, while global benchmark Brent crude prices are around $38 a barrel.

4. Tech responds to the protests

Protester holds up a sign on May 31 in downtown Minneapolis in response to the death of George Floyd at police hands. Photo: Stephen Maturen/Getty Images

An explosive weekend in America sent Silicon Valley grasping for moral clarity. While many companies and executives spoke out against racial inequities, critics and even some of the rank-and-file found some of the companies' responses lacking, Axios' Kyle Daly and Ina Fried report.

What's happening: The response from the tech industry to George Floyd's death and the subsequent protests and looting ranged from vague appeals to peace to statements of solidarity with the Black Lives Matter movement.

  • Google, Twitter, Netflix, Cisco and Uber were among the companies that either took broad stances in favor of Americans protesting in the name of racial equality, or saw top executives do so. (The Plug, a site that specializes in the role of black people in tech, curated many more tech industry comments in a Google Docs file.)
  • Some corporate leaders, such as Slack CEO Stewart Butterfield, Box CEO Aaron Levie and Jeff Dean, a top Google AI executive, took police to task for what they argued were actions that only heightened tensions with protesters, turning protests into violent clashes.
  • A number of companies also made donations to organizations fighting for racial justice, including YouTube and Apple.
  • Google devoted a portion of the Google and YouTube home pages to advocating for racial justice and also postponed an Android 11 event that had been scheduled for Wednesday.

Yes, but: A number of major tech companies already face vocal criticism that they exploit or even contribute to racial and economic injustice.

  • After Amazon tweeted, "The inequitable and brutal treatment of Black people in our country must stop" from its corporate account, the replies were filled with suggestions of concrete action the company might take on that front.
  • Suggestions included paying its warehouse employees better and stopping what many see as the retaliatory firing of employees who speak out on working conditions.
  • NBC News' April Glaser noted, "Amazon has hundreds of partnerships with police and law enforcement agencies across the country and wants more," referring to deals that give police access to video from Amazon's Ring cameras.

What they're saying: In an email to employees Sunday, Apple CEO Tim Cook wrote...

"At Apple, our mission has and always will be to create technology that empowers people to change the world for the better. ... To create change, we have to reexamine our own views and actions in light of a pain that is deeply felt but too often ignored. Issues of human dignity will not abide standing on the sidelines."

Our thought bubble: Cook's message was echoed by many other tech CEOs. In an era when tech is under fire from the political left and right, companies and leaders will be under the microscope for how they handle this moment. It may be a put up or shut up moment for those calls to "change the world."

Go deeper: I urge you to read some of Axios' other coverage looking at the genesis and complexity of the crisis.

5. The Fed's balance sheet expansion may be slowing inflation
Data: Federal Reserve Bank of St. Louis; Chart: Axios Visuals

Today, coins and bills in circulation make up only 10% of the money supply, Deutsche Bank Securities chief economist Torsten Sløk points out in a note to clients.

What it means: The majority of the money supply is now used by the Fed for its balance sheet and in the banking sector to purchase financial assets.

  • As such, the velocity of money has slowed dramatically, and "an increase in money supply relative to GDP is having a negative impact on inflation," Sløk says.
  • "[Y]ou can increase the Fed balance sheet and the money supply as much as you want, if the money goes into asset transactions rather than GDP transactions it will not be inflationary."

Background: "The velocity of money is the frequency at which one unit of currency is used to purchase domestically-produced goods and services within a given time period," according to the Fed.

  • "In other words, it is the number of times one dollar is spent to buy goods and services per unit of time."

The bottom line: Velocity looks set to slow further as the central bank ramps up its balance sheet expansion to an expected level of nearly half of U.S. GDP this year.

Dion Rabouin

Thanks for reading!

Quote: “Lurid flames roared and belched and licked their forked tongues into the air. Smoke ascended the sky in thick, black volumes and amid it all, the planes — now a dozen or more in number — still hummed and darted here and there with the agility of natural birds of the air.”

Why it matters: The quote is from a 10-page manuscript called “The Tulsa Race Riot and Three of Its Victims” by B. C. Franklin. It describes the events witnessed by the author on June 1, 1921, when white rioters destroyed the wealthy community of Greenwood, also known as Black Wall Street.

  • In 24 hours, the riot left 35 city blocks in charred ruins with over 800 people treated for injuries and historians now believe as many as 300 people were killed. Up to 6,000 black Greenwood residents were interned at three local facilities in the aftermath.
  • A history of the massacre is detailed here.