Aug 6, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • China's central bank set the daily currency fixing stronger than analysts expected, helping push the yuan well below the 7-to-1 mark against the dollar. (Bloomberg)
  • Luxury department store Barneys announced it will file for bankruptcy in order to restructure its business and pursue a sale. (NYT)
  • "[T]he Fed and its chair must be permitted to act independently and in the best interests of the economy, free of short-term political pressures and, in particular, without the threat of removal or demotion of Fed leaders for political reasons," Paul Volcker, Alan Greenspan, Ben Bernanke and Janet Yellen wrote in an op-ed. (WSJ)
1 big thing: The trade war could get much worse

A TV screen shows the numbers after the closing bell at the New York Stock Exchange, Aug. 5. Photo: Johannes Eisele/AFP/Getty Images

Stocks continued their sell-off overnight as fears of further escalation in the U.S.-China trade war were realized after markets closed on Monday.

The big picture: Investors are beginning to fear that not only will the trade war dent business confidence and economic growth, but with further escalation and no end in sight, it could do massive damage to the entire global economy.

What they're saying: "These types of beggar-thy-neighbor policies were a hallmark of the Great Depression and caused a much larger economic downturn in its aftermath," said Joe Brusuelas, chief economist at consulting firm RSM.

  • Jim Paulsen, chief investment strategist at The Leuthold Group, wrote in a note to clients: "If the stimulus introduced about the globe in the last six to nine months does not trigger at least some bounce in the economic and earnings recovery, it won’t be recession fears that will spike, it will be depression fears."

Driving the news: The U.S. Treasury Department officially declared China a currency manipulator Monday night. It's a meaningless designation that the Trump administration has passed on before and is now making without any real evidence. In response, the Chinese Ministry of Commerce confirmed Chinese companies have stopped purchasing U.S. agricultural products.

By the numbers: Stocks have continued to fall around the world.

  • Asian stocks fell further overnight, with China's Shanghai Composite Index down 1.6%, Japan's Nikkei 0.6% lower, Australian stocks down 2.4% and South Korea's KOSPI off by 1.5%.
  • That followed losses of 3% on the S&P 500 with the Nasdaq dropping 3.5% and the Dow closing 767 points, or 2.9%, lower on Monday, the worst day for the U.S. stock market of 2019.

Of note: Other markets, including bonds, currencies and commodities, have had more subdued reactions, as investors in those assets had priced in more downside risk already.

  • The U.S. Treasury yield curve, which first inverted in March, moved further negative, with 3-month T-bills holding yields 32 basis points higher than 10-year notes.

Be smart: “The fundamentals are impacted by the trade war and by tariffs, but that’s not the only reason for the sell-off," Peter Cecchini, global chief market strategist at Cantor Fitzgerald, told Bloomberg.

  • "I think it’s a deeper wound in the global economy that the market is suffering right now."
2. U.S. services data starts to sink
Expand chart
Data: Institute for Supply Management; Chart: Axios Visuals

The U.S. services sector slowed for a second straight month in July, showing the continued decline in American economic activity.

Why it matters: It was the lowest reading for the sector, which makes up around 70% of the U.S. economy, since August 2016.

What they're saying: The Institute for Supply Management said respondents to its survey "indicated ongoing concerns related to tariffs and employment resources. Comments remained mixed about business conditions and the overall economy.”

The big picture: The manufacturing sector has been in decline all year and is officially in recession. The services sector is far more important to the overall health of the economy and had managed to remain strong despite the trade war.

  • However, Monday's data shows that it, too, may be heading toward contraction.

Yes, but: While the level of growth has been slowing, the services sector is still expanding and has been for 114 straight months.

3. Central banks haven't cut this much since the financial crisis
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Adapted from a Goldman Sachs chart; Chart: Axios Visuals

Investors are pricing in a 100% chance the Fed cuts rates at its next meeting in September after Monday's market carnage, joining central banks around the globe that are providing more stimulus to their respective economies.

  • While the prospect of more interest rate cuts had buoyed the stock market going into last week's Fed meeting, Monday's sell-off showed that investors no longer view that as enough to sustain current price levels.

What's happening: Initially seen as a cautionary pause, the world's central banks have clearly returned to a path of lower interest rates that has not been seen since the global financial crisis.

  • More than half of the world's central banks are expected to cut interest rates in the third quarter, while 0% of central banks are expected to raise rates in the third or fourth quarters, data compiled by Goldman Sachs shows.

What they're saying:

  • "With global growth running at a below-trend rate of 2.75% — down from about 4% a year ago — a synchronized tilt towards easing looks like a natural response to a weaker outlook," Goldman Sachs research analysts wrote in a recent note to clients.
4. Digital currencies may become a reality without Facebook

Illustration: Rebecca Zisser/Axios

In addition to bringing easier monetary policy, central banks also are diving deeper into the idea of issuing digital currencies, thanks in large part to concerns about Facebook's Libra.

The general manager of the Bank for International Settlements, known as the central bankers’ bank, told the Financial Times in June that global central banks may have to issue their own digital currencies sooner than expected.

The Philadelphia Fed also recently evaluated the prospect of central banks producing digital currencies. It found that doing so would likely be a net positive.

"While a digital currency tends to promote efficiency in exchange, it can also crowd out bank deposits, raise banks' funding costs, and decrease investment. Despite these effects, introducing a central bank digital currency often raises welfare."
— Todd Keister and Daniel Sanches, in the Philadelphia Fed's research paper "Should Central Banks Issue Digital Currency?"
5. Tyson's stock rose 5% despite Monday's sell-off
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Data:; Chart: Axios Visuals

One of Monday's few bright spots for stock investors was Tyson Foods, which saw its shares jump 5% after reporting fiscal third-quarter earnings that beat expectations.

By the numbers: Net income rose more than $100 million to $676 million, and adjusted EPS beat consensus, according to FactSet. Total sales rose to $10.89 billion, from $10.06 billion last year.

The big picture: Investors were clearly impressed with Tyson's ability to perform and its potential to boost sales as worries about a swine flu outbreak have continued to reduce hog supplies in Asia.

  • Once China exhausts frozen inventory, Chinese importers are expected to turn to international suppliers like Tyson.
  • "Given the magnitude of the losses in China's hog and pork supplies, the impending impact on global protein supply and demand fundamentals is likely to be a multi-year event," Tyson CEO Noel White said in a statement.
Dion Rabouin