May 26, 2020

Axios Markets

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🎙“The man who begins to speculate in stocks with the intention of making a fortune usually goes broke, whereas the man who trades with a view of getting good interest on his money sometimes gets rich.” - See who said it and why it matters at the bottom.

1 big thing: U.S.-China trade tensions are escalating again

Illustration: Sarah Grillo/Axios

As the coronavirus pandemic appears to be subsiding in China, it's becoming clear that its targets for the phase one trade deal with the U.S. are unrealistic and there is so far no sign of a plan for renegotiation.

What's happening: White House National Economic Council director Larry Kudlow said Thursday the trade deal was "intact, and China has every intent of implementing it.”

  • Chinese Premier Li Keqiang said Friday that Beijing plans to "work with the United States to implement the phase one China-U.S. economic and trade agreement.”

Background: China agreed to buy $200 billion more in U.S. goods over the next two years than it bought in 2017.

  • The deal paused further escalation in tariffs and helped spur bullish sentiment (even though it did not remove many of the already implemented tariffs).

Yes, but: While China has significantly stepped up its purchases of U.S. agriculture products so far this year, including corn, soybeans, wheat and cotton, it is far from the pace necessary to meet targets for purchases overall.

  • Thanks in large part to the pandemic shuttering much of its economy for two months, Chinese purchases of U.S. goods are down 23.5% from 2019's levels and China was $21.2 billion behind schedule for the first three months of the year, according to an analysis earlier this month from Panjiva, which is part of S&P Global Market Intelligence.
  • The biggest shortfall is in purchases of U.S. energy products, particularly liquefied natural gas, as energy demand has cratered and prices have dropped.

By the numbers: Given the lull in imports during the January–March period, China would need to buy an "impossible" $2.9 billion of energy per month from April to December, Jason Bordoff, a former senior director at the U.S. National Security Council, writes in Foreign Policy.

  • "[A]t $30 per barrel (the U.S. government’s projected average price for 2020), that’s equivalent to about 3 million barrels of oil per day, or the total of all U.S. daily crude exports in 2019."
  • "That China would buy every last drop of exported U.S. oil is unrealistic enough — but today, that oil is not even available, as U.S. oil exports are projected to fall this year along with the collapse in U.S. shale output, which is projected to drop by roughly one-third over the next year."

One more thing: China also is facing renewed street protests in Hong Kong after passing a controversial national security law that Secretary of State Mike Pompeo called a “death knell” for Hong Kong's autonomy.

  • White House National Security Advisor Robert O’Brien said the U.S. is likely to impose sanctions on China if the law is passed.
  • China's Foreign Minister Wang Yi warned that some in the U.S. were pushing relations toward a "new Cold War."
2. Catch up quick

The decline in state and local finances from the coronavirus pandemic could weigh on the nation’s economic recovery for years to come. (WSJ)

The European Union is facing a split over how to finance economic recovery spending after a group of four northern countries rejected France and Germany's plan to issue EU debt to provide grants for hard-hit countries. (FT)

Some forecasts estimate that of the more than 21 million workers laid off in March and April, only about half will be able to return to their old jobs. (WSJ)

Japanese Prime Minister Shinzo Abe lifted the country's state of emergency and said that reviving the economy was now the top priority. (Bloomberg)

3. Airport traffic is starting to rise

Data: TSA; Chart: Naema Ahmed/Axios

People are returning to airports at a significant rate, TSA data show. While still down from its early March level when more than 2 million people were screened at airports each day, TSA screened nearly 350,000 people on Friday.

  • That is more than triple the number of people who went through screening checkpoints as recently as April 28.
  • Just 87,534 were screened on April 14, a 96% decline from the year ago period.

Go deeper: Airlines pack in customers like there's no coronavirus

4. Professional investors may be dipping their toes back into stocks

The historic inflow to money market funds from institutional asset managers finally paused last week and that could mean investors are starting to believe in equities again after steering clear of making major investments over the last two months.

What happened: Money market funds, which are effectively savings accounts, saw just $1.41 billion of inflows for the week ending May 21, data from the Investment Company Institute showed — and it was entirely from retail investors.

The big picture: Professional fund managers have moved more than $1 trillion into money markets since the week ending March 18, bringing total holdings to $4.8 trillion.

  • That's a record high and close to $1 trillion more than the record level prior to 2020, during the Great Recession.

What they're saying: “The extreme attractiveness of stocks over bonds, particularly as rates have plummeted back to near zero, can be the catalyst for the rotation into stocks, driving the market higher,” Savita Subramanian, Bank of America's head of U.S. equity and quantitative strategy, said in a recent note to clients.

By the numbers: Investment in stocks among BofA's clients has fallen by 3 percentage points to 57.1% while cash allocations have risen to nearly 14%, well above the historical average dating back to 2005, she noted.

  • The S&P 500′s dividend yield is more than three times the yield of the 10-year U.S. Treasury note — 1.95% vs. 0.66%, according to FactSet.

The bottom line: “As the economy enters what our economists forecast as the worst recession in the post war era, the market is telling us not to worry," Subramanian said. "And it is dangerous to ignore the market.”

5. Existing home sales crash, but prices soar
Data:; Chart: Axios Visuals

Sales of existing homes in the U.S. fell 17.8% month over month and 17.2% year over year in April, but the median price jumped to a record high, the National Association of Realtors (NAR) said last week.

  • The numbers were based on closed sales, so it corresponds to sales made in late February and March, suggesting the coronavirus pandemic began hitting the real estate market early.

Why it matters: The data show the combination of decreasing supply and historically low interest rates continued to push prices higher in an already expensive housing market.

  • The supply of homes for sale fell 19.7% annually to the lowest April inventory figure ever.
  • The median price of an existing home sold in April rose 7.4% annually to $286,800, a record high in nominal value.

The big picture: The disruption to sales was limited and listings on the market are still attracting buyers and boosting home prices, NAR chief economist Lawrence Yun said in a press release.

  • “Record-low mortgage rates are likely to remain in place for the rest of the year, and will be the key factor driving housing demand as state economies steadily reopen,” he said. “Still, more listings and increased home construction will be needed to tame price growth.”

What's next: The government's FHFA home price index of single-family homes will be released today at 9am ET, followed by the Commerce Department's new home sales report at 10 am ET.

Thanks for reading!

Quote: “The man who begins to speculate in stocks with the intention of making a fortune usually goes broke, whereas the man who trades with a view of getting good interest on his money sometimes gets rich.”

Why it matters: On May 26, 1896, Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow's Dow Jones index began trading with an average of 12 industrial stocks. It closed at 40.94 that day.

  • Dow founded the company and the indexes with statistician Edward Jones (who is not the Edward Jones of Edward Jones Investments).