Feb 16, 2021

Axios Markets

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❤️ Trivia: The son of a barber, in 1893 this man performed the first successful heart surgery in the world at the hospital he founded, which was the first to be Black-owned and the first non-segregated hospital in the United States.

  • Medical textbooks of the time said that operating on a human heart was too dangerous, and there was no precedent for opening a human's chest.
1 big thing: China's political power grows with its capital markets

Illustration: Aïda Amer/Axios

Axios' Bethany Allen-Ebrahimian and I write: Thanks to a mandate for outside investment and its strong rebound from the coronavirus pandemic, China’s financial markets are drawing record high chunks of global capital — particularly from U.S.-based investors — and are poised to keep growing.

Why it matters: As more money flows to China’s financial markets, its political leaders will have a clear mechanism to increase the country’s political power, giving China another potent weapon to challenge the United States’ position as the world’s superpower.

What we're hearing: China's goal is "renminbi internationalization," says Nicholas Borst, director of China research at Seafarer Capital Partners.

What it means: As more foreigners invest in mainland Chinese companies, government bonds and other securities that trade in renminbi — China's currency — they are forced to buy and hold the currency.

  • The more global investors hold these Chinese assets, the more international and important China's currency becomes.
  • "You can’t have a globally important currency unless you give investors a safe place to park it," Borst tells Axios.

The big picture: China has long weaponized access to its domestic consumer markets for geopolitical gain, forcing airlines, hotels, Hollywood studios, and many other companies to avoid crossing the Chinese Communist Party's red line.

  • As China's capital markets become more lucrative, many expect they will leverage access to those markets in the same way.

One case study: In Hong Kong, China's national security law requires banks to freeze the assets of pro-democracy activists accused of "terrorism" or "sedition" for political organizing activities.

By the numbers: As of 2020, the market cap of Chinese companies listed on mainland, Hong Kong and overseas indexes like the New York, London and Singapore stock exchanges, totaled nearly $17 trillion, with the vast majority ($11.7 trillion) on mainland exchanges.

  • That total rivals the combined market cap of the London Stock Exchange and the Euronext exchanges.

Yes, but: China has a long way to go before the RMB becomes an internationalized currency. That's in part because China's leaders are reluctant to make the currency fully convertible, since doing so would relinquish some control over capital outflows and domestic fiscal policy.

What to watch: China is developing a digital RMB, and the global payments giant SWIFT has partnered with China's central bank to help develop it.

  • A digital RMB could speed the internationalization of China's currency and expand Beijing's geopolitical sway around the world.
Bonus chart: China's stock market cap

Data: Seafarer Funds; Chart: Axios Visuals

Even as the Trump administration banned U.S. investors from owning shares in certain Chinese companies linked to the military and Congress passed legislation to delist Chinese firms from American exchanges, China has become one of the largest single-country exposures for U.S. investors, according to Seafarer's data.

  • "China is now both the second largest economy and the second largest capital market," Linda Zhang, CEO of Purview Investments, tells Axios.
  • "Most U.S. investors are exposed to Chinese firms ... either directly or indirectly through their brokerage accounts or 401ks."

Between the lines: Banning Chinese companies from U.S. stock exchanges could push Chinese companies to the Shanghai and Hong Kong stock exchanges.

  • In the long run, this would increase the relative power of these exchanges over those in the U.S., Bob Bartel, global head of corporate finance at New York-based financial consultancy Duff & Phelps, points out.
2. Catch up quick

A gauge of market positioning from JPMorgan shows global investors now are the least fearful of taking risk in markets since the dot-com bubble burst. (Bloomberg)

More than 15% of debt raised in the U.S. high-yield bond market has carried a rating of CCC or below, the lowest ratings given, since the start of 2021. That's the highest share since 2007. (FT)

Daily confirmed COVID-19 cases in the U.S. fell below 100,000 on Friday for the first time in months, a significant decline from the daily average of 250,000 cases just last month. (NBC News)

The WTO unanimously selected former Nigerian Finance Minister Ngozi Okonjo-Iweala to be the first woman and first African to lead the group. (Bloomberg)

3. Growing U.S. inequality reflected in slumping consumer confidence
Data: University Of Michigan; Chart: Axios Visuals

Stock markets closed at record highs again but consumers remain in a malaise, with expectations for the future trending away from their high levels at the start of 2020 and back toward the lows they plumbed in May, as the pandemic forced municipalities around the country to impose lockdown restrictions.

Driving the news: Friday's release of the University of Michigan's consumer sentiment index showed the overall index and consumer expectations index at their weakest level since September.

Between the lines: The entire decline in February's sentiment index was "concentrated in the expectation index and among households with incomes below $75,000," survey analysts said in a release.

  • "Households with incomes in the bottom third reported significant setbacks in their current finances, with fewer of these households mentioning recent income gains than anytime since 2014."

The bottom line: "When asked to assess their current financial position, the deep divisions become apparent: among those with incomes in the bottom third, just 23% reported improved finances, the lowest since 2014; in contrast, among those with incomes in the top third, 54% reported their finances had improved.

  • "Mentions of income gains fell to just 17% among those in the bottom third, compared with 44% in the top income third."

Go deeper: The winter COVID surge has reversed progress on economic inequality

4. Battle of the bulging prices
Data: FactSet; Chart: Axios Visuals

Bitcoin's rise to more than $50,000 a coin recently still hasn't brought its gains over the past year in line with perhaps the world's best-performing major speculative asset, Tesla stock.

5. Investors' inflation expectations are pushing up borrowing costs

Data: U.S. Department of the Treasury; Chart: Michelle McGhee/Axios

Bond investors are looking past last week's tepid consumer price index report that showed U.S. inflation rising at just 1.4% and continue selling out of Treasury bonds in a big way, pushing yields from the benchmark 10-year note to their highest since mid-March on Friday.

Why it matters: Even at their still historically low levels, the market's rising inflation expectations are beginning to have an impact on the real economy by pushing mortgage, credit card and auto loan rates higher, making them more expensive for consumers.

Where it stands: Mortgage rates increased in four of the first six weeks of 2021, data from the Mortgage Bankers Association showed last week.

  • “With the 30-year fixed rate increasing to 2.96 percent — a high not seen since last November — refinances declined, and their share of total applications dipped to the lowest level in three months," Joel Kan, MBA’s associate vice president of economic and industry forecasting, said in a statement.
  • Credit card balances and other revolving credit lines ticked down 0.3% month over month in December and fell by 10.8% year over year, the steepest decline ever, according to the Federal Reserve.

The big picture: With the notable exception of mortgages and student loans, Americans consistently reduced and took on less debt as 2020 progressed.

  • Banks also tightened lending standards and cut back lending, with the loan books at large U.S. banks shrinking for the first time in more than a decade and just the second time in 28 years, according to Barclays data.

State of play: Both student loan and mortgage rates fell to their cheapest level ever in 2020 but those trends are beginning to reverse as investors price in higher inflation expectations and push bond yields higher.

  • Ten-year breakeven inflation expectations rose to 2.23% on Friday, the highest since 2014, meaning investors are now pricing in average annual inflation of 2.23% for the next 10 years.

Don't sleep: As Treasury yields (considered the world's safest asset) are spiking and inflation expectations are hitting their highest levels in years, yields on high yield, or junk bonds, have fallen to the lowest in history.

Thanks for reading!

Trivia: The son of a barber, in 1893 this man performed the first successful heart surgery in the world at the hospital he opened, which was the first to be Black-owned and the first non-segregated hospital in the United States.

  • Medical textbooks of the time said that operating on a human heart was too dangerous, and there was no precedent for opening a human's chest.

Answer: Dr. Daniel Hale Williams.

  • His patient, who had been stabbed in a knife fight, lived for 20 years after the surgery.