Jan 29, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Was this email forwarded to you? Sign up here.

Situational awareness:

  • U.S. regulators have filed criminal charges against Huawei, China's largest technology company, for stealing trade secrets and bank fraud. (Bloomberg)
  • The U.S. government is now seen as the most corrupt in 7 years, falling out of the 20 top countries in Transparency International's global index. (Reuters)
  • PG&E filed for bankruptcy protection as it struggles with billions of dollars in potential liabilities from its role in sparking California wildfires. (WSJ)
  • The California Public Utilities Commission voted unanimously to allow PG&E to immediately obtain credit and loans as part of a Chapter 11 filing before the announcement (AP)
1 big thing: Following the money from Venezuela
Expand chart
Adapted from a Bloomberg map; Map: Axios Visuals

It is tempting to paint the competing factions backing Venezuelan President Nicolás Maduro and newly declared President Juan Guaido as East vs. West or socialist vs. capitalist, but the real delineation is about the money.

On one side: Most of the official bonds, around $65 billion worth issued by Venezuela and state oil company PdVSA, are held by investors in the U.S., Canada and Europe. Almost all of those bonds have been in default since November 2017.

  • Investors in North America and Europe are largely still holding the bonds. The odds of them being paid increase greatly if Maduro is replaced as president by someone who will seek help from the IMF and look to issue debt again on global credit markets. None of that can happen until an agreement is made with bondholders.

(This situation played out perfectly for investors when Mauricio Macri was elected president of Argentina and settled almost immediately with that nation's creditors on terms that were very favorable.)

The other side: China and Russia have enjoyed an off-the-books arrangement with Venezuela wherein the nation with the world's largest proven oil reserves ships them crude in exchange for discounted payment of outstanding debts and fresh cash.

  • Maduro also has signed over portions of the country's oil industry to China and sold discounted oil to Cuba, likely in exchange for that country's armed forces protection.
  • Turkey for some time has been supplying products for food packets to Venezuelan officials. Venezuela also ships gold to Turkey and the 2 countries recently announced joint ventures for gold and coal exploration.
  • U.S. officials allege Venezuela has been sidestepping sanctions and sending gold to Iran in exchange for cash and debt relief.

These agreements would be in question under a new president who was backed by the U.S., Europe and the IMF.

Iran and Russia also benefit from Venezuela's greatly reduced oil-production capacity, which props up crude prices.

Closer to home: Latin America's 2 major country alliances — Mercosur, which includes Venezuela but does not recognize Maduro, and Allianza Pacifico — have denounced Venezuela for years. Maduro's assault on democracy threatened international trade agreements and 3 million displaced Venezuelan emigrants have spilled into neighboring countries causing economic and political strain.

  • Bolivia's president Evo Morales and Mexico's Andrés Manuel López Obrador have stood with Maduro but also against a long tradition of U.S. intervention in Latin America.

The bottom line: Venezuela previously funded itself through debt financing and oil sales, but as the cost for Maduro to stay in power rose — with higher bond payments and more security — and he ran low on U.S. dollars he looked for partners who would take alternative payments. Those partners are now invested in him holding power, while defaulted creditors are invested in his removal.

2. Bears on parade
Expand chart
Data: Analysis of Wall Street outlooks; Chart: Axios Visuals

While major banks including Credit Suisse, Barclays, BMO and Citi have softened their bullish expectations for 2019's stock market gains, analysts at Capital Economics have upped the ante, saying they expect the S&P 500 to end the year lower,

In fact, the firm is expecting the U.S. economy to "slow sharply" this year with the S&P some 22% below its 2018 peak. Further, analysts say they do not rule out a mild U.S. recession this year.

"The data from the US have held up for now, but we expect the economy to slow further over the course of 2019 as the sugar-high from last year's fiscal stimulus wears off and the lagged effects of monetary tightening start to bite."
Neil Shearing, chief economist at Capital Economics
3. The CBO quantifies the shutdown
Expand chart
Data: Staff research; Chart: Axios Visuals

Economists are cutting expectations for 1st quarter GDP to reflect the government shutdown's hit to the economy, but not all of the growth lost during the shutdown is forever gone, Axios' Courtenay Brown writes.

  • Barclays economist Michael Gapen cited the shutdown's "effects on consumer spending and other expenditure categories over and above the direct effect in terms of the drop in production by furloughed government workers."

The big picture: The CBO estimates the shutdown cost the economy $11 billion, including $3 billion of activity that won't be recovered.

  • "Some businesses could not obtain federal permits and certifications, and others faced reduced access to loans provided by the federal government. Such factors were probably beginning to lead firms to postpone investment and hiring decisions," CBO officials wrote in their report.
  • Unsurprisingly, the White House disagrees that the shutdown's economic impact was this severe.

What's going on: Three of the big banks raised estimates for 2nd quarter growth, alongside their 1st quarter downgrades, saying that the lost economic activity will resurface in the second quarter.

  • There will be a rebound in economic activity in the 2nd quarter once federal employees — many of whom couldn’t work for 35 days, and missed 2 weeks of pay — work for an uninterrupted quarter, Morgan Stanley economist Ellen Zentner wrote in a note.

Yes, but: Ethan Harris, an economist at Bank of America, who also upped his 2nd quarter growth forecast says "only some of the lost private sector spending will come back."

  • The White House says backpay for federal workers is expected by the end of the week, but not all contractors can recoup wages.

Watch this space: S&P points out that lost productivity from furloughed employees won’t be recovered and business confidence will slump, especially if it appears that we’re headed for another government shutdown in 3 weeks.

Dion's thought bubble: It's important to note that the length of this shutdown is unprecedented. The 35-day shutdown was 2 weeks longer than the previous record in 1995-96 and more than twice as long as the 16-day shutdown in 2013.

4. Two takes on China

Two companies reported earnings this week and had dramatically different readings on what their slowing China sales mean, Courtenay writes.

Caterpillar, which makes 10% of its annual revenue in China, missed profit expectations by the biggest margin in 4 years. But executives say they aren't worried about a broad economic slowdown.

  • "It wasn't actually an overall view of China for the year that impacted the quarter. It actually was just a weakness relating to a very strong comparative in 2017," CFO Andrew Bonfield said on Monday's earnings call.

The other side: Nvidia, which cited China's economic slowdown as the reason for its "extraordinary, unusually turbulent, and disappointing quarter."

  • Nvidia CEO Jensen Huang in a letter to shareholders on Monday: "As we worked through [the 4th quarter], the global economy decelerated sharply, particularly in China, affecting consumer demand for [Nvidia's graphics processing units.]"
5. How Americans are feeling the economy

Ahead of this week's now-delayed report on U.S. GDP, think tank Prosperity Now produced an economic report it says shows how Americans are feeling the economy.

The big picture: The situation for American families is improving, with increased levels of savings, higher wages and fewer people in dire financial straits. However, the organization argues the data shows many Americans are still hurting in a time of strong economic growth.

  • The rate of Americans skipping necessary doctor visits because they couldn't afford them increased to 13.5%, and the rate of people without health insurance rose to 10.2%.
  • Further, 13% of households in the U.S. fell behind on bills and 40% lack a basic level of savings.
"Income poverty rates haven’t fallen below where they were in 2008 and 2007. The cost of living is greatly outpacing growth in wages, and the numbers show that too many of the jobs people do have are not setting them up to afford their healthcare, put money away, or securely meet their housing costs.
The numbers show people of color feel it the most and are vulnerable to the kinds of small disruptions that — as the shutdown demonstrated — can escalate very quickly if you are living paycheck to paycheck.”
— Kasey Wiedrich, director of applied research at Prosperity Now

Wages and Income

  • Nearly 25% of black households, 16.9% of Hispanic households, 10.4% of white and 6.5% of Asian households fell behind on bills.


  • 40% of American households don’t have enough savings to make ends meet at the poverty level for 3 months if their income was interrupted.


  • Almost 30% of Black households, 21.9% of Hispanic households, and 13.4% of White households have no wealth or owe more than they own.


  • The rate of people without health insurance did not decrease for the 1st time since the passage of the Affordable Care Act.
Dion Rabouin

Days without a factual error: 1