Feb 19, 2020

Axios Markets

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1 big thing: Waking up to Africa's importance

Illustration: Aïda Amer/Axios

Secretary of State Mike Pompeo is in Africa working to counter growing Chinese investment in the continent as the U.S. tries to fight China's rising global influence.

Why it matters: China has upped its spend on the continent in recent years while the Trump administration has not and looks to be trying to make up for lost time.

  • African countries are some of the fastest growing on Earth, a quality which is expected to become increasingly important as developed countries like the U.S. and China deal with aging populations and declining productivity that most asset managers believe will lead to reduced investment returns.
  • Last year, debt from African countries and other so-called frontier markets delivered the best return for investors since 2012.

What's happening: China has ramped its financing of infrastructure projects like bridges, airports, dams, power plants, and Africa's largest port.

  • Between 2014 and 2018, Chinese companies invested twice as much money in African countries as American companies, spending $72.2 billion and creating more than twice as many jobs, according to an analysis from accounting firm EY.
  • And Chinese President Xi Jinping vowed in 2018 to invest a further $60 billion.

Between the lines: Chinese companies are investing in African manufacturing companies as a means of avoiding U.S. tariffs on exports, making products in countries like Senegal and shipping to the U.S. from there.

On the other side: Though the U.S. created the International Development Finance Corporation to increase funding for Africa and other developing nations just last year, the Trump administration's latest budget proposed cutting aid and development funding to African states and is weighing cutting troops throughout the continent.

  • The Trump administration also recently announced an expanded travel ban that affects nearly a quarter of Africa’s population.
  • And few have forgotten that two years ago President Trump referred to African states as “shithole countries.”

The bottom line: The administration seems to be waking up to Africa's strategic importance in the trade war and in its ambitions to counter China.

2. Catch up quick

The novel coronavirus has now infected more than 75,000 people and killed at least 2,009, the latest figures show. (Axios)

S&P Global cut Macy's credit rating to junk status Tuesday, saying a new plan to revive its business carried considerable execution risk. (Reuters)

3. Mike Bloomberg's war on Wall Street

Illustration: Sarah Grillo/Axios. Photo: Mark Wilson/Getty Images

Axios' Felix Salmon writes: Mike Bloomberg makes billions of dollars from Wall Street every year. But his plan to rein in the financial sector is very aggressive. If he were to become president, it would be fought vociferously by all the biggest clients of Bloomberg LP, the financial-information company that's the source of the candidate's wealth.

Why it matters: Bloomberg's detailed financial reform policy, released Tuesday, could cost Wall Street trillions of dollars while significantly increasing regulatory scrutiny of financial activities. It's a vision that would not be at all surprising coming from Elizabeth Warren, but that was less expected from an avatar of red-blooded capitalism.

How it works: At the top of Bloomberg's wish list is for banks to hold significantly more capital on their balance sheets. While the policy doesn't specify a number, it does approvingly footnote a paper from the Minneapolis Fed that would end "too big to fail" by raising the so-called "capital requirement" for banks from 13% to as much as 38% for the biggest banks.

  • The Minneapolis Fed plan would force the banks to raise about $2 trillion from the markets, and would raise loan rates by 1.4 percentage points. Add it all up, and the total cost is estimated by the Minneapolis Fed at about 30% of GDP.
  • The Minneapolis Fed calculates the benefits of its plan as higher than the costs, thanks to banking crises happening much less frequently.

Also on Bloomberg's list:

  • A financial transactions tax, affecting mostly the very wealthy, that would raise about $500 billion over 10 years. Every stock, bond, and derivatives transaction would be taxed a tiny amount, helping to discourage socially useless high-frequency trading.
  • "Speed limits" on the stock exchange that would level the playing field by allowing everybody's orders to be filled at the same time and at the same price.
  • Allowing the Post Office to provide banking services.
  • Tougher banking supervision, including more stringent stress tests from the Fed and a ban on banks using their money to speculate in the markets.
  • Fully nationalize Fannie Mae and Freddie Mac.
  • Beef up the Consumer Financial Protection Bureau.
  • Automatically tie student loan payments to income, and make it easier to discharge student loans in bankruptcy.

The bottom line: Where Trump deregulated Wall Street, Bloomberg wants to re-regulate it — and he wants to go significantly further than even former President Obama managed with the post-crisis Dodd-Frank legislation.

4. Fintech investors avoided early-stage companies in 2019
Expand chart

Reproduced from CB Insights; Chart: Axios Visuals

Fintech investment fell in 2019, as the number of deals and the total amount of money invested both declined significantly from 2018's record pace.

  • The biggest decline was in early-stage investing, which saw the lowest number of deals in five years, according to data from CB Insights.
  • Later stage series B+ companies, on the other hand, saw funding rise to five-year highs.

Why it matters: The data shows fintech investors are increasingly moving their dollars away from young companies with higher risk and growth potential and consolidating investment in bigger, more established names that are foregoing public markets in favor of staying private and raising more funding.

  • Nearly 50% of fintech funding in 2019 came from 83 megarounds (deals over $100 million) totaling $17.2 billion.
  • "This is a positive signal that more fintech startups are maturing, which becomes more difficult with each subsequent financing," analysts say in the report.

Details: Annual funding fell by 15% year-over-year in 2019 to $34.5 billion across 1,913 deals.

  • North America, Europe and Asia all saw the number of deals and the total amount invested fall.
5. Fund managers are getting a bit more bearish

Expectations of global growth were cut in half in the latest Bank of America survey of asset managers.

What's happening: The survey showed money managers are less bullish this month than in January, but had also cut their cash holdings to 4.0% from 4.2%, which was the lowest since March 2013.

Details: Only a net 18% of investors surveyed said they expect the global economy will improve in the next 12 months, down from 36% in January. However, that number remains well above the lows of 2019.

  • 67% of investors surveyed expect below-trend growth and inflation over the next year, up 5 percentage points from January.
  • Investors also slashed their expectations for inflation — net 60% of respondents expect global inflation metrics will not rise in the next year.

Oh, word? When asked what would increase their expectations for inflation to rise, 26% of those surveyed responded Modern Monetary Theory, while 24% selected a G7 commitment to infrastructure spending.

Of note: "February saw big rotation into US bonds, tech, and EM, out of banks, energy and value," BofA analysts said in the report.

6. Foreign governments continue to shun U.S. government debt

Foreign private buyers continue to pile into U.S. government debt while foreign governments again pulled money out, led by China.

What it means: The U.S. Treasury International Capital Report showed a net inflow of $78.2 billion — $134.2 billion of foreign private inflows and net foreign official outflows of $56 billion.

  • Chinese government holdings of U.S. Treasury bonds fell for the sixth straight month in December, dropping by $19.3 billion.

Why it matters: Market analysts say the decline in foreign government holdings of Treasury bonds and the increase of issuance due to steadily rising U.S. budget deficits may be a prime factor in market stress, including issues in the structurally important repo market that banks use to get fast cash.

The big picture: For 2019, private buying netted to $197.6 billion, while official government purchases declined by $332.2 billion, BMO Capital Markets said in a recent note.

  • There has been "a more pervasive theme" of reserve managers cutting back their Treasury buying as the government has issued more debt, and foreign officials' holdings have been little moved since 2014 despite an increase of around $5 trillion in debt.
  • That gap has largely been filled by the Fed's recently restarted bond buying program and private foreign sources.

Benjamin Oliver Davis Sr. was a Howard University-educated war hero who fought in the Spanish-American War, commanded the Buffalo Soldiers, and went on to become the first African American colonel and the first general in the U.S. Army.

  • He also served as a professor of military science and tactics, and during World War II headed a special unit charged with safeguarding the status and morale of black soldiers in the Army.
  • In 1940, he was promoted to brigadier general by President Franklin D. Roosevelt, and retired in 1948 after 50 years of service.
  • He became an adviser for the military on racial discrimination, pushing for full integration of the armed forces and earned a Bronze Star and Distinguished Service Medal.

The next generation: His son, Benjamin O. Davis Jr., became the second African American general in the U.S. military and the first in the Air Force, where he led the Tuskegee Airmen.