Nov 5, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Was this email forwarded to you? Sign up here.

Situational awareness:

  • China is pushing the U.S. to remove more tariffs imposed in September as part of the “phase one” trade deal. (Reuters)
  • Xerox agreed to sell its 25% stake in Fuji Xerox to Fujifilm for $2.2 billion. (WSJ)
  • Uber's stock fell 5.5% in after-hours trading following an earnings report that beat analysts' estimates but showed a $1.16 billion net loss during the quarter. (CNBC)
  • Former McDonald CEO Stephen Easterbrook, who was fired for having a relationship with an employee, will keep stock awards worth more than $37 million, receive $675,000 in severance and health insurance benefits, and is eligible for a pro-rated bonus. (Bloomberg)

(Today's Smart Brevity count: 1,065 words, ~ 4 minutes.)

1 big thing: U.S. farmers could really use some help

Illustration: Sarah Grillo/Axios

Investors have been basking in the glow of the "phase one" trade deal between the U.S. and China, but farmers, who are supposed to be the main beneficiaries of the agreement, have reason to be wary, experts say.

What's happening: U.S. farmers have been suffering this year. Chapter 12 bankruptcies have risen 24% over the previous year and farm debt is projected to hit a record high $416 billion.

  • While farm income is expected to reach its highest total since 2014, 40% of that income will come from trade assistance, disaster assistance, the farm bill and insurance indemnities, according to the American Farm Bureau Federation.

What we're hearing: That's "definitely not the normal," Farm Bureau chief economist John Newton tells Axios.

  • The $28 billion bailout package for farmers that President Trump signed earlier this year has "increased the percentage to a level we’ve not seen in a while."

The big picture: Newton says the amount of U.S. agriculture buys from China that Trump has cited — $40 billion to $50 billion — would go a long way toward getting farmers "back to a level playing field," along with the revamped NAFTA deal. But, analysts have expressed some doubts about the reality of such figures.

  • "Even if the deal is signed, it’s unlikely that either side could deliver on its bloated promises to sharply increase US farm exports to China to $50 billion annually, or anywhere near that total," Peterson Institute senior fellow Jeffrey Schott wrote Monday.
  • Schott, a former Treasury Department international trade official, also noted that "Trump has many times announced Chinese plans to buy US farm products like soybeans, only to pull back and charge Beijing with reneging."

Between the lines: Chinese imports of U.S. agricultural products totaled $24 billion in 2017 and peaked at $29 billion in 2013, according to U.S. government data. Imports fell to $9 billion last year as a result of the trade war.

  • Increasing imports to $40 billion would require removing a number of major technical and political hurdles.
  • These include China changing its laws banning hormones and drug residues in meat and reversing already made investments in Brazilian soybean shipments, industry analysts told Reuters in October.

The bottom line: The trade deal, which is supposed to be signed in a matter of weeks, is largely dependent on China agreeing to meet that $40 billion to $50 billion metric. If the deal falls apart it's likely Trump will again escalate the trade war.

2. Global stock markets are exuberant

The Dow joined the S&P 500 and the Nasdaq in touching an all-time high on Monday, as U.S. equities continued to roar higher.

  • All three indexes set record highs.

By the numbers: The U.S. has been outperforming other global markets for much of the year, but international bourses are starting to pick up the pace.

  • MSCI’s All Country World Index hit its highest since February 2018 on Monday and is just a hair below its own record high, while MSCI's world index excluding the U.S. surpassed its previous year-to-date top.
  • MSCI's Asia Pacific Index was led higher by gains of more than 1% in Hong Kong, Taiwan, South Korea and Thailand, with the Asia Pacific index gaining for the seventh time in eight sessions.
  • European stocks also jumped, with the pan-European Stoxx 600 rising for the ninth time in 11 sessions. Germany's benchmark Dax 30 index rose 1.35%, despite data showing new orders at German factories fell for the 13th straight month in October, and employment levels dropped at the fastest rate since January 2010. 
3. China's growing share of the world's business revenue
Expand chart

Adapted from ChinaPower using Fortune data; Note: Top 10 countries shown, Italy dropped out in 2017; Chart: Andrew Witherspoon/Axios

Chinese companies are taking an increasingly larger share of the Fortune Global 500, an annual ranking of the world’s top 500 companies by revenue.

What's happening: In 2008, China had just 29 companies on the Global 500 and none in the top 10. This year, the list includes 119 Chinese companies that have a combined revenue of nearly $8 trillion, which represents almost a quarter of the revenue generated by all the companies on the list.

  • China also has three of the top five Global 500 — state oil and gas companies Sinopec and China National Petroleum, and electric utility State Grid.

Yes, but: The U.S. remains on top, with more than 24.2% of the companies on the Global 500 and 28.7% of the total revenue generated by companies on the list. It's also home to the largest company on the list, Walmart.

4. Muni bonds are on pace for a record year

Municipal bonds are on pace to see the highest inflows on record, data provider Lipper notes, surpassing the previous high set in 2009.

What's happening: Not only has the asset class almost surpassed the previous record already, but by mid-year, 2019's inflows were also "more than 10 times the amount of new investor money gathered over the whole of 2018," notes Mark Marinella, a portfolio manager at Capital Group.

What it means: The buying spree has been prompted by the Fed's rate cutting cycle, which has reduced the attractiveness of other bonds that don't carry munis' tax-friendly status, and the Tax Cuts and Jobs Act, Lipper senior research analyst Pat Keon points out in a recent post.

  • The tax law change capped state and local tax deductions at $10,000.

Why you'll hear about this again: "Even with muni yields near multiyear lows, after-tax yields have continued to exceed those of taxable bonds for anyone whose marginal tax rate is 24% or higher — well below the top tax rate of 37%," Marinella says.

Go deeper: Municipal bonds are 2019's hottest asset

5. U.S. employment index falls despite solid jobs report
Expand chart

Data: The Conference Board; Table: Axios Visuals

Despite a stronger-than-expected jobs report on Friday, the Conference Board's Employment Trends Index, which follows every U.S. payrolls report, decreased in October, with negative contributions from seven of its eight components.

  • “The index suggests that job growth may slow down a little in the coming months,” said Gad Levanon, head of The Conference Board Labor Market Institute.
  • “Leading indicators of employment are sending a slightly gloomier message than Friday’s stronger-than-expected jobs report. Still, with solid growth in consumer and government spending, and housing, the economy is likely to continue generating new jobs at a healthy rate, despite low business confidence.”
6. Cannabis companies could be facing cash crisis

Marijuana companies may be in serious trouble, as their declining stock prices are putting the cash-reliant businesses in a bind.

  • "Dealmaking is already slowing, while debt is becoming scarce and more expensive," WSJ's Carolyn Ryan writes.
  • "Large banks won’t lend to them while the drug remains federally illegal in the U.S., so pot businesses rely heavily on issuing new shares to fund their deals and expansion plans."

The big picture: Those expansion plans are being put on hold these days, as capital is drying up quickly. Per WSJ...

  • "The amount of capital raised in the cannabis industry during the week ending October 25 plummeted to $27 million from $708 million in the same period of 2018, data from Viridian Capital Advisors shows."
  • "And deals are beginning to fall through: MedMen Enterprises pulled plans for an all-stock purchase of PharmaCann in October."
Dion Rabouin