Jul 26, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • SoftBank announced its Vision Fund 2 with about $108 billion to invest into technology start-ups around the world. (Axios)
  • Alphabet’s stock jumped nearly 9% after hours as the company beat expectations in its second-quarter earnings and announced plans for a $25 billion buyback of its stock. (Forbes)
  • Juul spent more than $200,000 targeting children in schools and online, according to a U.S. House subcommittee report. (Bloomberg)
1 big thing: More negative interest rates won't save Europe

Illustration: Aïda Amer/Axios

The hope for interest rate cuts and more quantitative easing in September was not enough to placate the market on Thursday.

  • Stocks fell in the U.S. and Europe after an announcement from ECB president Mario Draghi that gave the distinct impression the central bank would ease monetary policy at its next meeting.
  • Most analysts said the reaction from the market was due to Draghi sounding more hawkish than expected, but investors may simply be waking up to the idea that central bank easing isn't what it once was, and the ECB's policy tool kit looks exhausted.

What they're saying: "Negative interest rates and more QE will only have a small impact, but given there are no other alternatives central banks really don’t have any other options," Torsten Sløk, chief economist at Deutsche Bank Securities, tells Axios in an email.

  • "The big option is of course fiscal policy but that is up to the politicians. And for political reasons there is very little room to maneuver for fiscal policy at the moment both in the US and Europe."
  • Joseph Trevisani, senior analyst at FX Street, adds: "Europe's problems are not cyclical. They are long-term weak demand, slow growth and the scarcity of worthwhile investments. These cannot be addressed by negative rates."

Be smart: Recent academic papers examining the impacts of quantitative easing show that it is no longer a useful instrument.

  • A January report from Princeton University researchers Markus K. Brunnermeier and Yann Koby suggests there comes a point at which lowering interest rates actually makes things worse, and "depresses rather than stimulates the economy."
  • The ECB's current -0.4% interest rate has clearly not created a sustainable stimulus, so it's possible that lowering it further could hurt rather than help the eurozone, further exaggerating the economic slowdown.

What's next: Market heavyweights, including BlackRock chief investment officer of global fixed income Rick Rieder and Ethan Harris, Bank of America-Merrill Lynch’s head of global economic research, expect the ECB may have to start buying stocks to keep the economy from stagnating.

  • But with a more limited pool of equities to choose from, given Europe's relatively small stock market, that may not enough.
2. AI startups net record funding
Expand chart
Adapted from CB Insights; Chart: Axios Visuals

Artificial intelligence startups generated their highest level of funding ever in this year's second quarter, according to research firm CB Insights.

  • The number of deals in the startup AI space rose to 488, the second-highest number on record, trailing only the 513 deals notched in the second quarter of 2018.
  • More than 3,600 AI startups have raised $66 billion since 2013 in over 70 countries, data shows.
  • At least 10 companies raised $100 million "mega-rounds" during the quarter. Eight of the top 10 were U.S. companies, with China's Face++ and France's Meero also on the list.
3. Amazon slides after missing earnings expectations

Amazon's shares fell as much as 2% in post-market trading Thursday after the e-commerce giant reported $5.22 in earnings per share, missing Wall Street's projected $5.57, Axios' Erica Pandey writes.

  • Amazon did, however, beat revenue expectations for the second quarter, reporting $63.4 billion, compared to the projected $62.5 billion, per CNBC. AWS revenue was $8.38 billion, falling short of the expected $8.5 billion.

The backstory: This quarter's earnings report comes as Amazon is facing regulatory scrutiny in the U.S. and Europe. The company recently had its most successful Prime Day to date, and has invested more than $800 million to speed up 2-day delivery to 1-day.

Key takeaways:

  • Amazon's sales bump — nearly 20% compared to Q2 in 2018 — was in part due to customer response to its 1-day shipping offering for Prime, which now applies to about 10 million products, the company said.
  • But, but, but: While 1-day shipping has high impact in North America, where 2-day or slower has been the standard, it may not make as much of a splash in some of Amazon's international markets — like China and India — where 1-day or same-day is the norm.
  • Amazon also now has 8.8% of the U.S. digital ad revenue, up 53% from its market share a year ago, according to data from eMarketer.
  • The company has also introduced Amazon Flex, which brings on contractors to deliver packages, in India.
4. Store closures don't mean retail is dead
Expand chart
Adapted from CBRE; Chart: Axios Visuals

U.S. store closures are on pace for a record level in 2019 with more than 7,400 already announced this year, and household names like Sears and Victoria’s Secret shutting their doors at malls across the country.

  • Property broker CBRE's latest data shows net absorption — a measure of the amount of new space leased to retailers in a quarter versus what was vacated — has been on a clear downturn over the past few years.
  • While net absorption has been falling, the price of rent has been rising. Overall net asking rent increased by 5% year-over-year to $18.01 per square foot, the highest level since Q1 2005 when CBRE began tracking this metric.

Yes, but: CBRE says the fire-and-brimstone, death-of-the-mall narratives are exaggerating and misinterpreting what's actually happening in the retail and real estate spaces.

  • Certainly, the mall sector is having some problems, but the full picture also includes an overall Q2 gain in demand across all retail formats, and a gradual repositioning of malls as mixed-use projects.

What they're saying: "U.S. retail real estate as a whole is healthy, especially grocery anchored centers," CBRE Global President of Retail Anthony Buono tells Axios in an email.

  • "Many established retailers are effectively harnessing online sales to combine with their in-store sales, and many online-only brands now are opening physical stores. Average rent across the whole of U.S. retail real estate has risen for 22 consecutive quarters."
5. Tesla expects windfall from self-driving tech rollout

Illustration: Sarah Grillo/Axios

Tesla is selling "full self-driving capability" as a $6,000 option on its electric vehicles, but can't put the money in its coffers for the time being, Axios' Joann Muller writes.

The big picture: Most of it is sequestered on the company's balance sheet as a liability — deferred revenue that it hopes to recognize some day, when its cars can actually drive themselves.

  • It's unclear when that will happen. Right now, with Autopilot, they have only limited highway driving capabilities.
  • But long term, CEO Elon Musk is banking on increased revenue and improved margins from automated vehicles to keep the Tesla growth story going.

When Tesla can offer a fully self-driving car, says Musk, profit margins will soar to as much as 30% (from today's 19%).

Between the lines: Tesla had about $1 billion of deferred revenue on its balance sheet as of March 31, for "unsatisfied performance obligations."

  • Deferred revenue is common in businesses where customers prepay for a subscription or service, for example.
  • In Tesla's case, these aren't just self-driving features that have yet to be activated.
  • They also include access to Tesla's Supercharger network, internet connectivity, and over-the-air software updates.

While most carmakers say fully automated vehicles are still a decade away, Musk says Tesla will have a million robotaxis on the road by next year.

Shade thrown: Barclays' Brian Johnson notes that many weekend athletes "aim" to run a 4-minute mile. It doesn't mean they achieve it.

Read the full story.

Dion Rabouin