Jan 8, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Situational awareness:

  • PG&E was cut to "junk" status by S&P Global, from “BBB-” to “B,” the lowest tier of so-called investment-grade ratings "as it faces massive claims stemming from deadly wildfires." (Reuters)
  • Trump's Fed nominee Nellie Liang has withdrawn her nomination to serve on the bank's board of governors "citing concern over a lengthy Senate confirmation process." (Reuters)
  • Samsung warned on operating profit "in the latest sign of challenges hitting the tech industry." The company blamed slowing demand and increased competition. (WSJ)
  • “I have been wrongly accused and unfairly detained based on meritless and unsubstantiated accusations,” former Nissan Chairman Carlos Ghosn told a Tokyo courtroom. Ghosn is accused of financial misconduct.
1 big thing: Trump's test at the World Bank

Illustration: Sarah Grillo/Axios

The presidency of the World Bank — the most powerful job in international development — is up for grabs, in the wake of the surprise resignation of Jim Yong Kim.

Why it matters: Kim's departure puts the Trump administration in a tough position, Felix Salmon writes.

No one knows why Kim quit so suddenly (although rumors are swirling), but the vacuum caused by his departure is likely to create an international diplomatic whirlpool which could prove very tough for Trump to navigate.

  • In theory, the president of the World Bank is elected by all the bank's member states, according to an "open, merit-based and transparent" process. So far, though, American men have always prevailed in that process, in accordance with the gentleman's agreement that the head of the IMF is always European and the head of the World Bank is always American.
  • With Trump in the White House, the Europeans have never been less inclined to scratch the Americans' back. If Trump were to nominate a well-qualified candidate like Indra Nooyi, however, then they would probably go along with the nomination.
  • Were Trump to nominate someone unacceptable to the Europeans — like National Security Adviser John Bolton or senior adviser Ivanka Trump — then the field would be wide open for other qualified candidates to seize the day.
  • Many believe former World Bank managing directors Ngozi Okonjo-Iweala and Sri Mulyani would make excellent presidents.

What's next? The ball is now in Treasury Secretary Steven Mnuchin's court. He could simply do nothing, and allow the very qualified CEO Kristalina Georgieva, Kim's interim replacement, to stay in the role indefinitely.

2. The dollar's wild ride
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Data: FactSet; Chart: Andrew Witherspoon/Axios

A host of competing narratives and the chaos of global markets is shaking the U.S. dollar. The trade-weighted value of the dollar fell to its lowest since October on Monday.

  • Currency traders are piling into the Japanese yen as global growth slows and political tensions rise. The yen hit its highest value against the dollar since March on Thursday but has since reversed course.
  • The FX options market is showing that a measurement of call and put options has climbed strongly in favor of the euro, Reuters reports.
  • While emerging market currencies have gained since Fed Chair Jerome Powell's dovish comments on Friday, the dollar has not sold off and EM currencies, which are favored in times when the market expects the Fed to take it easy, have not taken flight.

What we’re hearing from Tempus Inc Senior FX Trader and Strategist Juan Perez:

"The U.S. Dollar benefits when the globe is in chaos and the problems that were started by the tit-for-tat tariff conflict created a safe-haven scenario... Seems like now the lack of a clear solution to trade issues, the U.S. government shutdown and solutions to political pressures elsewhere, like the Italian budget, have halted the dollar’s momentum."
3. SoftBank still believes in WeWork

Lots of buzz yesterday about a Financial Times report that SoftBank was in "detailed negotiations" to invest $2 billion into WeWork, "slashing" the $16 billion or so investment that had been speculated in prior reports, Dan Primack writes.

This isn't nearly as big a shift as it's being made out to be, nor is it necessarily a macro commentary on any other unicorn valuations.

  • The $16 billion related to the possibility of SoftBank buying a majority stake in WeWork, but Axios reported in October that such a deal was off the table.
  • SoftBank is still investing $2 billion into WeWork, in which it already holds a sizable position. Not even the most profligate investor spends that kind of coin if it believes the company is in trouble.
  • It is true that SoftBank and WeWork felt it was best for SoftBank to make its new investment from the corporate balance sheet, rather than from the Saudi-backed SoftBank Vision Fund (both because of the Khashoggi murder and CFIUS scrutiny). And SoftBank stock has taken a big hit lately, including from the troubled performance of its just-listed Japanese mobile unit.
4. The coming of a new exchange

Photo: Spencer Platt/Getty Images

Nine major financial firms, including Morgan Stanley, Bank of America, and Fidelity Investments, are launching a new stock exchange — the Members Exchange, aka MEMX, Courtenay Brown writes.

  • MEMX expects to file an application with the Securities and Exchange Commission this year with plans to reduce costs and streamline the trading process, though it’ll probably be awhile before it’s up and running.
  • Shares of NYSE's parent Intercontinental Exchange and the Nasdaq fell 2% after news of the newcomer broke.

Be smart: It's notable that MEMX is backed by Citadel Securities and Virtu Financial — the country's biggest stock traders, which each facilitate 20% of U.S. equity volume, per WSJ — in addition to the big financial firms.

  • Despite being run by some big players, a new exchange doesn't guarantee they'll pull liquidity from the NYSE or Nasdaq.
  • Most traders don't pick and choose which exchange to participate in. They use all or many of the exchanges.

What they're saying:

  • Nasdaq's statement to CNBC: "We welcome competition to our transparent, highly regulated equity markets. However, with more than 40 equity trading venues already in operation in the United States, we are keen to learn more about the value proposition of a new exchange."
  • Cboe's statement to WSJ: "Healthy competition ups the game for all of us and we welcome new entrants into the space.”

The bottom line: MEMX hasn't announced how much lower its fees will be, and there's no guarantee the platform will take market share from those that right now control 60% of trading volume.

5. Data shutdown

The Federal Reserve may not have access to some important data points because of the partial government shutdown.

  • The Department of Labor will remain open through the shutdown, thanks to an earlier congressional spending agreement, but the Department of Commerce has already closed, shuttering the Census Bureau and Bureau of Economic Analysis.

What it means: We'll still get the jobs report and inflation data like CPI, but economic indicators including the government's retail sales report, GDP and durable goods will all stop during the shutdown. Reports on factory orders, construction spending and new home sales have already been missed.

Why you'll hear this again: Bostic also pointed to the partial government shutdown as impacting his expectation for just one interest rate hike this year instead of the two outlined at the Fed's most recent meeting.

Overnight from Bloomberg: The shutdown is "forcing analysts to focus on alternative data to gauge the effects of a trade war and the pace of growth in recent weeks... leaning more on reports such as business surveys and port-traffic data.

6. An output surprise in Germany

"German industrial output unexpectedly fell in November, putting the economy at risk of slipping into a technical recession at the end of 2018," Bloomberg reports.

  • "The decline... was broad-based and led by consumer goods and energy. Output was down 4.7 percent year-on-year, the most since 2009.
  • The data "has clearly increased the risk of a technical recession in Germany in the second half of 2018,” said Carsten Brzeski, chief economist at ING Germany.
  • Europe's largest economy had already cut its growth expectations by a third, announcing in December that it expected the economy to grow by just 1.5% in 2018.
7. Bouncing off the bottom
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Data: FactSet; Chart: Chris Canipe/Axios

GE jumped more than 6% on Monday, notching a sixth-straight daily gain and pushing the stock up more than 20% since mid-December. In fact, GE's stock has risen 31% since its 2018 intraday low of $6.66 a share (also its closing day low in 2009).

  • GE has managed to pull off the impressive run as the broader S&P 500 sank nearly 5%, including the worst December since the Great Depression.

Driving the news: Monday's gain followed a Bloomberg report that Apollo Global Management planned to make a bid for GE's jet-leasing business, which could be valued at as much as $40 billion.

  • GE's stock was one of 2018's biggest losers, slashing its dividend to a penny and falling so far that it was removed from the Dow Jones Industrial Average after having been a component of the index since 1896.
Dion Rabouin