Jun 23, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙 “We can only see a short distance ahead, but we can see plenty there that needs to be done.” - See who said it and why it matters at the bottom.

1 big thing: The U.S. economic recovery may be W-shaped

Illustration: Sarah Grillo/Axios

U.S. economic data has shown improvement in recent reports, starting with May's U.S. nonfarm payrolls report and including new home sales, various Fed manufacturing indexes and retail sales, all showing better-than-expected rebounds.

  • But the momentum could reverse quickly if the coronavirus pandemic picks back up and policymakers drag their feet on renewing stimulus measures, experts say.

Driving the news: Top U.S. health officials including Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, will tell House lawmakers today that "COVID-19 activity will likely continue for some time” as the U.S. approaches the flu season, according to prepared testimony.

  • "If there is COVID-19 and flu activity at the same time, this could place a tremendous burden on the health care system."

Why it matters: Most economic prognosticators, like those at the Fed and the CBO, have written off the likelihood of a quick, V-shaped recovery for the economy, and are generally expecting an elongated "Nike swoosh" style return. But even that delayed rebound is predicated on keeping COVID-19 infections in check.

  • Rather than a V or a U or even a swoosh, the virus' resurgence could mean the U.S. is looking at a W — meaning economic growth begins to rebound before falling back into recession.

What they're saying: "The shape of recovery will be determined by whether we get ongoing fiscal stimulus and whether we are able to tamp down on the virus," Kristina Hooper, chief global market strategist at Invesco, said Monday during the Bloomberg Invest Global conference.

  • "The ability to control the resurgence of the virus … that requires extensive contact tracing infrastructure."
  • "If we’re not able to effectively do that we could see the reimposition of lockdowns and we could also see an erosion of consumer confidence."

Where it stands: Nearly half of U.S. states are seeing daily increases in COVID-19 infections, led by Florida, Arizona and Texas, data shows.

Between the lines: While fund managers have worried openly about a second wave of infections stunting the economic recovery, Fauci recently pointed out that such talk is premature.

  • "When you have 20,000-plus infections per day, how can you talk about a second wave?" he recently told reporters.
  • "We're in the first wave. Let's get out of the first wave before you have a second wave."

Watch this space: In addition to flu season, coronavirus infections are picking up right as relief measures like eviction moratoriums, increased unemployment benefits and the government's Paycheck Protection Program are set to expire.

2. Catch up quick

The U.S. remains "engaged with China over the phase one trade deal," President Trump's chief economic adviser Larry Kudlow said, refuting comments from Trump’s trade adviser Peter Navarro, who said Monday night on Fox News the U.S.-China trade deal is "over." Navarro and Trump himself also walked back the comments. (Axios)

Facebook, Amazon, Google, Intel and Twitter reacted quickly and negatively to news that the Trump administration is extending a ban on entry of those with H-1B visas through the end of the year. (Axios)

Billionaire hedge fund manager Bill Ackman is looking to raise $3 billion for the largest ever special purpose acquisition company to acquire a yet unnamed venture capital-backed company he called a “mature unicorn." (Reuters)

3. Coronavirus could push more Americans to suburbs
Data: Investing.com; Chart: Axios Visuals

The contrast of new and existing U.S. home sales over the past few months portends an interesting potential long-term change for the U.S. economy.

Driving the news: Existing home sales fell to their lowest level in nearly 10 years last month, with prices rising by the smallest annual amount in more than eight years.

  • Those numbers reflect closings on contracts signed in March and April, and pending sales of existing homes for those months showed declines of 20.8% and 21.8% respectively.

On the other side: Sales of new single-family homes unexpectedly rose slightly in April, despite the lockdowns, after falling by 13.7% in March.

  • Overall, economists expect that the worst of the housing market declines are in the past, as mortgage purchase applications rose to their highest level in 11 years last week.

The big picture: A housing shift may be accelerating from cities, where existing homes dominate, to suburbs, which are packed with new houses.

What they're saying: Danielle Hale, chief economist at Realtor.com, says in a note that she's expecting new home sales to rebound even further in May.

  • New home sales are "benefiting from still-limited availability of existing homes for sale coupled with surging homebuyer demand including renewed interest in suburbs and the extra space they enable buyers to afford."
  • Data from Realtor.com shows views per property in suburban zip codes grew by 13%, nearly doubling the pace of growth compared to urban areas in May.
  • Suburban properties have outpaced urban for some time. However, "May marks the largest gap in this discrepancy since we started tracking the metric in 2016, aside from one month in September 2018," the company notes in a recent blog post.
4. Yale economist: Dollar falling 35% "sooner rather than later"

Yale University senior fellow and former Morgan Stanley Asia chairman Stephen Roach is the latest to predict the end of the dollar's run as the world's dominant currency, telling MarketWatch in an interview Monday that his forecast for a sharp deterioration of the greenback could happen "sooner rather than later."

What he said: Roach predicts the dollar will soon decline by 35% against its major rivals.

  • “This massive shift to fiscal stimulus is going to blow out the national savings rates and the current-account deficit,” he said, reiterating comments he made in a recent op-ed published by Bloomberg News on June 14.
  • In the Bloomberg piece, Roach argued the dollar's "downtrend could gather momentum in the years ahead, especially with the U.S. currently leading the charge in de-globalization and decoupling."
  • “In a COVID era everything unfolds at warp speed,” he told MarketWatch on Monday. He pointed to the contraction of the U.S. economy from an unemployment rate that was hovering around a 50-year low at around 3.5% in January to the highest unemployment rate on record in April.

Background: Currency analysts and fund managers have been calling for the dollar to weaken materially for years, while top economists like former Bank of England governor Mark Carney have called for the world to diversify away from the greenback. But this hasn't yet happened to any meaningful degree.

5. Oil's comeback
Data: FactSet; Chart: Axios Visuals

While it remains 33% below its price at the start of the year, WTI crude has rebounded an astonishing 255% since the low on April 21, according to FactSet data.

6. How the Robinhood effect is moving the market

Reproduced from BCA Research using Bloomberg data; Table: Axios Visuals

A report from BCA Research published Monday finds Robinhood users are moving into speculative bets at an incredible rate, radically increasing holdings in three groups of stocks — airlines, cruise ships and mortgage REITs.

What's happening: "Retail investors have provided institutions with an opportunity to exit stocks in the three stressed groups," Doug Peta, BCA's chief U.S. investment strategist, writes in the note.

  • "Stocks from the groups we highlighted all face daunting current predicaments. They might deliver sizable returns if they can emerge mostly unscathed, but that is a big if."
  • "They have come to account for an outsized share of Robinhood customers’ holdings, especially relative to their market capitalizations."

By the numbers: The number of Robinhood accounts owning airlines, cruise ships and selected mortgage REITs has "exploded since late March," Peta says.

  • The number of Robinhood accounts holding six large- and mid-cap airlines has risen by 48 times its Feb. 19 level, with component holdings of United and Spirit increasing at 87 and 81 times, respectively.
  • The number of Robinhood accounts holding REITS like Invesco Mortgage Capital, MFA Financial and AG Mortgage Investment Trust — which BCA notes "all failed to meet margin calls from their repo lenders and have either suspended or cut dividends" — has risen 93-fold, on average, since the S&P 500 peaked in February.

By contrast, holdings of Apple and the iShares and Vanguard S&P 500 Index ETFs have only doubled since the February market peak.

Of note: The only thing all three groups have in common is that they have fallen significantly in price since the Feb. 19 high.

The big picture: Retail investors may be leading the charge, but the recent surges in many of the stocks BCA examined suggest that "algorithms, hedge-funds and other fast-money pools of capital may be amplifying the momentum that retail activity has set in motion."

Watch this space: Retail traders also could be making up for the lack of stock buybacks, Goldman Sachs strategists argue in a note to clients.

  • While they expect net corporate demand to plunge 80% to $100 billion this year as companies slow down buybacks and ramp up stock sales to increase cash holdings, the decline is being partly offset by a roughly $270 billion increase in demand from households.
Dion Rabouin

Thanks for reading!

Quote: “We can only see a short distance ahead, but we can see plenty there that needs to be done."

Why it matters: On June 23, 1912, British scientist Alan Turing, a computer scientist who developed the Turing machine, one of the most important theoretical models of a computer, was born. He is considered by some to be the father of artificial intelligence and computer science.