Feb 21, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • Johnson & Johnson has received subpoenas from the Justice Department and Securities and Exchange Commission related to alleged asbestos contamination in its baby powder product line. (Reuters)
  • British lawmakers could vote on a revised Brexit deal as early as next week, finance minister Philip Hammond said. (Reuters)
  • Ride-hailing company Lyft is planning to list shares on the Nasdaq and is expected to make its IPO filing public as early as next week. (Wall Street Journal)
  • Shares of Maersk fell 9% after warning that its full-year profit guidance hinged on whether there’s an escalation in the U.S.-China trade war. (Associated Press)
1 big thing: Stock exchanges take on the SEC

Illustration: Aïda Amer/Axios

The Nasdaq, NYSE and the Cboe are seeking to block their regulator, the SEC, from implementing a new pricing program.

  • The 3 exchanges say the program would harm investors by driving up trading costs, but those who are in favor of the rule say investors are better off.

Why it matters: The SEC says what's been called the "biggest stock market experiment in more than a decade" is designed to benefit retail investors. But the stock exchanges are fighting back against a major prong in Trump appointee Jay Clayton's push to re-regulate stock exchanges.

What's happening: Later this year, the SEC will begin a pilot program for up to 2 years that would prohibit exchanges from paying some fees to big brokers like Charles Schwab or TD Ameritrade.

  • The operators, which together control all but one major U.S. stock exchange, use fees to attract brokers to execute trades on their exchange as opposed to carrying out orders on private exchanges — which offer brokers no fees.

What they're saying:

  • "The SEC's transaction fee pilot is the exact opposite of what our markets need. It will harm capital formation [and] severely damage market participation with wider spreads," a Nasdaq spokesman tells Axios in a statement.
  • The current fee structure has helped "offset consequences — such as reduced liquidity — of SEC policies," NYSE President Stacey Cunningham said in an op-ed last week.

The other side: The current system, allows exchanges to “pay incentives for people to send investors’ orders to places where they get a worse price,” John Ramsay, IEX Group's chief market policy officer and former acting head of Trading & Markets at the SEC, tells Axios.

  • James Angel, a finance professor at Georgetown who's filed public comment in support of the SEC's program, says most investors would "need an electron microscope to detect the difference" in trading costs when the pilot goes into effect.

What to watch: That the fight between the exchanges and the SEC has escalated to two separate court filings is unusual because the "SEC usually consults closely with the exchanges," Adam Clark Joseph, a finance professor at the University of Illinois, tells Axios. "In the past, lots that has been subject to disagreement ... has gotten smoothed out in advance."

Dion's thought bubble: Clayton, a lawyer who made millions from his firm's work with Wall Street banks like Bear Stearns and Goldman Sachs, has made pushing for the "interests of America’s retail investors" a primary focus of his administration. It appears this iteration has seriously stoked the ire of America's biggest exchanges. There's likely more to come.

2. S&P cites flattening yield curve in raising U.S. recession risk

Economists at ratings agency S&P Global raised the probability of a U.S. recession in 2019 to 20–25% Wednesday, in large part because of the flattening U.S. Treasury yield curve. That's higher than its previous assessment of 15–20% 3 months ago.

  • "Although economic indicators continue to point to a sustained economic expansion, heightened investor concerns over global economic developments led to market volatility and disruptions late last year, leaving a mixed picture for the second oldest expansion in U.S. history," said Beth Ann Bovino, U.S. chief economist at S&P Global.

Between the lines: S&P Global releases a quarterly publication that examines 10 leading indicators of near-term economic growth. Two indicators turned negative this quarter for the first time since mid-2017, when the ratings agency's economics group first began to look at these metrics.

  • "Financial conditions have eased in recent weeks, stemming from a significantly more dovish communication by the Fed," Bovino said. "If the easing persists, the quantitative assessment will likely decline in the coming months."

Don't blink: As S&P raises its U.S. recession worries, a new survey shows European money managers are growing increasingly wary of a global recession.

Almost 30% of respondents to Bank of America Merrill Lynch's latest survey of European money managers said a worldwide economic contraction was their biggest concern, the strongest consensus for any single risk since June 2017.

3. Nigeria's delayed election looks like chaos — or opportunity

A woman holds a branded table water called Buhari Vendors and bearing photographs of Nigeria's President Mohammadu Buhari and Vice President Yemi Osinbajo in Abuja. Pius Utomi Ekpei/AFP/Getty Images

A surprise delay in Nigeria's presidential election has some asset managers seeing dollar signs — and in some cases naira signs, writes Reuters' Karin Strohecker.

Why it matters: "Lured by a rekindled appetite for emerging markets and an upbeat oil price outlook, foreign investors have recently raised exposure to Nigeria," Strohecker writes, noting pickups in both Nigerian equities and fixed income since the start of the year, according to flow tracker EPFR.

  • "The delay adds to uncertainty for investors, who have endured a wild ride in the West African country: The 2014 oil price crash, and election in 2015 followed by currency controls and dollar shortages that tipped the oil-exporting economy into recession in the same year, its first in more than two decades. Its bonds got ejected from key indexes."

The announcement the election for 84 million registered voters would be rescheduled came days after foreign investors piled into Nigerian stocks and bonds, betting on a smooth election run.

  • But rather than retreating from Nigeria, some investors say this is a buying opportunity.

"This is a deeply unloved market whether measured by overall market volumes, foreign participation, valuation relative to history, or performance versus frontier or oil-exporter peers," said Hasnain Malik at Exotix Capital. "That level of despair usually means opportunity."

"Eurobond valuations still look attractive as yields are likely to remain anchored regardless of outcome and the election means we are unlikely to get issuance until 3Q," said Diana Amoa, emerging market debt portfolio manager at JPMorgan Asset Management.

Going deeper: Asset managers aren't just looking at Nigeria's hard currency-denominated debt, which has long been a favorite for risk-taking investors (and has outperformed both broad emerging market sovereign debt and African peers, returning around 10% year-to-date).

They're also snapping up Treasury bills denominated in Nigeria's local naira currency, which has been one of the most volatile on earth for years.

  • "We continue to like the T-bill trade as it’s an attractive carry play on oil," said Kevin Daly, investment director at Aberdeen Standard Investments in London.

Of note: Vetiva Capital predicted the naira will see a devaluation of 7% in 2019. It's one of presidential contender Atiku Abubakar's policy proposals.

"It is like picking up pennies in front of a steam roller," Capitulum Asset Management's Lutz Roehmeyer told Reuters of buying the local currency bonds. "You pick up a lot of pennies, but the losses are huge if the steamroller gets you."

4. Fed minutes

Minutes from the Federal Reserve's December policy meeting back the trend of continued retreat from tightening monetary policy highlighted yesterday. The minutes did suggest the Fed's policymakers are split between two camps, but those appear to be Dovish and More Dovish.

The minutes showed FOMC members largely agreed that the balance sheet rundown is likely to end in the second half of 2019. Nearly all top officials at the meeting agreed that the central bank should announce "before too long" details of a new plan to stop reducing the balance sheet later this year.

What they're saying: The FOMC meeting minutes included 13 mentions of the word "patient," and according to the minutes, there were a "variety of considerations that supported a patient approach," Yahoo Finance's Heidi Chung notes.

  • Furthermore, "a patient posture would allow time for a clearer picture of the international trade policy situation and the state of the global economy to emerge and, in particular, could allow policymakers to reach a firmer judgment about the extent and persistence of the economic slowdown in Europe and China."

What they're not saying: "The question is still whether to hike or not — we have yet to arrive at the 'when or how much to cut' stage of the cycle," BMO Capital Markets' rate strategist Ian Lyngen said in a note to clients.

  • Lyngen also points out that the word "recession" has been completely absent from the last three minutes, despite the fact that live tracking of the Cleveland and New York Fed's models put the probability of a contraction in the next 12 months between 25% to 30%, near post crisis highs.
5. The world's littest central bank cuts rates
Screenshot from Bank of Jamaica's Twitter feed.

Following a globally dovish theme, the Bank of Jamaica announced Wednesday it was lowering its policy rate to 1.5%.

  • "For the average man or woman the rate cut] should eventually mean an overall improvement in economic conditions as more economic activity is stimulated by reducing the cost of credit. If you are a businessperson seeking funds to invest, the benefit is more immediate," the Bank of Jamaica's said via its Twitter account after announcing the decision.

The BoJ has earned the "littest" central bank designation by virtue of its monetary policy videos here and here. Read the central bank's statement (with no musical accompaniment) here.

Go deeper: How Jamaica became the world's littest central bank

Dion Rabouin

History: Zumbi dos Palmares was a warrior king known as one of the pioneers of resistance to slavery of Africans by the Portuguese in Brazil. He was also the last of the kings of the Quilombo dos Palmares, a settlement of Afro-Brazilians who liberated themselves from enslavement, in present-day of Alagoas, Brazil.

Palmares was established around 1605 by enslaved Africans who fled to the hills and instituted a free settlement they called Angola janga, which would grow to be the greatest community of escaped slaves in the Americas.

By 1678, the governor of a local region offered freedom for all runaway slaves in Palmares if the colony would submit to Portuguese authority. Zumbi, then the commander-in-chief of the Palmares' forces, refused to accept freedom while other Africans remained enslaved.

Zumbi challenged the country's current king, his uncle who supported the accord, for the throne. As king, he implemented a far more aggressive stance against the Portuguese, leading Palmares for years to come.

Nov. 20 is still celebrated in Brazil as a day of Afro-Brazilian consciousness. Brazilians of African descent honor Zumbi as a hero and symbol of freedom.