Jun 25, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

Good morning! I'll be taking a "mental health day" tomorrow so Courtenay Brown and Jennifer Kingson will handle the newsletter. I'll be back in your inbox on Monday morning.

Was this email forwarded to you? Sign up here. (Today's Smart Brevity count: 1,338 words, 5 minutes.)

🎙 “I got a good life, man, pounds and pence. Enough dollars make sense. While you ride the bench catch me swinging for the fence.” - See who said it and why it matters at the bottom.

1 big thing: A worst-case scenario for developing countries

Illustration: Aïda Amer/Axios

The coronavirus pandemic's spread around the globe looks to be intensifying, bringing closer a worst-case scenario in which many of the world's developing countries are left with economic damage that is deep and long-lasting.

Driving the news: The IMF lowered its global growth projection for 2020, expecting a 4.9% contraction this year — almost two percentage points lower than it predicted in April.

  • It also lowered expectations for U.S. growth to -8% for 2020 and reduced its 2021 global growth prediction to 5.4% from 5.8%.

Why it matters: The Great Lockdown, as the IMF calls it, is pushing the world into a synchronized recession unlike any seen before.

What they're saying: As painful as the 2008 global financial crisis was, only 11 advanced economies were severely impacted, World Bank chief economist Carmen Reinhart said during this week's Bloomberg Global Invest summit.

  • "This time if advanced economies are seeing problems it actually pales in comparison to some of the problems and challenges the developing countries and emerging markets are seeing because they don’t have fiscal space to try to counter the effects of the lockdowns."
  • "The issue is how do you support countries in which revenue has collapsed. If you rely on tourism, tourism has collapsed, if you rely on commodities, commodity exports and volumes are down."

The intrigue: Advanced economies such as the U.S., eurozone and Japan have the ability to borrow and lend virtually unlimited sums of money to support their populations, but developing countries are forced to turn to organizations like the IMF and World Bank, which already have provided a record amount of aid and lending, Reinhart noted.

  • "The international community simply doesn’t have that kind of firepower."

Watch this space: Fitch downgraded Canada's credit rating Wednesday, making it the 25th country to have its sovereign rating downgraded by the agency since March — more than the previous total for any full year dating back to 1994, Fitch analysts tell Axios.

  • Additionally, 30% of the world's sovereign countries were on negative ratings watch as of June 2 and Fitch has taken some form of negative rating action on around 50% of rated sovereigns.
  • "It has definitely been a record year," says Kelli Bissett-Tom, a director at Fitch.

What's next: Ratings downgrades could cost some countries their investment-grade status, meaning fewer investors will be able to buy their bonds and make it more expensive and difficult for them to borrow money in the future.

Bonus content: Global debt now expected to surpass global GDP

Coronavirus infections are rising in emerging countries like Brazil, Russia and India, which are now three of the five countries with the highest number of confirmed cases.

  • To offset some of the negative economic impact from the pandemic, governments have announced massive fiscal packages and new borrowing that threatens their credit ratings and the sustainability of their budgets, the IMF warned in its latest World Economic Outlook.

What they're saying: “The steep contraction in economic activity and fiscal revenues, along with the sizable fiscal support, has further stretched public finances, with global public debt projected to reach more than 100% of GDP this year,” the fund said.

  • In its base-case scenario, global public debt will reach a record high in 2020 of 101.5% of GDP and 103.2% of GDP in 2021.

What to watch: At its April meeting the IMF recommended coordinated fiscal stimulus, a moratorium on debt payment and debt restructurings, and additional financing and grants for the world's poorest countries.

  • Outside of financing and grants from the IMF and World Bank and a moratorium from official creditors for some countries, none of that has yet materialized.

The bottom line: Unless action is taken, the emerging world could face an escalating virus epidemic with less available capital and a growing pile of debt.

2. Catch up quick

The coronavirus pandemic is getting dramatically worse in almost every corner of the U.S. (Axios)

Bayer has agreed to pay just over $10 billion to settle roughly 94,000 claims that its Roundup weedkiller causes cancer, the company announced on Wednesday. (Statement)

The head of the White House Council of Economic Advisers is leaving the administration at the end of the month, as is the former CEA chief, who will leave the administration again this summer. (Politico)

The Defense Department will make public a list of Chinese companies operating in the U.S. that have ties to the Chinese military, which includes Huawei, Hangzhou Hikvision, China Railway Construction Corp., and China Telecommunications Corporation. (Axios)

3. Pandemic prompts record food stamp spending

Reproduced from the Peter G. Peterson Foundation; Chart: Axios Visuals

The federal government spent $8.55 billion on Supplemental Nutrition Assistance Program (SNAP) benefits last month, a 62% increase from what it spent just two months earlier in March, new analysis from the Peterson Foundation shows.

Details: The coronavirus pandemic increased federal spending on the program by an average of 28% per month in April and May, nearly double the largest monthly growth seen during the Great Recession.

  • The only other time SNAP spending has grown nearly as fast was around February 2019, when benefits for that month were advanced to prepare for a government shutdown.

What it means: The growth reflects an increased need for food stamps and government assistance as well as legislative changes, like the Families First Coronavirus Response Act (FFCRA), which was signed into law on March 18, analysts at Peterson Foundation note.

The FFCRA:

  • Introduced the Pandemic Electronic Benefit Transfer (P-EBT), which provides benefits to families with children that rely on free or reduced-price school meals.
  • Allows states to increase maximum benefits to all households through Emergency Allotments.
  • Suspends the work and work training requirements for able-bodied adults.
  • The Congressional Budget Office estimated that those changes will increase program costs by $10.4 billion and $10.8 billion in fiscal year 2020 and fiscal year 2021, respectively.
4. Users say they're fed up with Facebook
Reproduced from CivicScience; Chart: Axios Visuals

Facebook stock sold off on Wednesday, losing 3.4%, and the company may face serious headwinds.

Driving the news: Last week Facebook said it would allow users to turn political ads off in their feed and according to CivicScience data most users plan on doing just that.

  • The firm's latest survey finds 58% of U.S. adult Facebook users say they are very likely to turn off political ads from their feeds.
  • Just 17% said they were not likely to do so.

Why it matters to the market: Political ads could become an important source of revenue for Facebook, as a litany of brands, including outdoor giants REI, The North Face and Patagonia, announced they were ending partnerships with the company after its refusal to moderate misleading and false content, particularly from President Trump.

What to watch: Among U.S. adults who are likely to leave a platform in the next six months, more than half say they are most likely to stop using Facebook.

Yes, but: Stock traders had been unfazed by the negative publicity leading up to Wednesday's overall market weakness. Facebook hit a record high on Tuesday, rising to an intraday peak of $245.19 and closing at a record $242.24.

  • And Facebook-owned Instagram notched the best reading on CivicScience's survey of what social networks users were likely to leave, with just 8% saying they planned to close their Instagram accounts.
5. China, public markets and secrecy

Illustration: Aïda Amer/Axios

Axios' Bethany Allen-Ebrahimian writes: National security concerns drove a recent bipartisan Senate vote to crack down on Chinese companies that can hide their books from U.S. regulators even though they are publicly traded on U.S. exchanges, according to interviews with six current and former U.S. officials.

The big picture: The Holding Foreign Companies Accountable Act, which the Senate passed May 20, targets fraud and aims to promote transparency. But U.S. officials are also hoping to uncover hidden links between these companies and the Chinese government.

  • Supporters have characterized the bill as a way to protect American investors from fraudulent Chinese business activity, such as the recent scandal over Luckin, a Chinese coffee startup and former “unicorn” that received delisting notices from the Nasdaq after fabricating hundreds of millions of dollars in sales.
  • But the legislation is also about putting these companies “on the horns of a dilemma,” says a former national security official: They can stop cooperating with Chinese security services or lose access to Western capital.
  • More than 150 mainland Chinese companies are traded on major U.S. exchanges.

Why it matters: The tough stance on Chinese companies publicly traded on U.S. exchanges, which includes tech giants such as Baidu and Alibaba, opens up a new front in the increasingly tense U.S.-China relationship.

Read the full story.

Dion Rabouin

Thanks for reading!

Quote: "I got a good life, man, pounds and pence. Enough dollars make sense. While you ride the bench catch me swinging for the fence.”

Why it matters: On June 25, 1996, Shawn Corey Carter released his first studio album under the moniker Jay-Z, "Reasonable Doubt." It would go on to be recognized as a hip hop classic and one of the greatest albums of all time.

Top 5 songs on "Reasonable Doubt":

5. "Dead Presidents II"

4. "Can't Knock the Hustle"

3. "Feelin' It"

2. "Ain't No N*gga"

1. "22 Two's"