Jul 8, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Was this email forwarded to you? Sign up here. (Smart Brevity count: 1,116 words / <5 minutes.)

Situational awareness:

  • Federal prosecutors are expected to unseal new charges against billionaire financier Jeffrey Epstein accusing him of running a sex-trafficking operation of underage girls. (NYT)
  • President Trump's steel tariffs have sped the decline of some U.S. mills by creating a stark divide between companies that use cheaper-to-run products and those with more costly legacy blast furnaces. (Bloomberg)
  • WeWork is looking to raise as much as $4 billion in debt in coming months ahead of its planned IPO to fund its growth until it can turn a profit. (WSJ)
  • Saudi Arabian budget airline Flyadeal reversed its plan to buy up to 50 Boeing 737 MAX jets, becoming the first airline to officially drop the plane since its grounding following two deadly crashes. (Bloomberg)
1 big thing: Saudi Arabia's spectacular summer

Illustration: Rebecca Zisser/Axios

Saudi Crown Prince Mohamed bin Salman is raking in international capital, and reviving chatter about a possible IPO for Saudi Aramco as the world continues to move past the killing of journalist Jamal Khashoggi.

Driving the news: This week Saudi Arabia rolled out its first-ever bond denominated in euros — a 3 billion euro issue ($3.37 billion) — which was nearly five times oversubscribed.

  • Bonds maturing in 8 years sold at a yield of 0.78% and a 20-year offering at 2.04%.
  • That's well below comparable rates for other emerging markets and even lower than similar U.S. government debt.

The big picture: The wild success of Saudi's bond offerings, its strong stock market and continued investor hunger has reinvigorated talk of what would be the largest IPO ever, a public offering of state oil company Saudi Aramco.

  • The eurobond offering follows a $67 billion deal in March, led by American underwriters, in which Aramco bought an ownership stake in Saudi petrochemical manufacturer Sabic.

Flashback: Khashoggi, a Saudi dissident and journalist for the Washington Post was killed at bin Salman's behest, according to the CIA, UN and other global intelligence agencies.

  • Despite wide-ranging international condemnation and a half-baked boycott of its Davos in the Desert event, investors have continued to bankroll the kingdom's efforts to diversify its revenue away from oil.

The big picture: Even before the murder of Khashoggi, Saudi Arabia had an awful human rights record. And with Khashoggi's killing having negligible impact on its relationship with the U.S., investors continue scooping up Saudi Arabian assets.

  • Just 3 months after Khashoggi was killed, the country received $27 billion in offers for a $7.5 billion bond offering. Three months after that, Saudi Aramco came to market with $12 billion in bonds that reportedly generated $100 billion of offers.
  • Over the past three years, Saudi Arabia has sold nearly $70 billion in international bonds, and become one of the biggest debt issuers among all emerging market countries.
  • Between 2007 and 2015, the kingdom issued no official sovereign debt.

Between the lines: The Saudi stock market also is taking off, thanks to its upgrade from international index maker MSCI, which moved Saudi Arabia into its emerging markets index starting this year. The index is followed by close to $2 trillion of global passive flows.

  • FTSE Russell and S&P Dow Jones also are moving Saudi equities into their respective EM indexes over the next year.
  • Saudi's Tadawul index has risen about 13%, year to date.
2. What happened to Deutsche Bank
Expand chart
Data: Investing.com; Chart: Axios Visuals

It was the long-expected end of an era for Deutsche Bank, as it announced Sunday it will pull out of its global equities sales and trading business, cut its dividend and slash risk-weighted assets by about 40% in some parts of the business, as part of a restructuring plan to save billions.

  • As Axios' Felix Salmon points out, the "restructuring will cost 18,000 jobs and $8.3 billion, which is a lot of money for a bank valued at just $16.6 billion at close of trade on Friday."
  • The German bank also expects to report a net loss of $3.14 billion in the second quarter.
  • It will release its second quarter earnings on July 25.

What happened: Deutsche's struggles in equities and investment banking are not new. The company's stock tumbled during the financial crisis, after peaking at more than $145 a share in May 2007, and has never recovered.

  • The stock began mounting what looked like a rebound in July 2015, but in 2016 the company was hit with billions in fines from the U.S. Justice Department and lost all of that momentum. The stock closed at $8.03 Friday.

Go deeper: After Deutsche Bank cuts, where will the growth be?

3. Breaking down the June jobs report
Expand chart
Reproduced from 2 CNBC charts, using Federal Reserve data; Chart: Axios Visuals

The U.S. added 224,000 jobs last month. More importantly, nominal average hourly earnings rose by 3.1% year over year, the White House noted in a recent post. "Prior to 2018, nominal average hourly wage gains had not reached 3% since April 2009."

What to watch: The education and health services sector has been been one of the strongest in the economy for much of this year and beyond.

  • The unemployment rate for workers in the sector has traditionally been much lower than for U.S. workers overall. Even during the Great Recession, education and health services workers' unemployment never touched 7%, according to the Bureau of Labor Statistics.
  • Last month, despite a net increase in jobs, it rose to 3%, its highest since July 2018.
4. The market is still convinced the Fed will cut rates
Expand chart
Data: CME FedWatch Tool; Graphic: Naema Ahmed/Axios

Friday's strong U.S. jobs report certainly got investors to rethink their expectations for the Fed's upcoming July 30–31 policy meeting, but Fed funds futures prices show they still see a 0% chance Jay Powell and company don't cut U.S. interest rates.

  • The market also has pared back expectations for 3 hikes (or 75 basis points of cuts) by the end of the year, but only modestly. Investors now see the likelihood of 3 cuts by December as just under 50%.
  • Powell will deliver his semi-annual Monetary Policy Report to Congress on Wednesday and Thursday. The Fed also will release its June meeting minutes on Wednesday.
5. "We all know who controls monetary policy now"

Things were finally starting to go right for Turkey, and then President Recep Tayyip Erdogan decided to fire the central bank governor.

Good things were happening: Turkish stocks and bonds had been rallying thanks to a global search for yield that prompted investors to reconsider Turkey despite its myriad problems. The rethink had made the lira the best performing currency in the world against the dollar since early May.

  • President Trump had not put in place threatened sanctions against Turkey over its purchase of a missile defense system from Russia and Erdogan had calmed investors' nerves by accepting an opposition victory in the Istanbul elections he had previously demanded be redone.
  • Analysts at Goldman Sachs and Barclays even said conditions were becoming beneficial to the lira.

Then they stopped: The lira fell 2% as traders sold, expecting that Erdogan has essentially taken control of the central bank and will work to lower rates in an effort to boost the economy.

  • "Deputy Governor Murat Uysal was named as the replacement," Brown Brothers Harriman Global Head of Currency Strategy Win Thin wrote in a note to clients, "though we all know who really controls monetary policy now."
Dion Rabouin