Oct 3, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • Sandwiched between Tuesday's disastrous manufacturing report and Friday's jobs report, ISM will release its U.S. services sector report today at 10am ET. (CNBC)
  • Meanwhile, the U.K.'s services sector dipped below the 50 boom/bust line, suggesting the economy is headed for recession. (Bloomberg)
  • Europe’s top court ruled Thursday that individual countries can order Facebook to take down posts and photos and restrict global access to some material. (NYT)
  • The IRS audits the poor more than the rich because years of budget cuts have made it too hard to audit the wealthy properly, Commissioner Charles Rettig says. (ProPublica)

(Today's Smart Brevity count: 1,196 words, < 5 minutes.)

1 big thing: The stock market is overreacting

Illustration: Lazaro Gamio/Axios

Stocks took a nosedive for the second consecutive day on Wednesday and the Dow and S&P fell for the fourth time in 5 sessions. But the U.S. Treasury market experienced a far smaller move, as it has been factoring in manufacturing weakness and slowing job growth for months.

Why it matters: The bond market's limited movement in the face of historically weak manufacturing and deteriorating employment data suggests the worst may be over, analysts say.

What's happening: Bearish investors appear to have seized control of stock markets and are now pricing in the impacts of the already-in-recession manufacturing sector. While the Dow fell by nearly 500 points on Wednesday, the benchmark U.S. 10-year Treasury note yield dipped just 5 basis points.

  • "The bond market has been more pessimistic about the economy than the stock market for a while and really the only data that has come out particularly weak has been the manufacturing numbers," Tom Simons, money market economist at Jefferies & Co., told Axios.

Reality check: Jobs, consumer spending and the all-important services sector, which represents around 70% of the U.S. economy, have largely held strong.

  • "There’s certainly a lot of downside risks, but data suggests [the economy is] still growing," Simons added.

Between the lines: Treasury yields have been incrementally moving lower throughout the year as traders have poured into bonds, correctly betting that U.S. economic data would continue to weaken and the Fed would cut overnight interest rates and ease policy.

  • Stocks, on the other hand, have largely ignored the economic data, moving higher on positive trade war headlines, however thin, and hopes that monetary policy would boost business balance sheets.

The bottom line: With more important data releases to come this week, the stock market may continue to be volatile. But the Treasury market has proven a better representative of the real economy this year and may have found a floor.

Bonus: Diverging markets
Expand chart

Data: U.S. TreasuryYahoo; Chart: Andrew Witherspoon/Axios

Historically, as U.S. stock prices rise, Treasury yields increase as investors sell bonds to buy equities. But that has not been the case over the past year.

2. Experts warn liquidity crisis could hit stock market

The U.S. stock market may be running low on liquidity, experts say, and that could very well weigh down prices and lead to further selling.

Why it matters: The dysfunction over the past few weeks in the repo market, which is where large financial institutions sell assets like Treasuries when they need quick cash, may have been the first signal of a wide-ranging liquidity shortage.

  • That shortage could be poised to deliver a larger shock to the broader financial system, with Wednesday's stock market selloff being the latest (and most prominent) example of a liquidity event.

What they're saying: "Over the past year we have seen liquidity risks bubbling up," Bank of America Merrill Lynch equity and quant strategist Savita Subramanian said in a note to clients.

  • "When the wall of worry turns to panic selling, we worry about an unlikely area of liquidity risk: the S&P 500."

The nagging issues in the repo market are "just a symptom of a larger macro problem," Yves Lamoureux, president of macroeconomic research firm Lamoureux & Co., told Axios.

  • "The economy requires much more credit and the Fed has gone too far in its tightening of the balance sheet."
  • "Liquidity is the blood needed to hold up the stock market. The simple fact that indices are dropping like rocks is a testament to its lack thereof."

Watch this space: The rapidly rising popularity of passive investing, converging stock ownership, and increasing fund flows from pension funds and large money managers into private equity is drying out typical sources of liquidity to the stock market and could mean major outflows in the face of bad news, Subramanian adds.

  • "Liquidity rarely matters, but when it does, it's all that matters."
3. ATM fees set a record, approaching $5
Expand chart

Data: Bankrate; Chart: Axios Visuals

Axios managing editor Jennifer Kingson writes: It now costs an average of $4.72 to take money out of an ATM that isn't owned by your bank — the highest amount since Bankrate.com started tracking the data in 1998 (when it was $1.97).

Why it matters: ATM fees disproportionately fall on low-income people in neighborhoods that banks tend to avoid. At the same time, saving money in the bank is harder than before, as banks lower the interest rates they pay to depositors.

By the numbers: There are 2 parts to what customers pay to use an out-of-network ATM...

  • A surcharge from the machine's owner, which now averages $3.09.
  • A fee that most banks charge for using someone else's machine, which now averages $1.63 among the 68% of banks with "non-bank ATM fees."

By the city: Of the 25 metro areas included in the study, Houston has the highest average ATM fee ($5.58), while Los Angeles has the lowest ($4.15).

  • For banks, "the ATM fee has long been low-hanging fruit in terms of boosting fee income," Greg McBride, chief financial analyst at Bankrate.com, told Axios. "Nobody's worried about alienating a non-customer."

Meanwhile, the average yield on a checking account is only .06% — down from 1.35% in 1998 (though the lowest figure was .04% in 2014, per Bankrate).

  • The average overdraft fee is $33.36 — down from the record of $33.38 in 2017, but up from $21.57 in the original survey.
  • Philadelphia has the highest average overdraft fee ($35.50), while Cincinnati has the lowest ($30.95).
4. Manufacturing shows some global green shoots

Tuesday's dramatic slide in U.S. manufacturing to the weakest level in 10 years generated jarring headlines and spooked the market, but there are signs the sector is improving on a global level.

  • Even in the U.S., things may not be as bad as the ISM's grim Tuesday report would suggest.

Between the lines: A survey of global manufacturing data from IHS Markit Tuesday showed that though the sector remains in contraction, the index rose for the second straight month.

  • Further, IHS Markit's U.S. manufacturing index showed "a marginally faster rate of improvement in the health of U.S manufacturing" and the highest reading in 5 months.
  • China, the world's No. 1 trading nation, looks to have recovered from weak readings earlier this year, which should help boost factory activity in the moribund eurozone and around the globe.
  • Emerging markets also have seen a solid reprieve with IHS' broad metric of EM manufacturing rising in September for a third consecutive month.

The last word: "The data provides no room for complacency, but is not quite as bleak as the ISM data suggests," Alan Ruskin, chief international strategist at Deutsche Bank, said in a note to clients.

5. Airbus tariffs could open new phase in the trade war

The U.S. opened another phase in what's beginning to look like a global trade war, announcing it will impose tariffs on $7.5 billion in aircraft, agricultural products and other goods from the European Union.

Details: The World Trade Organization authorized the tariffs as a result of a U.S. complaint over EU subsidies to Airbus.

  • The U.S. will add 10% tariffs to imported jetliners and 25% duties to other products including Irish and Scotch whiskies, cheeses and hand tools.

Why it matters: With little traction on a trade deal with China, and Europe's deteriorating economic stability, this action by the U.S. will likely further sour the mood of global equity markets and threatens to further weaken the global economy.

  • Stock across Asia fell by as much as 1% on the news.
  • European indexes were mixed, as U.K. stocks fell, but the pan-European Stoxx 600 was flat after suffering its worst performance this year on Wednesday.
“I’m tempted to say it will poison the well on other U.S.-EU trade issues, but the well is pretty poisoned anyways."
— William Reinsch, senior adviser, Center for Strategic and International Studies, said of the new tariffs to WSJ
Dion Rabouin

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