Axios Markets

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September 25, 2019

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Situational awareness:

  • “China-U.S. relations today have once again come to a crossroads,” Chinese State Councilor and Foreign Minister Wang Yi said in New York on Tuesday. (CNBC)
  • WeWork's Adam Neumann announced he will step down as CEO of the company. (Axios)
  • Vox Media will acquire New York Media, the parent company of New York Magazine. (NY Mag)
  • The value of bitcoin fell by as much as 17%, the most since January 2018, and dropped below $9,000 for the first time since June. (Bloomberg)

1 big thing: The market just wants a China trade deal

Illustration of the hands of a clock getting closer to midnight with a star beneath.
Illustration: Sarah Grillo/Axios

Bullish stock traders have taken just about every opportunity to buy U.S. equities after positive news about developments in the U.S.-China trade war this year, but both the S&P 500 and Nasdaq had their worst day in a month on Tuesday as obstacles to that deal mounted.

What's happening: Stocks reversed earlier gains after President Trump addressed the UN and accused China of failing to keep its promises and engaging in predatory practices that had cost millions of jobs in the U.S. and other countries.

  • "Trump's comments to the U.N. were very antagonistic toward China. In the last couple of weeks there's been optimism trade would go in a positive direction," Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, told Reuters.
  • "It was the tone and the fact he listed out in great detail all the gripes the U.S. has with China."
  • "All that trade optimism that's been building has been sucked out of the air and replaced with pessimism."

U.S. stocks fell further after Congressman John Lewis committed his support for impeachment proceedings based on reports Trump pressured Ukraine's president to investigate former Vice President Joe Biden and his son by withholding U.S. aid.

  • “This is going to be news that spills out over time, but I can’t imagine the start of this process improves the tone of the U.S.-China trade talks … if I’m China I feel empowered," Art Hogan, chief market strategist at National Securities, told CNBC.
  • "This is a market that’s been hanging on that tone getting better and I think it just got worse on the president’s hawkish tone at the UN and this process."

Where it stands: The impeachment inquiry House Speaker Nancy Pelosi announced Tuesday doesn't realistically portend a Trump exit from the White House, but it does further cloud what the market can expect from government policy, said Marc Chandler, global market strategist at Bannockburn Global Forex.

  • “My sense is the impeachment is well ahead of the country. I don’t think it’s going to be successful, and ... I don’t think the country is behind it. It just adds to uncertainty,” Chandler wrote in a note.

2. Watch the Treasury market's reversal

Data:; Chart: Axios Visuals
Data:; Chart: Axios Visuals

Stocks have steadily risen over the course of September, with the S&P edging up by around 3% month to date, while safe-haven U.S. Treasury prices have fallen, pushing yields higher, in a sign of investors' increasing appetite for risk.

By the numbers: U.S. equity ETFs have seen 3 straight weeks of net inflows, culminating with $18 billion of funds for the week ending Sept. 18, according to the Investment Company Institute.

  • Bond ETFs conversely saw their lowest inflows since the week ending Aug. 7 during that period, ICI data shows.

Why it matters: The pickup in stock buying so far this month has been a major reversal of the trend seen in markets for most of the year. Capital flows had largely been going into bonds and money market funds and out of stocks.

  • Equity ETFs and mutual funds saw net selling in every month of the year except February, for a total of $93.6 billion of outflows through July 31.
  • Bond ETFs and mutual funds had seen inflows every month this year without exception, totaling $258.5 billion.

The big picture: Without more good news on the trade war, investment flows could reverse out of stocks in the coming weeks and back into bonds. The yield on the benchmark 10-year Treasury note has clearly reversed course after touching 1.90% on Sept. 13, dropping all the way to 1.65% late Tuesday.

3. Consumer confidence slips, but remains very high

Data: The Conference Board; Chart: Axios Visuals
Data: The Conference Board; Chart: Axios Visuals

The stock market was also stung by a weak U.S. consumer confidence report from the Conference Board on Tuesday.

  • The index fell to 125.1 in September from a downwardly revised 134.2 in August. That was the biggest drop in 9 months, and the most the index has missed versus economists' expectations since 2010, according to Reuters.

What they're saying: “The escalation in trade and tariff tensions in late August appears to have rattled consumers,” Lynn Franco, senior director of economic indicators at the Conference Board, said in a release accompanying the data. “[I]t appears confidence is plateauing.”

  • “We aren’t in a recession yet, but the consumer is plainly worried,” Chris Rupkey, chief economist at MUFG, told Reuters. “Consumer confidence is fragile and any further escalation of the trade war will probably be all it takes to push them and the economy over the edge.”

Yes, but: Consumer confidence remains historically high. The Conference Board's index has yet to fall below 120 in 2019. It had barely risen above 120 in nearly 2 decades prior to 2017.

4. U.S. mortgage rates rise, applications and home prices fall

The housing market continued to slow as mortgage applications fell 10.1% from last week, according to data from the Mortgage Bankers Association’s (MBA) weekly survey.

Why it matters: The MBA survey released this morning follows weak numbers from the Case-Shiller 20-city home price index, which rose just 2% month-over-month in July and did not rise at all on a monthly basis after seasonal adjustments.

  • This represents the slowest rate of home price appreciation since 2012.

The intrigue: Despite a fall in U.S. Treasury yields and the Fed cutting overnight interest rates last week, the average U.S. 30-year mortgage rate ticked up above 4%, MBA's data showed.

  • "[D]espite falling yields, mortgage rates ticked up again and have risen 20 basis points over the past two weeks,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.
  • “The increase in rates led to fewer refinances, and activity has now dropped 17 percent over the last two weeks.”

5. Funding for China's PE market falls by a third

Private capital investment in China slowed markedly in the first half of the year, data from the Emerging Market Private Equity Association released Tuesday showed.

  • Capital invested in China's private markets fell from $15.1 billion in the first half of 2018 to $9.8 billion through June 2019, with deal count across all transaction types in the country declining from 582 to 322 over the same period.

The big picture: Emerging markets broadly have suffered, with private equity and venture capital seeing declines of 10% and 32%, respectively, in the period through June, compared to 2018.

  • However, the decline "was expected," EMPEA said in a release, "given the sheer amount of capital raised in 2018, particularly in Emerging Asia and Latin America."

But, but, but: The trade group representing EM institutional investors, fund managers and industry advisors also cautioned that the "slowdown in private capital investment activity in the first half of 2019 was more pronounced amid rising trade tensions between major economies and a more uncertain global economic outlook."