Mar 12, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

Good morning! Before you do anything else, watch this video of former vice presidential candidate and Alaska Gov. Sarah Palin scream rapping "Baby Got Back."

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🎙Earth provides enough to satisfy every man's needs, but not every man's greed.”- See who said it and why it matters at the bottom.

1 big thing: Brace for coronavirus supply shocks

Illustration: Eniola Odetunde/Axios

Products from major American companies including Apple, GM, Coca-Cola and even Facebook may soon become unavailable, as the fallout from the COVID-19 outbreak backs up and shuts down global supply chains, Axios' Joann Muller, Bob Herman, Courtenay Brown and I write.

Why it matters: Consumers should brace themselves for products to go missing in the coming weeks and months — and it may not be the ones they expect.

For example: Facebook is already short on Oculus VR headsets, and Apple has reportedly told support staff that replacement iPhones for some devices will be in short supply for two to four weeks, our colleague Ina Fried notes.

  • Coca-Cola warned in late February that products in artificial sweeteners used to make Diet Coke have been delayed.

Go deeper: The coronavirus hasn't upended the pharmaceutical supply yet, but the federal government is acutely aware that dozens of prescription drugs are at risk of shortage.

  • The FDA is working with 180 drug companies and 63 medical device manufacturers to evaluate whether their products and components are at risk.
  • However, it has suspended most inspections of foreign manufacturing sites through April.

The big picture: The supply shortage will likely expand significantly, experts say.

  • "As East Asia starts to recover, the focus turns to Europe and then to North America," Joe Brusuelas, chief economist at tax and consulting firm RSM, tells Axios.
  • He expects a cascade of shocks to continue, "with the worst impact for businesses to come in April and May."

Chinese supply chains may be lumbering back, but there will likely be rolling auto parts shortages in other regions of the world, mirroring the spread of the virus, throughout 2020, Andrew Chien, a partner at consulting firm Oliver Wyman, tells Axios.

  • The next risk will likely come from Korea, where most of the world’s memory chips are made. Carmakers have a few weeks’ buffer of supply, but Chien expects to see shortages within a month.
  • Other potential shortages could include components imported from Italy: Brembo brakes, Pirelli tires, FiatChrysler engines and transmissions.

By the numbers: A survey released Wednesday by data provider ISM shows the virus outbreak has caused supply chain disruptions for nearly three-quarters of U.S. companies, and many are already pricing in revenue losses this year as a result.

What's next: Companies in multiple industries tell Axios shipping and delivery could become a new operational chokepoint, especially if more regions end up in lockdowns like Italy's.

Bonus: 1 ⛽️ thing

My colleague Amy Harder points out that amid this particular exogenous shock the world is experiencing the converse of what happened during the 1970s.

Amy writes: "I find it a little ironic that while there are shortages in almost every part of the economy, the world is awash in arguably too much oil... So at least consumers — those who are venturing out of home life — will have cheap gasoline."

2. Catch up quick

The European Central Bank is expected to announce a slate of easing measures despite opposition from board members. (CNBC)

Activist investor Carl Icahn raised his stake in Occidental Petroleum to 10% from 2.5% in recent days as the stock's price has fallen. (WSJ)

The NBA suspended the rest of its season indefinitely after Jazz center Rudy Gobert tested positive for COVID-19. (AP)

3. What's happening on Wall Street

Photo: Bryan R. Smith/AFP via Getty Images

The selling looks far from over as futures trading on all three major U.S. indexes had to be halted after falling by 5% ahead of the market open today.

  • The S&P 500 will likely fall into a bear market following the Dow, which dropped 20.3% from its last high on Wednesday, officially ending the longest bull market in U.S. history.

What's happening: "The market is having a crisis of confidence," Joseph Trevisani, senior analyst at FXStreet, tells Axios.

Flashback: Traders were underwhelmed by the Trump administration's lack of concrete stimulus proposals to offset the economic damage expected from the COVID-19 outbreak Tuesday night and began selling S&P 500 futures.

  • The market opened Wednesday morning nearly 2% below its previous closing level and proceeded to fall by another 3% throughout the day.
  • The World Health Organization's decision to declare the coronavirus outbreak a pandemic, a Congressional doctor predicted the U.S. would see 70 million-150 million coronavirus cases, and lockdowns and quarantine measures ordered in countries around the world added fuel to the selloff's fire.

Threat level: Following Wednesday's market carnage President Trump addressed the nation from the Oval Office, but his speech only increased Wall Street's panic.

  • In contrast to a joint stimulus package from the Bank of England and U.K. Treasury for around $400 billion of tax breaks, government-funded sick pay and worker benefits announced earlier in the day, Trump's authorization of $50 billion of loans to certain companies looked weak and disjointed, investors said.

Behind the curve: Worse, his proposal to ban European travelers from entering the U.S. for 30 days likely worsens the economic outlook, Stephen Innes, global chief markets strategist at AxiCorp, told Bloomberg.

  • “By criticizing Europe and not announcing stricter domestic travel measures in the U.S., President Trump is treating Covid-19 as a European and Asian problem. Clearly, the market doesn’t like this.”
  • “Now the ‘no endgame in sight’ risk-off trade takes over as traders are hammering the sell button now thinking the U.S. government has fallen well behind the curve in its Covid-19 response.”

The Washington Post reported late Wednesday that Trump also was working to pressure Fed chair Jerome Powell to "figure out a way to stimulate the economy," citing three White House officials with knowledge of the matter.

Where it stands: Ahead of the U.S. open, markets in Europe and Asia sank, with Australia's benchmark ASX index again falling by more than 7%, India's Sensex 8% lower, and Thailand's SET losing more than 10% overnight.

  • Benchmarks in Hong Kong, Japan and South Korea all fell to multiyear lows.
  • The pan-European Stoxx 50 index is down 5%, with some euro area indexes lower by 7%.
4. How we got here

The Dow's bull market may have ended in record time (19 days), but there has been a clear march toward this point.

Nov. 8, 2019: U.S. companies are holding off on major purchases and investments, paying down debt and stacking up cash as they look to position for an expected economic downturn in 2020. (Axios)

Jan. 28: Growing worry over the widespread outbreak of the coronavirus is compounding an already jittery market. (Axios)

Jan. 29: The U.S. Treasury yield curve between 3 months and 10 years inverted on Monday, as it has before every recession in the past 50 years. (Axios)

Jan. 31: As the [coronavirus] outbreak worsens, so do concerns that it could hit the global economy right as prospects for growth were beginning to look up. (Axios)

Feb. 13: An overwhelming majority of the world's asset managers think stocks are overvalued and expect a recession this year or in 2021. (Axios)

Feb. 18: Worries are growing that the economic impact from the novel coronavirus outbreak will be worse than expected and that markets are being too complacent in factoring it in as a risk. (Axios)

Feb. 28: In just a matter of weeks, top economists and investment bank analysts have gone from expecting the coronavirus outbreak to have minimal impact on the U.S. economy to warning that an outright recession may be on the horizon. (Axios)

March 10: Coronavirus is already the most serious threat to the U.S. economy since the financial crisis, and the dominoes are aligned for a severe recession that could erase much of the 11-year recovery. (Axios)

5. Back to zero

Data: CME Group; Chart: Axios Visuals

I asked Axios visual journalist Naema Ahmed to make the above chart at around 9 pm EDT, thinking Fed funds futures prices would peak ahead of President Trump's address.

  • I was very wrong.

What happened: Once the president finished speaking, the market only moved further in its expectations for rate cuts. Traders have priced in as much as a 95% likelihood that the Fed cuts rates by 100 basis points to 0%-0.25% at its next meeting.

  • It would be the Fed's largest rate cut since December 2008 when it last cut rates to zero, warning that "labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined."
6. In real time
A screenshot of a tweet from financial writer Joshua Green.

The Dow had a very clear and almost instant reaction to President Trump's Oval Office address.

Dion Rabouin

Quote: Earth provides enough to satisfy every man's needs, but not every man's greed.”

Why it matters: On March 12, 1930, Mahatma Gandhi began with several dozen followers on a trek of about 240 miles to the coastal town of Dandi on the Arabian Sea to defy British policy by making salt from seawater.

  • Along the way, Gandhi addressed large crowds, and with each passing day, an increasing number of people joined him on the trip.
  • By the time they reached Dandi on April 5, he was at the head of a crowd of tens of thousands.