Oct 25, 2019

Axios Markets

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Situational awareness:

  • Amazon shares fell by as much as 9% in after-hours trading following the release of its earnings report, which showed weak forward guidance for the upcoming holiday season. (CNBC)
  • Indonesian investigators blamed design flaws in the 737 MAX jet, ineffective U.S. regulators and pilot error for the Lion Air crash that left hundreds dead. (Bloomberg)
  • Walmart, CVS and Rite Aid are removing all 22-ounce bottles of Johnson & Johnson’s baby powder following last week's recall of some bottles due to possible asbestos contamination. (Reuters)
  • Next on “Axios on HBO”: An exclusive interview with Iraq’s President Barham Salih (sneak preview), the head of the IMF Kristalina Georgieva talks socialism and taxes, and Sen. Kamala Harris gives her take on 2020. Oh, and Felix Salmon and I debate the severity of the next recession.
1 big thing: Draghi saved by the bell

Illustration: Aïda Amer/Axios

The eurozone is an escalating mess and European Central Bank president Mario Draghi is getting out right before the proverbial fit hits the shan.

Driving the news: Draghi delivered his final press conference as head of the ECB on Thursday, keeping rates in the 19-member bloc unchanged following the controversial announcement of an interest rate cut to -0.5% and a $22 billion a month bond-buying program at September's meeting.

  • He will hand over control of the central bank to former IMF leader Christine Lagarde who, with no central banking experience, will inherit not just a group of weakening economies, but a squabbling 25-member governing council described by the Wall Street Journal as "warring factions."
  • The committee has split largely based on Draghi's reported 11th-hour decision last month to cut rates and restart the bond purchases it had concluded in December.
  • With Draghi moving on and the rest of the ECB's central bankers at odds over already instituted policy, “everyone is waiting for Christine” one unnamed official told WSJ.

What's happening: The manufacturing sector in the euro area shrank for the ninth consecutive month, data showed Thursday, and remains on the brink of an outright contraction. There are growing signs in the bloc’s largest economy, Germany, that the manufacturing slump is starting to take a toll on employment.

  • Britain, the EU's second-largest economy, is embroiled in a 3-year saga of failed attempts to leave the union, and the union’s other major economies — France, Italy and Spain — are experiencing some of the worst economic and political strife since the financial crisis.
  • While Britain is the only country that has so far voted to leave, political parties skeptical or in outright opposition to the European Union and euro currency are increasing in political power in each of the EU's major countries.

What's next: In addition to a looming recession, a divided governing council and a rising wave of opposition toward European unity, the ECB looks to be out of bullets, as even interest rates well below 0 and trillions in bond purchases have failed to accomplish its stated goals.

Bonus: Elsewhere in Europe...

While almost every major central bank on earth is loosening monetary policy as they attempt to stimulate economic growth, two look to be moving in the opposite direction.

  • Sweden's Riksbank announced Thursday it hopes to raise its overnight rates to 0% by its December meeting, bringing them out of negative territory for the first time since 2015.
  • Norway's central bank has raised interest rates four times in the past year to 1.5%, well above the average for industrialized countries in Europe. Policymakers said Thursday they intend to keep interest rates “at this level in the coming period.”
2. Tesla short sellers are feeling the burn
Expand chart
Data: S3 Partners; Chart: Lazaro Gamio/Axios

Tesla's stock price rallied nearly 18% on Thursday after a stronger-than-expected earnings report, putting a big dent in the profits of short sellers.

  • Many short sellers pulled out of the trade after the stock fell to $178.97 a share in June, counting $5.16 billion in mark-to-market profits because of the stock's decline, according to data from S3 Partners. But those who continued to short Tesla have paid dearly, and are now in the red, year-to-date.

What happened: Tesla's stock has been a tale of two halves. In the first half of the year, short-sellers had nearly recouped the entirety of their losses from the 2016-2018 period when Tesla was one of the market's hottest companies.

  • But since June 3, shares have rallied by more than 60%, as CEO Elon Musk has managed to produce solid numbers and beef up production in China.
  • Short sellers lost close to $1.5 billion on Thursday alone, wiping out almost 70% of their year-to-date profits, S3's managing director of predictive analytics Ihor Dusaniwsky said in a note.

Where it stands: Thursday wasn't quite the "short burn of the century" Musk threatened on Twitter was "comin soon" in May 2018, but it was pretty bad.

3. ADP: Wage growth and job gains may have peaked
Expand chart
Reproduced from ADP; Chart: Axios Visuals

The pace of wage increases and hiring is slowing, data shows, as the previously red hot U.S. labor market continues to cool.

  • After a fast start to 2019, year-over-year employment growth slowed to 1.7% in September, private payrolls processor ADP said in its recently released Q3 workforce vitality report.

Why it matters: "Though wage growth remains healthy, the tight labor market continues to pressure wages and fuel growth across nearly all industries, but employers may be losing the capacity to raise paychecks any further."

Of note: The Midwest leads the nation in wage growth at 3.9%, followed by the West (3.2%), Northeast (3.1%), and South (2.9%). The Midwest has led the nation in wage growth for five consecutive months, but their wages are lowest among the regions and employment growth also lags behind that of other regions.

4. Libra could make America great again, Congressman says

Facebook CEO Mark Zuckerberg's plea to members of Congress Wednesday that they allow the company to develop its Libra digital currency to help the U.S. compete with China in the space was rendered a bit hollow by the fact that the Libra Association will be based in Switzerland.

Congressman Lance Gooden (R-TX) pointed this out during questioning and asked Zuckerberg to relocate the headquarters of his cryptocurrency project to the U.S.

“Mr. Zuckerberg was right to emphasize the importance of innovation for America’s future as an economic and financial leader. Emerging opponents are working diligently to outpace us in this field. Our government should be an enabling factor for the development of new technologies, not a limiting factor.
“Most importantly, I remain convinced the natural home of this project is here in the United States. That’s particularly true if this endeavor is of heightened importance to the future of America’s economic standing in the world, as Mr. Zuckerberg told us during the hearing yesterday.”
5. What we learned this week: stocks haven't moved much

Big moves in well-known companies like Tesla, Twitter, JPMorgan Chase and Ford have generated headlines this week but the broader market has been little moved. That's been true for the month, the quarter and the majority of the year.

By the numbers: As of market close Thursday, the S&P has risen 0.8% from its closing level a week ago; is up 1.1% so far in October; and up 2.3% since the end of Q2.

  • Excluding the first quarter's rebound from December's historic selloff, the S&P has risen 6.2% this year, according to data from FactSet.
  • Year-to-date the index is up 20.1%.

Watch this space: While a number of companies have posted surprise earnings beats, overall earnings now are expected to have declined 2.3% year-over-year in the quarter, according to IBES data from Refinitiv.