News : Axios Markets: Reversing course

Friday, October 16, 2020

Axios Markets: Reversing course

Presented By the Center for Audit Quality

Axios Markets

By Dion Rabouin ·Oct 16, 2020

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🎙 "If you stay home, your message stays home with you. If you stand for justice and equality, you have an obligation to find the biggest possible megaphone to let your feelings be known." - See who said it and why it matters at the bottom.

1 big thing: Employment gains are reversing course

Data: U.S. Department of Labor; Chart: Andrew Witherspoon/Axios

Nearly 900,000 Americans applied for first-time unemployment benefits last week, the Labor Department announced, the highest number since mid-August and the second weekly increase in a row.

What's happening: "It appears there was a widespread reversal of the downtrend in claims that has been in place for several weeks," Jefferies' money market economist Thomas Simons and chief economist Aneta Markowska wrote in a note to clients.

"We suspect that the continued inaction in Washington on a new round of stimulus is contributing to the weakness."
"Many small businesses need an injection of cash as the service sector continues to struggle due to COVID."

One level deeper: "We feared an above-consensus initial claims number, because claims in Wisconsin — the only state which publishes daily data — rose sharply last week, and Google searches for 'file for unemployment' nudged up, but this is a higher reading than we expected," Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note.

"[I]t is a fair bet that this increase in claims is concentrated in states where Covid cases are high and rising rapidly, like Wisconsin."
"[T]he increase is consistent with the message from the downward trend in the Homebase small business employment numbers since the start of this month."

By the numbers: The number of Americans receiving benefits from the Pandemic Emergency Unemployment Compensation (PEUC) program for long-term jobless has risen by more than 10,000% since April 11 and included 2.8 million people as of Sept. 26.

The program provides an additional 13 weeks of benefits after Americans have exhausted traditional unemployment.

Of note: "One thing to keep in mind is that we are now hitting the 6-month anniversary of the spike in jobless claims over the Spring that took the data to historic highs," Jeffries' Simons and Markowska said.

"For example, claims were 6.615M for the week of April 3. That was 27 weeks ago, and jobless benefits typically pay for 26 weeks."

Watch this space: During the week ending Sept. 26, 818,000 more people enrolled in the PEUC program while 803,000 came off the rolls of continued traditional unemployment.

"This suggests that the major reason we've seen continuing claims fall so sharply over the last couple of weeks is due to benefits expiry rather than people finding jobs."

"The bottom line here is that the state of the labor market is contingent on the virus picture," Shepherdson said.

"So we can't rule out further increases [in jobless claims], and at this point we'd regard a zero print for October payrolls as a decent result; a clear decline is entirely possible."

2. Catch up quick

The WHO's solidarity trial found COVID-19 drug remdesivir has no substantial effect on a patient's chances of survival, delivering a significant blow to hopes of identifying existing medicines to treat the disease. (FT)

Senate Majority Leader Mitch McConnell said he would only put a $500 billion stimulus package on the floor, defying a call by President Trump to "go higher" than the White House's current $1.8 trillion offer (NY Times)

China's first direct bond sale in the U.S. was five times oversubscribed, garnering $30 billion in bids, with U.S.-based investors taking nearly one-fifth of the offering in spite of President Donald Trump's decoupling threats. (Nikkei)

3. A financial lifeline for 5G spectrum

Data: FRED; Chart: Axios Visuals

Axios' new managing editor for business Aja Whitaker-Moore writes: A company that could be at the center of 5G's future is being thrown a lifeline, but one for which it will pay a hefty price.

Driving the news: Ligado Networks is raising $3.85 billion in new financing to stay out of bankruptcy. The spectrum company's survival could be crucial to the long-sought-after, and sometimes controversial, dream of deploying a nationwide 5G network.

Why it matters: Wireless companies like T-Mobile, Verizon and AT&T are racing to acquire spectrum to build next generation 5G wireless networks. The type of spectrum Ligado holds, commonly known as L-Band, is a source of additional capacity and may help traditional carriers boost their ability to create even better networks.

One estimate from New Street Research says Ligado's L-Band spectrum portfolio could be worth anywhere from $12-$23 billion, depending on how the carriers want to use it.

By the numbers: JPMorgan bankers presented Ligado's bond deal earlier this month with juicy interest payments of 13% on the highest priority notes and 16% on the more junior notes, according to an offering document reviewed by Axios.

But that wasn't good enough — the bank changed the terms yesterday in order to drum up more demand, according to one investor not authorized to speak publicly.
Ligado reduced the amount it is borrowing from $4.3 billion, and is now offering to pay a 15.5% coupon on the more senior notes and 17.5% on the junior bond, says the investor, adding the company will pay no cash interest right away.

The intrigue: The 17.5% coupon on the junior bonds is the highest rate on any U.S. corporate bond since 2011.

Thanks largely to the record-low rates most companies are paying, U.S. high yield issuance for the year was $352.7 billion through Wednesday, higher than any full year on record, per LCD, S&P Global Market Intelligence.

State of play: The FCC and Trump administration leaders like Attorney General William Barr, a former telecom exec, and Secretary of State Mike Pompeo firmly back Ligado's effort. But other U.S. agencies, including the FAA, the Department of Defense, and members of Congress have lobbied hard against the company.

The opposition cites concern that granting Ligado a license puts critical systems at risk, like GPS technology used for the military and aerospace.
U.S. Senator James Inhofe went so far as to hold up the confirmation of an FCC member this summer to pressure the commission to overturn its Ligado decision.

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4. Bank earnings soar again; stock prices not so much

Data: FactSet; Chart: Axios Visuals

JPMorgan, Goldman Sachs and Morgan Stanley all saw trading revenue rise more than 20% in the third quarter, with Morgan Stanley's earnings report Thursday showing profits jumped 25% from a year earlier to $2.72 billion and a 16% increase in revenue, which rose to $11.7 billion.

That follows Q2's record for modern Wall Street's trading and dealmaking units.

The big picture: Even after lackluster headline earnings from Bank of America and Wells Fargo, the five biggest U.S. investment banks are on pace to rake in $100 billion in trading revenue this year.

They've already generated almost $84 billion, more than any full year since 2010, per Financial Advisor.
The finance sector's current earnings decline of 10.5% is less than half the 23.1% decline expected before the banks started reporting results last week.

Yes, but: The banks remain unloved on the stock market. State Street's financial sector ETF is down nearly 20% year to date and its bank-specific ETF, KBE, is down 30%.

Even after its searing earnings results on Wednesday, Goldman gave back all of its stock gains and then some yesterday.

5. What we learned this week

Screenshot

Fed vice chair for supervision Randal Quarles let the world know he is unafraid to stunt on his haters by showing off his immaculate office during an interview with the Institute of International Finance on Thursday.

Background: This week has seen the confluence of the IMF and IIF annual meetings and the Milken Conference, all of which are being held virtually.

For the record: I saw the chosen video conferencing locations of Boston Fed president Eric Rosengren, Minneapolis Fed president Neel Kashkari, Atlanta Fed president Raphael Bostic, Fed vice chair Richard Clarida and Fed chair Jerome Powell (to name only the FOMC members), and none of them came close to approaching the palatial estate of an office Quarles displayed.

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Quote: "If you stay home, your message stays home with you. If you stand for justice and equality, you have an obligation to find the biggest possible megaphone to let your feelings be known."

Why it matters: On Oct. 16, 1968, Olympians Tommie Smith and John Carlos raised the Black Power salute after being awarded their gold and bronze medals during the Mexico City Games to protest racism and injustice against African Americans.