Axios Markets: New rules of engagement

Plus: Speedier trade times | Monday, December 06, 2021

Open in app View in browser   Presented By Northern Trust   Axios Markets By Kate Marino ·Dec 06, 2021 🌅 Good morning, Markets readers! 🏝 It's been two weeks since I've been in your inbox … and the world has changed? Powell was renominated, Omicron appeared, transitory's dead, stocks and bitcoin sold off — and that so-so-but-also-kinda-good jobs report … 🥵 It's good to be back, as we here at Markets do our part to help make sense of it all. 📊 Today's newsletter is 1,231 words, a 5-minute read.     1 big thing: D.C.-Beijing tensions shift markets Illustration: Aïda Amer/Axios   U.S. markets stand to lose $2 trillion in value if D.C. and Beijing drift further apart, Axios' Hope King writes. Why it matters: Political chasms are showing up in new securities regulations that put companies and investors in a bind. The rules are also another reflection of how much relations between the world's largest economies have cooled, even as they remain economically interdependent. Driving the news: Ride-hailing giant DiDi is preparing to delist from the New York Stock Exchange and to relist in Hong Kong following pressure from Chinese regulators. It's the first — with more than 200 others potentially at risk for delisting — as Chinese and U.S. regulators simultaneously pull and push Chinese companies out of U.S. markets.  Details: SEC rules laid out last week require Chinese companies listed in the U.S. to face audits or risk delisting within three years — an escalation of a nearly two-decade-old requirement. Meanwhile, Beijing's financial regulators are readying rules that will make it more onerous and costly for Chinese tech startups to list outside of China. Threat level: "Absent a political solution," all Chinese companies listed in the U.S. could be delisted within three years, says Brendan Ahern, chief investment officer of Krane Funds Advisors. By the numbers: There were 248 Chinese companies listed on the three largest U.S. exchanges as of May 2021, according to the U.S.-China Economic and Security Review Commission. The total market capitalization of these firms exceeded $2 trillion, or just under 10% of the NYSE's 2020 equity market capitalization, according to the World Federation of Exchanges. Be smart: Chinese companies are "stuck between a rock and a hard place," because Chinese law has prohibited them from undergoing audit reviews that will keep them listed — but the companies were allowed to list when it was known that they couldn't adhere to the reviews in the first place, Ahern notes. The SEC, Nasdaq and NYSE declined to comment. The Public Company Accounting Oversight Board oversees the audits and says on its site: "We remain concerned about our lack of access in China and will continue to pursue available options to support the interests of investors and the public." On Sunday, the China Securities Regulatory Commission issued a statement addressing the audit issue saying there's been cooperation between U.S. and Chinese policymakers and that they've "worked together on pilot inspection programs." The bottom line: Securities regulators in the U.S. and China want to draw new rules of engagement that only push them further apart. Go deeper.     2. Catch up quick Employers pay for millions of Americans' prescription drugs, but secretive contracts with companies that promise to help keep costs down prevent employers from understanding whether they're paying reasonable prices. (Axios) In the nation's shift to renewable energy, a labor market conundrum has emerged: many of the newly created jobs aren't located in the same places as legacy jobs being phased out. (WSJ) China Evergrande gave its clearest acknowledgment yet that its $300 billion debt load is unsustainable, saying it plans to actively engage with offshore creditors on a restructuring plan. Its shares plummeted today as it neared default. (Bloomberg) Adding to the signs of distress in China's property sector, the developer Sunshine 100 missed another bond payment that was due Sunday. (Bloomberg)     3. Charted: SPAC blitz Data: Dealogic; Chart: Thomas Oide/Axios SPACs are outpacing traditional IPOs in 2021, Axios' Dan Primack writes. 562 SPACs (special purpose acquisition vehicles) went public on U.S. exchanges between January and November, compared to 373 regular companies, according to data from Dealogic. SPACs raised $151 billion in their IPOs, while traditional issuers raised $148 billion. By the numbers: SPACs owe most of their lead to the first quarter, when it felt like every VC, private equity and hedge fund manager was raising a SPAC for easy money optionality. Things have since begun to equalize a bit, but last week brought a dozen SPAC IPOs and no traditional ones. The bottom line: SPACs seem to be here to stay as a viable IPO alternative.     A message from Northern Trust Balancing public and private investments     With new private investment opportunities emerging across a range of asset classes, is now the time to reevaluate the role of private investments in your portfolio? A new report offers research-backed insights to weigh your options. Learn more.     4. Wall Street speeds up, slowly Illustration: Shoshana Gordon/Axios   The machinery of U.S. markets is — eventually — going to move a lot more quickly, with settlement times getting slashed in half from two days to one day. But it's going to take a while to get there, Axios' Felix Salmon writes. Why it matters: The current plan is for the new settlement cycle to go live in the first half of 2024. The big picture: Currently, most capital-markets transactions, like buying stocks or even converting currency, settle on a T+2 basis. If the exchange is agreed on a Monday, then the seller receives the cash the following Wednesday. Driving the news: The most important industry bodies just agreed to reduce that settlement time to T+1 — meaning that if you enter into a contract to sell a stock on Monday, you'll receive the money on Tuesday. Between the lines: Getting there from here won't be easy. After all, it took about five years, from 2012 to 2017, to move to T+2 from T+3. What's next: Eventually, the agencies anticipate a move from T+1 to T+0.5, with trades settling the same day, although there's no timetable for that. What's not next: Real-time settlement, as proposed by Robinhood, is unlikely to happen in the foreseeable future. It would require extremely expensive and unnecessary changes to almost all market infrastructure, including repo, prime brokerage, and funding requirements for retail investors. Be smart: Real-time settlement would destroy most of the current benefits of securities netting, where Wall Street firms only transfer the small net amount owed at the end of the day, rather than the enormous gross amount owed. Flashback: Robinhood was forced to restrict trade in meme stocks like GameStop in February, and put up $3 billion in cash, in large part because of the way the current T+2 system is structured. A move to T+1 would cut those collateral calls in half. The bottom line: A glance at the 169-page "implementation playbook" for the move to T+2 in 2017 gives a hint of the complexities involved in this change. The move to T+1 is in many ways even gnarlier.   Share Axios and earn rewards If you like this newsletter, your friends may, too! Refer your friends and get free Axios swag when they sign up. Be a good friend and share   5. What we're watching this week Illustration: Aïda Amer/Axios   The latest measure of inflation is set for release Friday, as market watchers continue to process last week's confusing jobs report and try to game out the economic impact of the latest coronavirus variant, Axios' Aja Whitaker-Moore writes. Why it matters: Americans, politicians, and regulators are laser-focused on price gains picking up steam and impacting the overall economic recovery. By the numbers: Consensus estimates among economists call for the core Consumer Price Index, which measures the price of goods and services excluding food and energy, to have risen by 0.4% in November from October. That compares to the 0.6% hike seen in October, and September's 0.2% uptick. What they're saying: A group of top economists have ramped up their inflation expectations in recent months, and downgraded their forecasts for U.S. economic growth in 2021, according to a new NABE Outlook survey released today. "Nearly three-fourths of respondents — 71% — anticipate that the Federal Reserve's preferred gauge of inflation, the change in the core PCE price index, will not cool down to or below the Fed's target of 2% year-over-year until the second half of 2023 or later," said NABE vice president Julia Coronado, in a statement. The bottom line: The Fed has already reversed course on its stance that higher prices would be temporary and that admission may change the central bank's view on its policies.     A message from Northern Trust Stay informed with the Tax Policy Resource Center     Prepare your portfolio and wealth plan for change with research-based insights on the likelihood of proposed tax policy changes and cutting-edge wealth planning strategies for managing complex wealth from The Northern Trust Institute. Ready for reform?   Like this email style and format? Learn more about Axios HQ. 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