Today's Big Picture
The seemingly unstoppable upward movement of equity markets may have met its match last night. Yesterday, the first day of trading in 2020, saw the Nasdaq 100 rise 1.6%, the Nasdaq Composite gain 1.3%, the Dow 1.2%, and the S&P 500 0.8% driven in large part by the news that China's central bank cut reserve requirements, unleashing a material level of liquidity.
This morning things have changed. US equity futures are in the red on the news that General Qassim Soleimani, Iran's top commander who led a special forces unit of Iran's elite Revolutionary Guards and has been a key figure in Middle East politics, was killed by a US drone strike in Baghdad. As we warned in yesterday's piece, this comes after a New Year's Eve attack by Iran-backed militias on the US Embassy in Baghdad. The Defense Department's statement, issued last night at 10 pm ET, can be read here, and a response on Twitter from Iran's Foreign Minister Mohammad Javad Zarif is here.
This could get very ugly.
In response, crude oil rose over 4%, the CBOE Volatility Index rose over 25%, and safe-havens such as US Treasury bond futures, gold, and the Japanese yen spiked upwards as well. The majority of equity indices in Asia were mixed. The Kong Kong Hang Seng and China's Shanghai Composite closed lower while the Chinese Shenzhen Composite, Korean Kospi and Australia's S&P/ASX 200 rose slightly. Japan's Nikkei remained closed. European equity indices all moved lower with all sectors of the pan-European Stoxx 600 in the red except oil and gas. US futures are down over 1% across the board.
The explosive situation in the Middle East is likely to put a damper on the excessive levels of enthusiasm we have been seeing. Just yesterday, the CNN Business Fear & Greed Index hit 97 out of 100 and flashed Extreme Greed. Investor sentiment was already shifting direction before today's news. The American Association of Individual Investors most recent sentiment survey findings for January 2, 2020, revealed that after peaking at 44.1% in late December, Bullish investor sentiment has fallen to 37.22%. That's below the 40.9% reading for Neutral sentiment that has climbed from 35.4% in late December. We interpret that shift as investors recognizing the velocity of the recent melt-up in the stock market may have it priced to perfection, leaving it vulnerable to the kind of shock we've had in the past 24 hours.
There are few earnings reports expected today, however next week, more than 20 companies will issue their latest quarterly results. Inside those reports, investors will be on the hunt for clues as to what we'll hear in the soon to be upon us December quarter earnings season that kicks off in force on January 14, one day before President Trump is expected to sign the phase-one trade agreement with China. The good, the bad and the potentially ugly clues obtained in those earnings reports next week will also inform investors as to how realistic the consensus EPS view of +9.6% year over year growth for the S&P 500 is. That determination over the coming weeks will likely be one of the major catalysts for the market's March quarter move.
Data Download
Putting aside the profound spike in tensions in the Middle East, this morning, some interesting economic data from around the world was released.
The unemployment rate in Germany was unchanged as expected in November, at 3.1% (seasonally adjusted harmonized rate), the 7th consecutive month the rate has been at a 39-year low. Neither the number of unemployed nor employed changed. The number of people in Spain registering as unemployed decreased by 34.6k to 3.2k in December, the lowest level for a December since 2008.
Inflation is starting to appear to a small degree in Europe. Housing prices in the UK rose to 1.4% in December YoY as expected, up from 0.8% previously. The preliminary inflation rate in France rose to 1.4% YoY in December from 1.0% in November. That said, the M3 money supply in the EU rose less than expected in November, remaining at 5.6% YoY versus expectations for an increase to 5.7%.
Loans to households in the European Union remained steady at 3.5% YoY in November as expected. Loan growth to non-financial corporations slowed to 3.4% YoY in November from 3.8% in October. Consumer credit in the UK rose just over half as much as expected in November, increasing by £0.563 billion versus expectations for £1.0 billion.
As we get ready for US equity markets to open, we have several pieces of December quarter data coming at us today. These include November Construction Spending, December Auto & Truck Sales, and the weekly reports for EIA Natural Gas and Crude Oil inventories. We strongly suspect the US economic data that will take the spotlight will be the December ISM Manufacturing Index, a key input to GDP estimates, and one that we'll be digging into, particularly the new order component to determine the initial speed of the economy in the March 2020 quarter.
We'd also like to point out as we work through the final data points for 2018 that the year-over-year change for the Conference Board's US Leading Economic Indicator ex S&P 500 recently dropped below zero for the first time since the Great Financial Crisis.
This afternoon the Federal Reserve will release the minutes from its December meeting. We'll be looking for further insight into the Fed's thoughts on its support of the overnight repo market, which expanded the Fed's balance sheet from $3.8 trillion in September (when the repo situation was a one-off, idiosyncratic situation) to $4.17 trillion as of January 1st. And for those who thought it was just a 2019 event, yesterday the Fed added another $56.72 billion, nearly half of which was via a 14-day repo.
Stocks to Watch
WESCO International (WCC) has submitted a revised proposal to the board of directors of Anixter International (AXE) to acquire Anixter for $97.00 per share in cash and stock, up from its prior offer of $93.50 a share.
Efforts are once again underway for a Eurozone-wide tax on plastic waste. While there remains ample road ahead for this endeavor, investors should look to comments during the upcoming earning season from Dow (DOW), LyondellBasell Industries (LYB), Exxon Mobil (XOM), Chevron (CVX) and other suppliers to the global plastic industry. We see this as another step in the global movement that is reflected in Tematica's Cleaner Living investment theme and index.
Fiesta Restaurant Group's (FRGI) Pollo Tropical announced the launch of a Vegan Tropichop and Wrap featuring a "picadillo" made with Beyond Meat's (BYND) plant-based ground meat.
The South China Morning Post reports luxury goods company LVMH Moet Hennessy Louis Vuitton (LVMHF), is preparing to shut one of its Louis Vuitton shops in Hong Kong where protests have hit demand and rental costs remain high. Investors will likely watch moves made by Moncler SpA (MONC:IM), Gucci owner Kering (KER:FP), and other luxury goods companies that are contending with falling sales in Hong Kong and in some cases a large footprint of shops.
After securing government subsidies and just days before it rolls out cars manufactured at its plant in Shanghai, Tesla (TSLA) shaved almost $8,000 off the starting price of its Chinese-built Model 3s to 299,050 yuan ($42,900).
Universal Forest Products (UFPI) has completed the reorganization of its operations and is now operating as UFP Industries, a change announced in August 2019.
Apple (AAPL) signed a five-year contract with the production company of former HBO exec Richard Plepler to make television series, documentary, and feature film exclusive for Apple TV+. This is the latest sign of escalation in the streaming wars, which we continue to think will drive demand and prices for content, particularly quality content, higher.
Sticking with streaming services, reports suggest Disney (DIS) may have hit the 25 million subscriber mark for its Disney+ service as it entered 2020.
Yesterday shares of Advanced Micro Devices (AMD) rose 7.1%, leading the semiconductor sector higher. Its shares now trade at triple their peak during the dotcom insanity with revenue growth that is roughly half of what it was back then. Even though the chip sector has several growth drivers, including 5G, WiFi 6, and the continued data center build-out, as we shared above, past a certain point, investors are likely to question upside potential and valuations to stocks that are seemingly priced to perfection.
After today's US equity markets close, there are no companies slated to report their quarterly results. For a look at upcoming earnings reports, we recommend checking in with Nasdaq's earnings calendar page.
On the Horizon
- Upcoming IPOs:
- There are no IPOs scheduled for this week.
- For a complete list of upcoming IPOs by month, please visit the Nasdaq IPO Calendar.
- Dates to mark:
- January 7-10: 2020 International CES
- January 15: President Donald Trump is expected to sign the phase one trade deal with China.
Thoughts for the Day
As we get ready to close the final holiday season week, two thoughts to ponder from Greek Stoic philosopher Epictetus:
- "The key is to keep company only with people who uplift you, whose presence calls forth your best."
- "It's not what happens to you, but how you react to it that matters."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Chris Versace
Christopher (Chris) Versace is the Chief Investment Officer and thematic strategist at Tematica Research. The proprietary thematic investing framework that he’s developed over the last decade leverages changing economic, demographic, psychographic and technology landscapes to identify pronounced, multi-year structural changes. This framework sits at the heart of Tematica’s investment themes and indices and builds on his more than 25 years analyzing industries, companies and their business models as well as financial statements. Versace is the co-author of “Cocktail Investing: Distilling Everyday Noise into Clear Investing Signals” and hosts the Thematic Signals podcast. He is also an Assistant Professor at NJCU School of Business, where he developed the NJCU New Jersey 50 Index.
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Lenore Elle Hawkins
Lenore Elle Hawkins has, for over a decade, served as a founding partner of Calit Advisors, a boutique advisory firm specializing in mergers and acquisitions, private capital raise, and corporate finance with offices in Italy, Ireland, and California. She has previously served as the Chief Macro Strategist for Tematica Research, which primarily develops indices for Exchange Traded Products, co-authored the book Cocktail Investing, and is a regular guest on a variety of national and international investing-oriented television programs. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.
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