Markets

Daily Markets: Equities Cheer Potential Progress on U.S.-China Trade Deal

China and US flags flying alongside each other - Bloomberg photo
Credit: Tomohiro Ohsumi/Bloomberg

Today’s Big Picture

Asian equities finished the day mostly higher led by the 1.4% move in Japan’s Nikkei and the 1.6% climb in South Korea’s Kospi while Hong Kong’s Hang Seng slipped 0.3% and China’s Shanghai Composite slumped 0.4%. Positive comments following a regularly scheduled Phase One trade deal conversation between China and the U.S. spurred European equities higher across the board by mid-day trading and U.S. futures point to a strong market open later this morning.

Positive trade deal comments reportedly include greater protection for intellectual property rights, remove impediments to American companies in the areas of financial services and agriculture, and eliminate forced technology transfer as well as China’s significant increases in the purchasing of U.S. goods. The message emanating from the trade conversation was both sides see progress and are committed to taking the steps necessary to ensure the success of the agreement. That should eliminate some investor concerns following the recent escalating tensions between the two countries. While a relief, there are other hurdles for investors to cross in the coming days as the market establishes new record levels. Those forthcoming events include the latest economic data and earnings reports but also the virtual version of the Fed’s annual Jackson Hole, Wyoming conference at which Fed Chairman Powell is expected to outline the Fed’s most active efforts to date to spur inflation. And, of course, a contentious 2020 U.S. presidential race.

Data Download

International Economy

Germany’s final estimate or Q2 GDP came in at -11.3 YoY, versus expectations for a 2.3% contractions after Q1’s decline of 11.7%. Germany’s Ifo Business Climate in August rose to 92.6 vs. 90.4 in July and edged out the expected 92.2 reading. The Current Conditions index for August was 87.9 versus 84.5 in July and the expected 86 while the Expectations index rose MoM to 97.5 but fell short of the 98 consensus.

Spain’s PPI came in at -4.8 YoY in July, versus June’s decline of 5.9%.

Domestic Economy

Yesterday the Chicago Fed released its National Activity Index for July which shows that while conditions are improving, they are doing so at a much slower pace, consistent with many other economic indicators of late. The index saw a massive, record-breaking plunge followed by a large recovery from March through June, but July’s data is now reflective of a roughly 15% QoQ seasonally-adjusted-annual-rate increase in GDP in Q3, which on its own looks pretty good, but would leave total output about 7.5% below Q4 2019 levels.

Today the Conference Board releases its August consumer confidence report with expectations for the headline index to rise to 93.6 from July’s 92.6. The Census Bureau also reports new residential home sales for July that are expected to see 777,500 single-family homes sold at a seasonally adjusted annual rate. We will also get the S&P/Case-Shiller home price report for June, Richmond Fed Manufacturing Index for August, and the usual weekly Redbook retail sales report and the weekly API Crude Oil stock report.

Markets

With new coronavirus cases in the U.S. falling to their lowest levels in two months, on top of the FDA approval of a new treatment blood plasma treatment for Covid-19, investors were in an optimistic mood yesterday that saw travel and tourism-related stocks get a much-needed boost. American Airlines (AAL) led the S&P 500, gaining 10.5% while Carnival Corp (CCL) also felt the love, rising 9.6%. Expedia Group gained 4.8% on the day and is now up 99.5% from its April 2 low.

The S&P 500 gained 1.0% on the day to hit yet another new all-time high, the S&P 500 equal weight rose 1.6%, the Dow 1.4%, the broader NYSE Composite 1.3%, and the Nasdaq 0.6%, also making a new high. The Dow is still 4% below its all-time high. All the S&P 500 sectors closed in the green except Healthcare which fell 0.5%. The Energy sector led, rising 2.8% with financials a close second at 2.3%.

The Dow is getting a bit of a makeover, replacing Exxon Mobil (XOM) with Salesforce.com (CRM)Amgen (AMGN) with Pfizer (PFE), and Honeywell (HON) with Raytheon Technologies (RTX) effective next week. Exxon had been in the Dow since 1928, the longest-tenured current component, that is until next week.

Stocks to Watch

Best Buy (BBY) crushed July quarter EPS expectations while revenue for the quarter rose 3.9% YoY to $9.91 billion, ahead of the $9.79 billion consensus. Domestic revenue of $9.13 billion increased 3.5% YoY primarily driven by comparable sales growth of 5.0% that was offset by the loss of revenue from 25 permanent store closures in the past year. The largest comparable sales growth drivers were computing, appliances, and tablets, which were mitigated by declines in mobile phones, digital imaging, and services. During the quarter, Enterprise comparable sales Increased 5.8% and the company’s Domestic comparable online sales increased 242%. While Best Buy did not issue formal guidance, the management team shared it is “planning for Q3 sales to be higher compared to last year but likely will not continue at the current quarter-to-date level of approximately 20% growth.“

McDonald's (MCD) is adding Spicy Chicken McNuggets to the menu for a limited time offering beginning on September 16 across the US. The new McNuggets, which marks the first flavor change for the McNuggets menu item since 1983, will be breaded with a tempura coating made of both cayenne and chili peppers. The company is also introducing a new dipping sauce called Mighty Hot Sauce made with a blend of crushed red peppers and chilis.

Papa John’s (PZZA) reported preliminary estimated comp sales for its August fiscal period from July 27-August 23: Domestic company-owned restaurants +18%; North America franchised restaurants +26.1%; System-wide North America restaurants +24.2%; and System-wide international restaurants +23.3%.

Hormel Foods (HRL) reported better than expected EPS for its July quarter on revenue that rose 4.0% YoY meeting consensus expectations. For the current quarter, the company sees “strength from our retail businesses and the ongoing recovery in our foodservice business. However, the magnitude of additional recovery in the foodservice industry, the performance of the entire food supply chain and the state of the broader economy remain highly uncertain."

The Financial Times reports India is phasing out equipment from Huawei and other Chinese companies from its telecoms networks over an escalating border dispute. This likely bodes well for other mobile and broadband equipment companies like Ericsson (ERIC) and Nokia (NOK).

AstraZeneca (AZN) initiated a Phase 1 clinical trial of AZD7442, a combination of two monoclonal antibodies (mAbs) in development for the prevention and treatment of COVID-19. The trial includes up to 48 healthy participants in the UK aged 18 to 55 years to evaluate the safety, tolerability, and pharmacokinetics of AZD7442.

Palo Alto Networks (PAWN) reported non-GAAP EPS of $1.48 vs. the $1.39 consensus while revenue for the quarter rose almost 18% YoY to $950.4 million, nicely ahead of the consensus forecast. Billings for the quarter rose 32% YoY to $1.4 billion besting the $1.2 billion consensus. Product revenue was roughly flat on the year at $305.6 million, higher than the $296.9 million consensus. Subscription and support revenue rose from $500.3 million in the year-ago quarter to $644.8 million vs. the $628.3 million consensus. The company guided the current quarter to $915-925 million in revenue, up 19-20% YoY, vs. the consensus of $901.2 million. Bookings for the quarter are expected to climb 15%-17% to $1.03-1.05 billion with EPS of $1.32-1.35 vs. the $1.19 consensus. Along with its quarterly earnings, Palo Alto announced it plans to buy incident response firm The Crypsis Group for $365 million in cash.

Portland General Electric (POR) slashed its full-year EPS forecast to $1.30-$1.60 from the prior guidance of $2.20-$2.50 and the Wall Street consensus of $2.35-$2.59. It appears company personnel entered into a number of energy trades during 2020, with increasing volume accumulating late in the second quarter and into the third quarter, resulting in significant exposure to Portland Energy. In August, this portion of POR's energy portfolio experienced significant losses as wholesale electricity prices increased substantially at various market hubs due to extreme weather conditions, constraints to regional transmission facilities, and changes in power supply in the West. As of August 24, the company's energy portfolio experienced realized losses of $104 million and unrealized, mark-to-market losses of $23 million. Total third-quarter losses in the portfolio are estimated to be up to $155 million subject to market conditions. Management sees this impact as a one-time event and reaffirmed its 4%-6% long-term diluted EPS growth based on previous guidance.

Bloomberg reports Apple (AAPL) intends to start reopening US retail stores that had been closed over the past several weeks due to local Covid-19 spikes. Apple also bought VR startup Spaces for an undisclosed amount. Spaces spun out of DreamWorks Animation in early 2016 and developed a range of location-based VR experiences, including "Terminator Salvation: Fight for the Future." This adds to Apple’s other acquisitions in the VR space, including NextVR, Akonia Holographics, and Vrvana.

iRobot (IRBT) announced the launch of iRobot Genius Home Intelligence, a new robot platform that unlocks an expansive range of digital features and experiences for the company's line of Wi-Fi connected products, including the Roomba robot vacuum and Braava jet robot mop.

LVMH (LVMHF) and Tiffany (TIF) have extended their deadline to complete their $16.2 billion merger back another three months to November.

Delta Air Lines (DAL) is preparing to will furlough nearly 2,000 pilots beginning in October unless it can reach a cost-cutting agreement with the employees’ labor union

CNBC reports Alphabet's (GOOGL) Google Cloud is investing $100 million into AmWell, a company that builds technology for virtual doctors’ visits. The company has filed to go public, and Google’s investment will be a concurrent private placement at the IPO price.

Armstrong World Industries (AWI) acquired the business and assets of Moz Designs, enriching its leading portfolio of metal ceiling and wall solutions.

Analog Devices (ADI) voluntarily withdrew its pre-merger notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act), as amended relating to the company's proposed acquisition of Maxim Integrated Products (MXIM) to provide the Federal Trade Commission with additional time to review the proposed acquisition. In accordance with the regulations under the HSR Act, Analog Devices plans to resubmit its HSR Act filing on August 26, commencing a new 30-day waiting period under the HSR Act.

Alibaba (BABA) affiliated Ant Group that has filed to go public gave investors the first look at its financials in a new filing yesterday. According to that filing, the company reported a profit of 21.9 billion Chinese yuan ($3.2 billion) on total revenues of 72.5 billion yuan in the first half of the year. Ant runs the Alipay mobile payments app in China which has over 900 million users and offers wealth management, business loans, and insurance as well. The company is targeting a concurrent listing on the Shanghai stock exchange's STAR market and the Hong Kong stock exchange.

Cloud software company Snowflake (SNOW) filed to go public yesterday after revenue more than doubled in the first half of the year to $242 million. The company’s data warehouse technology allows businesses to store and manage data in the cloud rather than on legacy databases, making it easier for clients to quickly access and analyze critical information across the enterprise. Customers listed in the filing include Capital One (COF), Sony (SNE), Adobe (ADBE), and McKesson (MCK).

Work management platform Asana (ASANA) filed for a direct listing on the NYSE. As of January 31, Asana had over 1.2 million paid users and the free-to-paid conversion rate was 4.8% versus the 3.6% in the prior year's period. Revenue for the company’s FY20 was $142.6M, up 86% YoY, with a net loss was $118.6 million.

San Diego, CA-based biopharmaceutical company Metacrine (MTCR) filed a preliminary prospectus for a $100 million IPO. The company develops therapies for liver and gastrointestinal disorders.

3D gaming engine company Unity Software (U) that powers video games and other programs filed to go public. According to the filing, more than half of the top 1,000 games in the Apple App Store and Google’s Play Store were built with Unity in 2019. The company also derives revenue from solutions that can help companies monetize their content, including through advertising.

Bloomberg reports Nintendo Co. (NTDOY) plans to debut an upgraded model of its Switch console next year along with a lineup of new games. Good news for the company but not good news for gamers that were hoping for a new model later this year.

And if you need a bit of a pick me up today, Starbucks (SBUX) announced its popular Pumpkin Spice Latte will return for its 17th year in the U.S. and Canada as part of the company’s fall menu that includes Pumpkin Cream Cold Brew as well as pumpkin-flavored cream cheese muffins and scones.

After today’s market close, Hewlett Packard Enterprises (HPE), Intuit (INTU), Salesforce (CRM), and Toll Brothers (TOL) are among the companies expected to report their quarterly results. Investors looking to get a jump on those reports and other upcoming ones to be had this week should visit Nasdaq’s earnings calendar page.

On the Horizon

  • Dates to mark:
      • August 26: MBA Mortgage Applications, Durable Goods
      • August 27: GDP, Personal Consumption, Initial Jobless Claims, Bloomberg Comfort, Pending Home Sales
      • August 31: Before the market open, Salesforce.com (CRM) will replace Exxon Mobil (XOM), Amgen (AMGN) will replace Pfizer (PFE) and Honeywell International (HON) will replace Raytheon Technologies (RTX) in the Dow Jones Industrial Average.

Thought for the Day

“An intellectual says a simple thing in a hard way. An artist says a hard thing in a simple way.” ~ Charles Bukowski

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 serves as the Chief Macro Strategist for Tematica Research. With over 20 years of experience in finance, her focus is on macroeconomic influences that create investing headwinds or tailwinds. Lenore co-authored the book Cocktail Investing and in addition to her Tematica work, provides M&A consulting services for companies in Europe looking to expand globally. 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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Mark Abssy

Mark Abssy is Head of Indexing at Tematica Research focused on index and Exchange Traded Product development. He has product development and management experience with Indexes, ETFs, ETNs, Mutual Funds and listed derivatives. In his 25 year career he has held product development and management positions at NYSE|ICE, ISE ETF Ventures, Morgan Stanley, Fidelity Investments and Loomis Sayles. He received a BSBA from Northeastern University with a focus in Finance and International Business.

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