Markets

Daily Markets: Investor Fears Over Speed Of Coronavirus Recovery Grows

Coronavirus social distancing in a store
Credit: Issei Kato / Reuters - stock.adobe.com

Today’s Big Picture

Following yesterday’s sell-off in the US equity markets, equities in Asia were mixed in trading today due in part to reports China has implemented a partial lockdown of Jilin City after a spike in coronavirus cases. This added to growing fears that the amount of time it will take for the global economy to bounce back from the pandemic will be longer than many investors had hoped.

Stoking those concerns are reports of a resurgence in coronavirus cases in certain countries as they start to reopen their economies as well as a warning from Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, against a premature reopening of the US economy. Fauci also warned that a vaccine will be essential in stopping the coronavirus spread but noted it will be a while before a usable one is available. By mid-day trading, European equities were all in the red while US futures point to an attempted rebound from yesterday’s sell-off.

Your authors suspect the comments to be made this morning from Fed Chairman Powell during a 9 AM ET Peterson Institute for International Economics webcast will dictate how US equity markets begin trading today. Even several Federal Reserve bank presidents have spoken against any plans for the Fed using negative interest rates. The futures market recently depicted slightly negative interest rates in the first half of 2021.

Data Download

Coronavirus

Yesterday saw over 85,000 new confirmed coronavirus cases, bringing the worldwide total to nearly 4.3 million with over 5,000 more lives lost Tuesday, bringing that total to over 292,000. The US has over 1.4 million cases, more than the next six most affected nations combined, Spain, Russia, UK, Italy, France, and Brazil. In the US, New York and New Jersey remain the two most affected states by a large margin, with nearly 350,000 and over 142,000 cases, respectively. Illinois is quickly adding new cases, with over 4,000 yesterday for a total of over 83,000, compared to the nation’s most populous state, California, which saw over 1,700 new cases yesterday for a total of nearly 71,000, most of which are in LA County, which has 33,180 cases. Los Angeles Public Health Director Barbara Ferrer announced that the LA stay-at-home-order will be extended until at least the end of July, “with all certainty.”

The US FDA yesterday granted a fast-track review to Moderna’s (MRNA) Covid-19 vaccine. Researchers are also exploring if the Gilead (GILD) drug remdesivir can be combined with other antivirals to make an even more potent coronavirus-fighting cocktail.

Shortly after the markets closed yesterday, California State University announced that its 23 campuses will remain closed through the entirety of the Fall semester. We expect to see more schools announcing similar postponements.

Hong Kong reported its first local transmission cases in over three weeks today. Poland recorded its highest daily number of new cases yet yesterday. Russia saw its rate of new cases slowing on Wednesday but still had its 11th consecutive day with over 10,000 new cases.

Germany announced that it will begin relaxing its border controls Saturday but told its residents to avoid holidays abroad for a while. Borders to its western and southern neighbors were closed in mid-March to slow the spread of the pandemic. Borders controls with France, Switzerland, and Austria will be extended from May 16 to June 15. Borders with Luxembourg will be opened Saturday with Denmark expected to follow shortly. 

International Economy

Australia’s Melbourne Institute and Westpac Bank Consumer Sentiment Index rose 16.4% in May from April, the biggest one-month rise on record after the 17.7% drop in April, and puts the index close to the 93.4 mark where it was at the start of the year. The nation’s seasonally adjusted wage price index rose 2.1% YoY in March after a 2.2% gain in February, in-line with market expectations. This was the weakest rise since the third quarter of 2018.

The number of corporate bankruptcies in Japan rose 15% in March YoY, according to data from Tokyo Shoko Research. Of the 743 bankruptcies recorded, 71 were specifically linked to the pandemic with hospitality and leisure services hardest hit. 

In emerging markets, the sovereign debt situation is getting worse. Zambia, Ecuador, the Maldives, Lebanon, Argentina, and Rwanda have all announced recently that they are struggling to repay their sovereign debt as the pandemic decimates tourism and many other industries. With a record level of US dollar-denominated debt around the world, we expected to see rising defaults.

The portion of Eurozone banks reporting a demand for long-term investment loans fell to a -15% in the first quarter, down from 0 in the three quarters ending December 31, 2019. Demand for working capital, on the other hand, rose to a +26% as companies look to cover expenses with little to no revenue during lockdowns. Chief Economist at Capital Economics, Andrew Kennigham, estimates that Eurozone business investment may fall 24% YoY in 2020. France saw its largest contraction ever in gross fixed capital investment, which measures both private and public investment. Spain saw a near record-level contraction. Italy saw its biggest drop in output, falling 28.4%. Eurozone Industrial Production fell 12.9% YoY in March versus -12.4% expected and fell 11.3% MoM. This was the largest month-to-month decline on record, vastly outpacing the prior 4.1% record fall in January 2009.

Data out of the UK today was poor but not as bad as expected. The preliminary read for the UK’s GDP growth in Q1 was a decline of 1.6% YoY (-2.1% expected). Business Investment in Q1 rose just 0.7% YoY, while Industrial Production fell 8.2% YoY in March (-9.3% expected), Manufacturing Production fell 9.7% YoY in March (-10.4% expected) and Construction Output fell 7.1% YoY (-8.2% expected).  In March, GDP fell 5.7% YoY, better than the 7.2% decline expected. 

Domestic Economy

Yesterday the White House launched another figurative missile in the US-China trade war. President Trump sent letters to the head of the US government’s main pension fund urging the Federal Retirement Thrift Investment Board to not invest in index funds that buy Chinese shares. The letters argued that Chinese companies could be sanctioned for allegedly “culpable actions of the Chinese government with respect to the global spread of the [coronavirus].” We are in an election year with an economy facing its biggest crisis in nearly 100 years. Expect this battle to continue to heat up.

House Democrats just released a roughly $3 trillion plan to counteract the pandemic, but Senate Republicans are reportedly wary of adding more the rapidly rising US federal debt. The House could vote as soon as Friday on the proposal. 

Later today we’ll get the usual weekly reports for mortgage applications and oil as well as gasoline inventories. Late yesterday, The American Petroleum Institute reported US crude supplies rose by 7.6 million barrels for the week ended May 8, while gasoline stockpiles declined by 1.9 million barrels. Also, today, the April PPI will be reported, but the main focus this morning will likely be on Fed Chairman Powell’s speech and what is said about the economy, potential monetary policy moves, and the Fed’s thoughts on negative interest rates. 

Markets

Once again, stocks opened up in positive territory yesterday but then faded towards the close with the S&P 500 and the Nasdaq Composite both losing 2.1%, ending their respective 3-day and 6-day winning streaks. As we mentioned yesterday, investors’ more dour mood came as hope met the realities of the pandemic. The CBOE Volatility Index (VIX) rose 20% on the day, ending at 33 versus its peak of 82.9 on March 16.

Stocks to Watch

Slack Technologies (WORK) suffered from widespread service disruptions starting shortly before 8pm ET yesterday, which kept users from sending messages. The service was back up within about 2.5 hours.

Volkswagen (VLKAF) announced it will pause the production of assembly lines for its best-selling Golf 7 and 8 models as well as those for Tiguan and Seat Tarraco SUVs due to weak demand for new cars in Europe.

CyberArk (CYBR) reported mixed March quarter results that included an EPS beat but missed on quarterly revenue. Alongside issuing downside June quarter EPS guidance of $0.17-0.35 vs. the $0.40 consensus, CyberArk shared it acquired California-based “Zero Trust approach” company IDaptive Holdings, Inc. for $70 million in cash.

Shares of fast-casual restaurant chain Potbelly (PBPBPfell more than 12% last night following the company’s quarterly results that showed a wider than expected loss and sales below consensus forecasts even though Potbelly’s delivery, drive-through, and takeout sales rose 45% in April.

Shares of The Container Store Group (TCS) also traded off in aftermarket trading last night after the retailer preannounced its quarterly results missed top and bottom-line expectations for its latest quarter. The company is slated to report its full results next week. 

Shares of networking equipment firm Infinera Corp. (INFN) dropped in after-hours trading last night after the company reported larger quarterly losses than expected amid the COVID-19 pandemic. Infinera guided its June quarter revenue to $309-$329 million vs. the $330.3 million in the March quarter, but it expects to have negative operating margins in the June quarter. 

Shares of Eventbrite (EB) were crushed in aftermarket trading last night following the company delivering weaker-than-expected quarterly results that pointed to the challenges of being a ticketing business amid an uncertain future for live events. Per the company, “paid ticket volume was down roughly 90% year-to-year in March. We’ve seen improvement off the March lows with paid ticket volume pacing 85% lower year-to-year in early May.”

The Wall Street Journal reports big-budget advertisers, including General Motors (GM)PepsiCo (PEP)Domino’s Pizza (DPZ), and General Mills (GIS), “are seeking to walk back spending commitments they made to broadcast and cable networks…” Per the Journal, “Ad buyers estimate that roughly $1 billion to $1.5 billion in commitments for third-quarter ad spending could be canceled.”

Comcast (CMCSA) owned Universal Studios Orlando will reopen its CityWalk portion on Thursday, with select venues operating from 4-10 p.m. each day. The Universal Studios park and Islands of Adventure will remain closed at least through May 31, as will Universal Studios Hollywood.

Almeda County in California has agreed to allow Tesla (TSLA) to begin minimum business operations at its California plant this week in preparation for possible opening next week.

United Natural Foods (UNFIreported preliminary quarterly results that topped revenue and EPS expectations. The company noted,  “customer demand for both our natural and conventional products surged early in our fiscal third quarter and remains elevated.”

MSC Industrial Supply (MSCI) reported April net sales that fell 10.5% YoY to $235.5 million. Combined net sales for March and April (the first two months of the company’s fiscal third-quarter) were $565.4 million, down 7.8 YoY.

Emerson Electric (EMRreported trailing three-month orders were down 12% in April with underlying orders down 10%, excluding 2% of unfavorable currency impact. Automation Solutions orders were down 10% while Commercial & Residential Solutions orders were down 16%, with trailing three-month orders for both reflecting a sharp drop in April orders. 

Uber Technologies (UBER) made an offer to acquire Grubhub (GRUB), a move that could combine two of the largest food-delivery apps in the US as the coronavirus drives a surge in demand. Bloomberg reports a deal could be announced as soon as this month. According to a Wall Street Journal report from yesterday, the deal is to exchange 2.15 Uber shares for each Grubhub share, which as of yesterday’s close, would value Grubhub shares around $71.36.

Las Vegas Sands (LVS) announced it will discontinue its pursuit of Integrated Resort development in Japan.

After today’s market close, Cisco Systems (CSCO), Flowers Foods (FLO), Jack in the Box (JACK) and SmileDirectClub (SDC) will be among the companies reporting their quarterly results. Investors looking to get the nitty-gritty on those reports and the sea of others to be had later today should visit Nasdaq’s earnings calendar page

On the Horizon

    • Dates to mark:
        • May 14: Retail sales for April, Industrial Production, JOLTS, University of Michigan Consumer Confidence
        • May 21: Existing homes sales and Philly Fed Outlook
        • May 25: US stock market closed for Memorial Day
        • May 26: Chicago Fed Activity, Case-Shiller Home Prices, Consumer Confidence, New Home Sales, Dallas Fed Manufacturing
        • May 27: Fed Beige Book
        • May 28: Second estimate for Q1 GDP, Durable Goods report, Capital Goods, Pending Home Sales, and Kansas City Fed
        • May 29: Goods Trade Balance, Wholesale Inventories, Personal Income and Spending, PCE, Chicago PMI

Thought for the Day

“Your greatest test will be how you handle people who mishandled you.” ~Unknown

Disclosures

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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