Daily Markets: Investors Aren't Bugged By This Virus
Today’s Big Picture
The major equity indices in Asia bounced back from their recent slides shrugging off a growing list of companies warning over the impact of the coronavirus as all but the Shanghai composite closed in the green today. By midday, the main European equity indices were also in the green and US equity futures point to a slight rise at the open after yesterday's opening dip that reversed into a new record high for the Nasdaq Composite while the S&P 500, Dow and Russell 2000 closed down 0.3%, 0.6% and 0.2% respectively.
US Treasury yields are falling across the board this morning. Yesterday part of the US Treasury yield curve inverted with the yield on the 3-month above that of the 10-year, keeping that inversion in place this morning. This first happened in late March last year and the two rates have been playing tag since then. The US Dollar Index is pushing up against the 100 level for the first time since May 2017 and the VIX jumped 8% yesterday, closing below its 200-day moving average.
According to data analysis by Morgan Stanley (MS), production in China had only reached 30% to 50% of normal levels as of last week, leading MS to estimate that first-quarter GDP growth could slow to 3.5% if COVID-19 is not contained quickly enough. So far the virus has killed 2,004 with nearly 75,000 confirmed cases. China is the world's second-largest economy and its biggest manufacturer, accounting for around 29% of all output with the US a distant second at just over 16%. Much of China's manufacturer is based in the affected regions. A prolonged shutdown of production lines will affect much more than just China's domestic economy by impacting other market's ability to produce goods.
Data from Japan today was overall worse than expected:
- Exports contracted less than expected with a 2.6% YoY decline January, less than the 6.3% decline in December, and better the anticipated 6.9% fall.
- Imports contracted more than expected with a 3.6% YoY decline in January versus expectations for a 1.3% decline, but up from the 4.9% decline in December.
- Machinery Orders declined more than the expected, falling -3.5% in December versus expectations for a 1.3% contraction and well below November’s 5.3% increase.
Construction output in the European Union was well below expectations in December, contracting 3.7% YoY versus expectations for a 1.4% increase.
Inflation overall for January in the UK came in slightly higher than expected across a range of indicators, but remains muted:
- Overall inflation was higher, rising 1.8% YoY versus expectations for 1.6% and up from the prior 1.3%.
- Core inflation was also higher, rising 1.6% YoY versus expectations for 1.5% and up from the prior 1.4%.
- Producer Price Output, prices of goods produced by UK manufacturers, rose more than expected, up 1.1% YoY from 0.9% previously and above expectations for 1%.
- Core Producer Price Output, which excludes food, beverages, tobacco, and petroleum, rose less than expected, up 0.7% YoY, declining from the prior 0.9% and less than the expected 0.8%.
- The Retail price index rose more than expected and saw the strongest pace of change, rising 2.7% YoY, up from the prior 2.2% and besting expectations for 2.6%.
Later today in the US we have the usual weekly Wednesday data — MBA Mortgage Index, the Redbook retail index, and Oil Inventory report - but we will also receive the January data for Housing Starts & Building Permits as well as the January take on Producer Prices.
We also have several speeches from Federal Reserve Presidents Mester (Cleveland), Kashkari (Minneapolis), Kaplan (Dallas) and Barkin (Richmond) that will bookend the publication of the Fed’s January FOMC meeting minutes. With the Fed’s next week in 28 days, the CME FedWatch Tool currently sees the highest probability of an interest rate cut at the Fed's July meeting but even that percentage is just 42%. Investors will likely be digging into the January meeting minutes looking for any signs as to what the central bank may be thinking in terms of monetary policy and the coronavirus as well as the Fed's balance sheet policy.
Stocks to Watch
Automotive technology company Aptiv (APTV) cut its Mach quarter guidance due to the impact of coronavirus citing a significant number of production delays to extend through February, with certain customers not resuming operations in mid-to-late February before ramping up to full production rates throughout March.
While Herbalife Nutrition (HLF) reported better than expected bottom-line results the company warned, "The extent and duration of business disruption and related financial impact from the Coronavirus cannot be reasonably estimated at this time but could materially impact our consolidated results for the first quarter and full-year 2020. The company will update its guidance for full-year 2020 when we can reasonably estimate the impact."
German sportswear company Adidas (ADDYY) warned that activity in China has declined roughly 85% since the Lunar New Year on January 25 compared to the same period last year. The company reported that traffic has also declined in other markets, mainly Japan and South Korea, but not by as much. Adidas expects to report more on its operations when it releases full-year results on March 11 as it is currently too early to assess the magnitude of the impact. Shares gained around 1.5% this morning in Europe - of course.
Another German sportswear company, Puma (PUMSY) also reported that the coronavirus has negatively affected its business since the beginning of February with more than half of both owned and operated and partner stores have been closed due to restrictions of the local authorities. The company also reported that other Asian markets have been affected, primarily due to the decline of Chinese tourism. Shares rose almost 8% in Europe this morning - naturally.
And rounding out our sportswear commentary this morning, Nike (NKE) announced new leadership changes last night that included Nike Direct boss Heidi O'Neill becoming president of consumer and marketplace, CFO Andy Campion will become Nike's chief operating officer and Matthew Friend, currently, CFO of operating segments and VP of investor relations will become the new CFO. These appointments are effective April 1, and follows the company's latest CEO, John Donahoe, taking the captain's chair on Jan. 13. It would seem that Nike believes in a team both on and off the field.
Alphabet (GOOG) announced it is shutting down Makani, a subsidiary working to harness wind energy through airborne kites. This is the third subsidiary closure in the past year, following Chronicle, a cybersecurity company, and Jigsaw, a tech incubator focused on addressing misinformation and other issues. Jigsaw was folded back into Google.
The EU's digital and competition chief, Margrethe Vestager, is expected to publish the first draft of an EU digital strategy that focuses on a "digital single market" that aims to support growth and innovation in the European tech industry, as well as a framework for companies' use of artificial intelligence (AI) and facial recognition technology. That framework is expected to focus on how governments should monitor the use of AI health care or transportation. Given the scope of the expected draft as well as products and services offered, there are likely to be implications for Apple (AAPL), Facebook (FB), Alphabet, and Amazon (AMZN) in particular.
After missing both top and bottom-line earnings expectations last night, shares Blue Apron (APRN) rebounded in aftermarket trading as the company announced its board was evaluating strategic alternatives that run the gamut from a strategic combination to raising capital to a sale of the company. It would seem everything is on the menu for this meal kit company.
Bed Bath & Beyond (BBBY) plans to invest $350-$400 million upgrading its stores, technology initiatives and supply chain improvements as well as streamlining the "look" inside its stores. The company also expects to have an online pickup service available in all stores by the end of the year and more private brands. We'll look to contain any snark when we say, it looks like Bed Bath & Beyond is adopting the playbook used by Target (TGT), Walmart (WMT) and others that have embraced the digital commerce aspect of Tematica’s Digital Lifestyle investing theme.
For a company used to contending with headwinds, Boeing (BA) is facing yet another one following reports it found debris in the fuel tanks of an undisclosed number of parked 737 Max jets. Despite the discovery made during“routine” inspections, Boeing continues to target the 737 Max returning by midyear. Several airlines, however, have indicated they do not expect the aircraft to return to the skies until late summer.
Groupon (GRPN) shares lost 25% yesterday in extended trading after the company reported a miss on both top and bottom line with EPS of $0.07 versus expectations for $0.15 and revenue of $612 million versus expectations for $709. CEO Rich Williams told analysts on the call that the company intends to ditch goods and instead focus on experiences for a “stronger Groupon to emerge” in 2020. Interim CFO Melissa Thomas is not permanently taking the position and Valerie Mosley and Helen Vaid have joined the Board of Directors.
The race to space continues following the recent surge in Virgin Galactic (SPCE) shares as NASA has given SpaceX (SPACE) the thumbs up to become the first company in its Commercial Crew program to send humans into space. Investors looking for more well-rounded exposure to the race to space should examine the Procure Space ETF (UFO), which counts Virgin Galactic as its largest holding at 14.1%.
Coming up after today’s US equity markets close, the earnings fun continues with investors likely to focus on the reports from Avis Budget (CAR), Boston Beer Co. (SAM), Cheesecake Factory (CAKE), Fossil (FOSL), Green Dot (GDOT), Hyatt Hotels (H), Jack in the Box (JACK), Realty Income (O), Stamps.com (STMP), Tivity Health (TVTY) and Zillow (Z). Readers looking for more details on these and other reports should visit Nasdaq’s earnings calendar page.
On the Horizon
- Upcoming IPOs:
- Genetics medicine company Passage Bio (PASG) is looking to price 7.4 million shares between $16-$18.
- For a complete list of upcoming IPOs by month, please visit the Nasdaq IPO Calendar.
- Dates to mark:
- Feb. 24-27: Mobile World Congress
- March 3: 2020 Presidential Election Super Tuesday
- March 5-6: OPEC meeting
- March 12: European Central Bank rate decision
- March 17-18: Federal Reserve FOMC meeting
- April 28-29: Federal Reserve FOMC meeting
- April 30: European Central Bank rate decision
- May 12-14: Google I/O Developer Conference
- May 25: US stock market closed for Memorial Day
- Upcoming IPOs:
Thoughts for the Day
“Some people feel the rain, others just get wet.” ~ Bob Marley
- Nike (NKE), Target (TGT), Walmart (WMT) are constituents in Tematica Research's Thematic Dividend All-Stars Index.
- Herbalife Nutrition (HLF), Tivity Health (TVTY) are constituents in Tematica Research’s Cleaner Living Index.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.