Daily Markets: Magic 8-Ball Geopolitics Continues

An image of Trump at a fund-raiser
Credit: Donald Trump (Shutterstock photo)

Today’s Big Picture

While yesterday the markets lost their nerve following President Trump’s comments that he’d be just fine if a trade deal with China wasn’t reached until after the 2020 election, today's rumor has it the two countries are getting closer to an agreement, but that depends on the source. While in the US the reports are positive with the US and China making progress on agreeing to the degree to which tariffs would be rolled back in a so-called phase-one trade deal, South China Morning Post has a less optimistic take reporting China does not have a deadline for an agreement and “will not be rushed or bullied on the issue.” 

While the headline news is leading equities in Europe higher and offers a positive start for US equity markets, we remain skeptical of this daily Magic 8-Ball will-they-won’t-they dynamic. Our concern is the longer phase-one talks drag out, the more likely investors are likely to be underwhelmed by the details and global supply chains will be permanently affected. And despite all of that, consensus expectations for S&P 500 earnings growth year over year in 2020 is still hovering near 10% despite 2019 shaping up to deliver little to no EPS growth. We suspect that will soon become a key topic for investors, particularly if US equities continue to grind higher.

Asian equities closed today’s trading in the red despite better than expected economic data in China and India, and Japan’s parliament approving the US trade deal as the Australian economy continued to slow and conflicting US-China trade talk reports continue.  Equities in Europe were in positive territory by mid-day trading, shrugging off comments from US Commerce Secretary Wilbur Ross that the Trump administration has not ruled out auto tariffs. And as we touched on above, US equity futures are pointing to an opening in positive territory after closing in the red for three consecutive days.

Data Download

This morning we got signs of further slowing in Australia, which serves as a useful barometer for China’s economy. Australia’s GDP came in sequentially weaker than expected for the September quarter at +0.4% versus expectations for +0.5% and down from the prior quarter’s +0.6%. Capital Expenditures continued to weaken, falling-0.2% in the September quarter from -1.7% in the June quarter. GDP Final Consumption came in at +0.3% quarter over quarter from the prior +1%. 

This morning we also received a boatload (technical term) of services data for Asia and the Eurozone that showed improvement in most areas with only Italy and France coming in below expectations:

  • Japan saw a slight improvement with Jibun Bank Services PMI for November rising to 50.3 from the previous 49.7 (below 50 is contraction), weaker than the expected 50.4.
  • China improved more than expected with Caixin Services PMI hitting 53.5 from the previous 51.1, beating expectations for 52.7.
  • India improved more than expected with Markit Services PMI hitting 52.7 from the previous 49.2, beating expectations for 49.8.
  • Germany improved more than expected with Markit Services PMI hitting 51.7 from the previous 51.6, beating expectations for 51.3.
  • Spain was stronger than expected with Markit Services PMI hitting 52.2 from the previous 52.7, beating expectations for 51.9.
  • UK was stronger than expected with Markit /CIPS UK Services PMI hitting 49.3 from the previous 50.0, beating expectations for 48.5.
  • Italy was weaker than expected with Markit/ADACI Services PMI hitting 50.4 from the previous 52.2, weaker than expectations for 51.2.
  • France was weaker than expected with Markit Services PMI hitting 52.2 from the previous 52.9, weaker than expectations for 52.9.
  • Overall the Eurozone improved more than expected with Markit Services PMI hitting 51.9 from the previous 52.2, beating expectations for 51.5.

In terms of US data, today brings the ADP Employment Report for November; the IHS Markit Composite PMI and Markit Services PMI final marks for November as well as the November ISM Non-Manufacturing PMI Index that will include several must assess metrics ranging from Business Activity, Employment, and Prices to New Orders and Order Backlog. 

Taking a step back to see how things have changed since the start of the month, so far this week President Trump has announced that the US will restore steel and aluminum tariffs on imports from Brazil and Argentina; up to 100% tariffs on goods from France including Champagne, cheese, butter and porcelain; potential similar tariffs to be placed on goods from Italy, Austria and Turkey; and he isn't all that keen after all on getting a trade agreement signed with China. These along with the pending additional December 15 tariffs on China goods are poised to add more oomph to the headwinds being faced by the global economy. Bah! Humbug!

Stocks to Watch

November medium and heavy-duty truck orders fell 38% year over year according to data from ACT Research. Stocks likely to feel the bite of that data include Paccar (PCAR)Navistar (NAV), and Cummins (CMI)

We’ll need to know more to see how this meshes with Tematica’s Cleaner Living index and investing theme, but Ford (F) and McDonald’s (MCD) have announced a partnership in which Ford will use coffee chaff from McDonald’s to manufacture car parts, some of which will be up to 20% lighter and offer energy savings up to 25%.

Hyundai Motor (HYMTF) is joining the electric and autonomous vehicle battleground with its "Strategy 2025" that will see the company invest nearly $52 billion on future technologies. Roughly one-third of that investment is earmarked for electric and autonomous vehicles, and the company shared it is also looking at developing flying cars, "which could be commercialized ahead of the most advanced self-driving car." Maybe it's us but we seriously doubt many that possess a drivers' license are ready to command a vehicle in flight. 

Interdigital Communications (IDCC) has filed a patent infringement action against Huawei in the UK. The action comes after 18 months of negotiation and the expiration of Huawei's previous 3G, 4G, and 5G standards-essential patents license with InterDigital.

The pain continues for Boeing (BA) as United Airlines (UAL) shared it will buy 50 Airbus (EADSY) jets to replace its aging fleet of Boeing 757-200 plans for flights between the US and Europe beginning in 2024.

Mastercard (MA) increased its quarterly dividend to $0.40 per share from $0.33 per share and authorized a new $8 billion stock repurchase plan. 

After the market close last night, Alphabet (GOOGL) said Larry Page is stepping down from his co-CEO position, and Sundar Pichai will be CEO of both Google and its parent company.

Last night Salesforce (CRM) reports quarterly results that topped expectations, but the company offered a mixed view on the current quarter with revenue of $4.74-4.75 billion vs. the $4.73 billion consensus but $0.54-40.55 in EPS, below the $0.61 consensus. Salesforce reiterated its 2020 revenue guidance of $16.9-17.0 billion and upped its EPS guidance to $2.89-2.90 from $2.80-2.84.

Despite boosting its 2020 subscription revenue forecast to $3.085-$3.087 billion from $3.06-$3.07 billion, shares of Workday (WDAY) fell in aftermarket trading as the company's 2021 forecast for subscription revenue growth of 21%, was below the consensus 23.6% estimate.

For the entire Black Friday and Cyber Monday period, GoPro (GPRO) shared total camera unit sales grew more than 120% year over year. Based on available data from its retail partners, GoPro year over year sell-through growth of 30% in the US and 20% in Europe during the week of Black Friday.

After today’s market close, more than a dozen companies will be reporting their quarterly results. Some of the ones we’ll be focusing on include:

  • Five Below (FIVE), which is expected to report EPS of $0.17 on revenue of $373.6 million
  • Consensus expectations have RH (RH) earning $2.25 in EPS on $676.5 million in revenue
  • Slack (WORK) is expected to report EPS of -$0.08 on revenue of $156.1 million
  • A more complete list of earnings reports can be found at Nasdaq’s earnings calendar page

On the Horizon

  • Upcoming IPOs:
    • Saudi Aramco (ARMCO) - which is expected to be the largest IPO in history, produces about 1/10th of the world's crude and is the world's most profitable company. Reports suggest the company is considering pricing its IPO at the top end of the marketed $8 to $8.53 range. The final pricing for the transaction is expected to be set on December 4th.
    • E-commerce and facilities-based platform company for buying, selling, renting pre-owned and new vehicles LMP Automotive (LMPX) is expected to price its 2.1 million share IPO between $5.00-$6.00.
    • Analytics and social management company Sprout Social (SPT) has launched its IPO offering of 8.8 million shares with an expected pricing range of $16-$18. 
    • For a more complete list of upcoming IPOs by month, please visit the Nasdaq IPO Calendar.
  • Dates to mark:
      • December 2-6: Amazon Web Services re:invent 2019
      • December 3-4: NATO Summit
      • December 5-6: OPEC meeting
      • December 9: Old Dominion Freight Line (ODFL) will replace SunTrust Banks (STI) in the S&P 500.  Cabot Microelectronics (CCMP) will replace ODFL in the S&P MidCap 400 and Ready Capital (RC) will join the S&P SmallCap 600.
      • December 11: Federal Reserve Rate Decision
      • December 15: New tariffs on consumer goods from China scheduled to go into effect barring any deal
      • December 20:  US government funding date
      • December 20: Options Expiration Date
      • December 24: Christmas Eve Early Close (1 pm ET)
      • December 25 - Christmas holiday

Thoughts for the Day

“Lots of people want to ride with you in the limo, but what you want is someone who will take the bus with you when the limo breaks down.” - Oprah Winfrey

“This too shall pass… It may pass like a kidney stone, but it will pass.” - All of us when it is just one of those days.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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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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