Daily Markets: No V-Shaped Recovery in Virus-Driven Economy

Today’s Big Picture

Equities in Asia wrapped up trading today on a mixed note with Japan’s Nikkei shedding 0.2%, and Hong Kong Hang Seng finishing down 0.4% while China’s Shanghai Composite climbed 0.3%. Amid worsening relations between China and the U.S., the U.S. consulate in Chengdu, the capital of China's southwest Sichuan province, officially closed earlier today. According to the Chinese Ministry of Foreign Affairs, Chinese authorities then entered “and took over.” We concur with the view that the downsizing of diplomatic avenues is likely to escalate trade tensions further between the U.S. and China.

By midday trading, European equity indices were also mixed while U.S. futures pointed to a positive open later this morning. That expected move higher comes in advance of the busiest week thus far for the June-quarter earnings seasons that brings 171 S&P 500 companies reporting over the next handful of days, including several high profile technology companies - Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), and Facebook (FB) - that have been largely responsible for driving U.S. equity indices higher over the last several months.

This week also brings the next Federal Reserve monetary policy meeting that will culminate with the usual press release and Fed Chair Powell led press conference. While we think the Fed will not unveil any new policy actions, we suspect Powell will use the after-meeting presser to call for the passage of more economic stimulus in response to the pandemic.

On that note, we’d mention that over the weekend, White House economic advisor Larry Kudlow said the next round of coronavirus relief will include $1,200 stimulus payments to Americans and the Trump administration will lengthen the federal eviction moratorium. This paves the way for Republicans to introduce their next coronavirus relief bill today, but as we noted before, we expect there will be the usual political drama and horse-trading to be had given what this package contains vs. the one Democrats are wanting. As a reminder, we do have a presidential election coming up in a few months and so far the sitting president is behind in the polls. Things are likely to get “interesting” on this front.

All that and on Thursday the Bureau of Economic Analysis is expected to report that second-quarter GDP contracted by a whopping 34%. It’s going to be a busy week that could very well get a little turbulent, but we’ll be here to help you through it.

Data Download

Coronavirus

The global confirmed coronavirus case count is over 16.3 million with more than 650,000 lives lost to Covid-19. The U.S. has more than 4.3 million confirmed cases and has seen nearly 150,000 people lost their lives to this horrid virus. Brazil has more than 2.4 million confirmed cases and is nearly 90,000 lives lost. India, the third most-affected nation has over 1.4 million cases with its 7-day rolling average of daily new cases nearing 50,000.

According to Reuters, nearly 40 countries reported record-high single-day increases in daily coronavirus infections over the past week, about twice the number that did so the previous week. The World Health Organization (WHO) Director-General Tedros Adhanom Ghebreyesus said this week. “We’re asking everyone to treat the decisions about where they go, what they do, and who they meet with as life-and-death decisions – because they are.” That’s not exactly an inspiring statement for getting economies around the world back to normal.

Some quick hits around the world:

• Australia has made masks mandatory for residents of Melbourne after a new outbreak.
• Australia and Japan posted new daily record highs this week and are seeing rising infection rates among the young, who have been out celebrating. 2020 is decidedly not the year for fun.
• Mexico saw a record-high in daily new cases last week and warned that hospitalization levels could exceed June’s highs by October.
• Spain’s new cases are back on the rise, which may deter the nation’s much-needed tourists.
• Kenya recorded a record high in new daily cases just two weeks after loosening up on restrictions.
• Omar imposed new restrictions over the weekend after seeing a record number of new cases.

The first wave of the coronavirus in the U.S. was centered around the mid-west and the northeast and took roughly 4-6 weeks to peak then another 8 weekly to see cases work their way back down. The second wave has been centered in the south and southeast and started in early June. It looks like it may have peaked in early July, again 4-6 weeks after it started. The 7-day rolling average of daily new cases has been relatively flat between 68,000 and 69,000 per day over the past week.

North Korean leader Kim Jong Un has ordered a city near the border with South Korea to be locked down after a person, who illegally returned to the nation on July 19 across the demarcation line with South Korea, was found to potentially be infected with the coronavirus. This individual had defected to South Korea years ago - how or why they returned is unknown.

International Economy

We are entering the tit-for-tat phase of the not-so-cold U.S.-China trade war. After the U.S. ordered China to close its consulate in Houston last week in retaliation for espionage, which led to dramatic scenes of embassy workers burning documents in the embassy courtyard, China has now ordered the U.S. to close its consulate in Chengdu. This consulate is close to Tibet and Xinjiang.

Japan’s All Industry Activity Index for May fell 3.5% MoM after a 6.4% contraction in April. The nation’s Coincident Index for May fell to 73.4 versus 80.1 in April and expectations for a decline to 74.6. Japan’s Leading Economic Index rose to 78.4 in May after sitting at 77.7 in April and expectations for an increase to 79.3.

Germany’s Ifo Business Climate in July hit 90.5 from June’s 86.2 and versus expectations for an increase to 89.3. The Current Conditions Index rose to 84.5 from the prior 81.3 and compared to expectations for an increase to 85.0. The Ifo Expectations index jumped to 97 in July, up from June’s 91.4, versus consensus for an increase to 93.7.

Domestic Economy

The final $600-per-week supplemental payments under the CARES act went out last week, payments which amounted to around 4% of the nation’s pre-pandemic GDP and were a profound tailwind behind retail spending. As of yet, no further agreement has been reached in Congress, which means that additional income support is disappearing as the economy is once again locking down thanks to rising new daily cases, hospitalizations, and deaths in many parts of the country.

Republicans are expected to release their proposals for the next round of stimulus today, which is anticipated to include a $1,200 per person direct cash payment, extended moratoriums on evictions, and a reduction in federal unemployment benefits to be capped at 70% of prior wages.

Friday’s New Home Sales report revealed that new home sales in June surged to the highest levels since 2007 with the number of months’ supply down to the lowest levels since 2016. This is likely a function of builders having a tough time getting homes finished March through May, record-low mortgage rates, and buyers looking to get away from urban settings. The share of new home sales that are for units that have not yet been started rose to a record high, with nearly one in four new homes purchased in the U.S. in June not-yet-started. This is a great tailwind for building activity through the rest of the year.

According to Yelp (YELP), 60% of the 26,160 closed restaurants on the company’s business review site as of July are now permanently shut. Temporary closures are declining while permanent shutdowns are on the rise. The company reported a 23% increase in permanent restaurant closures MoM with bars and clubs closing permanently at a 44% MoM pace.

Today in the U.S. we will get Durable Good report for June and the Dallas Fed Manufacturing Index for July,

Markets

Friday was a down day in the markets, with the S&P 500 falling 0.6%, the Dow 0.7%, Nasdaq Composite 0.9%, and the Russell 2000 1.5%. A full 10 of the 11 S&P 500 sectors closed lower on the day as did 385 of its component companies. The biggest movers on the day were Intel (INTC), which lost 16.2% on news during its earnings release of 6-month manufacturing delays for its 7-nanometer processors, validating Apple’s decision to move it using its own silicon. Its rival Advanced Micro Devices (AMD) conversely gained 16.5% on the news, having recently debuted its new7-nanometer Ryzen 4000 Series processors. Intel’s delay will give AMD a serious head start.

Over the past four months, the Nasdaq-100 has gained more than 56%. In the index’s history, going back to 1985, there have been just four 50%+ rally’s in a four-month period, the three others were in February 1991, late 1998, and early 2000. So what happened after such a profound rally in such a short period of time? After the 1991 rally, the index traded mostly sideways for the next six months. After the 1998 rally, it just kept moving higher, but after the 2000 rally, it crashed, so no clear trend.

What if we compare growth to value? The S&P 500 Growth Index has risen 14.5% versus a 7.9% decline in the S&P 500 Value index over the past 100 trading days for a spread of over 22 percentage points, topping the prior record high from December 1999, near the peak of the dotcom boom. In March 2009 the spread was over 17 percentage points which means that the only time the spread between value and growth was anywhere near where it is today, it was either the worst (1999) or the best (2009) time to purchase the broader market.

We are a bundle of useful trivia today.

Taking a look at valuations, the S&P 500 overall trailing PE ratio is in the 99.9th percentile of the last ten year. Looking at sects, Communication Services, Technology, and Consumer Discretionary are all in the 95th percentile or above. Add on to those Industrials and Materials which are in the 91st percentile or better. Consumer Staples and Healthcare are 84th percentile or better and Energy is in the 71st percentile. Financials at in the 53 percentile, Utilities in the 46th percentile with Real Estate at the very bottom, in its 36.7th percentile of trailing PE ratios over the past 10 years.

Real interest rates on TIPS dropped to new all-time lows, with inflation-adjusted yields dropping into negative territory. That trend is driving gold to break out to new all-time highs and the U.S. dollar has dropped to its lowest level against the euro in almost two years. A further decline would be negative for domestically focused stocks and positive for those with more emphasis on international sales. The falling dollar has been a boon for commodities with the Silver ETF (SLV) up 26% YTD and up over 3 standard deviations above its 50-day moving average.

The Census Bureau’s weekly Household Pulse Survey is indicating that employment has reversed course and dropped significantly over the past few weeks.

Stocks to Watch

Avery Denison (AVY) reported June quarter EPS of $1.27, well ahead of the expected $1.12, as revenue for the quarter rose 15.2% YoY to edge out the consensus forecast. For the September quarter, the company sees a decline in sales before the impact of currency translation in the range of 7%-9% on an organic basis.

Hasbro (HAS) reported disappointing June quarter results, widely missing consensus revenue and EPS expectations for its June quarter.The performance for the quarter was hit by temporary store closures, product shortages in fast-growing categories, and lower retail inventory. The company stopped short of issuing formal guidance but shared expectations for sequentially better performance as stores reopen.

Cemex S.A.B. de C.V. (CX) reported a 10% YoY decline in sales for 2Q 2020 sales as demand slumped in most geographies due to coronavirus-led lockdowns save for the US where cement volumes rose 6% YoY. June quarter cement volume fell 10% YoY while ready-mix volume dropped 18% and aggregate volumes tumbled 15% YoY.

Ryanair Holdings (RYAAY) reported quarterly EPS of -€0.17 as revenue for the quarter plummeted 94.6% YoY to €125.2 million as over 99% of the company’s fleet was grounded from mid-March to the end of June and traffic fell to 0.5 million from 42 million. Given the pandemic, the company did not issue formal guidance but shared that it intends to exit the COVID-19 crisis with a much lower cost base.

SAP SE (SAP) reported Jun quarter EPS of €1.17, €0.03 better than the consensus as revenue for the quarter came in slightly better than expected. The company confirmed its previous guidance issued in late April that calls for a gradually improving demand environment in the third and fourth quarters, expecting further reopening of economies and easing of population lockdowns. Non-IFRS total revenue is expected to be in a range of €27.8-€28.5 billion at constant currencies, up 1%-3% YoY. Non-IFRS cloud and software revenue is still forecasted to be in a range of €23.4-€24.0 billion at constant currencies, 1%-4% YoY. SAP also intends to IPO is Qualtrics but expects to remain the majority owner.

The Economic Times reports Chinese telecom company Huawei Technologies has cut its India revenue target for 2020 by up to 50% and is laying off more than half of its staff in the country. Nokia (NOK) and Ericsson (ERIC) will be companies to watch as this story unfolds further.

NJ.com reports Democratic presidential candidate Joe Biden supports the decriminalization of cannabis but will leave legalization decisions to individual states. Investors will want to watch shares of Cronos Group (CRON), Tilray (TLRY), Aurora Cannabis (ACB), and other cannabis-focused companies found in the AdvisorShares Pure Cannabis ETF (YOLO).

After today’s market close, there is a bevy of companies reporting their quarterly results, including F5 Networks (FFIV), NXP Semiconductor (NXPI), and Crane Co. (CR). Investors looking to prepare for the earnings maelstrom to be had this week should visit Nasdaq’s earnings calendar page.

On the Horizon

• Dates to mark:
  • • July 28: Case-Shiller Home Prices, Consumer Confidence, Richmond Fed Manufacturing
    • July 29: MBA Mortgage Apps, Trade Balance, Wholesale Inventories, Retail Inventories, Pending Home Sales, FOMC Rate Decision
    • July 30: GDP, Personal Consumption, Jobless Claims, Bloomberg Comfort
    • July 31: Personal Income and Spending, PCE, Employment Cost Index, Univ of Michigan Sentiment
    • August 3: ISM Manufacturing PMI
    • August 5: ADP Nonfarm Employment and ISM Non-Manufacturing PMI
    • August 7: Nonfarm Payrolls and Unemployment Rate
    • August 10: JOLTs report
    • August 11: PPI
    • August 12: Core CPI
    • August 14: Retail Sales

Thought for the Day

"There is more to life than increasing its speed." - Mohandas K. Gandhi

Disclosures

• F5 Networks (FFIV) is a constituent in the Foxberry Tematica Research Cybersecurity & Data Privacy Index.

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

Other Topics

Coronavirus Economy Stocks Earnings Jobs & Unemployment