Daily Markets: The Pandemic Trade Returns
Today’s Big Picture
Pandemic worries are again dominating the markets this morning as equities in Asia tumbled to finish today’s trading lower across the board. Leading them lower was the 1.3% fall in China’s Shanghai Composite and the 1.0% drop in the Hong Kong Hang Seng. Weighing on those markets was renewed concern over coronavirus lockdowns in Europe, which hit shares of China Eastern Airlines (670:KH), China Southern Airlines (1055:HK), Korean Air Lines (003495:KS), Qantas Airways (QUBSF), and Singapore Airlines (SINGF). Adding to those lockdown worries, UK Prime Minister Boris Johnson called for people to work from home “if possible” and ordered all hospitality sites across England to start closing at 10 PM from Thursday. Despite that warning, European equities were modestly higher by mid-day trading while U.S. futures point to a mixed open later this morning.
With a light economic and earnings calendar for today, odds are the focus will once again be on the Fed. Today kicks off a busy week for Federal Reserve Chair Jerome Powell as he will testify today, along with Treasury Secretary Steven Mnuchin, before the House Financial Services Committee in an “Oversight of the Treasury Department’s and Federal Reserve’s Pandemic Response” hearing. Ahead of his testimony, Powell commented that “the path forward will depend on keeping the virus under control, and on policy actions taken at all levels of government.” We expect this means he will reiterate not only the Fed’s accommodative monetary policy stance but reiterate the Fed’s view that additional fiscal stimulus is needed. While we agree, we strongly suspect stimulus talks will take a backseat to the 2020 presidential election and the move to replace Supreme Court Justice Ginsburg.
Tomorrow Powell will testify before the House of Representatives’ Select Subcommittee on Coronavirus Crisis, and on Thursday, he is back with Mnuchin before the Senate Banking Committee regarding “The Quarterly CARES Act Report to Congress.”
The UK’s CBI Industrial Trends order book for September rose to -44 in August 2020, the highest since March, but missed market expectations of -35. This latest reading suggests the UK’s manufacturing sector remains “severely depressed,” with the number of firms reporting below-normal levels of orders still outnumbering by a wide margin those reporting above-normal orders.
Germany’s economy is recovering more quickly than expected from the pandemic lockdowns, according to the Ifo Institute in Munich, which expected the country’s economy to shrink by 5.2% in 2020 versus the prior expectations for a 6.7% contraction. After years of budget surpluses (whatever does that look like!?), the government is expected to have a deficit of €170.6 billion this year, which would drop to €86.9 billion next year. Next year’s budget is expected to be released tomorrow.
Later today, we will get Consumer Confidence for the Euro Area in September.
Yesterday the release of the Chicago Fed’s National Activity Index revealed that while economic growth is slowing, it remains above average with the headline index dropping to +0.8 in August from +2.5 in July. Two subcategories remained in positive territory - Production & Income; Employment, Unemployment, and Hours. Two dropped into negative territory - Personal Consumption and Housing; Sales, Orders, and Inventories.
The Cass Freight Index report was released yesterday, and it found that shipment volumes for August were down 7.6% YoY and 10.4% over the past two years, but up 8.0% MoM. The Shipment Index is up 19.1% from the April lows and at the highest absolute level since November 2019. The Expenditures Index was down 5.1% YoY, down 7.6% over the past two years, but up 9.9% MoM. The Shipment Index is 20% higher than at the May lows with the highest spend on freight since December 2019. The Truckload Linehaul Index rose 1.8% MoM and is down just 4.3% YoY, and the Intermodal Price Index rose 1.1% MoM and remains down 18.9% YoY. Overall the Cass Freight Index saw accelerated progress in August, with pricing moving faster than volumes. Volumes are expected to remain at or above the current levels for the next few months.
The Federal Reserve released its Quarterly Financial Accounts Survey for the second quarter. Here are the highlights:
- Federal government debt rose at a 58.9% pace in Q2 thanks to the CARES Act.
- State and local government debt rose 3.5%, its fastest pace since 2009.
- Non-financial business debt rose 14%, below the 18.4% pace in Q1, but faster than any pre-pandemic levels going back to 1980, the earliest date for which data is available.
- Consumer credit fell at a 6.6% annualized pace, the fastest on record post-World War II. The bulk of the decline came from a decline in credit card balances, while auto lines increased slightly, and student loans were little changed.
The Congressional Budget Office (CBO) sees federal deficits increasing to 13% of GDP in 2050 from 5% in 2030 if current laws governing taxes and spending generally don’t change, according to its latest projections for federal deficits, debt, spending, and revenue over the next 30 years. The CBO now also projects that debt as a percentage of GDP will be 45 percentage points higher in 2049 than it projected last year, partly due to bigger projected deficits in 2020 and 2021.
Later today, we will get the latest data for Existing Home Sales, Richmond Fed Manufacturing Index, and the usual weekly Redbook retail sales and weekly API Crude Oil report.
The S&P 500 declined 1.2% yesterday, significantly better than its intraday low of down 2.7%, as renewed uncertainties on the geopolitical and coronavirus fronts stoked fresh economic growth concerns, not to mention the hullabaloo concerning FinCEN revelations that slammed banks. Strength in technology stocks, notably Apple (AAPL), Microsoft (MSFT), and Oracle (ORCL), led the Nasdaq to inch ahead by 0.1% while the Dow Jones Industrial Average and the Russell 2000 fell 1.8% and 3.4%, respectively.
As investors watch the number of coronavirus cases rising in many parts of the world, shares of those companies whose businesses thrived during the lockdowns rose while hospitality and brick & mortar retail shares took a beating. Shares of Zoom Video Communications (ZM), rose 6.8%, Hello Fresh (HLFFF) gained 10.8%, and The Container Store Group (TCS) rose 8.8%. Travel and hospitality companies were hit particularly hard: Lindblad Expeditions Holdings Inc (LIND) and Melia Hotels International SA (SMIZF) both lost 10.1%, Summit Hotel Properties (INN) lost 10.5%, and EasyJet PLC (ESYJY) fell 14.2%. At least for now, it appears the lockdown trade is back on.
European markets closed deeply in the red yesterday, with the pan-European Stoxx 600 falling more than 3.2%, Germany’s DAX down 4.4%, the UK’s FTSE down 3.4%, and France’s CAC down 3.7%.
Stocks to Watch
RE/MAX Holdings (RMAX) issued downside guidance for its September quarter with revenue now expected to be in the $69-$71 million range vs. the $74.5 million consensus. The company also announced the acquisition of the Gadberry Group, a location intelligence data company whose products were incorporated in the newly launched www.remax.com consumer website.
Li Auto (LI) announced a three-way strategic agreement Nvidia (NVDA) and Huizhou Desay SV Automotive through which Li Auto will be the first OEM equipping its full-size extended-range premium smart SUV to be launched in 2022, with Nvidia’s Orin SoC chipset.
After yesterday’s market close, Tesla (TSLA) CEO Elon Musk tweeted Tesla expects to increase battery cell purchase from partners, including Panasonic but still foresees future shortages “unless we also take action ourselves.” Musk went on to tweet, “Important note about Tesla Battery Day unveil tomorrow. This affects long-term production, especially Semi, Cybertruck & Roadster, but what we announce will not reach serious high-volume production until 2022.”
Shares of Synchronoss Technologies (SNCR) fell in aftermarket trading last night after the cloud services company shared its CEO resigned following allegations that he violated the company’s code of conduct.
Airbus (EADSY) warned forced job cuts are likely given the sharper-than-expected decline in travel has led carriers to push back deliveries of new jets. Air France-KLM (AFLYY) also warned that more cost cuts might be needed after travel demand dropped off at the end of the summer. UK hotel operator Whitbread Plc, the operator of Premier Inn hotels, announced plans to eliminate as many as 6,000 workers.
Tiffany & Co. (TIF) welcomed the decision by the Delaware Chancery Court to grant Tiffany’s motion to expedite its lawsuit against LVMH Moët Hennessy-Louis Vuitton SE (LVMHF). Tiffany’s lawsuit seeks, among other things, an order requiring LVMH to abide by its contractual obligation under the November 24, 2019 Merger Agreement to complete its acquisition of Tiffany on the previously agreed terms. The Court has set January 5, 2021, to begin a four-day trial.
Bloomberg reports that in recent months, Uber’s (UBER) two largest shareholders, SoftBank Group Corp. and Benchmark, have privately encouraged UBER CEO Dara Khosrowshahi to find more investors its self-driving car division, which is expected to exhaust its funds by the end of 2021.
Ahead of an investor conference presentation later this week, professional and technical staffing company Kforce (KFRC) boosted its outlook for the current quarter. The company now sees revenue and EPS exceeding the top end of its previously announced guidance of $362 million in revenues and EPS of $0.82. Consensus expectations for the quarter were $256.8 million in revenue and EPS of $0.76.
Coca-Cola (KO) expects it will release its first hard seltzer in the US in the first half of 2021 under Topo Chico, a drink brand the company acquired in 2017.
After today’s market close, Nike (NKE) and KB Home (KBH) will report their latest quarterly results. Investors looking to get the nitty-gritty on those reports and the others to be had later this week should visit Nasdaq’s earnings calendar page.
On the Horizon
- September 23: IHS Markit Flash PMI data (September), FHFA Home Prices, MBA Mortgage Applications. Samsung (005930:KS) Unpacked event
- September 24: Initial Jobless Claims, Bloomberg Comfort, New Home Sales, Kansas City Fed Manufacturing
- September 25: Durable Goods, Capital Goods
- September 28: Dallas Fed Manufacturing
- September 29: Trade Balance, Wholesale Inventories, Retail Inventories, Case-Shiller Home Prices, Consumer Confidence
- September 30: Caixin China General Manufacturing PMI (September), ADP Employment, GDP, Personal Consumption, MNI Home Sales, Pending Home Sales
- October 1: Personal Spending, PCE, Initial Jobless Claims, Bloomberg Comfort, Markit Manufacturing PMI, ISM Manufacturing, Construction Spending
- October 2: Nonfarm Payrolls, Unemployment Rate, Average Hourly Earnings, University of Michigan Sentiment, Factory Orders, Durable Goods, Capital Goods
Thought for the Day
“Time always reveals what you mean to someone.” ~ Anonymous
- Nvidia (NVDA) is a constituent in the Tematica BITA Digital Infrastructure and Connectivity Index.
- Tesla (TSLA) is a constituent in the Tematica Research’s Cleaner Living Index.
- Microsoft (MSFT), Tiffany (TIF), Walmart (WMT) are constituents in the Tematica Research’s Thematic Dividend All-Stars Index.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.