Daily Markets: Tightening Presidential Race Casts Uncertainty Into Markets
Today’s Big Picture
After yesterday’s sharp pullback in the U.S., markets in Asia were mixed today with Japan’s Nikkei closing relatively flat, Australia’s ASX 200 lost 1.7%, China’s Shanghai Composite lost 0.1%, and Hong Kong’s Hang Seng dropped 0.5%. By midday trading, European equity markets were mostly down on the day, but U.S. futures point to positive moves at the open.
The focus this week is on rising coronavirus cases in the U.S. and Europe and next week’s election. Recently the race has begun to look like it might be tighter than earlier polls have predicted, adding to the overall heightened level of uncertainty. Amid this we have the latest economic data and a sea of corporate earnings, all of which likely means equities will remain rangebound until we have some clarity on the 2020 presidential election.
The advanced estimate for South Korea’s Q3 GDP came in at -1.3% YoY, up from Q2’s -2.7%, and better than the expected -1.9%. The economy is expected to have expanded 1.9% QoQ in Q3 after falling 3.2% QoQ in Q2, better than the expected 1.7% expansion. Consumption further contracted, down -2.3% from -1.3% in Q2. Fixed capital formation rose 2.6%, up from 1.9% in Q2. Exported declined -3.7% versus -13% in Q2 and imports declined -5.3% up from the prior -8.5%.
China’s industrial profits fell -2.4% in the first nine months of 2020, up from -4.4% for the first eight months. State-owned industrial firms saw profits decline -14.3% while the private sector declined only -0.5%. Of the 41 sectors surveyed, 20 saw a contraction in profits which Oil and Natural Gas extraction posting the worst decline.
France’s Producer Price Index for September rose 0.2% MoM, accelerating from the prior 0.1%. The Index now sits at 100.2, well below the December 2019 peak of 104.0.
European banks have been slowing their lending to European companies and households in anticipation of a sharp increase in bad loans from the impact of the pandemic. Loans to companies rose 7.1% and to households 3.1% while the overall money supply increased by 10.4% in September - the highest pace of monetary expansion since 2008. Credit standards on loans to firms in the third quarter were tightened and are expected to tighten further in the current quarter.
Spain’s Unemployment Rate in the third quarter rose to 16.3% from Q2’s 15.3%, the highest rate since Q1 2018 when it was 16.7%. Youth unemployment (those under 25 years old) rose to 40.5% as the nation is expected to see its economy contract more than any other major European country in 2020.
New home sales are now up 32% YoY while inventories are down 11.5%, which is particularly startling in light of non-started inventories up 31.6% YoY. This means that the ratio of home sales to the inventory of completed homes is at its highest level going back to at least 1999 - once built, homes are selling fast! This serves as a strong tailwind to construction.
The Dallas Fed’s Manufacturing Activity Index was released yesterday, which means we have now received four out of the five regions. Looking at the data in aggregate, shipments and new orders continue to be strong, backlogs are rising and inventories are on the decline - all good. However, the future outlook is less constructive with only lagging inventories expected to rise faster than is typical for the coming months.
After reaching 1 million for the first time since March last week, air passenger traffic has been declining week-over-week basis for seven consecutive days.
Later today we will get the Durable/Capital Goods report for September, FHFA Home Prices, Case-Shiller Home Prices, Consumer Confidence, Richmond Fed Manufacturing, and the usual weekly Redbook retail sales report.
Yesterday the pressure from accelerating new coronavirus cases and the reality that no stimulus bill is coming before the election weighed heavily on markets. Equities had their worst day since late September with the Dow falling 2.3%, the Russell 2000 -2.2%, the S&P 500 -1.9%, and the Nasdaq -1.6%. Only one stock in the Dow managed to close in the green yesterday and all S&P 500 sectors lost ground. Those stocks that performed the best in the early days of the pandemic were those that performed the best yesterday. Names like Regeneron (REGN) and Clorox (CLX) rose 1.0% and 0.9% respectively on the day while travel and hospitality companies such as Hilton Worldwide Holdings (HLT), United Airlines (UAL), and Lindblad Expeditions (LIND) closed down -4.4%, -7.0%, and -9.9%.
Stocks to Watch
AMD (AMD) topped September quarter EPS expectations as revenue for the quarter jumped almost 56% YoY due to strong demand for PC, gaming, and data center products. For the final quarter of 2020, AMD expects revenue to be approximately $3.0 billion, plus or minus $100 million, an increase of approximately 41% YoY and 7% QoQ. AMD now sees full-year 2020 revenue growing by 41% YoY, up from its prior guidance that called for a 32% YoY increase. AMD also announced it would acquire Xilinx (XLNX) in an all-stock transaction with a combined enterprise value of approximately $35 billion that expands AMD’s total addressable market to $110 billion and its presence in the data center market. Xilinx stockholders will receive a fixed exchange ratio of 1.7234 shares of AMD common stock for each share of Xilinx common stock they hold at the closing of the transaction. Based on the exchange ratio, this represents approximately $143 per share of Xilinx common stock.
Caterpillar (CAT) reported September quarter EPS of $1.34 on revenue of $9.88 billion vs. the consensus forecast of $1.17 and $9.78 billion. On a YoY basis, revenue for the quarter fell 22.6% due to lower sales volume driven by lower end-user demand for equipment and services and the impact from changes in dealer inventories.
3M (MMM) issued better than expected September quarter EPS on quarterly revenue that matched the consensus forecast. During the third quarter, end-market demand remained strong in personal safety, home improvement, general cleaning, semiconductor, data center, and biopharma filtration. Due to the continued evolving and uncertain impact of the COVID-19 pandemic, 3M continues to believe it is prudent to not provide guidance. The company estimates total sales for October to be flat to up low-single digits YoY, which factors in the anticipated impact of one fewer business day in October 2020 versus October 2019.
Restaurant Brands (QSR) reported quarterly EPS of $0.68 per share, $0.05 better than the $0.63 consensus, even as revenue for the quarter fell 8.3% YoY to match the consensus forecast of $1.345 billion. For the quarter, system-wide sales growth at Tim Horton's was -13.7% vs. the consensus of -29.1%; Burger King: -7.9% vs. consensus of -15.7% and Popeye's: +21.5% vs. consensus of +27.3%.
Eli Lilly (LLY) missed top and bottom-line expectations for its September quarter but guided its 2020 revenue and EPS to match the consensus forecast. The company continues to rapidly advance the development of potential therapeutics for the treatment of COVID-19 and has submitted requests for Emergency Use Authorization to the FDA for both bamlanivimab and baricitinib. Revenue growth is still expected to be driven by volume from key growth products.
NXP Semiconductor (NXPI) reported in-line results for its September quarter and guided its current-quarter revenue to $2.375-2.525 billion vs. the $2.28 billion consensus. “The momentum which began during the September quarter is continuing. Within our strategic end markets of Automotive, Industrial & IoT and Mobile, the improving trends are due to a combination of a rebound in our core business, as well as a solid contribution from the ramp of new products.”
Stanley Black & Decker (SWK) reported mixed September quarter results with EPS that topped expectations despite missing the consensus revenue forecast for the quarter. The company reported 11% organic growth for its Tools & Storage business vs. the expected 10.4%. Net sales for the quarter were $3.9 billion, up 6% versus the prior year, with volume (+3%), acquisitions (+2%), and price (+1%) contributing to the growth. Industrial net sales declined 7% versus 3Q'19 as the CAM acquisition (+10%) and currency (+1%) was offset by volume (-18%). Security net sales declined 1% versus 3Q'19 as currency (+2%) and price (+1%) was offset by lower volume (-4%).
September quarter results at Sensata Tech (ST) topped top and bottom-line expectations and the company guided current-quarter revenue above the consensus forecast. For the current quarter, this industrial technology company sees revenue in the range of $810-$850 million vs. the $794 million consensus.
K12 (LRN) shares jumped in aftermarket trading last night following September quarter results that crushed expectations. For the quarter, the company reported EPS of $0.30 vs. the expected -$0.24 on revenue of $370.96 million vs. the $362.6 million consensus. Total enrollment was up +57.1% YoY to 195K.
Connected learning platform Chegg (CHGG) bested consensus expectations for its September quarter and boosted its revenue outlook for the current quarter. Revenue for the September quarter rose 63.5% YoY to $154 million vs the $111.16 million consensus, with Services Revenues up 72% YoY to $118.9 million, or 77% of total net revenues, as the number of Chegg subscribers jumped 69% YoY to 3.7 million. For the current quarter, the company sees revenue of $188-$190 million vs. the $153.90 million consensus.
In an 8-K filing, Steelcase (SCS) shared it detected a cyberattack on its IT systems and quickly implemented a series of containment measures to address the situation, including temporarily shutting down the affected systems and related operations. At this time, the company is not aware of any data loss from its systems or any other loss of assets as a result of this attack.
JM Smucker (SJM) has entered into a definitive agreement to sell its Crisco oils and shortening business to B&G Foods (BGS) for approximately $550 million in cash. The divestiture aligns with Smucker’s previously stated intent to exit the U.S. baking category and focus more of its resources on its core growth platforms of pet food, coffee, and snacking.
After today’s market close, Denny’s (DEN), FireEye (FEYE), First Solar (FSLR), Juniper Networks (JNPR), Microsoft (MSFT), O-I Glass (OI), Terex (TEX), and Veeco Instruments (VECO), among a few dozen others will report their latest quarterly results. Investors looking to get a jump on those and other such reports in the coming days should visit Nasdaq’s earnings calendar page.
On the Horizon
- October 28: MBA Mortgage Applications, Wholesale Inventories, Retail Inventories
- October 28: Facebook (FB), Google (GOOGL), and Twitter (TWTR) testify before the Senate Commerce Committee
- October 29: Initial Jobless Claims, Bloomberg Comfort, GDP, Personal Consumption, Pending Home Sales
- October 30: Personal Income, Personal Spending, PCE Deflator, Employment Cost, MNI Chicago PMI, University of Michigan
- October 31: Boo!
- November 3: Election Day in the US
- November 17: Facebook (FB) CEO Mark Zuckerberg and Twitter CEO Jack Dorsey appear before the Senate Judiciary Committee.
Thought for the Day
“Where there is no imagination, there is no horror.” – Arthur Conan Doyle
- Juniper Networks (JNPR), NXP Semiconductor (NXPI), Xilinx (XLNX) are constituents in the Tematica BITA Digital Infrastructure and Connectivity Index.
- FireEye (FEYE) is a constituent in the Foxberry Tematica Research Cybersecurity & Data Privacy Index.
- 3M (MMM), Microsoft (MSFT) are constituents in Tematica Research's Thematic Dividend All-Stars Index.
- First Solar (FSLR), O-I Glass (OI) 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.