Markets

Daily Markets: Will Weekend Bring Reprieve As Investors Wring Their (Very Soapy) Hands*?

Woman wearing protective mask passes empty shelves in a store
Credit: Edgar Su / Reuters - stock.adobe.com

* We suspect lotion sales will skyrocket as people look to avoid cracked and sandpaper hands!

Today’s Big Picture

US equity futures point to another drop at the open after the major equity indices in Asia all closed in the red today, down between 1.2% (China’s Shanghai Composite) to 2.8% (Australia’s ASX 200).  Not to be outdone, by midday trading, the major equity indices in Europe were all down over 3%. We all need this weekend.

The number of cases of coronavirus around the world will likely surpass 100,000 over the weekend if not by the end of today as it has spread to more than 70 countries worldwide.  More infections have been reported in the US, Germany, France, Spain, Belgium, Italy, and South Korea while those in Iran surged and the Netherlands reported its first virus-related death. Markets have responded with a palpable fear that has the CNN Business Fear & Greed Index deep in Extreme Fear territory and investors pulling $14.4 billion from US stock funds and $8.9 billion in bond funds while money markets funds racked up $38.5 billion this week according to Lipper. 

As of yesterday’s close, 78% of the S&P 500 constituents were in correction territory. The yield on the US 10-year Treasury has fallen to a mind-boggling 0.74% by early Friday morning. It closed at 1.92% at the end of 2019. The iShares 20+ Year Treasury Bond ETF (TLT) is up 32.3% over the past year and 17% year-to-date. The Nasdaq 100 is down 0.7% YTD, the S&P 500 down 6.4%, and the Dow down 8.5%. The CBOE S&P 500 Volatility Index (VIX) is up 221.8%. In our view, it seems appropriate that yesterday was multiple personality day.

As we closed the books on last week, we shared our suspicion that we were likely to see sell-off into the market close, and those thoughts proved to be spot on. Our rationale was given the unknowns to be had over the weekend regarding the coronavirus, traders would look to trim positions and assume defensive postures because the data coming in over the weekend on the virus would dictate how equity markets opened Monday. Given the wide swings we’ve seen in the market this week and the continued escalation and reverberation of the virus, we see a similar late Friday trading session. Candidly, we hope we are wrong, but that’s the way the dots look to be lining up. 

Data Download

It feels a bit weird these days to look through pre-covid data as we now live in covid-time where a week feels like months. Nonetheless, it gives us an idea of directional moves before things all went pear-shaped in the world.

Household spending in Japan contracted about as much as expected in January, down 3.9% YoY from the prior 4.8% contraction. Average cash earnings rose more than expected, up 1.5% YoY, besting expectations for 1.3% and well above the prior 0% increase.

Some good news from Germany today - factory orders in January rose 5.5% MoM, up from the prior 2.1% decline and better than the 1.4% expected.

Some not so great news from Spain where Industrial Production in January fell 2.1% YoY from the prior 1.1% increase and well below the expected 1.3% contraction.

Italian retail sales in January rose to 1.4% YoY in January from the prior 0.8% and better than the 1.3% expected. That said, the coronavirus disaster began on February 21 and rapidly progressed to nationwide closures of schools, churches, sporting, and cultural events. February may be elevated based on a rush to stock up, but March is likely to look awful.

Auto production in Mexico rebounded sharply in February climbing 4.5% YoY vs. the 4.1% drop recorded in January. The country’s auto exports, however, trended lower by 1.8% after falling 5.8% in January. 

In the US, today brings the February Employment Report for which the consensus view expects 175K-185K jobs to have been created during the month.  Alongside that report, we'll get the January Trade Balance data, which will be followed by January Wholesale Inventory data. Before US equity markets close, the January Consumer Credit report will be published and following the surge in revolving credit that occurred in December, investors will looking to see if that trend continued or if it was holiday spending related. And as the market closes, we’d suggest readers check both the Atlanta Fed’s GDP Now and the New York Federal Reserve’s Nowcasting Report to see the impact on their respective GDP forecasts for the current quarter.

Speaking of the Federal Reserve banks, beginning this morning and into the evening, there are several Fed head speeches, including ones from Bullard (St. Louis), Williams (New York), Rosengren (Boston) and George (Kansas City). While they will likely be tight-lipped following the Fed's emergency 50 basis point rate cut earlier this week, odds are investors will be looking to see what if anything is said about the likelihood of another rate cut at the Fed's upcoming monetary policy meeting on March 17-18. Currently, the CBOE’s Fed Watch Tool sees an 88% chance of another interest rate cut at that meeting. 

Stocks to Watch

Following another worker testing positive for coronavirus, Samsung (SSNLF) has once again suspended production at its smartphone factory in Gumi, South Korea. Wash those hands, people!

Last night Starbucks (SBUX) updated its outlook for the current quarter sharing it now sees COVID-19-related headwinds of approximately $400-430 million in its China business for the quarter. Even though currently more than 90% of the company’s have re-opened, during February its China comps were down 78% due to a combination of store closures, reduced hours and "severely reduced" customer traffic. For the quarter in full, Starbucks sees its China comps down roughly 50% and currently sees store traffic rebounding modestly in the June quarter. As the virus has spread outside of China, it has impacted Starbucks's business in Japan, South Korea, and Italy, however, at this time the company cannot reasonably assess the degree of that impact. 

Microsoft (MSFT) joined the ranks of Amazon (AMZN) and Facebook (FB) in reporting the first known case of the coronavirus among its employees. Facebook is encouraging all workers in the California Bay Area to work from home starting today, as is Google (GOOGL). Reports suggest JPMorgan Chase (JPM) has started moving half of its New York and London sales and trading staff to backup locations near each city. 

As folks work from home versus heading to the office, as well as possibly avoiding public gathering spots, we expect to see restaurants hurt but grocers could benefit as people stock up and eat more at home. And for those looking for an approved list of cleaners and sanitizers, the EPA has released a list of suitable products to combat the coronavirus. Good news for Clorox (CLX)Ecolab (ECL), and Reckitt Benckiser Group (RBGLY). 

Walmart (WMT) joined the growing list of companies issuing new travel guidelines that restrict cross-border international travel to "business-critical trips" that require high-level approval, and domestic travel will only include trips tied to essential operations. 

As a preventative measure to help curtail the transmission of the coronavirus, Moody's (MCO) has decided it will hold its March 11 Investor Day as a virtual fireside chat, becoming the latest company to join the digital-first movement. One more example of pain for travel-related companies but a win for technology platforms for virtual meetings.

Shares of Costco Wholesale (COSTrose nearly 2% in aftermarket trading last night following February quarterly results that bested Wall Street expectations. The company reported EPS of $2.10 vs. the expected $2.06 as revenues rose 11% YoY and same-store comps climbed 9% (7.9% excluding gasoline and foreign exchange), which included US comp sales up 8.1% and eCommerce sales that rose 28%. We’ve been hearing of runs on Costco warehouses as concerns of the coronavirus have spread, and Costco shared it saw "an uptick in consumer demand" late in the quarter and estimated the "positive impact" on total and comparable sales to be around 3%. After all, who hasn’t stocked up on 2 years worth of toilet paper, 10 pounds of rice and five gallons of bleach? Clearly, some are thinking well ahead of the EPA...

National Beverage (FIZZ) the company behind the LaCroix seltzer business reported January quarter EPS of $0.57, $0.07 ahead of the $0.50 consensus. Revenue for the quarter was also better than expected at $223 million vs. $216.6 million consensus. Turning to the company’s 10-Q filing for the quarter, the YoY sales increase was due primarily from a 2.4% increase in case volume, which was offset by a 1.5% decline in average selling price. We’ve seen the beverage aspect of Tematica’s Cleaner Living investing theme become increasingly crowded in recent quarters as other beverage companies look to grab a share of the growing flavored seltzer business to offset declines in traditional sparkling beverage businesses.

Haptic technology company Immersion (IMMR) reported better than expected quarterly EPS despite revenue falling short of expectations for the quarter. The company sees the coronavirus impacting the business of its customers, which in part led it to reduce its 2020 EPS outlook to  $0.04-$0.19 vs. the breakeven consensus. On another note, Immersion and VIEX Capital, an existing shareholder that owns roughly 12% of IMMR stock, have come to an agreement surrounding several additions to Immerson’s board as well as the formation of a strategy committee. We are rather curious as to where this is going.

Southwest Airlines (LUV) is anticipating a hit of up to $300 million to first-quarter operating revenue from the coronavirus scare, forcing the carrier to cut its outlook.

On a cheerier note, NanoViricides (NNVC) jumped 36% during yesterday’s extended trading after its announcement concerning development plans for a drug to treat COVID-19. Never underestimate the human ability to solve problems.

Never underestimate people’s ability to take advantage of a crisis as well. Cyber-criminals have been quick to take advantage of the understandable levels of fear. This morning NortonLifeLock (NLOKsent an email to its clients warning about a phishing email going around that uses the logo of the CDC Health Alert Network claiming to provide a list of local active infections. Recipients are asked to click a link where they are then to enter email login credentials, which are then stolen. The European Central Bank (ECB) has warned banks that there may be a jump in cyber attacks as hackers look to exploit the chaos this may be causing amongst organizations. Fortinet (FTNTpublished on its blog recently how the company has seen a significant increase in malicious activity surrounding the coronavirus. Our advice is to wash your hands frequently and be wary of what you click on and where you click. It’s a viral world.

There are no companies expected to report after today’s market close, but readers looking to get the lowdown on those reports to be had next week, we suggest visiting Nasdaq’s earnings calendar page

On the Horizon

    • Upcoming IPOs:
        • Environmental services company GFL Environmental (GFL) targets 73.2 million shares in the range of $20-$21.
        • Clinical-stage biopharmaceutical company IMARA Inc. (IMRA) is looking to price 4.5 million shares in the range of $16-$18.
        • For a complete list of upcoming IPOs by month, please visit the Nasdaq IPO Calendar.
    • Dates to mark:
        • 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

Thoughts for the Day

“Life’s not an Agatha Christie novel, it’s a lot messier.” ~ Forsythe “Jughead” Pendelton Jones

After the week we’ve all endured:

  • “I’ve been thinking Hobbes–“
  • “On a weekend?”
  • “Well, it wasn’t on purpose.” – Calvin & Hobbes, Bill Watterson

Disclosures

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

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.

Read Chris's Bio

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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