Morning Note: Everything You Need To Know About The Markets Today

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Today’s Focus

Markets in Asia struggled today to get any traction following yesterday’s lackluster markets in the US and the weakening data coming out of Europe. The European equity markets are mostly in the green (albeit only slightly) with the exception of the FTSE 100 which is slightly down as of mid-day trading.

The beleaguered Hong Kong stock exchange got a shot in the arm today as the initial public offering of AB InBev’s Asia Pacific business - Budweiser Brewing Company APAC Ltd (1876.HK) - raised $5 billion, the second largest IPO of the year behind Uber’s (UBER) $8.1 billion in May. The company had initially looked to raise closer to $10 billion two months ago but was forced to put the IPO on hold after investors balked at the price. That seems to be a growing trend these days.

Major events for the day will be the 74th session of the United Nations General Assembly which begins with the leaders of France, Turkey and the US scheduled to speak - we suspect Twitter (TWTR) will get some extra action and the east-side of Manhattan will be as densely packed as a sardine can with hotel prices to match. Britain, France and Germany issued a joint statement at the UN blaming Iran for the attack in Saudi Arabia - geopolitical tensions continue to rise, adding to stock market uncertainties.

So far UK Prime Minister Boris Johnson is having a bad day. He has made little progress on Brexit after a 30-minute sideline chat with Donald Tusk - he’ll try his luck with Netherland’s Mark Rutte and Ireland’s Leo Varadkar today. 

While Boris is busy in the Big Apple, the biggest geopolitical event of the day took place in the UK where its Supreme Court announced that his advice to the Queen to prorogue parliament (effectively suspend it) until October 14 was unlawful. Sterling rose nearly 0.4% on the announcement. Brenda Hale, the President of the Supreme Court said that the judges were unanimous in their decision that there was no justification for suspension of parliament. The October 31st deadline is looking more and more like it will be another one to come and go.

The Senate Judiciary Committee’s antitrust panel convenes today to discuss the level of consolidation in the technology sector as Big Tech acquires smaller rivals, thereby limited competition. This is of concern not only for consumers, but for job seekers as research has found the more highly concentrated an industry, the less pricing power workers have when it comes to compensation.

On the US-China trade front, U.S. Treasury Secretary Steven Mnuchin has confirmed Chinese Vice Premier Liu He is headed to Washington in coming weeks. That combined with news that China has given waivers for tariff-free U.S. soy purchases should put investors in a more hopeful mood that upcoming trade talks will be productive. Much like any piece of economic data, we continue to think the devil will be in the details of any trade agreement and these negotiations have been on-again-off-again for years. That said, the early morning trade developments have US stock market futures in positive territory with the S&P Futures back above the 3000 mark.

Today’s Economic Data

Following yesterday’s manufacturing weakness out of the eurozone and Germany in particular, manufacturing activity for Japan (the world’s third biggest economy) shrank in September at the fastest pace in seven months with the latest Jibun Bank flash Manufacturing PMI at 48.9, down from 49.3 - still well in contraction territory where it has spent much of 2019.

Turkey’s Capacity Utilization fell from 76.6% to 76.3% and Manufacturing Confidence Index fell to 98.8 in September from 102.5 as expectations fell regarding output, export orders and employment - pretty much what we are seeing all over the world.

France’s Business Confidence remained unchanged in September from August. Germany’s September Ifo Business Climate and Current Conditions both improved slightly and were better than expected while Expectations worsened and came in below expectations - in line with the downward slide we’ve seen in most of the data coming out of the eurozone’s largest economy. The UK’s Industrial Trends Orders came in better than expected

On the domestic data front we’ll get an update on home prices with the S&P/Case-Shiller home price index(expectations are for a 3.1% year-over-year increase) and Richmond Fed Manufacturing Activity (looking to see if this matches Empire State and the Conference Board Consumer Confidence). We’ll also get the Redbook Index for September, which is a sales-weighted of same-store sales growth in a sample of large US general merchandise retailers representing about 9,000 stores. 

Companies in Focus

Europe’s top court ruled today that the Alphabet (GOOGL) search engine Google does not have to apply the bloc’s “right to be forgotten” rules globally. In 2015 France had ordered the company to apply this rule around the world. The company didn’t and was fined over $100,000.

Europe’s second-highest court overturned a ruling by the European Commission that a tax deal between the Dutch government and Starbucks Corp (SBUX) was effectively illegal state support while Fiat Chrysler Automobiles NV (FCAUlost its battle against a similar charge with respect to special treatment in Luxembourg. The bigger picture is that the General Court was seen today to generally endorse the Commission’s tax crackdown, but it needs to have a solid argument which likely is not a good sign for Apple’s (AAPL) efforts to avoid a €13 billion Irish tax bill - one that Ireland argues it shouldn’t have to pay.

On the earning front, before the market open, we’ll be hearing from Autozone (AZO), CarMax (KMX) and Blackberry (BB).  Consensus EPS expectations for Autozone and CarMax are $21.79 and $1.33 respectively. Following the rebound in domestic August auto sales, investors will be looking to see if that trend is set to continue following two Fed rate cuts. Consensus EPS expectations for Blackberry are -$0.01, but the real tell for the shares will be the speed of the company’s ongoing makeover to focus on enterprise security.

The United Auto Workers (UAW) strike at General Motors (GM) persists, making it the longest walkout since 1970, and has idled more than 30 of GM’s US auto plants as more than 45,000 full-time factory workers have hit the picket lines. Surely this will affect September quarter auto sales figures, but also lead to a pronounced shift as car buyers vote with their wallets and head elsewhere. Should the strike continue, it will not only hit GM’s September quarter performance and December quarter outlook, but also that for key GM suppliers as well. 

As GM contends with that strike, the Honda Motor Company (HMC) announced it would cease sales of diesel vehicle sales in Europe by 2021 as it looks to electrify all of its European cars by 2025. This is part of Honda’s larger, global plan to have electric cars, including all battery-electric vehicles, comprise two-thirds of its vehicle line up by 2030 from less than 10% today. Honda is not alone in this shift, and as the industry morphs their vehicle offering it will disrupt the existing supply chain and ramp up the competition to be had in the automotive market. As Bob Dylan famously sang, “The Times They Are A-Changin’.”

After the market close, investors will focus on earnings from Nike (NKE), which are expected to grow 6% year over year to $0.71 per share. With 17% of Nike’s revenue and 23% of its contract manufacturing derived from greater China, the company’s comments on the trade war’s impact on its business will likely set the stage for what we will hear when the September quarter earnings season in the coming weeks. We’ll also be looking to hear any commentary around the impact of the strong dollar. The company has a track record of beating on EPS 90% of the time and sales 73% since 2001. So far this year Nike shares are up 18% but haven’t moved much since March.

Dividend Aristocrat uniform and services company Cintas Corp. (CTAS) will also reports its quarterly results after the close and is expected to suit up with EPS of $2.15 per share. 

On the Horizon

In terms of the IPO calendar, offerings slotted to price this week include entertainment and sports company Endeavor Group (EDR), financial services company Oportun Financial (OPRT) and interactive fitness platform company (and Hawkins’ obsession) Peloton Interactive (PTON)

Other items to watch this week include:

  • September 25 - Amazon (AMZN) hardware event; Uber’s (UBER) London operating license expires
  • September 26 - Banxico, the Mexican central bank, rate decision; Third estimate of US June quarter GDP

Recap from Yesterday

The major US stock market indices finished Monday mostly flat, recovering from their opening drop that reflected disappointing flash manufacturing PMI readings from IHS Markit for the eurozone. That September data revealed continuing declines in backlogs, expectations and new orders confirming the global slowdown continued in September. Despite gains in a number of constituents, including Apple (AAPL), Broadcom (AVGO), Ulta Beauty (ULTA), and Lululemon Athletica (LULU), declines at Netflix (NFLX), Incyte Corp. (INCY), Liberty Global plc (LBTYK) and Take-Two Interactive Software (TTWO) led the Nasdaq 100 to finish the day lower. 

What we found most concerning was the broadening out of the slowing into the eurozone’s service sector, which has seen growth slow to its weakest rate since 2014. In particular, Germany's flash PMI for September fell deeper into contraction territory to its lowest reading (41.4) since 2009 and “Slumping manufacturing orders led the decline, recording the steepest drop in more than a decade in September.” Germany may already be in a recession. The STOXX Europe 600 lost 0.8% on the day with Germany’s DAX and France’s CAC 50 both falling more than 1%.

The Flash September PMI data for the US, while still sluggish, came in better than expected, with US manufacturing hitting 51.0, up from 50.3 in August and marked a 5-month high in the process. However, total composite new orders across manufacturing and services came in the weakest since October of 2009 with employment contracting for the first time since January 2010. 

The Chicago Fed National Activity Index rose +0.1 in August from a revised -0.4 in July, well above expectations for an increase to just -0.35. While better than consensus, only production-related indicators pushed the month into positive territory with three subcategories served as a drag: sales, orders and inventories; employment-related; and personal consumption and housing.

That said, overall the US economy remains the best house on the economic block of the four global economic horsemen that we wrote about in Cocktail Investing: Distilling Everyday Noise for Clear Investing Signals

The Philadelphia Semiconductor Index rose 1.0% as the chip sector rebounded following reports that US-China trade talks conducted last week were “productive” and “constructive.” 

American Express (AXP) announced a 120 million share repurchase program and increased its quarterly dividend 10% to $0.43 per share. After receiving a new Overweight rating at Piper Jaffray, shares of Lululemon Athletica finished more than 3% higher on the day. 

Shares of Walt Disney (DIS) rallied +0.6% following a new Outperform rating at Wells Fargo (WFM), which was accompanied with a $173 price target. Disney’s shares have been fueled of late by prospects for its video streaming service, Disney+. Concerns over the mounting competition in the streaming video space has taken its toll on Netflix - as of last night’s market close NFLX shares crossed into the red on a year to date basis and have fallen more than 30% from their 2019 high reached in late April. In our view, as investors revisit their valuation parameters for Disney shares, they are also re-thinking how to value NFLX shares as well. 

Thoughts for the Day

“The trouble with having an open mind is that people keep coming along and stick things in it.” - Opus from Bloom County

Sometimes all that really does matter is love, particularly when a Border Collie is involved.

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.

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Lenore Elle Hawkins

Lenore Elle Hawkins has, for over a decade, served as a founding partner of Calit Advisors, a boutique advisory firm specializing in mergers and acquisitions, private capital raise, and corporate finance with offices in Italy, Ireland, and California. She has previously served as the Chief Macro Strategist for Tematica Research, which primarily develops indices for Exchange Traded Products, co-authored the book Cocktail Investing, and is a regular guest on a variety of national and international investing-oriented television programs. 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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