Morning Note: Looking for Clues Amid Mounting Market Uncertainty

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Today’s Big Picture

Today is poised to start with a full plate of uncertainty for investors, and that has US futures well in the red this morning as investors continue to embrace a risk-off view. Even as the presidential impeachment inquiry continues to wind its way through Washington, following yesterday's economic data that reignited concerns over the global economic slowdown, investors will be looking for more economic and earnings clues in today's reports.  House Speaker Nancy Pelosi is set to give a press conference this morning and markets could get rattled further depending on what she says concerning impeachment proceedings.

All the main equity indices in Asia closed in the red today following yesterday’s dismal US manufacturing data reignited fears of a global slowdown. Markets in China remain closed for the week. Equities in Europe are also in the red today due in part to yesterday’s economic data and anticipation of the fall-out from today’s latest and greatest Brexit proposal. The main issue at stake remains the border between Northern Ireland and the Republic to the south. Today is the most critical for U.K. Prime Minister Boris Johnson. His proposal may be immediately rejected, but if not there is a very short window to negotiate final terms before the October 17 European Council and the October 31 Brexit deadline. 

Data and Events to Watch

Today in the US we'll get September's ADP Private Employment report ahead of Friday's Bureau of Labor Statistics Employment report which will give further insight into the financial health and confidence level of households. Expectations are for an additional 140,000 jobs in September after a 195,000 increase in August.

The World Trade Organization (WTO) decision on EU aircraft subsidies will be published at 10:00 ET, which could lead to $7.5 billion in new US tariffs on EU imports.

From the Federal Reserve we'll hear from Philadelphia President Harker (FOMC Voter), Richmond Fed President Barkin (FOMC non-voter) and New York President Williams (FOMC voter). We'll also get the Department of Energy's report on inventories and demand for crude, distillate, and gasoline.

UK Prime Minister Boris Johnson is set to deliver a comprehensive plan to Brussels today to replace the Irish backstop and give a speech to the conference in which he is expected to “bin the backstop.” Word so far is that it involves taking Northern Ireland out of the EU’s customs and VAT territory but within the EU’s agri-food and industrial goods region. 

An alliance of six Mediterranean EU states, including France and Italy, are set to meet today in Malta to discuss developing a tech and blockchain technology expert group that will meet in Brussels once a year. The event itself isn’t a market mover but shows just how widespread the interest has become in developing blockchain.

Not to be outdone by the drone drama in Saudi Arabia, North Korea fired at least one missile in the early Wednesday morning hours, (Japan’s Prime Minister Shinzo Abe reported there were two) one of which fell in the waters of Japan’s Exclusive Economic Zone the day after announcing the resumption of previously stalled talks with the US aimed at ending its nuclear program. 

Consumer Confidence in Japan fell to 35.6 in September from the prior 37.1. Retail sales in Hong Kong crashed 23% in August, marking the worst decline on record, as protests discourage inbound tourism. South Korea reported a drop in consumer prices and the Reserve Bank of Australia cut its interest rate to a record low. Spain saw an increase in unemployment in September, but overall the unemployment rate was the lowest for a September since 2008. September UK construction activity slumped further than expected in September with the Markit Economics PMI indicator falling to 43.3 down from 45.0 in August vs. the expected 45.0 for September. 

Stocks to Watch

Homebuilder Lennar (LEN) reported August quarter EPS of $1.59 per share, $0.27 better than the consensus forecast of $1.32 per share. The 7% increase in deliveries for the quarter led revenues to best expectations. The dollar value for new orders in the quarter, a key barometer of what lies ahead, rose 3% led by a 9% increase in new order volumes. 

While it beat August quarter EPS expectations, specialty chemical company RPM International (RPM) was the latest company to miss on revenues and cut its outlook for the current quarter. 

Other companies set to report quarterly earnings this morning are lighting company Acuity Brands (AYI) and frozen french fry and potato food processing company Lamb Weston (LW). Investors will be watching Acuity’s results to see if they shine the light on business investment spending prospects ahead. Comments on restaurant traffic and new restaurant building activity as well as pricing trends will be of keen interest when management at Lamb Weston comments on its quarterly results. 

Microsoft (MSFT) is holding a hardware event today at which it is expected to unveil several new Surface products, including a dual-screened version, and debut Windows 10X.

TD Ameritrade (AMTDannounced it will follow Charles Schwab (SCHW) in eliminating commissions for its online exchange-listed stock, ETF (domestic and Canadian), and option trades effective October 3. This move is expected to hit TD Ameritrade’s revenue to the tune of $220-$240 million per quarter. 

Visa (V) and Mastercard (MA) are reconsidering involvement in Facebook's (FB) Libra as officials in the U.S. and Europe raise the specter of regulatory scrutiny, and Tesla (TSLA) is planning to start China production next month.

United Parcel Service (UPS) has received the thumbs up from the Department of Transportation to operate a drone airline initially focused on delivering vital healthcare supplies. 

Post-market close earnings reports today will be had from Bed Bath & Beyond (BBBY) and Resources Connection (RECN). As we gear up for the holiday shopping season, expect Wall Street to pick apart Bed Bath & Beyond’s guidance for not only overall retail sales across its diverse retail operations but also its expectations for digital sales this holiday season. 

On the Horizon

  • October 3: ISM Non-Manufacturing Index for September
  • October 4: September Employment Report 
  • October 10-11:  US-China trade talks resume in Washington, DC
  • October 29-30: Federal Reserve FOMC meeting 

Index substitutions. Effective before the market opens on October 3, Las Vegas Sands (LVS) will replace Nektar Therapeutics (NKTR) in the S&P 500 as Nektar Therapeutics replaces Sotheby's (BID) in the S&P MidCap 400 

On the IPO front this week we have several new issues expected to price all of which are biotechnology companies:

  • Clinical stage oncology-focused biotech company ADC Therapeutics (ADCT)
  • Clinical stage biopharmaceutical company developing cancer therapeutics Aprea Therapeutics (APRE)
  • Frequency Therapeutics (FREQ), a clinical-stage biotechnology company using "Progenitor Cell Activation" system to repair or reverse damage from degenerative diseases
  •  Cancer focused clinical-stage biopharmaceutical company Monopar Therapeutics (MNPR
  • Viela Bio (VIE), a clinical-stage biotechnology company developing treatments for autoimmune and inflammatory diseases

Yesterday’s Highlights

The major hit to the market yesterday came from the first economic data point for the quarter, the ISM US Manufacturing Purchasing Manager’s Index (PMI) which dropped to 47.8, the lowest since June 2009, well below expectations for 50, marking the second consecutive month the index sat in contraction territory. The only category up on a year-over-year basis was Customer Inventories. Production fell to its lowest level since April 2009. New Export Orders fell to 41, the lowest level since March 2009 while New Imports increased - these two typically move in unison with the discrepancy implying that the US economy remains stronger than the rest of the world. August construction spending was also a miss, up just +0.1% month-over-month versus the +0.5% expected for August. 

After those dismal reports, which raised questions over the economy’s vector and velocity as well as stoke expectations for the Fed’s late October monetary policy meeting,  the Atlanta Fed trimmed its December Quarter GDP forecast to 1.8% from 2.1%  Looking forward into the December quarter, the ISM data tends to lead actual exports by about 3 month with this ISM data implying a possible 8% drop in exports in the final quarter of 2019, which would be the worst showing since at least 1992 (excluding the global carnage of Q4 2008 and Q1 2009). 

That economic data pushed all the major US Indices down with the Dow Jones Industrial Average and NYSE Composite both falling -1.3%, the S&P 500 -1.2%, the Nasdaq -1.1%, the Nasdaq 100 fared the best at -0.84%. The DXY US Dollar Index pulled back from its recent 16-year high while gold rose +0.7%.

Shares of manufacturing firms such as Honeywell (HON), 3M (MMM) and Eaton Corp (ETN) were hit on the news, falling -3.1%, - 3.7% and -2.8% respectively yesterday. Despite the dour tone for industrials, shares of United States Steel Corp (X) gained +3.5% on the day after it announced that it will acquire 49.9% of Big River Steel for about $700 million in cash with an option to buy the remainder within the next four years.

WeWork was back in the news yesterday as Fitch Ratings downgraded the company's debt deeper into speculative territory after the company pulled its plans to proceed with an initial public offering.

Yesterday we saw more evidence of downward pricing pressures and the increasingly ubiquitous subscription model.

Brokerage firms took more hits from a very different kind of trading war Tuesday as Charles Schwab (SCHW)announced that starting October 7, online trading commissions for US stocks, ETFs and options will be cut from $4.95 to absolutely nothing. While investors overall are cheering the boost to their portfolio costs, Schwab shareholders were less than enthused on concerns that this will hit their bottom line as shares of SCHW lost -9.4% on the day and competitors TD Ameritrade (AMTD) fell -25.7%, its worst day since 1999, and E*Trade (ETFC) dropped -16.4%, its worst day since 2009.

Robinhood, a Silicon Valley start-up, has been offering free stock trading since 2013. Last week Interactive Brokers Group (IBKR) made a similar move, announcing a new product that will provide commission-free stock trades. Its shares lost -9.2% yesterday. JPMorgan Chase & Co (JPM) released its free trading app back in August.

Gamers had reason to cheer alongside investors yesterday as Sony (SNE) announced that it is cutting the price of its PlayStation Now video game subscription service in half and adding new titles. Shares of the company fell -2.0% on the day. Investors will want to watch for price cuts at other streaming game services, such as Apple’s (AAPLApple Arcade and pricing plans from soon to be launched one such as Google’s (GOOGL) Stadia and Microsoft’s (MSFT) xCloud game streaming service. 

Former unicorns Uber Technologies (UBERand Lyft Inc (LYFT) lost -4.3% and -3.3% respectively yesterday, both posting their lowest close ever.

JP Morgan estimates that the strike by General Motors (GMunion workers, now in its third week, has cost the company over $1 billion in the third quarter.

Thought for the Day

“Better to remain silent and be thought a fool than to speak out and remove all doubt.” – Abraham Lincoln

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 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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