Daily Markets: First, the Pandemic, Now Renewed US-China Trade Tensions


Today’s Big Picture

Equity indices in Asia finished today on a mixed note with most of the region’s indices ending the week in the red. By mid-day trading, European equity indices were higher for the most part; however, U.S. equity futures suggest the market will give back some of yesterday’s bounce. Investors are bracing for what will be ugly with a capital U April Retail Sales report out this morning among others that are expected to be record-breaking on the downside. While investors come to grips with the revelation the global economic rebound won’t be the V-shape that was hoped for, they are also digesting the rising tensions between the U.S. and China as the U.S. looks to reclaim supply chains for critically-needed items. 

This morning the U.S. Commerce Department announced it was amending an export rule to “strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.” The Commerce Department also issued a 90-day extension of a temporary reprieve of its ban on the use of equipment from Huawei Technologies to provide “an opportunity for users of Huawei devices and telecommunication providers-particularly those in rural U.S. communities-to continue to temporarily operate such devices and existing networks while hastening the transition to alternative suppliers.” 

Reports also suggest the White House is preparing an executive order which will require certain essential drugs be made in the U.S. – currently 72% of pharmaceutical ingredient manufacturers supplying the U.S. are located overseas, including 13% in China. And as if that wasn’t enough to send us off into the weekend, CNN reports the U.S. is “upping military pressure on China amid increased tensions over the South China Sea and accusing Beijing of seeking to leverage the coronavirus pandemic to extend its sphere of influence in the region.” We suspect the weekend news programs will be ones to watch as the renewed trade tensions join the slate of topics that will no doubt include the pace of reopening of the economy. 

As we wrap this week, we are officially halfway through the June quarter – man o’ man how time flies in the COVID world. Despite the setbacks recorded this week for the major market indices, at the midpoint of the current quarter, the Nasdaq-100 and the Nasdaq Composite Index are at the top of the leader board with both up more than 16% quarter to date. By comparison, the S&P 500’s is up just over 10% while the Dow and the small-cap heavy Russell 2000 are up 7%-8% quarter to date. Those collective moves helped all of the indices recover from the double-digit losses recorded in the March quarter, but even the lone major market index to deliver positive year to date results as we head into today’s trading is the Nasdaq-100; that index is up 4.1% to date as of last night’s market close.  

Data Download

Coronavirus

There are now over 4.5 million confirmed cases of the coronavirus worldwide and over 96,000 deaths. The United States has over 32% of the world’s total, or 1.46 million cases, and saw more than 27,200 additional cases yesterday, and more than 1,700 additional lives lost for a total of just under 87,000 deaths.

The pandemic has once again hit home in the White House as the FDA warned last night that the Abbott Laboratories (ABT) test being used there could be returning inaccurate results, giving false negatives in almost half of cases. Wednesday New York University posted a report on BioRxiv that found Abbott’s test missed at least a third of positive cases detected with a rival test.

The New York Stock Exchange plans to re-open their floor on May 26, according to an op-ed from Stacey Cunningham in WSJ. This comes as New York Governor Andrew Cuomo announced that five regions upstate and in central New York will be allowed to being a phased reopening of their economies starting today after having met the seven measured outline by health officials to qualify for reopening. Retails can reopen, but with curbside or in-store pickup and construction work may resume. New York City has met only four of the seven requirements, which as Mayor Bill de Blasio put it, the city is “clearly not ready yet.” The stringent stay-at-home orders are expected to remain in place into June.

The travel and hospitality and retail industries aren’t the only ones devastated by the pandemic, those organizations involved with entertainment and sporting events have also taken a massive hit. David Lampitt, managing director of sports partnerships at Sportradar, estimates that the sports industry is likely losing around $60 billion globally. All is not lost as fans will be able to tune in online for games as Germany’s Bundesliga resumes this weekend and South Korea’s K League already starting holding matches last week. Viewership has been exceedingly strong given all the pent up demand, but in the second half of the year, things are going to get interesting in sports with a lot of live sports viewing compressed into the second half of 2020. How all those events will compete with one another is yet one more headwind. 2020, the gift that keeps on giving.

International Economy

In China, Fixed Asset Investment in April fell 10.3% YoY, up from the 16.1% contraction in March, but slightly worse than the -10% expected. Industrial Production rose by 3.9% YoY in April, up significantly from March’s 1.1% decline and better than the 1.5% growth expected. The Unemployment rate rose to 6% in April from 5.9% and 6.2% in February. Foreign Direct Investment (FDI) in China fell 6.1% YoY in the first fourth months of 2020, but it wasn’t all bad news. The tech sector including information services, e-commerce services, and professional technical services investment rose by 46.9%, 73.8%, and 99.6% respectively. Investment from the EU, on the other hand, fell by 29.1%. 

Signs of weakening inflation and downright deflation are rising, particularly in those nations most export-oriented:

  • Japan’s Producer Price Index fell 2.3% YoY in April compared to the prior -0.4% in March and worse than the-1.6% expected. For such a massively indebted nation, deflation is the last thing it needs.
  • Germany’s PPI fell 1.9% YoY in April, declining further from the 0.8% contraction in March and worse than the 1.8% contraction expected.
  • France’s Inflation Rate and Harmonized Inflation Rate are down to 0% MoM in April.
  • Italy’s Harmonized Inflation Rate has fallen from 2.2% to 0.5% MoM in April with YoY down to 0.1%.

The 19 countries in the Eurozone collectively saw their economies contract 3.8% QoQ in Q1 and 3.2% YoY, France contracted by 5.8%, Spain by 5.2%, and Italy by 4.7%. Eurozone employment contracted 0.2% in Q1 even before the worst of the pandemic hit. Italy’s Industrial Orders fell 26.2% YoY in March with Industrial Sales down 25.2% YoY in March. The German economy shrunk at the fastest pace since Q1 2019, contracting 2.2% QoQ and 2.3% YoY. Deutsche Bank (DB) is forecasting a 14% contraction in Q2 for Germany.

With everything going on in the world, Brexit has been relegated to the back pages, but in reality, is even more meaningful given how both economies are struggling. Unfortunately, no good news here either. Talks have been faltering with little progress ahead of next month’s deadline when politicians meet to decide if it is worth continuing talks. Today, the European Commission threatened the U.K. with a lawsuit for breaking the bloc’s rules on freedom of movement. The U.K. fired back that the E.U. is at risk of failing to honor commitments it made in the Brexit Withdrawal Agreement to protect the rights of U.K. citizens living in the E.U. There will be just one more round of talks before June’s deadline and the U.K. Prime Minister Boris Johnson has threatened to walk away if he feels progress isn’t being made. If he does that, the U.K. could end its post-Brexit transition period on December 31 without a free-trade deal with the E.U. – not great for an economy already hit hard by the pandemic.

Domestic Economy

Thursday’s jobless claims would have been another one for the record books had it not been for the prior seven weeks of record job losses. Yesterday there were 2.98 million initial jobless claims, bringing the total since March 20 to 36.5 million jobs or 22.2% of the civilian labor force as of February 2020. Naturally, equities rallied once again on the day – a phenomenon we’ve been seeing with nearly every horrible report.

Yesterday the Census released a high-frequency indicator of small business health which found that in general, small businesses are facing falling revenue with only about 40% having enough cash on hand to stay open for the next month. Only 28% of these businesses expect a return to normal in less than three months and 11.5% have missed a loan payment while 24% have missed other payments. Those in the retail and hospitality sectors have lower cash on hand than most, making their permanent closure more likely. 

Later today we will get a deluge of economic data with many of those reports expected to be the worst on record: 

  • Retail Sales for April expected to fall 12% (worst on record)
  • NY Empire State Manufacturing for May expected to be -60 (2nd worst on record)
  • Industrial Production for April expected to be -12 (Worst on Record)
  • Capacity Utilization for April expected to fall to 63.8% (Worst on Record)
  • Michigan Consumer Confidence for May 68.0 (Worst since 2011)

We will also get the monthly JOLTS report which will give further insight into the damage done to the labor market, Business Inventories, and the usual Baker Hughes weekly Oil Rig report.

Markets

Yesterday’s equity market was a reversal of Tuesday and Wednesday’s action with stocks initially falling at the open, the S&P fell nearly 2%, then rallying towards the close with the S&P 500 up 1.2%. This was the largest intraday range for the S&P 500 since May 1. The stocks that were down the most during the market decline in February and March were up the most yesterday and those that were lost the least then were up the least yesterday. Financials were the best performers, gaining over 2.6% with Consumer Discretionary coming in second at 1.3%. 

Stocks to Watch

VF Corp. (VFC) issued quarterly results that missed revenue and EPS consensus forecasts for the company’s March quarter. Currently, all of the company’s retail stores in the APAC region, including Mainland China, have re-opened. While retail store traffic has improved recently, the company shared it remains down significantly YoY. VF has started a phased reopening of its retail stores in the EMEA region, per guidance from government entities and healthcare authorities. In North America, VF is prepared to begin a phased reopening of its retail stores also subject to guidance from government entities and healthcare authorities to allow proper training and preparation of the retail environment. VF currently expects most of its retail stores to be open by the mid-calendar year 2020, but even so, it sees June quarter revenue down just over 50% YoY.

JD.com (JD) reported quarterly EPS that beat consensus expectations as did the company’s revenue for the quarter. Revenue for the quarter rose nearly 21% YoY led by the 38% YoY increase in sales of general merchandise products and the 29.6% YoY increase in net service revenues. The company’s annual active customer accounts jumped 24.8% to 387.4 million on a trailing 12-month basis. Mobile monthly daily active users in March 2020 increased by 46% Y/Y. 

Applied Materials (AMAT) reported quarterly EPS that matched expectations despite a modest revenue miss for the quarter. Revenue for the quarter was negatively affected by Applied’s ability to ship systems to customers as shelter in place and locked down orders impacted some of its suppliers’ operations. On the company’s earnings conference call it shared that “even when COVID-related effects are taking into account, we still believe that our semiconductor business can deliver strong double-digit growth for our fiscal year. In Display, we expect our FY 2020 revenues to be close to FY 2019 as the industry navigates the bottom of this spending cycle.”

Farfetch Ltd (FTCH) delivered mixed March quarter EPS that beat on the revenue line but missed on EPS. Revenue for the quarter rose 90.4% YoY led by gross merchandise value (GMV), up 46% YoY, to nearly $611 million. Overall traffic grew 41% year-on-year, reflecting the acceleration of the shift of luxury online and GMV from new customers grew faster than GMV from existing customers for the first time in 3 years amid a 27% YoY increase in active customers across the Farfetch marketplace. 

Taiwan Semiconductor (TSM) confirmed plans to build a $12 billion chip factory in Arizona as the U.S. looks to bring global supply chains back from China. The plant, which would create over 1,600 jobs, is expected to produce “the most sophisticated 5-nanometer chips that can be used in high-end defense and communications devices.” 

Despite quarterly revenue falling more than 36% YoY, Denny’s (DENN) served up better than expected EPS for its March quarter. For the quarter, domestic system-wide same-store sales decreased -6.3% but have sequentially improved over the last few weeks of April from the low of -80% experienced in late March. Pick-up sales in April 2020 accounted for 57% of total sales, while delivery sales accounted for 39%.

McDonald’s (MCD) issued a 59-page illustrated memo asking restaurant owners in the U.S. to make dozens of changes to ease coronavirus concerns before reopening their dining room.

Starbucks (SBUX) is asking landlords for changes to lease terms and base rent for the next twelve months due to the impact of the pandemic on traffic and sales.

Quarterly results at Dillard’s (DDS) fell significantly YoY due to the pandemic and the company reported no comparable store sales data for the quarter due to the temporary closure of its brick-and-mortar stores as well as the interdependence between in-store and online sales. Dillard’s expects to generate a net operating loss for the year. 

NortonLifeLock (NLOK) reported better than expected top and bottom-line results for the company’s March quarter and issued June quarter EPS guidance of $0.18-$0.22 vs. the $0.20 consensus. The average revenue per user in the March quarter rose 3% YoY to $9.07.

As of yesterday, 100% of Nike (NIKE) owned stores, and over 95% of partner stores in Greater China and South Korea were open, with some still operating with reduced hours. Store reopening has begun in over 15 countries including Germany, France, the Netherlands, Brazil, and the U.S. Roughly 40% of NIKE-owned stores in EMEA, 15% in APLA, and 5% in North America are open, with some operating with reduced hours. Wholesale partners in these countries have also begun to re-open stores. Nike is expected to report earnings in early June. 

Several reports infer Apple (AAPL) has acquired Southern California virtual-reality startup NextVR, which provides live content, such as sports and concerts, for VR headsets. We suspect many will see this acquisition as confirmation of Apple’s plans to launch augmented-reality glasses, which some suspect could come as soon as 2022.  

CNBC reported JC Penney (JCP) is planning to file Chapter 11 bankruptcy within the next 24 hours, which would include a restructuring plan that would include closing 180-200 out of the 846 department stores that were active as of February.

Europe’s largest low-cost airline Ryanair (RYAAY) cut more than 250 staff in offices in Dublin, London, Madrid, and Wroclaw, Poland and continues to meet with pilot and cabin crew unions across Europe to finalize up to 3,000 job cuts and 20% pay cuts. Further announcements on crew job losses and pay cuts expected before the end of May.

Office Depot (ODP) announced a restructuring plan that includes “closing and/or consolidating distribution facilities and retail stores and the reduction of approximately 13,100 employee positions by the end of 2023.”

CNBC reports that Cruise, General Motors’ (GM) majority-owned self-driving vehicle unit, will be cutting about 8% of its workforce. The cuts are expected to primarily come from outside the company’s engineering operations, including recruiting and human resources.

Hey, it’s Friday, and that means no companies are expected to report their quarterly results after US equity markets close today. Investors looking to get the nitty-gritty on those reports to be had next week should visit Nasdaq’s earnings calendar page

On the Horizon

    • Dates to mark:
        • May 21: Existing homes sales and Philly Fed Outlook
        • May 25: US stock market closed for Memorial Day
        • May 26: Chicago Fed Activity, Case-Shiller Home Prices, Consumer Confidence, New Home Sales, Dallas Fed Manufacturing
        • May 27: Fed Beige Book
        • May 28: Second estimate for Q1 GDP, Durable Goods report, Capital Goods, Pending Home Sales, and Kansas City Fed
        • May 29: Goods Trade Balance, Wholesale Inventories, Personal Income and Spending, PCE, Chicago PMI

Thought for the Day

“The trouble with practical jokes is that very often they get elected.” ~ Will Rogers

Disclosures

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



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