Daily Markets: Is It Time To Party Over Hopes For Reduced Uncertainty and Increased Liquidity?

Today's Big Picture

Santa came a tad earlier than usual this year, giving investors what they wanted most - a reduction in geopolitical uncertainty and an increase in liquidity - but is it all as it appears?

What we do know is that equity markets in Asia are up across the board - both Japan's Nikkei and Hong Kong's Hang Seng closed up over 2.5%. The major European equity indices likewise are all enjoying gains of 1% plus today, and US futures point to positive moves at the open.

There are a few party catalysts to be had, and we'll start in the UK where Prime Minister Boris Johnson and the Conservative party are celebrating a seriously crushing victory, winning by their largest majority since 1987. Johnson gained at least 49 seats while Labour lost 60, the Scottish National Party (who supports a second referendum as it does not want Brexit) gained 13, and the Lib Dems lost 2. The British Pound Sterling rose to its highest level against the dollar since June 2018 and against the Euro since December 2016. The markets breathed a sigh of relief that the UK may finally enjoy some political stability now that Brexit is all but guaranteed, or at least that is the prevailing view. UK government bond yields and equities are rising along with the currency - a highly unusual occurrence.

If Johnson pushes his plan through parliament, that will be one majority uncertainty resolved in short order - now let's turn our heads to the latest on US-China trade.

Last night investors also got the news that (stop me if you heard this one before over the past-God-only-knows-how-many-months) the US and China are nearing a mini trade deal (how mini? what are the exact details?). Rumor has it the mini deal would mean the tariffs scheduled to come into effect Sunday would be canceled, and some existing ones could be rolled back.

Party on! The MSCI world index of global stocks hit a new record high, moving past the prior January 2018 peak.

Then this morning, entirely too early for sane folks in the US, the Wall Street Journal reported that despite President Trump signing off on an agreement with China, China appears to not be officially on board. According to the WSJ, at a regular news briefing today, Foreign Ministry spokeswoman Hua Chungying referred only to how news of the agreement pushed equities higher but did not confirm an agreement was reached. Instead, Chungying kept to the China party line, saying, "Any agreement must be mutually beneficial." At roughly the same time, CNBC reported that its sources close to the talks confirmed that a deal had been reached. It looks like it will be one of those things that comes down to the wire, and while we remain optimistic, we recognize this morning's trade deal excitement could turn on a dime.

If that lovely lack of clarity has you sufficiently on edge, then we suggest you don't look under the market's surface where you just might find some problematic liquidity undercurrents.

The New York Federal Reserve has been injecting money into the repo market since things got wiggly in September to address a shortage of short-term funding that had pushed the overnight rate to as high of 10%. Yesterday, the New York Fed announced a new plan to address the problem, which despite the initial assessment of it being "idiosyncratic" has only increased in severity. The new plan consists of overnight lending through the New Year of $225 billion, coupled with a $190 billion longer-term repo loans starting next week. Keep in mind all of that is on top of the current $75 billion already provided, which tallies to a total of $490 billion. Remember back when half a trillion was real money? This is essentially doubling the scale of its recent interventions. Those interventions, by the way, were unable to keep the overnight rate from rising above 4% this week - the upper target limit is 1.75%.

Remember that whole Quantitative Tapering thing? That's not only ended in September, but the Fed has been expanding its balance sheet through the purchase of Treasury bills by $60 billion a month since mid-October in a bid to add more cash to the markets. For those of you less savvy than us at Tematica Research, you might think that sounds exactly like QE (Quantitative Easing), but you'd be absolutely right totally incorrect, as the Fed continues to assure us that this is not QE4. Ok then. Right. HOWEVER, while the Fed is telling us it is all good, don't worry, they've got this, the IMF is not 100% convinced - a good weekend read from them is here for those so inclined. This short piece in the Financial Times is also insightful into how changes in regulation have affected market liquidity.

Data Download

Manufacturing in Japan continues to be abysmal with the Tankan Large Manufacturing Index for Q4 at 0, down from 5, and below expectations for 2. The Small Manufacturing Index also disappointed, dropping from -4 to -9, below expectations for a drop to -8. Large Manufacturing Outlook was also a disappointment in Q4 coming in at 0 versus expectations for an increase to 3 from the prior 2. Industrial Production contracted -7.7% YoY in October, well below the expected -7.4% decline and the prior 1.3% increase. Capacity Utilization similarly disappointed, contracted -4.5% MoM in October versus expectations for a 0.3% increase after the previous 1% increase.

Japan's service sector, like much of the rest of the world, is coming in stronger than expected. Takan Large Non-Manufacturing Index hit 20 in Q4, down from 21 in the prior quarter, but better than the expected 16. The Takan Outlook rose to 18 in Q4 from the prior 15 and well above the expected 16.

Foreign Direct Investment in China declined year-to-date to 6% YoY growth from the prior 6.6%. Back in August, the year-to-date stood at 7.3%.

Inflation continues to be elusive in the Eurozone. Wholesale Prices in Germany contracted -2.5% YoY in November. Spain's Inflation rate in November matched expectations at 0.4% YoY.

Italy's Manufacturing Sector continues to struggle but came in better than expected in October. Industrial Sales contracted -0.2% YoY, which was arguably an improvement over the prior -1.6% contractions and expectations for -1%. Industrial Orders contracted -1.5% YoY, which was a significant drop from the previous 0.2% increase, but better than the expected -3.4% decline.

Before today's US market open, we'll get the November Retail Sales report, which should include the benefit of the Thanksgiving shopping weekend, but also confirm the accelerating shift to digital shopping that is part of Tematica's Digital Lifestyle investing theme. November headline retail sales are expected to rise 0.5% MoM with the retail ex-auto component slated to climb 0.4% MoM. Alongside that report, we'll also receive November Import and Export prices followed by October Business Inventories data mid-morning.

Stocks to Watch

Let the US 5G mobile carrier war begin! AT&T (T) has turned on its new consumer 5G service in 10 markets, including Los Angeles, San Diego, and Pittsburgh. For now, the company is offering the 5G Samsung (SSNLF) Galaxy Note 10+, but we expect its array of 5G devices will grow considerably along with the 5G network footprint in the coming quarters.

That's not the only consumer-facing war in the coming year. Microsoft (MSFT) unveiled its new Xbox Series X that will go on sale in time for the 2020 holiday season. The new gaming console is expected to be Microsoft's "fastest, most powerful console ever," with the ability to show images up to 120 frames per second and 8K video capability. Now to see how Sony (SNE) and others respond.

With the Boeing (BA) 737 MAX now not expected to receive FAA approval until February, it comes as little surprise the company has pushed out its 737 production plans and now sees hitting peak production in 2021.

Analytics and social management company Sprout Social (SPT) priced its IPO offering of 8.82 million shares at $17, the midpoint of the expected $16-$18 range.

OneConnect Financial Technology (OCFT) priced its IPO of 31.2 million American Depository Shares (ADS), each representing three ordinary shares, at $10.00/ADS.

Last night we had three significant earnings reports, all of which offered investors something to be happy with:

• Broadcom (AVGO) reported better than expected EPS on in-line revenue and boosted its 2020 outlook, which now includes the recently acquired Symantec Enterprise Security business. Broadcom also increased its quarterly dividend by 23% to $3.25 per share, offering investors an annual yield near 4.0%.
• Costco Wholesale (COST) also reported better than expected quarterly EPS results last night on revenues that met consensus expectations. As today's November Retail Sales report is likely to show, Costco continues to win consumer wallet share as total company comp sales for the quarter rose 4.3% (5.0% excluding the impact of gas prices and foreign exchange). Exiting the quarter, Costco operated 785 warehouses vs. 768 in the year-ago quarter, with plans to open more, which bodes well for the company's high-margin membership fee revenue stream.
• Similar to both Broadcom and Costco, last night, Adobe (ADBE) reported better than expected quarterly EPS of $2.29 on revenue that matched the consensus forecast. Adobe issued in-line EPS guidance for the current quarter and essentially matched its 2020 EPS view with the $9.75 consensus.
• Oracle (ORCL) shares fell in aftermarket trading last night as the company's latest quarterly results fell short of expectations. Revenue from the company's largest business, Cloud Services, and License Support rose 3% year over year to $6.81 billion, a tad shy of the $6.82 billion consensus estimate.

Proving the premium smartphone market is alive and well, TechCrunch's Disrupt event in Berlin Samsung Electronic's (SSNNF) president Young Sohn shared Samsung sold 1 million units of its $2,000 Galaxy Fold device since it went on sale in September.

And leaning on its picture/camera strategy for the iPhone, Apple (AAPL) has acquired Spectral Edge, a UK-based developer of technology that improves smartphone pictures via machine learning to blend an infrared shot with a standard photo to improve clarity and the accuracy of colors.

After today's US equity markets close, there are no companies expected to report their quarterly results. Those investors looking to get a jump on those that will do so next week, the likes of which include FedEx (FDX), Micron (MU), Nike (NKE) and others, we recommend checking in with Nasdaq's earnings calendar page.

On the Horizon

• Upcoming IPOs:
  • For a complete list of upcoming IPOs by month, please visit the Nasdaq IPO Calendar.
• Dates to mark:
  • December 15: New tariffs on consumer goods from China scheduled to go into effect barring any deal.
  • December 17: Before the market open, Choice Hotels (CHH) will replace Plantronics (PLT) in the S&P MidCap 400, and Plantronics will replace Vitamin Shoppe (VSI) in the S&P SmallCap 600. Franchise Group (FRG) is acquiring Vitamin Shoppe.
  • December 20: US government funding date
  • December 20: Options Expiration Date
  • December 24: Christmas Eve Early Close (1 pm ET)
  • December 25 - Christmas holiday

Thoughts for the Day

"It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt." ~ Mark Twain

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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