Daily Markets: Markets Feverish Again Over Contagion Fears

Today's Big Picture

Yesterday US investors were surprised to see the market suddenly drop around midday, the Dow falling almost 400 points at one point, with no one clear, obvious catalyst. The suspected culprit was a report of new coronavirus cases at a Beijing hospital combined with other reports of the outbreak accelerating outside of China.

The coronavirus is once again front and center for investors today with stocks in Asia closing mostly in the red except for the major Chinese indices on word that the return to work is accelerating in the major foreign trade provides. The Shenzhen Composite gained 1.1% and the Shanghai Composite 0.3%. South Korea, on the other hand, saw its Kospi drop 1.5% after reporting the first confirmed death in the country from COVID-19 on top of having the highest number of people infected with the virus outside of mainland China.

The major European indices were all in the red by midday trading as both the number of cases of and deaths from the coronavirus grows. Three residents of the Lombardy region of Italy have now tested positive, the first case of local transmission confirmed in the nation. The initial patient contracted the disease meeting a friend who had recently returned from China. He has been admitted to a local hospital. One of your authors is living in this region and has developed a case of OCD handwashing!

This morning we are receiving more data on the toll the virus is taking on corporate earnings, which, combined with the above, is leading to a drop in US equity markets at the open.

An example of just how volatile this virus situation can get, yesterday protesters threw stones at buses in Ukraine carrying evacuees from China. Protestors attempted to block the route of the convoy, hurling rocks and engaging violently with the police. The coaches eventually were able to reach their destination, a hospital in Kyiv, where the evacuees will spend the next two weeks in quarantine.

The euro has fallen to the lowest level in nearly three years while the yen has fallen this week to the lowest level in almost a year as the Gold Shares SPDR ETF (GLD) hit a 7-year high despite the strengthening US dollar.

And as we get ready for the weekend, our suspicion is we will be joined by many investors this weekend in what has become required reading. That's right, this is the weekend in which the Oracle of Omaha, Warren Buffet, releases his letter to Berkshire Hathaway (BRK.A, BRK.B) shareholders. From our experience, the annual letter is filled with wisdom, insights, and more than a dose of good humor. We anticipate some laugh out loud moments, and we encourage all readers to give it a whirl. The company's annual letters can be found here.

Data Download

Despite an unemployment rate of 2.2%, well below the 3.6% in the US, Japan continues to find inflation utterly elusive. Inflation in January dropped as expected to 0.7% YoY from the prior 0.8%. Core Inflation remained steady at 0.8% versus expectations for a decrease to 0.7%. Ex-Food and Energy dropped to 0.8% versus expectations for it to remain at 0.9%.

Inflation remains below the targeted 2% in the Eurozone, with core falling as expected to 1.1% YoY in January from the prior 1.3%. Headline inflation rose as expected to 1.4% from 1.3%.

Inflation is slowing in Italy with the Harmonized Rate dropping to 0.4% YoY in January from 0.5% and contracting -1.8% MoM from a 0.2% increase previously. Headline inflation remains flat at 0.5% YoY versus expectations for an increase to 0.6%.

Japan's Jibun Bank Flash Services PMI came dropped into contraction at 46.7 from the previous 51 - anything below a reading of 50 is a contraction. Flash Manufacturing PMI dropped into eroded further, falling to 47.6 from 48.8 in January versus expectations for an increase to 49. The Flash Composite PMI for the month also fell into contraction at 47.0 from 50.1. Evidence that hyper-low unemployment does not guarantee a strong economy.

France's Manufacturing PMI also fell into contraction in February, dropping to 49.7 from 51.1 versus expectations for 50.7. Services PMI came in stronger than expected at 52.6 from 51, better than the expected increase to 51.3.

Germany's February Flash Manufacturing PMI improved, but remains in contraction at 47.8, up from the prior 45.3 and much better than the expected decline to 44.8. Services PMI declined more than expected to 53.3 from January's 54.2 versus expectations for a drop to 53.8.

For the Eurozone overall, Markit Manufacturing Flash PMI remains in contraction at 49.1 in February, up from the prior 47.9 and better than the expected slight decline to 47.5. Meanwhile, the February Flash Services Flash PMI improved to 52.8 from 52.5, better than the expected drop to 52.2.

In the UK, Markit/CIPS Flash Manufacturing PMI rose unexpectedly to 51.9 from 50, much better than the expected decline to 49.7. Services PMI fell more than expected to 53.3 from 53.9 versus the expected decline to just 53.4.

In Italy, Industrial Sales fell 1.4% YoY in December and fell 3% MoM versus expectations for a decline of 2% and an increase of 0.6% respectively. The more forward-looking Industrial Orders rose 6% YoY in December and 1.4% MoM, much better than the expected decline of 2% and 0.6%, respectively.

Later this morning, we will hear from the National Association of Realtors when it releases data on existing home sales for January. Expectations are for a 2% decline in the annual rate from December's sales. We will also get the IHS Markit PMI for Manufacturing and Services shortly after the opening bell with economists expecting a preliminary flash reading of 51.5 for manufacturing and 53.2 for services. This morning will also hear from various Federal Reserve officials, including Dallas Fed's Kaplan, Fed Governor Lael Brainard, and this afternoon Vice Chair Clarida. We'll also get the usual weekly Baker Hughes Oil Rig count for the week.

Stocks to Watch

Allianz (ALIZY) reported better-than-expected fourth-quarter net profits this morning and raised its guidance for full-year 2020. Quarterly net profit rose 9.5%, to $2 billion, the upper range of guidance. The property and casualty division missed expectations after setting aside €600 million to help its struggling corporate business. The company announced an allocation of an additional €1.5 billion to its share buyback program.

Bloomberg reports auto sales in China fell 92% in the first half of February as the coronavirus took its toll on the industry. Companies that are likely to feel the impact include Ford Motor (F), General Motors (GM), and Fiat Chrysler (FCAU).

The International Air Transport Association announced that its initial assessment of the impact of the Novel Coronavirus 2019 outbreak found a potential 13% full-year loss of passenger demand for carriers in the Asia-Pacific region. We suspect investors will once again be pouring over reports looking to assess the exposure for United Airlines (UAL), American Airlines (AAL), Delta Air Lines (DAL), and others.

Fears may extend the financial impact beyond the Asia-Pacific region as we are seeing travel plans curtailed even within the United States. Facebook (FB) and Sony (SNE) announced yesterday that they would not participate in next month's Game Developers Conference in San Francisco due to coronavirus concerns. Facebook is also going to skip PAX East, a gaming convention schedule to take place in Boston. Recall that this year's Mobile World Congress conference set for next week was canceled as sponsors and attendees, including Amazon (AMZN), Ericsson (ERIC), and others pulled out. More reasons for airlines and hotel companies to fret.

Beverage company Coca-Cola (KO) reaffirmed its 2020 outlook with EPS of $2.25 but also shared it sees a 2%-3% impact from the coronavirus on its unit case volume and a $0.01-$0.02 EPS impact in the current quarter.

Lululemon Athletica (LULU) provided investors with an update on its China business, sharing the majority of its 38 stores have been closed since February 3, with some now operating on a reduced schedule.

Shares of Hon Hai Precision Industry (HNHPF), better known by its subsidiary FoxConn, saw its shares drop 2.5% yesterday after announcing that it is cautiously restarting production at its main plants in China and warned that its revenue will take a hit from the impact of COVID-19.

Shares of French car-maker Renault SA (RNSDF) lost 2.8% in European trading this morning on the news that the company intends to delay restarting some of its operations in China beyond February 24.

The South Korean semiconductor supplier SK Hynix (HXSCL) saw its shares drop just shy of 1% today after it announced that 800 of its workers quarantined themselves after it was discovered that a trainee had had contact with a COVID-19 patient.

Deere & CO (DE) reported better than expected quarterly results this morning despite the YoY dip in revenue for the quarter and forecast its 2020 Net Income to be in the range of $2.7-$3.1 billion.

Motion picture theater company Cinemark (CNK) missed quarterly expectations for both its revenue, adjusted EBITDA, and EPS. On the company's earnings conference call, we expect it will discuss its plans to add new theaters and screens in the coming year as well as how it plans to fend off the growing number of video streaming services that are a part of Tematica's Digital Lifestyle investing theme. Grab the popcorn. It should be an exciting drama to watch!

Shareholders of Domino's Pizza (DPZ) had cause for celebration after shares gained nearly 26% yesterday when the company reported results that blew away expectations.

Dropbox (DBX) shares gained 8.8% in extended trading yesterday after the company reported better-than-expected results and its intention to be profitable by the end of 2020.

As we mentioned yesterday, just before the open Morgan Stanley (MS) announced it will acquire E*Trade (ETFC) for $13 billion. Shares of E*Trade closed up 21.8%, and Morgan Stanley fell 4.6%.

We mentioned earlier that the ETF GLD hit a 7-year high. Newmont Goldcorp (NEM) is the biggest gold miners in the VanEck Vectors Gold Miners ETF (GDX) and has seen its share price rise above its 2016 peak to reach the highest level in nearly eight years.

Sprouts Farmers Market (SFM) reported EPS of $0.27, nearly doubling consensus estimates. Revenue was also slightly better than forecasts on top of a better-than-expected full-year outlook.

Stamps.com Inc (STMP) utterly blew away expectations and offered better-than-expected guidance when it reported yesterday, leading shares to end the day up 65.5%. We see the company as a direct beneficiary of the accelerating shift to digital commerce and a great way to avoid those lines at the post office.

Shares of ViacomCBS (VIAC) took a severe beating yesterday, falling nearly 18% after a disappointing earnings report. Revenue fell 3% from the same quarter in 2018 to $6.9 billion versus expectations for $7.3 billion. Full-year 2020 revenue guidance also came in short at $28.9 to $29.5, while analysts were looking for $29.7 billion. The company currently trades at less than five times projected 2020 earnings, a fraction of the S&P 500's multiple and of rival Disney's (DIS).

Virgin Galactic Holdings Inc (SPCE) gets our Rolaids award for the day after its shares swung wildly yesterday without any public news from the company, gaining as much as 13% and falling as much as 17% only to end up flat at the close.

After today's close Cabot Oil & Gas (COG), Evergy (EVRG), Telephone & Data (TDS), and US Cellular (USM) are expected to report. For looking to get a head start on the next onslaught of reports to come next week, visit 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:
  • March 3: 2020 Presidential Election Super Tuesday
  • March 5-6: OPEC meeting
  • 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 moves pretty fast. If you don't stop and look around once in a while, you could miss it." ~ Ferris Bueller

Disclosures

• Coca-Cola (KO) is a constituent in Tematica Research's Thematic Dividend All-Stars Index.
• Lululemon (LULU) and Sprouts Farmers Market (SFM) are constituents in Tematica Research's Cleaner Living Index.

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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