Daily Markets: Renewed U.S.-China Trade War Hits Global Equities

Today’s Big Picture

As we move deeper into the second quarter of the month, this week, it will be chock full of earnings reports as more than 1,350 companies share their March quarter results and offer some insight on the current quarter. Included among them will be 143 S&P 500 constituents, which means that when this week is said and done, almost 80% of the 500 will have reported. This week also has several key pieces of economic data, but after the more than 30 million initial jobless claims over the last several weeks, all eyes will be on Friday’s April Employment Report, and odds are it will be ugly with a capital U.

After giving back some of April’s gains last Friday, global equities are poised to do more of the same today as global trade and COVID-19 tensions are heating up. As Reuters reports, rising tensions between the U.S. and China officials over the origin of the coronavirus -- more on that below -- is fueling fears of a new trade war. In addition to new potential tariffs on China, the Trump administration is reportedly looking at initiatives to move “U.S. production and supply chain dependency away from China, even if it goes to other more friendly nations instead.”

When it comes to the above, we echo our comments from Friday’s Daily Markets note. The reignited battle between the U.S. and China has injected yet another layer of uncertainty into a market that is already grappling with enormous uncertainty surrounding reopening the global economy. Investors face a barrage of data in the coming months that will paint a picture of record-breaking economic damage from the lockdowns on top of a deluge of quarterly earnings that point to more pain in the current quarter. 

While equity markets in Japan and China were closed today, Hong Kong’s Hang Seng closed down 4.2%, India’s Sensex fell 5,.9%, and South Korea’s Kospi lost 2.7%.  By mid-day trading, European equities were down across the board, and U.S. equity futures point to a down market open. China’s Shanghai Composite will remain closed through Tuesday, while Japan’s Nikkei will be closed through Wednesday.

Data Download

Coronavirus

Today the world will see over 3.6 million confirmed cases of the coronavirus and over 250,000 deaths. On the plus side, the worldwide daily death toll from the virus fell to 3,481 yesterday, the fifth consecutive day of declining fatalities, and the smallest daily loss of life since the end of March. On the negative side, the number of newly confirmed cases rose the most for a Sunday since the pandemic began. 

During a Sunday night interview on Fox News, President Donald Trump said that he thought China had made a “horrible mistake” on the virus outbreak and that the U.S. would soon release a “very conclusive report” on what had happened. He also said that up to 100,000 people in the US could die from the virus and a higher number than he’d previously stated. His comments came after the U.S. Secretary of State Mike Pompeo said that there was “enormous evidence” that the virus came from a Wuhan, China laboratory. The U.S. has nearly 1.2 million confirmed cases and just under 70,000 deaths. Yesterday was the lowest daily loss of life since April 6. 

New York and its six neighboring states have formed a buying consortium to purchase billions of dollars in coronavirus medical and testing equipment in preparation for reopening their economies. Friday, Oregon’s Governor Kate Brown signed an executive order to extend the state of emergency through July 6. 

Spain will surpass 250,000 confirmed cases in a few days, with over 25,000 deaths as of this morning. Italy has over 210,000 confirmed cases, with nearly 29,000 deaths. Yesterday, Italy had the lowest new case count since March 7, and today is starting to relax some of the lockdown rules for the first time. On Sunday, Russia saw its highest new daily case count yet, with 10,633 new cases for a total of 134,686. On a more positive note, New Zealand reported no new cases today for the first time in 7 weeks, after having imposed one of the world’s toughest lockdowns in mid-March. 

Travelers to France from outside the EU, the Schengen zone, or the UK, will have a mandatory 14-day quarantine upon arrival until July 24. Greece announced that facemasks will be compulsory starting today on public transport and at all medical facilities. Japan’s prime minister Shinzo Abe is expected to announce the extension of a nationwide state of emergency through the end of May.

Swiss pharma company Roche (RHHBF) received emergency use authorization from the FDA for its Elecsys Anti-SARS-CoV-2 antibody test to determine if someone has been infected with the coronavirus. The test reportedly has a specificity of over 99.8%. The company has already begun shipping the rest globally and will increase production to high double-digit millions per month.

Some more good news came out of South Korea where social distancing rules are being relaxed further, and more businesses are opening starting May 6. The Prime Minister announced Sunday that the government will “allow businesses to resume at facilities in phases that had remained closed up until now and will also allow gatherings and events to take place assuming they follow disinfection guidelines.”

International Economy

Hong Kong saw its domestic economy contract at the fastest rate on record on both a quarterly and yearly basis, with GDP falling 8.9% in Q1 YoY and 5.3% QoQ.

South Korean manufacturing volumes fell at their fastest pace in over ten years, as April’s Nikkei-Markit Manufacturing PMI dropped to 41.6 from 44.2.

The Saudi petrochemical giant Sabic announced that it will suspend all but essential capital expenditures in light of the crashing oil prices after having reported a first-quarter net loss of $250 million. We expect to be hearing this a lot, and not just in the energy sector. 

The European Central Bank’s first quarterly survey of 57 experts since the lockdowns on average forecast a 5.5% contraction in the region’s economy this year versus the prior expectations for growth of 1.1% with inflation expectations to slow to 0.4%. The group expects unemployment to increase to 9.4% from March’s 12-year low of 7.4%. The group expects that growth will increase to 1.4% by 2024, with inflation 1.6%, with unemployment remaining elevated at 7.7%. So that sounds like fun. 

The Eurozone IHS Markit Manufacturing PMI fell to 33.4 from March’s 44.5, the steepest 1-month contraction in the series history, going back to 1997. Output, new orders, export sales, and purchasing activity all fell at a record pace, and employment declined the most since April 2009 with confidence about the future at a new record low.

• Italy’s manufacturing activity fell to the lowest level on record as the IHS Markit PMI for April dropped to 31.1 from March’s 40.3, dropping lower than during the worst of the Great Financial Crisis. 
• Spain’s manufacturing activity also plunged to a near-record low in April with the IHS PMI falling to 30.8 from 45.7 in March. This is just slightly above the 28.5 recorded in December 2008. Output fell at the fastest rate on record, going back to 1998. Tourism in the nation also took a massive hit with the countries office for national statistics reporting that the number of nights in non-hotel tourist accommodations, think self-catering and camping, dropped 63% YoY in March.
• France’s IHS Markit Manufacturing PMI dropped to a record low of 31.5 in April from 43.2 in March, the third month of contraction with output, new orders, exports, and employment all falling at a record pace. Sentiment also fell to the lowest level in the survey’s history.
• Germany saw the sharpest contraction in factory activity since March of 2009 in April with the IHS Markit/BME PMI dropping to 34.5 from 45.4. Factory job numbers saw the deepest cuts in around 11 years with expectations for output over the coming year right around March’s record low.

India’s manufacturing activity crashed in April with the Nikkei Manufacturing PMI from IHS Markit falling to a record low of 27.4 in April from the prior 51.8 as the nation struggles with one of the world’s strictest lockdowns. This was the sharpest contraction on record.

Domestic Economy

Friday’s manufacturing survey’s from IHS Markit ISM painted a bleak picture with new orders, output, and employment all worse than during the worst of the Great Financial Crisis. A report from the Wall Street Journal pointed out yet another problem with the Payroll Protection Program, which has been plagued with issues from the start. The Treasury Department and the Small Business Administration added a rule after the PPP was passed by Congress that allows only up to 25% of the funds borrowed to be used for “rent, mortgage interest, and utility payments.” How many small companies that need financial help to get through this crisis case manage that?

Friday’s GDP report was even uglier than expected with real GDP contracted at a 4.8% annual rate in the first quarter, the worst since the Great Financial Crisis and worse than any pullbacks in the 1990-1991 or 2001 recessions. Outside of the GFC, you have to go back to the early 1980s to see a contraction this dire. If we strip out the sharp jump in food-buying that rose a record 25.1% annualized, as this was likely a whole lot of panicking purchasing, then GDP would have fallen 6.3% before any lockdown impacts even kicked in!

Real personal consumption expenditures fell 7.6%, worse than anything we’ve seen in forty years. Spending on services fell a record 10.2%, with the biggest declines in recreation -31.9%, restaurants and hotels -29.7%, and transportation -29.3%. The one area that saw material growth outside of stocking up on food was residential construction, which rose 21.1%, having risen for three consecutive quarters. 

Non-residential construction moved in the opposite direction, falling 8.6% annualized, the fourth consecutive quarterly contraction. Business capex fall 15.3%, now down for three consecutive quarters and four of the past five - not good for future productivity growth. Export volumes fell 8.7% annualized in Q1, which was the biggest decline since the first quarter of 2009. 

The parent company Chinos Holdings of the privately-held fashion group J Crew filed for Chapter 11 bankruptcy protection as the retailer struggles with widespread store closures due to the pandemic, the first major U.S. retailer to buckle under the pressure. J Crew announced that it had reached a deal with its lenders to convert $1.65 billion of debt into equity and has secured commitments for a debtor-in-possession financing facility of $400 million from its current lenders. The company will be retaining its growing Madewell brand.

Later today we’ll get the ISM New York Index for April and Factory Orders for March.

Markets

While April was the strongest month for both the Dow and the S&P 500 since 1987, the first trading day in May was the worst for the month going all the way back to 1928 as all the major indices closed sharply down, the Dow lost 2.6%, the S&P 2.8%, and the Nasdaq 3.2%. Each of the S&P 500’s eleven sectors fell on the day and just one of the Dow’s components, Walmart (WMT) gained on the day. We’d also like to point out that if you strip out the tech and healthcare sectors, the market is still down over 20%. 

As of Friday, 55% of the companies in the S&P 500 had reported results for the March quarter. The percent of those companies reporting actual EPS that was above estimates was 65%, below the 5-year average, while the percentage of companies reporting actual sales above estimates is 63%, which is above the 5-year average, according to data from FactSet.

The blended (actual for those reported and estimated for those that have not) earnings for the S&P 500 is currently -13.7%, which is an improvement from last week’s -16.1%. This improvement came primarily from better-than-expected earnings from companies in Energy, Information Technology, and Health Care. The current blended earnings is the biggest contraction since Q3 2009 when earnings fell by 15.7%.  If S&P 500 earnings remain negative this quarter, and if clearly will, it will be the fourth quarter out of the past five when the index has reported a year-over-year decline. Last week was the first time the forward 12-month P/E ratio for the S&P 500 reached 20.0 or higher since April of 2002, sitting at 20.3 currently, which is above both the 5-year and 10-year averages. That’s a lot of optimism. 

Stocks to Watch

Ferrari (RACE) reported March quarter results that topped expectations with total shipments up 4.9% YoY to 2,738 units. The company provided updated 2020 guidance that now calls for €3.4-3.6 billion in revenue down from its prior €4.1 billion guidance. Ferrari is expected to restart its Maranello and Modena plants today and targets returning to full production on Friday, May 8.

Following weekend comments that the airline industry has “changed in a very major way” from Warren Buffett, who also shared Berkshire Hathaway (BRK.A) sold out of the four U.S. airlines, shares of Delta Air Lines (DAL), American Airlines (AAL), and United Airlines (UAL) are down in pre-market trading.

Roche (RHHBY) shared the U.S. Food and Drug Administration issued an emergency use authorization for its new Elecsys antibody test to help determine if people have been infected with the coronavirus.

After getting U.S. approval for emergency use, Gilead Sciences (GILD) is aiming to get its drug remdesivir to patients within days. 

Applied DNA Sciences (APDN) and Takis Biotech announced: “the first injections of the DNA vaccine candidates against the Spike protein (product of the S gene) of the SARS-CoV-2 virus, cause of the COVID-19 disease, have produced neutralizing antibodies in test animals.”

General Motors (GM) reported its two joint ventures in China saw double-digit unit sales growth in April, as the region recovers from COVID-1GM’sM’s joint venture with SAIC Motor Corp (600104.SS), which manufactures Buick, Chevrolet, and Cadillac vehicles, said its sales in China grew 13.6% YoY to 111,155 units in April. By comparison, its venture with SAIC and Guangxi Automobile Group, which produces no-frills minivans, saw its sales jump 13.5% to over 127,000 units last month.

The Nevada Gaming Commission released guidelines for reopening casinos with slot machines spread further apart, poker games limited to 4 players per table vs. nine normally, and gaming operations will not resume in the beginning stage of recovery. Ahead of those guidelines, Wynn Resorts (WYNN) and Caesars Entertainment (CZR) started taking Vegas reservations for Memorial Day weekend.

IHS Markit (INFO) announced the acquisition of Catena Technologies (Catena), a global regulatory trade reporting firm based in Singapore.

Calcalist reports Intel (INTC) is in advanced talks to acquire Moovit, an Israeli public transit app developer, for $1 billion. Moovit’s free mobile navigation app provides transit information to more than 750 million users in 100 countries.

According to a filing to Spain’s market regulator, talks to merge Telefonica’s (TEF) mobile operator O2 and Liberty Global’s (LBTYA) Virgin Media network company have commenced.

Westpac Banking (WBK) announced it will not be paying a dividend in the June 2020 quarter, but the board “will continue to review dividend options for this year.” 

After today’s market close, American States Water (AWR), Chegg (CHGG), Denny’s (DENN), Expedia Group (EXPE), Freshpet (FRPT), Omega Health (OHI), and Shake Shack (SHAK) will report their quarterly results.  Investors looking to get the nitty-gritty on those reports and the sea of others to be had later today should visit Nasdaq’s earnings calendar page. 

 On the Horizon

• • Dates to mark:
    • • May 5: ISM and Markit Services PMIs
      • May 7: Nonfarm Productivity, Unit Labor Costs, Consumer Credit
      • May 8: Nonfarm Payrolls for April, Wholesale Inventories and Trade Sales
      • May 12-14: Google I/O Developer Conference
      • May 12: NFIB Small Business Confidence Report, Hourly Earnings, Budget Statement
      • May 14: Retail sales for April, Industrial Production, JOLTS, University of Michigan Consumer Confidence
      • May 21: Existing homes sales and Philly Fed Outlook
      • May 25: U.S. 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

“Loneliness does not come from having no people about one, but from being unable to communicate the things that seem important to oneself, or from holding certain views which others find inadmissible.” ~ Carl Jung

Disclosures

• Freshpet (FRPT) is a constituent in the 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.

Other Topics

Stocks Economy Earnings Coronavirus World Markets