Daily Markets: Virus-Related Concerns in China Weighing On Markets

Today’s Big Picture

Coming off the Martin Luther King holiday for which the US markets were closed yesterday, shares in Hong Kong led losses in Asia after Moody’s cut its rating for the city from Aa2 to Aa3 on Monday; there are also concerns over a new strain of coronavirus in China just as Lunar New Year holiday travel heats up. As we write today’s Daily Markets note, nearly 300 people have been diagnosed globally, with the vast majority in China, and the death toll in China has climbed to six. The World Health Organization will meet tomorrow to discuss whether to declare the outbreak an international public health emergency. Those concerns have rippled across global markets with European equities trading off and US equity futures pointing to a lower open.

Thanks to the MLK holiday, we have a shortened trading week ahead, but that doesn't mean there's any less going on over the next four days. Between impeachment, the World Economic Forum (WEF), upcoming Brexit and economic data and earnings season, investors are likely to have their hands full. Speaking at the WEF today, President Trump commented phase two China trade talks with begin shortly and tariffs will remain in place during those negotiations. Also at the WEF, US Treasury Secretary Steven Mnuchin said the Trump administration would propose a new middle-class tax cut later this year.

Today's economic calendar is a tad light but that will change as the week progresses, especially on Friday when we get the Flash IHS Markit January PMI data. All told almost 200 companies are slated to report quarterly results, up from 59 last week. 43 of them are also S&P 500 constituents. Below we've reviewed the ones we and other investors will be scrutinizing this morning as well as those we'll be dissecting after today's market close.

Data Download

Over the weekend ahead of this week’s World Economic Forum, the International Monetary Fund (IMF) cut its growth forecast for 2020 citing uncertainty in US-China trade tensions, sluggish growth in India, geopolitical issues in the Middle East and climate shocks in Australia. The IMF now sees 2020 growth at 3.3%, below its October projections for 3.4%. For 2021 it is now 3.4% vs. its prior 3.6% forecast. Even though the IMF is trimming these growth forecasts, we'd note they still point to a faster-growing economy compared to 2019, which saw the global economy grow by 2.9%. More details on the updated forecast can be found here.  

Foreign direct investment (FDI) into China rose 5.8% YOY in 2019 to CNY 941.5 billion ($136.71 billion), which despite the US-China trade ware was the largest increase since 2017 and kept China the second-largest recipient of FDI globally.

January readings for the closely watched Zew Economic Sentiment Index showed a sharp improvement in both the Eurozone and Germany. The index is a leading indicator created from a survey of up to 300 experts from banks, insurance companies and financial departments of selected corporations regarding their six-months expectations for the “economy, inflation rates, interest rates, stock markets and exchange rates in the Eurozone, Germany, Japan, United States, United Kingdom, France, and Italy as well as their expectations concerning the oil price."  In the Eurozone, the January reading jumped to 25.6 from 11.2 in December 2019 and the expected 5.5. In Germany, the Zew Economic Sentiment Index in Germany increased to 26.70 in January from 10.70 in December of 2019 and the expected reading of 15.

Stocks to Watch

Virus related concerns in China are weighing on luxury goods producers including LVMH Hennessy Louis Vuitton (LVMUY), Burberry Group (BRBY) and Compagnie Financière Richemont (CFR). Those same virus concerns have led Chinese travel booking platforms from Trip.com (TCOM) to Alibaba’s (BABA) Fliggy are offering free cancellations on bookings.

Shares of TAL Education (TAL) are getting socked in pre-market trading following December quarter results that missed EPS expectations even though the company served up a revenue beat for the quarter. Also weighing on the shares was Tal’s weaker than expected guidance for the current quarter of $959.1 - $980.9 million vs. the $1.01 billion consensus.

The US and France have kicked the digital tax can down the road until the end of 2020, with postponing the tax and the US delaying retaliatory tariffs in favor of continued negotiations. If it had been implemented the digital tax would have imposed a 3% tax on digital revenues of companies like Google (GOOGL), Apple (AAPL), Facebook (FB) and Amazon (AMZN).

Facial recognition technology looks to be a battleground topic with Alphabet and Microsoft (MSFT) squaring off. Google CEO Sundar Pichai is in support of the EU proposal for instating a ban of up to five years on the use of facial recognition in public areas as privacy regulations are developed while Microsoft President Brad Smith argues for more methodical reforms. We expect more to be had on this topic at the WEF as well as others that will speak to drivers of the Foxberry Tematica Research Cybersecurity & Data Privacy Index.

One of the largest food apps in India, Zomato, acquired Uber’s (UBER) food delivery business in India in an all-stock transaction, which gives Uber 9.99% ownership in Zomato.

VF Corp. (VFC) will start a strategic review for the occupational portion of its work segment that includes Red Kap, VF Solutions, Bulwark, Workrite, Walls, Terra, Kodiak, Work Authority and Horace Small brands and businesses. The decision reflects management’s focus on transforming VF into a more consumer-minded and retail-centric enterprise.

Walt Disney (DIS) announced its Disney+ streaming service will launch sooner than expected on March 24 in the UK, Ireland, France, Germany, Italy, Spain, Austria, and Switzerland. The service will be available for £5.99 / 6.99 euros per month, or £59.99 / 69.99 euros per year.

Boeing (BA) is reportedly turning to banks for additional funding as it looks to meet the rising costs associated with 737 Max crashes and production suspension. Those reports suggest Boeing has lined up roughly $6 billion of the $10 billion+ it aims to secure.

BAE Systems (BAESY) has agreed to buy Collins Aerospace's (UTX) Military Global Positioning System for $1.925 billion in cash, as well as Raytheon's (RTN) Airborne Tactical Radios division for $275 million.

Tesla (TSLA) has indicated it will move forward with the acquisition of a 300-hectare property in a designated industrial area just outside of Berlin.

Subaru (FUJHF) has set a target to sell only electric vehicles worldwide by the first half of the 2030s. Between now and then the company intends to develop a "strong hybrid" vehicle using Toyota (TM) technology and is also developing an all-battery electric car with Toyota.

After today's US equity markets close, we have several high-profile corporate earnings reports including:

• IBM (IBM), which is expected to report EPS of $4.69 on revenue of $21.6 billion;
• Netflix (NFLX) will face consensus EPS forecasts of $0.52 on revenue of $5.5 billion;
• TD Ameritrade (AMTD), which is merging with Charles Schwab (SCHW), is expected to deliver EPS of $0.77 on revenue of $1.3 billion;
• and investors will see if United Airlines (UAL) can soar its EPS to $2.64 on revenue of $10.9 billion. 
• For a more detailed look at upcoming earnings reports, 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:
    • • Jan. 22 - Jan 25: World Economic Forum
      • Jan 28-29: Federal Reserve FOMC Meeting
      • Jan 31: Brexit deadline

Thoughts for the Day

“In many cases, “believing is seeing” rather than the reverse: Our beliefs shape our perceptions of the world, often in ways we don’t realize.” ~ Thomas Gilovich

Disclosures

• IBM (IBM), Microsoft (MSFT), Raytheon (RTN) and United Technologies (UTX) are constituents in Tematica Research's Thematic Dividend All-Stars 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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