Daily Markets: Options Expirations, PMI Data, Election Season to Direct Today's Trading

Today’s Big Picture

Asian markets finished the week on a higher note shrugging off weaker than expected Flash August PMI data following reports the U.S. and China have agreed to hold trade talks “in the coming days” and moderate Democrats, known as the Blue Dog coalition, are putting pressure on House Speaker Nancy Pelosi to restart pandemic related stimulus talks. Japan's Flash Manufacturing PMI for August came in better than expected but remained in contraction territory for the 16th consecutive month, while the Flash August Composite PMI reading for the Eurozone hit 51.6 vs. the expected 54.9.

European equities were mixed by mid-day trading and U.S. futures point to a weak open as investors look to close out the week. Last night, Joe Biden accepted the Democratic nomination for president, promising to raise taxes on wealthy, invest in infrastructure and clean energy, strengthen the Affordable Care Act, implement rapid coronavirus testing, and the manufacturing of medical products in the U.S. As investors mentally prepare for the coming 70+ days of political muckraking to be had leading up to the 2020 presidential election, we suspect this week’s finish for U.S. equities will be influenced by details contained within the IHS Markit Flash August PMI readings as well as the fact today is an options expiration day.

Data Download

International Economy

Japan’s inflation rate climbed 0.3% in July from June 0.1% YoY. On a sequential, consumer prices edged up 0.2% after inching up 0.1% in June. Core consumer prices were unchanged. The July inflation rate rose 0.4% excluding food and energy, matching the 0.4% YoY increase in June. Japan’s Jibun Bank Services Flash PMI for August slipped to 45.0 from July’s 45.2 while the Flash August Manufacturing PMI rose to 46.2 from July’s 45.2 but missed the market expectation of 49. Combining those two, the Flash August Jibun Bank Japan Composite PMI was unchanged at 44.9 compared to July, well below the market consensus of 50.5.

In the UK, retail sales in July rose 3.6% MoM after rising 13.9% in June. On a year-over-year basis, retail sales rose 1.6% after falling 1.6% in June. Ex-fuel sales, July retail sales rose 3.1% YoY following the 1.7% gain in June.

This morning brought a slew of Flash Markit PMI data for August:

• Euro Area Manufacturing PMI hit 51.7 from July’s 51.8 but below the expected 52.9;
• Euro Area Services PMI registered 50.1 from July’s 54.7, below the expected 54.5;
• France’s Manufacturing PMI came in at 49.0 vs. July’s 52.4, below the expected 53.7;
• France’s Services PMI fell to 51.9 from July’s 57.3 and below the 56.3 consensus forecast;
• Germany’s Manufacturing PMI rose to 53 from July’s 51, modestly ahead of the expected 52.5;
• Germany’s Services PMI dropped to 50.8 from July’s 55.6, well below the expected 55.1;
• UK’s Manufacturing PMI rose to 55.3 from July’s 53.3, coming in nicely ahead of the 53.8 consensus;
• UK’s Services PMI registered 60.1 from July’s 56.5 and the expected 57.

Domestic Economy

Yesterday’s weekly jobless claims report was a serious disappointment for the labor market which expected 925,000 new applications. While last week’s initial claims came in below 1 million for the first time in 21 weeks, yesterday saw initial claims increase by 135k to 1.106 million, the biggest 1-week increase since the pandemic began, excluding the first two massive jumps of over 3 million each in the immediate aftermath of the March lockdown. Last week’s numbers were also revised upwards to 971k from 963k. On a non-seasonally adjusted basis, claims were 891.5k, which is the third consecutive week below 1 million, but was up 52.8k from last week - the first increase in four weeks and the third-largest increase since the first week of April.

Yesterday’s Philly Fed Business Outlook Survey echoed Monday’s weaker-than-expected Empire Fed survey and this week’s jobless claims. The headline index dropped 7 points to 17.2, the second month of declines, which means that while the manufacturing sector in the region has continued to expand, it has been so at a decelerating pace over the past two months. As for the sub-indices, most remain in expansion territory, but like the headline index, are slowing. Delivery Times, Inventories, and Prices were the only sub-indices to increase MoM while Inventories and Unfilled Orders were in contraction. New Orders remain in the upper quartile of all readings going back to 1980 but Shipments are in the 38th percentile. In line with the week’s jobless claims, the index for the Number of Employees fell as did the Average Workweek. The Number of Employees hired dropped from 20.1 to 9, which is the biggest change for any sub-index in the report.

The Conference Board’s Leading Economic Index rose 1.4% in July after rising 3.0% and 3.1% in June and May respectively - improving still but like most everything else we’ve seen this week, at a slowing pace. The current pace indicates that, according to Ataman Ozyildirim, the Conference Board’s senior director of economic research, “The LEI suggests that the pace of economic growth will weaken substantially during the final months of 2020.”

Later today, we will get the Flash August Markit PMI reports, Existing Home Sales for July, and the usual weekly Baker Hughes Oil Rig report.

Markets

The power of the Tech sector returned yesterday, with the Nasdaq 100 gaining 1.4%, the Nasdaq Composite 1.1%, the S&P 500 0.3%, the S&P 500 Equal-Weight lost 0.6%, and the Dow gained 0.2% with just 11 of its 30 component companies closing in the green. Within the S&P 500 index, only 151 stocks were actually up on the day, versus 344 losers and five that were unchanged. The small-cap Russell 2000 rose 0.2% but the S&P 600 fell 0.9%.

While the Tech sector has been the darling this year, Financials are taking a beating. In fact, Financials’ share of market cap is about 0.7 percentage points below the March 6, 2009 record low and 0.37% above the earlier record low of 8.96% at the end of October 1990. The S&P 500 ex-Financials is up 8.6% YTD while the S&P 500 Financials is down 21%. That under-performance by Financials is record-breaking dating back to 1940. The only time that sector came close to performing so poorly on a relative basis was in 1987 when it trailed by 23% at around the same time of year.

What’s even more impressive is that while share price performance has been dramatically poor, earnings on a relative basis have not been, and in fact, since the start of 2016 have been outperforming the broader market. This is a valuation problem and not about the income statement, which isn’t all that surprising in light of falling interest rates and the level of economic uncertainty during a global pandemic.

Yesterday was the first time in history that the high yield of a 30-year TIPS auctions/reopening saw the yield drop below zero, with the high yield settling at -0.272% compared to the original auction of this CUSIP in February at 0.261%. We live in interesting times.

Stocks to Watch

Johnson & Johnson (JNJ) plans to begin phase three trials for a potential coronavirus vaccine in September with up to 60,000 healthy people ages 18 and older across nearly 180 locations in the US and other countries.

Agriculture and construction equipment company Deere & Company (DE) delivered better than expected July quarter results with EPS and revenue that handily beat consensus expectations. Agriculture & Turf sales decreased 5% YoY due to lower shipment volumes and the unfavorable effects of currency translation, partially offset by price realization. The company’s Construction and Forestry sales for the quarter fell 28% YoY mainly due to lower shipment volumes and currency translation. For the full year, Deere sees its net income coming in near $2.25 billion. Alongside its quarterly results, the company announced broad employee-separation programs that will be completed during the fourth quarter.

Buckle (BKE) crushed July quarter expectations, delivering EPS of $0.71 per share, $0.65 better than the $0.06 consensus. Revenue for the quarter rose 6.0% YoY to $216 million. vs the $151.23 expectation. Driving the company’s quarterly results was its online sales, which nearly doubled YoY to $46.0 million for the quarter vs. $23.1 million for July 2019 quarter.

July quarter EPS at Foot Locker (FL) came in at $0.71, better than the expected $0.69, as revenue rose 17.1% YoY to $2.08 billion vs. the $2.07 billion consensus. Comp-store sales for the quarter rose 18.6% YoY. During the second quarter, the Company opened 18 new stores, remodeled or relocated 26 stores, and closed 31 stores. As of August 1, 2020, the Company operated 3,100 stores in 27 countries in North America, Europe, Asia, Australia, and New Zealand. Given the uncertainty surrounding the evolving COVID-19 pandemic and its potential impact on the back-to-school season, team sports participation, and additional government stimulus packages, Foot Locker opted to not provide forward guidance. However, the company reinstated a far skinnier quarterly dividend of $0.15 per share compared to the prior $0.38 per share declared this past February.

A California state appeals court ruled Uber (UBER) and Lyft (LYFT) can keep operating as normal while challenging a judge’s order to comply with a state labor law that mandates the companies treat their workers in California as employees, something that would likely upend their business models.

According to Bank of America (BAC) credit and debit card data, e-commerce growth accelerated to +70% YoY for the week ended August 15, up from +68% for the week prior. Per the data, department stores saw an increase in e-commerce spending during the month and restaurant food delivery is up 140% month to date. Stocks to watch on this news include Amazon (AMZN), Target (TGT), Walmart (WMT), Macy’s (M), Uber, and GrubHub (GRUB) among others.

Ross Stores (ROST) reported a July quarter loss of $0.13 per share, besting the -$0.28 consensus. Revenue for the quarter fell 32.5% YoY to $2.68 billion, which was ahead of the $2.42 billion consensus. The company began a phased process of reopening its stores on May 14, with the vast majority of its retail locations open and operating by the end of June. For the quarter, same-store comps were down -12% for reopened stores from the date of their reopening to the end of the quarter. Speaking to its outlook, the company shared “trends have not materially changed from the second quarter with comparable store sales for the first two and a half weeks trending down mid-teens versus last year,” and “Due to the limited visibility we have on these risks, we are not providing sales or earnings guidance at this time."

Alibaba’s (BABA) affiliate Ant Financial intends to list its shares on Shanghai and Hong Kong bourse as early as October and raise roughly $30 billion in the public offering. Alibaba owns a 33% stake in Ant.

Shares of Square (SQ) gapped up yesterday after analytics firm YipitData said Cash App monetized volumes re-accelerated "to over 150% YoY after early August weakness."

Yum Brands’ (YUM) Taco Bell announced it will launch Taco Bell Go Mobile, a mobile restaurant concept in 1Q 2021 that will be smaller than the usual Taco Bell restaurant and feature two drive-thru lanes to more quickly serve customers who order using the Taco Bell app. The mobile restaurants will also offer curbside pickup and "bellhops" who will help customers who order using tablets.

Shares of mobile security company MobileIron (MOBL) jumped in aftermarket trading following reports the company is “exploring options,” including a potential sale.

Sorrento Therapeutics (SRNE) and SmartPharm Therapeutics announced a merger agreement under which it will acquire SmartPharm, a gene-encoded therapeutics company developing non-viral DNA and RNA gene delivery platforms for COVID-19 and rare diseases with broad potential for application in enhancing antibody-centric therapeutics. The transaction is expected to close in early September 2020.

Dover (DOV) completed its acquisition of Europe-based Solaris Laser, which is now part of the global manufacturer of product identification and traceability solutions unit that within Dover's Imaging & Identification segment.

ViacomCBS’s (VIAC) CBS is reportedly seeking around $5.5 million for 30-second commercial spots in next year’s Super Bowl, roughly in line with commercial prices in the 2020 game.

Reuters reports Facebook (FB) is pushing pushed for legislation that makes it easier for users to transfer photos and videos to a rival tech platform, in comments it sent to the Federal Trade Commission ahead of a hearing on the topic on Sept. 22.

After today’s market close, there are no companies expected to report their quarterly results. Investors looking to get a jump on upcoming reports to be had next week should visit Nasdaq’s earnings calendar page.

On the Horizon

• Dates to mark:
  • • August 24: Chicago Fed Activity Index
    • August 25: Case-Shiller Home Prices, New Home Sales, Consumer Confidence, Richmond Fed Manufacturing
    • August 26: MBA Mortgage Applications, Durable Goods
    • August 27: GDP, Personal Consumption, Initial Jobless Claims, Bloomberg Comfort, Pending Home Sales

Thought for the Day

“Every saint has a past, and every sinner has a future.” ~Oscar Wilde

Disclosures

• Ross Stores (ROST), Target (TGT), Walmart (WMT) are constituents in the 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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Stocks Earnings Economy Coronavirus