Daily Markets: Volatility Returns Amid Rising Geopolitical Tensions

Today’s Big Picture

The major equity indices in Asia closed mixed today after yesterday’s rally in the US. Japan’s Nikkei and South Korea’s Kospi both rose 0.9%, and Australia’s ASX gained 0.5% while Hong Kong’s Hang Seng fell 0.6% and China’s Shanghai Composite and Shenzhen component fell 0.6% and 0.9,% respectively.

By midday trading, most of the major European equity indices were lower, and US futures point to a down open ahead of today’s European Central Bank meeting. The consensus view is the ECB will keep its monetary policy steady, but investors and economists will be watching to see if President Christine Lagarde begins laying the groundwork for an intervention that would prevent the euro’s relative strength from weighing on the economy. 

Investors will also be watching for Brexit developments as the EU and UK are holding emergency talks today following the UK’s Internal Market Bill, which would undercut parts of the Withdrawal Agreement agreed to in January. Adding another wrinkle to the situation, US House Speaker Nancy Pelosi said any potential US-UK trade deal would not pass Congress if Britain undermines the Good Friday peace agreement. 

Earlier this year, the market was all about vaccines and stimulus measures. Yesterday the news that AstraZeneca’s (AZN) phase 3 trial of its Covid-19 vaccine had been put on hold had little effect with shares of AZN falling all of 2%. The Nasdaq 3-day slide reversed course, making for the quickest correction in history - naturally because it is 2020, and that’s what we do this year. The S&P 500 enjoyed its strongest day since June. 

While your authors typically don’t listen to rumors making the rounds on the internet, in addition to today’s stock market action, there is some speculation that the first single from the next Bruce Springsteen record, Letter To You slated to drop on October 23, could be streaming later today. Here’s hoping the chatter is authentic, and we get a nice fresh serving of Bruce juice. 

Data Download

International Economy

Yesterday the Bank of Canada announced that it would keep its overnight rate low for many years to come, but signaled it intends to be less aggressive with its asset purchases than was previously indicated. The assets of Canada’s central bank have expanded by 350% YoY, a much faster expansion than the 2x of the Federal Reserve.

Machinery Orders in Japan continued their ugly trend, falling 16.2% in July YoY after a 22.5% decline in June, but bested expectations for an 18.3% decline. On a MoM basis, orders rose 6.3% after a 7.6% decline in June.

Consumer inflation expectations in Australia declined slightly from 3.3% in August to 3.1% in September.

Vehicle sales in China rose 11.6% YoY in August, slowing from the prior 16.4% increase. Per the China Association of Automobile Manufacturers, new energy vehicle sales rose 25.8% YoY to 109,000 units in August. Investors will see that as positive news for Tesla (TSLA), Nio (NIO), and others targeting the China electric vehicle market. 

Industrial Production in France came in weaker than expected, rising just 3.8% MoM in July, down from June’s 13% increase, and below expectations for 5% growth as much of Europe experiences a slowing recovery heading into the Fall.

Italy, on the other hand, saw Industrial Production come in stronger than expected, rising 7.4% MoM in July, down from the prior 8.2%, but better than the expected 3.5%.

The US Energy Information Administration boosted its 2020 forecasts for West Texas Intermediate and Brent crude oil prices according to the Short-Term Energy Outlook report released yesterday. The EIA’s revised forecast for WTI oil in 2020 is $38.99 a barrel, up 1.3% from its August forecast. The group also lifted its Brent crude price forecast by 1.2% to $41.90 for this year. The EIA also raised its forecast for natural-gas prices by 5.8% to $2.49 per million British thermal units.

Domestic Economy

Yesterday’s JOLTs report from the Bureau of Labor Statistics saw the number of open jobs as a percent of the labor force rise to pre-pandemic levels - a good sign that labor demand is holding up well in the aggregate. Layoffs and discharge rates are back to levels seen in 2019 - also a good sign. Some industries - construction, nondurable manufacturing - trade/transportation/utilities, and a range of service industries - have seen their job opening rates rise above the February levels. Others that would have seemed more pandemic-proof are still struggling, such as financial services, mining and logging, white-collar services, and state/local government.

In addition to the usual weekly Thursday economic data that is jobless claims and the EIA natural gas inventory report, today also brings the July Wholesale Inventories data and the August Producer Price Index. 

Markets

Well, that was fast. After a 3-day drop of over 10%, the Nasdaq-100 gained 3.0% yesterday, the Nasdaq Composite rose 2.7%, the S&P 500 closed up 2% while the S&P 500 equal weight rose 1.3%. S&P 500 breadth was strong, roughly four gainers to every one stock that fell. Both the Dow and the broader NYSE Composite gained 1.6%, with the small-cap Russell 2000 rising 1.5%.  After having lost around 1/3 of its market cap in a matter of days, Tesla (TSLA) rose 11%, as did Zoom Video Communications (ZM). 

After the news on AstraZeneca’s vaccine, other makers saw their shares rally with Moderna (MRNA) gaining 4.7%, BioNTech (BNTX) 4.2%, Johnson & Johnson (JNJ)1.7%, and Pfizer (PFE) 0.7%. Investor optimism concerning a vaccine remains strong.

There was no obvious catalyst for either the slide or the reversal. Still, investors have been taught to buy the dip and punished severely if they didn’t, so it will take something significant to override that nearly Pavlovian response. Those shares that were hit the hardest during the 3-day slide had been the strongest performers before the slide and were naturally the biggest gainers yesterday.

Treasuries changed direction as well, with the 30-year yield rising to 1.46% while gold rose to $1,956 an ounce, and WTI crude is back at $38.

The Investment Company Institute’s fund flows report for the week ended September 2, found that flows for equity funds for the combined mutual funds and ETFs were in the bottom percentiles for all periods on record. For ETFs only, flows were in 55.7%ile. Commodity mutual funds and ETFs and Bond mutual funds and ETFs saw their flows in the top 85%ile and 98.7%ile.

Stocks to Watch

Bloomberg reports Reliance Industries Ltd. (RELIANCE:IN) is offering to sell a roughly $20 billion stake in its retail business to Amazon (AMZN).

The coronavirus continues to be a headwind for airlines:

• International Consolidated Airlines Group SA (ICAGY), the parent company of British Airways and one of the world’s largest airline groups, announced it expects even fewer passengers in 2020 than previously estimated. The company reported that by the end of June, bookings had leveled off to about 30% of pre-pandemic levels, and it now expects capacity, which is measured by available seat kilometers, to fall 63% in 2020 versus 2019. It previously expected a 59% decline. For 2021, the company expected a 27% decline, up from the prior 24% decline. The company is calling for the introduction of airport testing for Covid-19 to help boost travel.
• United Airlines (UAL) is forecasting lower quarterly sales as well and announced that it expects to decrease its scheduled capacity for the third quarter by about 70%, more than the prior estimate for a 65% cut.
• Europe’s largest low-cost carrier Ryanair (RYAAY), warned that this winter would be “a write-off,” as the company expects to carry just 50 million passengers in the 12 months to the end of March 2021, down from the 60 million in projected in July and the 150 million that was expected before the pandemic.
• Singapore Airlines (SINGF) shared it will cut around 4,300 positions due to the “long road to recovery for the global airline industry.”

The Verge reports the Google (GOOGL) navigation company, Waze, is laying off 5% of its global workforce and shutting down several offices as it refocuses on key markets.

The Wall Street Journal reports TikTok owner ByteDance (BDNCE) and the US government are in discussions over possible ways allowing for something less than a full sale of TikTok’s US operations. Reports also suggest ByteDanceis likely to miss a Trump administration deadline for the sale of its TikTok US operations “after new Chinese regulations complicated negotiations with bidders Microsoft (MSFT) and Oracle (ORCL).”

Radian Guaranty, the mortgage insurance subsidiary of Radian Group (RDN), reported new defaults on 6,173 loans in August, down from 8,477 in July.

Energizer Holdings (ENR) reaffirmed its FY20 outlook with adjusted EBITDA of $575-$585 million, EPS of $2.45-$2.55 vs. $2.52 consensus, and adjusted free cash flow to be greater than $300 million. The company now expects reported net sales for the year to increase 9.5%-11%, which includes anticipated organic net sales growth of 1.5%-2.5% for the fiscal year and anticipated organic net sales growth between 3%-6% for the fourth quarter.

GameStop (GME) reported disappointing July quarter results, missing both top and bottom-line expectations as comp sales for the quarter fell 12.7% after adjusting for approximately eight percentage points from the impact of reduced operating days due to COVID-19. Global e-commerce sales rose 800% for the quarter, leading the company’s e-commerce sales penetration to over 20%.

Direct to consumer platform company SelectQuote (SLQT) reported reports quarterly results that showcased an 89.5% YoY increase in revenue to $141 million vs. the $119.6 million consensus. For its FY21 that ends in June 2021, the company sees revenue in the range of $775-$815 million with consolidated net income in the range of $115-$127 million.  

RH (RH) Reported July quarter results that topped consensus expectations for its top and bottom line. While the company did not offer detailed financial guidance, it shared that its business trends have continued to build month over month with RH Core demand +7% in May, +32% in June, +34% in July, and +47% in August versus the same months in 2019. For September 2020, that metric is +44% for the first ten days of the fiscal month.

Walmart (WMT) announced it has partnered with FlyTrex, an on-demand drone delivery company, for a pilot program in Fayetteville, NC, that will include select grocery and household essential items.

Semiconductor company Taiwan Semiconductor (TSM) reported August revenue of NT$122.8 billion, up +15.9% MoM (+15.8% YoY).

US mall owners Simon Property Group (SPG) and Brookfield Property Partners (BPY) are reportedly close to finalizing an $800 million deal to rescue JC Penney from bankruptcy, avoiding a total liquidation and saving about 70,000 jobs and 650 stores

After today’s market close, Chewy (CHWY), Dave & Buster’s (PLAY), Oracle (ORCL), and Peloton (PTON), among others, will report their quarterly results. Investors looking to get a jump on those upcoming reports and others in the coming days should visit Nasdaq’s earnings calendar page. 

On the Horizon

Dates to mark:

• September 11: CPI and Budget Statement
• September 15: Empire Manufacturing, Import/Export Prices, Industrial Production, Capacity Utilization
• September 16: August Retail Sales, MBA Mortgage Applications, Business Inventories, TIC Flows, Homebuilder Sentiment, FOMC Rate Decision
• September 17: Building Permits, Housing Starts, Philly Fed Outlook, Initial Jobless Claims, Bloomberg Comfort
• September 18: Options Expiration, University of Michigan Sentiment
• September 21: Chicago Fed Activity
• September 22: Existing Home Sales, Richmond Fed Manufacturing
• September 23: IHS Markit Flash PMI data (September), FHFA Home Prices, MBA Mortgage Applications
• September 24: Initial Jobless Claims, Bloomberg Comfort, New Home Sales, Kansas City Fed Manufacturing
• September 25: Durable Goods, Capital Goods
• September 28: Dallas Fed Manufacturing
• September 29: Trade Balance, Wholesale Inventories, Retail Inventories, Case-Shiller Home Prices, Consumer Confidence
• September 30: Caixin China General Manufacturing PMI (September), ADP Employment, GDP, Personal Consumption, MNI Home Sales, Pending Home Sales
• October 1: Personal Spending, PCE, Initial Jobless Claims, Bloomberg Comfort, Markit Manufacturing PMI, ISM Manufacturing, Construction Spending
• October 2: Nonfarm Payrolls, Unemployment Rate, Average Hourly Earnings, University of Michigan Sentiment, Factory Orders, Durable Goods, Capital Goods

Thought for the Day

“Opportunities are usually disguised as hard work, so most people don’t recognize them.” ~ Ann Landers

Disclosures

• Walmart (WMT) is a constituent in the Tematica Research’s Thematic Dividend All-Stars Index. 
• Tesla (TSLA) 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.

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Stocks Earnings Coronavirus US Markets