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Daily Markets: China Retaliation Irks Equities

Today’s Big Picture

Yesterday’s sell-off in U.S. equities spilled over into Asia with those equities finishing the week on a lower note with Hong Kong’s Hang Seng finishing down 2.2% today and China’s Shanghai Composite Index falling 3.9%. By mid-day trading, equities in Europe were down across the board following China ordering the U.S. to close its consulate in Chengdu in retaliation to the closure of the consulate in Houston despite economic data that showcased a rebound in the region. The latest saber-rattling on the geopolitical front combined with technology-related earnings pressure has U.S. futures pointing to further losses following yesterday’s sell-off.

Adding injecting some uncertainty into the mix, The New York Times is reporting Senate Republicans and the Trump administration are still at odds over how to extend supplemental jobless benefits. Assuming those two have a meeting of the minds, odds are we’ll be in for yet another round of Washington gamesmanship given that Republicans support a stimulus package around $1 trillion while Democrats are demanding $3 trillion. Needless to say, between the U.S.-China trade tension and that which we are about to see in Washington next week, the weekend news will be worth watching as it will set the stage for next week’s market when almost 1,500 companies report their quarterly earnings. Our advice is this: Get some rest this weekend, you’ll need it.

Data Download

Coronavirus

There are now more than 15.6 million confirmed cases of the coronavirus worldwide and nearly 640,000 lives have been lost to COVID-19. The U.S. has nearly 4.2 million cases and is coming up on 150,000 lives lost. The U.S. has reported two consecutive days of more than 70,000 new infections and reported over 1,000 lives lost to COVID-19 for three consecutive days, according to data from the COVID Tracking Project.

Mexico hit a new daily record high in confirmed coronavirus cases of 8,438 according to the nation’s health ministry. Mexico has the world’s fourth-highest overall number of lives lost to COVID-19.

President Trump canceled plans for the bulk of the Republican National Convention in Jacksonville, Florida as the state, and the nation, struggle with rising cases, hospitalizations, and deaths.

International Economy

Australia’s CommBank Manufacturing PMI rose to 53.4 from 49.8, below the expected increase to 53.6. Service rose the 58.5 from 53.2 where it was expected to have remained.

Fitch Solutions downgraded its outlook for the South Korean economy in 2020 to a 0.7% contraction after official data showed that Asia’s fourth-largest economy has been pushed into a recession by the pandemic. This comes after the worse-than-expected 3.3% decline in the nation’s economy in the second quarter.

UK Retail sales dropped just 1.6% YoY in June following the 12.9% YoY drop in May and the 22.7% YoY fall recorded in April. UK Retail Sales were expected to fall 6.4% in June. The month over month view offers a much different picture as UK retail sales climbed 13.9% in June vs. the expected 8% increase following the 12.3% MoM increase in May and the 18% drop in April. Retail sales ex-fuel improved to 13.5% MoM in June versus May’s 10.6% MoM and the 15.1% sequential drop recorded in May.

The Producer Price Index (PPI) in Spain fell 6.1% YoY in June after an 8.8% decline in May.

France’s Markit Flash Manufacturing PMI in July 52.0 versus the prior 53.2 and compared to expectations for an increase to 53.2. The Flash Service PMI rose to 57.8 in July after June’s 50.7 and expectations for an increase to 52.3.

Germany’s Markit Flash Manufacturing PMI hit 50.00 in July after June’s 45.2 and compared to expectations for an increase to 48. The Flash PMI for Services climbed to 56.7 in July from June’s 47.3 versus expectations for an increase to 50.5.

For the Eurozone as a whole, Markit Flash Manufacturing PMI rose to 51.1 in July from June’s 47.4 and compared to expectations for an increase to 50. The initial Services for July came in at 55.1, up from June’s 48.3 versus expectations for an increase to 51.

Italy’s Business Confidence in July registered 85.2 vs. the upwardly revised 80.2 in expectations for an increase to 85.5. Consumer Confidence dipped to 100.0 in July from June’s 100.7 which was expected to improve to 103.8.

The UK’s Markit/CIPS Flash Manufacturing PMI rose to 53.6 in July from June’s 50.1, compared to expectations for an increase to 52. By comparison, the Flash Services PMI in July jumped to 56.6 from June’s 47.1 and the expected 51.5.

Domestic Economy

After declining for a record-breaking 15 consecutive weeks, initial jobless claims rose this week to 1.416 million, which was also above expectations. At this point, jobless claims have given up all of their declines since the week of June 19 – so much for the V-shaped labor market recovery. Continuing claims, which are lagged an additional week, the decline continued for the seventh consecutive week and was the largest 1-week decline of the seven.

Airlines including Southwest (LUV)Spirit Airlines (SAV), and American Airlines (AAL) reported they saw a saw a big slowdown in activity during July relative to improvements since it bottomed out in April – reinforcing the recent TSA data we’ve been seeing.

After 16 years of litigation at the World Trade Organization (WTO), Airbus (EADSY) has agreed with the governments of France and Spain to make amendments to the A350 Repayable Launch Investment contracts. This dispute has been the justification for the ongoing U.S. tariff regime and assumedly its end will prompt Washington to ease.

The Bloomberg Index of Consumer Comfort has risen in either of the past nine weeks since hitting a low of 34.7 on May 17. The 10-point increase since then is the strongest nine-week improvement on record, but taking a step back, the index is now right smack in the middle of its historical range.

The Kansas City Fed’s Manufacturing Index yesterday came in slightly below expectations, at 3 versus the estimated 5.

AT&T (T) shared that about 340,000 of its postpaid wireless phone customers weren’t paying their bills in the June quarter, up substantially from just 40,000 in the March quarter. The same was had with some 159,000 broadband users and 91,000 premium-TV users.

Later today we will get the Markit Manufacturing and Service PMI’s for the U.S. economy, New Home Sales, and the usual weekly Baker Hughes Oil Rig Count report.

Republicans in the Senate have decided to postpone the release of their coronavirus relief package until next week, which means the current support package of $600 per week will expire at the end of the month without a known replacement.

Markets

Investors were drinking from the fire hose yesterday between the onslaught of economic data, quarterly earnings, the stimulus debate on Capitol Hill, and the ongoing U.S.-China not-so-cold cold war. For most, the morning markets were unchanged, but by the afternoon, nerves got the better of investors, which led to stocks suffering their worst decline in nearly four weeks. The S&P 500 had its worst day so far this month, losing 1.2%. The Dow was hit even worse, falling 1.3%, and the tech-heavy Nasdaq Composite closed down 2.3% as the previous high-flyers Apple (AAPL) lost 4.6%, Microsoft (MSFT) fell 4.4%, and Amazon (AMZN) closed down 3.7%. Don’t feel too bad for the tech giants as they, along with Facebook (FB) and Alphabet (GOOG) account for 23% of the S&P 500’s index weighting. Microsoft alone accounts for 5.9% of the S&P 500, nearing the record high of 6.4% for International Business Machines (IBM) in 1985.

Yesterday’s weakest sectors were technology, communications, and consumer cyclicals with eight of the S&P 500’s eleven sectors closing in the red. Consumer staples, utilities, and financials were the only sectors to close in positive territory.

Investors moved towards the traditional safety trade of gold, which made a new all-time high of $1,889.10, gaining 1.3% on the day. The 10-year yield fell below 0.58% and the VIX rose 7%.

After consecutive weeks of declines, reserve bank credit at the Federal Reserve rose $30 billion WoW to $6.91 trillion. The 3-month annualized rate of growth is down to 72% from 540% a week ago.

Stocks to Watch

American Express (AXP) announced Q2 (Jun) earnings of $0.29 per share, beating the consensus estimate of $0.02while revenues fell 29.2% YoY to $7.67 billion versus the $8.25 billion expectation. The company acknowledged “the challenges of the current environment” and reaffirmed the soundness of its approach stating, “Our customers continue to be engaged with our products and services; we have a productive and dedicated workforce; our capital and liquidity levels remain strong; and we continue to focus on those areas most critical to our long-term growth.”

Honeywell (HON) announced June quarter EPS of $1.26 per share, beating the consensus estimate of $1.24 while revenues fell 19.1% YoY to $7.48 billion vs. $7.28 billion expectation. Of note, the company’s organic revenue dropped 18% YoY in the quarter. Aerospace revenue fell 27% YoY on an organic basis in the June quarter, while revenue for both Honeywell Building Technologies and Performance Materials and Technologies dropped 17% YoY. Those declines were mitigated by the +1% YoY growth recorded at the company’s Safety and Productivity Solutions business. While the company previously announced that it has suspended providing full financial guidance until the economic impact of COVID-19 stabilizes it does expect ongoing top-line challenges due to the current market conditions, particularly in the aerospace and oil and gas sectors.

Staffing company Robert Half (RHI) reported mixed June quarter results, beating on the bottom line but missed revenue expectations for the quarter. Given the pandemic and the collapse in demand for its services, the company’s June quarter revenue plummeted 58% YoY. Management shared it was “encouraged” by “signs of week-on-week sequential growth in staffing.”

Intel (INTCannounced Q2 (Jun) earnings of $1.23 per share, beating the consensus estimate of $1.11 while revenues rose 19.5% YoY to $19.73 B versus the $18.55 B estimate. The company issued mixed guidance for Q3, seeing EPS of approximately $1.10 versus consensus of $1.14 and Q3 revs of approximately $18.20 B as compared to the $17.94 B expectation. The company stated it is accelerating its transition to 10 nano-meter products this year with increasing volumes and strong demand for an expanding line-up. The company’s 7nm-based CPU product timing is shifting approximately six months relative to prior expectations. The primary driver is the yield of Intel’s 7-nanometer process, which based on recent data, is now trending approximately twelve months behind the company’s internal target.

RF semiconductor company Skyworks (SWKS) reported stronger than expected June quarter top and bottom-line results and issued upside guidance for its September quarter. Helping power the company’s results above expectations was its Sky5 platform that reportedly gained traction in 5G applications at leading smartphone OEMs and increasingly with IoT customers. Skyworks sees EPS of $1.51 vs. the $1.43 consensus for the current quarter with revenue in the range of $830-850 million vs. the $788.6 million consensus.

Scientific Games (SGMS) announced a Q2 (Jun) loss of $2.15 per share, under the consensus estimate of ($1.89) while revenues fell 36.2% YoY to $539 M as compared to the $457.59 M expectation. COVID-19 impacted Gaming and Lottery revenue as the virus prompted temporary closures of casino operations globally and a lower level of lottery ticket sales. While physical locations were negatively impacted Digital and SciPlay segments saw nearly 70 and 80 percent growth, respectively, driven by new launches and the continued “stay at home” environment.

Skechers (SKX) reported better than feared June quarter results with EPS of -$0.44, $0.20 ahead of the consensus forecast. Revenue for the quarter came in ahead of expectations falling “just” 42.0% YoY. For the quarter, Skechers’ domestic business fell 47.3% YoY while its international businesses faired a tad better, falling 37.8% YoY, which included an 11.5% increase in China sales.

Boston Beer (SAM) announced Q2 (Jun) earnings of $4.88 per share, more than doubling up on the consensus estimate of $2.42 with revenues rising 42.0% YoY to $452.2 M versus the $421.44 M expectation. The company stated YoY shipment volume increased 39.8% to approximately 1.9 million barrels and issued raised guidance for FY20, seeing EPS of $11.70-12.70 up from $10.70-11.70 versus the $9.59 consensus estimate.

Reuters reports Senators Amy Klobuchar, Elizabeth Warren, and five other Democratic senators have urged the Justice Department to be cautious in reviewing Google’s planned purchase of Fitbit (FIT) and “expressed skepticism that the purchase was solely a bid to enter the wearables market since Google’s revenues are largely based on advertising driven by consumer data.”

Walt Disney (DIS) shared it has made some major changes to its box office release calendar that include indefinitely delaying “Mulan” from its August 21 release and pushing back the debuts of future Star Wars and Avatar movies by a year.

Sierra Wireless (SWIR) announced a definitive agreement to divest its Shenzhen, China-based automotive embedded module product line for $165 million in cash to Rolling Wireless Limited, a consortium led by Fibocom Wireless of Shenzhen.

After today’s market close, there are no expected quarterly earnings reports – thank God it’s Friday! Investors looking to get ahead of the plethora of earnings reports to be had next week should visit Nasdaq’s earnings calendar page.

On the Horizon

  • Dates to mark:
      • July 24: Preliminary Markit PMIs, New Home Sales
      • July 27: Durable Goods, Capital Goods, Dallas Fed Manufacturing
      • July 28: Case-Shiller Home Prices, Consumer Confidence, Richmond Fed Manufacturing
      • July 29: MBA Mortgage Apps, Trade Balance, Wholesale Inventories, Retail Inventories, Pending Home Sales, FOMC Rate Decision
      • July 30: GDP, Personal Consumption, Jobless Claims, Bloomberg Comfort
      • July 31: Personal Income and Spending, PCE, Employment Cost Index, Univ of Michigan Sentiment

Thought for the Day

“The world will not be destroyed by those who do evil, but by those who watch them without doing anything.” ~ Albert Einstein

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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