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Daily Markets: Equities Continue to Climb Despite Rising US-China Tensions

Today’s Big Picture

In the last 24 hours, investors have been watching the latest escalation between the US and China after China’s parliament passed the controversial national security bill for Hong Kong and blocked a Trump administration effort for a United Nations Security Council meeting on China’s security bill. The passage of that bill into law raises concerns over Hong Kong’s future as a financial center, runs the risk of sparking even more protests, and could lead to companies leaving Hong Kong. 

Yesterday, Secretary of State Mike Pompeo told Congress that Hong Kong was no longer autonomous from China, raising questions over its favorable trade status with the US. Last night, the US House of Representatives authorized sanctions against Chinese officials for human rights abuses against Muslim minorities, which, having been passed by the Senate, now heads to President Donald Trump, who hasn’t said whether he would sign it into law. Adding to the tension, a Canadian judge yesterday ruled against a Huawei executive fighting extradition to the US.

Last night Senator Josh Hawley (R-MO) tweeted, “I will introduce legislation to end these special government giveaways. If Twitter (TWTR) wants to editorialize & comment on users’ posts, it should be divested of its special status under federal law (Section 230) & forced to play by the same rules as all other publishers. Fair is fair.” This follows reports that President Trump is expected to take action today that could result in lawsuits against Twitter, Facebook (FB) and other social media companies as the government narrows liability protections for third parties’ posts. 

All of the above has equities largely treading water today as investors brace for what develops next on the US-China front and social media protection fronts. Also adding to the day’s uncertainty is the latest US weekly Initial Jobless Claims report, which will continue to serve as a barometer for putting the pandemic in the rear-view and a harbinger for consumer spending. 

Data Download

Coronavirus

There are currently over 5.8 million confirmed cases of the coronavirus worldwide, and nearly 360,000 lives have been lost. We will see 6 million cases globally before the end of May. The US has nearly 1.75 million cases and has lost over 100,000 lives to the pandemic. With less than 5% of the world’s population, the US accounts for over 28% of all official COVID-19 deaths worldwide. Brazil remains solidly in second place for the most number of cases at just under 415,000 cases and nearly 26,000 lives lost while Russia is in third at 380,000 cases and a shockingly low number of deaths at just over 4,000.

The UK temporarily shut down its embassy in North Korea and had all diplomatic staff leave the country because restrictions on entry had made it impossible to reasonably operate the embassy amidst the pandemic. North Korea has yet to officially report any confirmed cases of the coronavirus.

South Korea’s health minister warned today that the next two weeks will be critical to stopping the spread of the coronavirus as the nation battles a second wave of infections. Quarantine measures for Seoul will be strengthened for two weeks after the country saw its biggest daily increase in new cases in two months. 

On the other end of the spectrum, more than 70 leaders from the travel industry have called on the UK government to cancel its plans for a compulsory 14-day quarantine for travelers arriving from abroad, arguing that mandatory quarantines are the very last thing the travel industry needs after months of lockdown. Amongst those signing the petition are directors of hotels such as The Savoy, The Dorchester, Abercrombie & Kent, and Mr. and Mrs. Smith.

GlaxoSmithKline (GSK) announced today that it will produce 1 billion doses of a vaccine booster that the company believes could make a “significant contribution against Covid-19.” According to GSK, the company’s adjuvant can reduce the amount of vaccine protein that is required per dose, making more doses available.

International Economy

South Korea’s central bank lowered its policy rate by 25 basis points to a record low of 0.5% today. This is the second cut of the year as policymakers warned that the pandemic will be worse for the economy than the 2008 financial crisis. The central bank also lowered its 2020 GDP projection to a 0.2% contraction, the steepest contraction since the 1998 Asian financial crisis, and well below the 2.1% estimate from February.

Retail sales in Spain plummeted 31.6% YoY in April after a 14.2% decline in March. This is the biggest decline on record for the series going back to 2001.  Retail sales fell 20.4% MoM, also a record drop. The decline in sales also saw a decline in the country’s harmonized inflation rate to a deflationary -0.9% YoY in May.

Germany saw retail sales fall 13.8% MoM in April after a 7.5% decline in March, taking sales back to their 2016 levels, according to new experimental early indicators. 

Consumer Confidence in Italy fell to 94.3 in May from 100.1 in April, beating expectations for a decline to 88.5. This is the lowest reading since December 2013, with every sub-index falling. Business Confidence dropped to 71.2 in May from 87.2 in March, falling to its lowest reading on record. The nation’s Producer Price Index fell 5.12% in April YoY from the 3.7% decline in March.

Business Confidence in the Eurozone dropped to -2.43 in May, the lowest reading since September 2009, from -1.99 in April. Consumer Confidence for May fell to -18.8 from April’s 11-year low of -22. Economic sentiment rose to 67.5 in May from the 11-year low of 64.9 in April. Morale improved for manufacturers, retails, and consumers. Industrial sentiment rose to -27.5 from April’s -32.5 while Services Sentiment fell to a new record low of -43.6 from April’s -38.6.

The UK index for production expectations for the next three months rose to -49 in May from -56 in April. The index that tracks demand expectations for service producers improved to -64 in May from -76 in April.

Mexico’s central bank cut is 2020 GDP forecast to a worst-case scenario of a nearly 9% contraction in the economy with as many as 1.4 million job losses.

Domestic Economy

Later today we will get April’s Durable Good report which is expected to see a 15% drop in new orders for manufactured durable goods, Preliminary Corporate Profits report for Q1, GDP Price Index estimate for Q1, the usual weekly jobless claims which are expected to see 2.5m new claims, PCE Prices for Q1, Pending Home Sales for April, and the usual EIA weekly energy report.

Markets

Markets continued their “risk-on” mood yesterday, with the Dow rising 2.2% to close above 25,000 for the first time since March 10. The S&P 500 rose 1.5%, closing above 3,000 for the first time since March 5. The Nasdaq rose just 0.8% as large tech stocks underperformed. All 11 of the S&P 500 sectors closed in the green, led by financials, industrials, and other more cyclical sectors while tech shares were in the red for most of the day and closed as the worst-performing sector.

Stocks to Watch

Sanderson Farms’ (SAFM) April quarter results came in below expectations for both revenue and EPS as the company processed 4.2% fewer pounds of chicken than expected in late February.  The company now expects to produce 5.9% fewer pounds during the current quarter as it continues to shift production into Sanderson’s retail grocery store program vs. foodservice customers. 

March quarter results at Solar power company Canadian Solar (CSIQ) came in better than expected as its total module shipments increased 41% YoY to 2.2 GW. However, the company issued downside guidance for the current quarter, calling for revenue in the range of $630-$680 million vs. the $780 million consensus. 

Discount retailer Dollar General (DG) crushed quarterly expectations for its revenue and earnings as its comp-store sales jumped 21.7% YoY. Same-store sales increased in each of the consumables, seasonal, home products, and apparel categories, with the largest percentage increase in the home products category. Management shared it expects to exceed its prior guidance of EPS growth in the range of 10-11.5% but was not able to forecast the extent of the upside to be had. 

Chinese electric vehicle company Nio Inc. (NIOreported better than expected top and bottom lines for its March quarter and guided current-quarter revenue in the range of CNY3.37-3.53 billion. For the March quarter, Nio delivered 3,838 vehicles and shared that during April, it delivered 3,155 vehicles, which suggests the company is well on its way to deliver the forecasted 9,500-10,000 vehicles in the current quarter. 

HP (HPQ) reported mixed quarterly results that contained better than expected EPS but revenue that fell short of consensus forecasts. Revenues fell 11% YoY to $12.47 billion led by double-digit declines in printing and desktops while the company’s notebook business was flat YoY. While HP guided its current quarter EPS to $0.39-$0.45 vs. the $0.45 consensus, the company held off providing full-year guidance. 

Quarterly results at homebuilder Toll Brothers (TOL) came in ahead of Wall Street expectations, and shared deposits over the last three weeks were up 13% compared to the same period a year ago. However, the company withdrew its full-year forecast and warned it would not provide such guidance for the foreseeable future due to uncertainty caused by the COVID-19 pandemic.

Apple (AAPL) has acquired machine learning startup Inductiv, continuing its nip and tuck acquisition strategy for artificial intelligence companies.  Inductiv had been developing technology that uses artificial intelligence to identify and correct errors in datasets. Reports suggest the Inductiv team joined Apple “in recent weeks” to work on several different projects, including Siri, machine learning, and data science.

Boyd Gaming (BYD) will resume operations at 13 properties in Nevada, Missouri, and Iowa, pending receipt of final regulatory approvals… MGM Resorts (MGM) will reopen its Las Vegas casinos on June 4… Walt Disney’s (DISWalt Disney World is planning for a phased reopening of its theme parks in July. 

Western Union (WU) offered it has continued to see improved transaction trends thus far in May in the Consumer-to-Consumer business and will provide further specifics on May performance in early June.

A day after announcing it would cut 6,770 US workers, Boeing (BA) announced it has resumed production of the 737 MAX at its Renton, Washington factory, and will gradually ramp up production this year. The company plans to lay off a total of over 12,000 employees, more than half of those will be involuntary.

Low-cost passenger airline EasyJet plc (ESYJY) plans to cut up to 4,500 jobs and shrink its fleet of aircraft in response to the smaller post-pandemic travel market… American Airlines (AAL) shared it will reduce its management and support staff by roughly 30% and may trim frontline employees as it downsizes… United Airlines (UAL) also said it will need to reduce its management and administrative staff by about 30%. 

After today’s close investors can look forward to earnings from Costco Wholesale (COST), Dell (DELL), Marvell (MRVL), Nordstrom (JWN), Salesforce (CRM), Ulta Beauty (ULTA), Williams-Sonoma (WSM) and Zscaler (ZS). Investors that want to get a jump on those and other corporate earnings reports coming at us this week should visit Nasdaq’s earnings calendar page

On the Horizon

  • Dates to mark:
    • 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

“It is inhumane, in my opinion, to force people who have a genuine medical need for coffee to wait in line behind people who apparently view it as some kind of recreational activity.” ~ Dave Barry

Disclosures

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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