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Daily Markets: Equities Continue to Grapple With Rising Coronavirus Case Counts

Today’s Big Picture

Asian markets closed up with Japan and Korean markets each rising 1.13%, and China gaining 0.26%. Upon re-opening following yesterday’s Dragon Boat festival, Hong Kong markets reacted to the news that, on prompting by the U.S. Department of Justice, Alphabet (GOOGL), and others are considering alternative locations for the destination of a long-planned undersea data cable that, until recently, was slated to stretch from Los Angeles to Hong Kong. The Hang Seng index closed down 1.01%.

Despite the recent explosion in coronavirus cases in the U.S., European markets are back on the bull having a strong day, posting a midday overall gain of 1.22% with France and Germany up 1.87% and 1.17% respectively, and the U.K. rebounding sharply from yesterday’s selling, up 1.82% as of midday. This newfound optimism is based on improving conditions and while those economies aren’t necessarily turning around, they are, let’s say, less worse than they have been recently. Once again, better than feared is good news. 

As we approach the opening of U.S. equity markets, futures point to a mixed open to finish out a challenging week. Tracing back the week in full, equities are grappling with conflicting signals between rising COVID-19 case counts in the U.S. and the possibility of renewed restrictions, even as recent economic data has come in better than expected. That better-than-feared data mixed with companies chiming in with similar comments has led to the current quarter experiencing one of the sharpest rebounds in equities in recent memory. With two trading days left until we close out June and 2Q 2020, odds are it will be one for the record books for several reasons. Ahead of the July 4 holiday, we suspect a rather quiet week on the corporate news front, which means the coronavirus will likely take center stage as we get ready for what we expect will be a challenging June quarter earnings season. 

Data Download

Coronavirus

There are now over 9.7 million confirmed cases of the coronavirus worldwide and just under 500,000 lives lost to Covid-19. The U.S. has over 2.5 million cases and over 126,000 lives lost. Brazil has over 1.2 million cases and 55,000 deaths with Russia the third most-affected at 621,000 cases and an absurdly low number of reported deaths that are so ridiculous as to not warrant even reporting. India is nearing 500,000 confirmed cases.

Yesterday the Center for Disease Control and Prevention (CDC) reported that the number of coronavirus infections could be 10x the official statistics because of asymptomatic cases. The CDC arrived at this conclusion after studying blood samples to determine whether people had developed antibodies against the virus.

When the pandemic first hit, people began a list for events that were being canceled, but as the days and weeks rolled by, the list became pointless as canceling became the norm. Now we are seeing a new trend of delaying or re-closing. We mentioned earlier this week that Walt Disney is postponing its planned July 17 reopening of Disneyland. Now it is rumored that it may also delay the opening of its next (hopefully) blockbuster movie, Mulan. Apple has once again closed 32 stores over the past week that it had recently reopened.

There has been much debate concerning the lockdowns in the U.S. and their impact on the economy, with some arguing that the economic damage from the lockdowns was more detrimental to society than the pandemic itself. The thinking is that without the official lockdowns, the economy would have continued to operate relatively normally. As states ease their restrictions and cases are rising, in some cases quite rapidly, there is growing evidence that assertion was not correct.

With rising new cases and rising hospitalizations, this study found that more Americans are looking for more stringent social distancing measures and evidence that even without government-imposed restrictions, the economy will not function near normal, as people voluntarily restrict their activity.

Just one month after reopening, Texas is tapping the brakes, banning elective surgeries in its four biggest cities as hospitalizations for the coronavirus spike. Yesterday the state saw yet another record high for daily new cases, with nearly 6,000 people testing positive and at least one hospital in Houston has already run out of ICU beds. The new order has no effect on the state’s other re-opening policies, which are some of the most aggressive in the U.S., allowing even bars and restaurants to operate at 50% capacity. North Carolina took similar steps to slow its reopening Wednesday.

CEOs of American Airlines (AAL), Delta (DAL), United (UAL), Southwest (LUV), and JetBlue (JBLU) will meet with Vice President Mike Pence and U.S. officials to discuss a range of coronavirus-related travel issues, including federally mandated temperature checks, EU travel restrictions on U.S. travelers, contract tracing of passengers and the impact of COVID-19 on travel demand.

Paris’ Orly airport had its first commercial flight take off this morning, after having been closed since March 31. The Transavia flight to Porto, Portugal was saluted with sprays of water from the airport’s fire brigade. Controls on travel within the European Union have been relaxed this month with regular intercontinental services expected to resume after July 1.

In the race to find a vaccine, the usual steps are being skipped. This morning AstraZeneca (AZN) reported that it will begin talks with Japan’s government to supply doses of the currently unproven Covid-19 vaccine that it is developing with Oxford University. Around 300 million of the 400 million doses of the Oxford prototype are expected to go to the U.S., where the Department of Health and Human Services announced it was collaborating with the company to make the first doses available as early as October. An alliance of the Netherlands, Germany, France, and Italy reached an agreement with AstraZeneca to supply Europe with up to 400 million doses of any successful vaccine from the end of this year at a price that was not disclosed. 

Japan, with a population of 126 million, is seeing some success with its contact-tracing app, which has been downloaded around 4.5 million times in the week since its launch. The app, Contact-Confirming Application (COCOA) uses Bluetooth signals to detect contact with users lasting at least 15 minutes. If users become infected, the app will let them know they have been in contact with an infected person. In comparison, Germany, with a population of 83.2 million, saw 12.2 million people download their country’s app in the first-week post-launch earlier this month.

International Economy

According to the Netherlands’ statistical agency data on world trade and world industrial production, in April both saw the biggest declines on record, going back to 2000. World trade fell 12% MoM and world industrial production fell 10.6%.

The head of the European Central Bank, Christine Lagarde, poured more cold water on the V-shaped recovery narrative when speaking at the Northern Light Online Summit. She said, “The recovery is going to be a complicated matter, I would characterize it as sequential and restrained.” Concerning the hospitality and travel sector, she said, “We will not travel as much, so the airline industries, the hospitality industries, the entertainment industries, are going to come out of this recovery process in different shape and some will probably be hurt irremediably.”

Consumer Confidence rebounded more than expected in France, rising to 97 from 93, closer to the longer-term average of 100. French consumers’ propensity to make a major purchase also improved significantly, despite rising fears over unemployment.

Sales for non-financial companies in Germany rose 7.5% in May MoM, which is still 15% below pre-pandemic levels after falling by a record amount in April. Companies in Germany were also less pessimistic about hiring in May, with the Ifo employment barometer improving 4 points to 92.3. Import prices in Germany fell 7% YoY in May, after falling 7.4% in April.

Retail sales in Spain rose 19.3% in May MoM with personal and household goods enjoying the strongest rebounds as sales nearly or more than doubled April’s levels. Sales remain down 19% YoY, an improvement from April’s level that was down 31.6% YoY.

Italy saw both consumer and business confidence improve in June, but business sentiment improved less than expected. 

Car production in the U.K. improved to (this is a seriously astounding number) down 95.4% YoY, up from April’s level that was down 99.7% YoY.

Domestic Economy

Yesterday’s jobless claims report found that, on the plus side, jobless claims have declined for a record 12 consecutive weeks. However, while they are declining, they have exceeded expectations 9 times and continue to be, week after week, well above the record high set before the pandemic. Since March 21, there have been 47.3 million jobless claims, which is 28.7% of the civilian labor force as of February 2020 and 5.4 times the jobs lost during the Great Financial Crisis. Yesterday’s 1.48 million initial claims is more than double the pre-pandemic record-high of 695,000 jobless claims from 1982.

Continuing claims fell below 20 million for the first time since mid-April and have fallen in 4 of the past 5 weeks since the peak of 24.9 million on May 8. This week’s decline of 767,000 to 19.5 million continuing claims was the second largest on record. That said, the labor force participation rate has fallen all the way back to were it was in April 1973 and the unemployment rate remains above 10%. The U.S. has gone from the lowest unemployment rate in 50 years to the highest in just two months.

The Government Accountability Office reported on Thursday that over 1 million stimulus payments amounting to around $1.4 billion were paid to dead people as the government rushed to inject money into the economy during the pandemic lockdowns. It turns out that the Treasury Department, in its haste to send out the checks, didn’t consult death records to make sure that people who had passed away were not receiving support. It is currently not clear if the money can be pulled back as some was sent directly to bank accounts through direct deposit. Treasury Secretary Mnuchin said that heirs of the deceased who received stimulus checks should give the funds back and the IRS has provided instructions for returning the money. The reality is that the cost of trying to get back $1,200 makes such an effort not worth it, so there’s that.

Yesterday we also got the Kansas City Fed Manufacturing data following Richmond Fed’s report from earlier this week. Looking at four of the largest Fed reporting regions, New York, Philadelphia, Richmond, and Kansas City, June has been a major improvement over May with the sub-indices for shipments, new orders, inventory, and delivery times all improving. However, despite strong positive expectations for the future, employment and the workweek continue to worsen. Expectations for shipments, new orders, unfilled orders, and average workweek are all in the top quintile of readings – shipments and new orders are in the top 2% of data going back to 2004.  What this means is that sentiment remains quite positive, but so far the reality has been lackluster.

Yesterday also brought trade data from May, which was seriously ugly. Both import and export activity fell to new lows and are in the lowest in at least 10 years. In addition, the narrowing of the trade deficit in late 2019/early 2020 has now fully reversed.

The Census report on manufacturing for durable goods delivered a beat on the headline numbers,  with orders up over 15% MoM, but they remain down more than 20% from February’s level and shipments are down nearly 20%. Orders for Durable goods ex-defense are up 15.5% MoM, but down 21.1% over the past 3 months. Orders for Capital Goods are up 25.8% MoM, but down 13.8% over the past 3 months. Orders for “Core” Durable Goods are up 7.2% MoM, but down 18.9% over the past 3 months. 

Yesterday also brought the final number for Q1 GDP, which was lowered to -4.73% from the second estimate of-4.69%. The major areas for weakness were Consumption of services, inventory, and exports.

Later today in the U.S. we will get data on Personal Income and Spending, Michigan Consumer Sentiment report, and the usual weekly Baker Hughes Oil Rig report.

Markets

U.S. equities spent most of the day in negative territory before rebounding, with all the day’s gains coming after 3 pm driving by the news regulators will be loosening up restrictions placed on banks concerning risk-taking in the aftermath of the financial crisis. The S&P and Nasdaq Composite both ended the day with a 1.1% gain while the Dow rose 1.2%. But here’s the thing, after the market’s close, bank shares fell because the Federal Reserve is being tougher-than-expected on banks in its latest round of stress tests in light of the analysis for banks under the worst-case scenarios for the pandemic. To preserve capital, the Fed’s Board of Governors decided to suspend banks’ share buybacks through the third quarter and cap their dividend payouts.

Yesterday saw the largest auction of 7-year Treasury notes in history. Wednesday was the largest auction of 5-year notes. The bid-to-cover was 2.49, the lowest since February. Indirect bidders got 62.6% of the auction, the second consecutive month that percent has been declining and just below the average for the past 10 auctions. Direct bidders were stronger, increasing their share from 12.4% last month to 15.7%. Primary dealers were left with the remaining 21.7% of the day’s auction, down 24% from last month.

Credit Suisse’s Michael Strobaek wrote in a note to clients today that, “The upcoming earnings season, a recent uptick in coronavirus infection numbers, and political developments in the USA create a challenging backdrop for financial markets going into the summer.” The Swiss bank is advising its wealthy clients to cash in after the market’s rapid rise with the thinking that after the summer, risk assets will offer further potential gains.

Stocks to Watch

Reuters reports the U.S. Justice Department is nearing the completion of an antitrust investigation against Google that is expected to result in a lawsuit being filed this summer. 

The world’s second-largest fashion retailer, Hennes & Mauritz (HMRZF), saw a large loss in the second quarter after most of its stores were closed due to the pandemic. The Swedish group reported that sales from June 1-24 were down 25% YoY after a 50% decline in Q2. Since the middle of April, sales have gradually recovered as stores reopen and H&M’s online business has seen a 36% increase in Q2.

Indian online travel company MakeMyTrip (MMYT) reported March quarter results that matched EPS expectations but fell short on its top line as revenue for the quarter fell 16% YoY. 

58.com (WUBUreported non-GAAP earnings and despite a 15% shortfall in Y0Y quarterly revenues, a 20% reduction in “paying business users” and a gross margin reduction of approximately 2% diluted earnings posted to 410% gain over the same quarter in 2019 attributable to a gain related to the deconsolidation of a holding of subsidiary 58 Home.  

Amazon (AMZNis entering the autonomous vehicle space, announcing they will spend $1B to purchase self-driving car developer Zoox which has been focusing on urban center focused autonomous multi-passenger vehicles. It is not clear what direction if any Amazon will give Zoox for future development.

Facebook (FB) stated that Verizon (VZ) will remove all advertising from the platform including Instagram until the company implements measures to limit racism and hate speech. 

Uber (UBER) has announced it will cease efforts to join the financial services space and focus on core competencies. The company announced last October plans to venture into fintech with what they dubbed “Uber Money” envisioning proprietary credit cards, a digital wallet, and instant payments for drivers.

CoreLogic (CLGX) boosted its revenue for the current quarter to $445-$465 million vs. its prior guidance of $420-$445 million and the $440 million consensus forecast. The company also lifted and tightened its EBITDA guidance for the quarter to $145-$150 minion from $120-$135 million.

Big Lots (BIG) issued upside guidance for its July quarter with EPS of $2.50-$2.75 vs. the $0.84 consensus led by quarter to date comp sales through June that are well ahead of expectations. For the July quarter, the company now expects comparable sales to be up by a mid-to-high twenties percentage.

Group 1 Auto (GPI) noted significantly improving market conditions and operating trends in May and June-to-date when compared to March and April 2020.

In a filing with the SEC, Lending Club (LC) shared it launched interest-only hardship plans on June 11 and is planning to launch additional plans during the second half of 2020. The company has also tightened underwriting on new loans, increased interest rates on new loans, added capacity to help borrowers over the phone, and launched self-service options online. Lending Club expects losses to peak in Q4 2020 and Q1 2021 based on the structure and timing of hardship plans. 

Nike (NKE) reported a loss of $0.51 per share which was $0.55 lower than expectations of them earning $0.04. Revenues were down 38% YoY at $6.31B as compared to expectations of $7.26B as the company, with a heavy brick and mortar retail presence was impacted severely by pandemic related store closures. The company reported that online sales increased 75% to account for 30% of overall revenues. The company did not provide guidance on the back half of 2020.

In a blow to movie theater companies such as AMC Entertainment (AMC) and Cinemark Holdings (CNK) and following Disney’s (DIS) postponement of MulanAT&T’s (T) Warner Brothers has postponed the release of Tenet to August 12.

Harley-Davidson (HOG) announced it will be eliminating 140 jobs as it re-sets production schedules.

Okta (OKTAjoined CrowdStrike (CRWD)Netskope, and Proofpoint (PFPT) announcing the companies are coordinating to develop and implement an integrated, zero trust security strategy suitable for managing security as corporate networks shift from tightly managed infrastructures to the current work from home or distributed work environments. 

Grocery chain Albertsons Companies (ACI) priced a scaled back IPO at $16, below its targeted price range of $18-$20. The offering was downsized to 50 million shares vs. the targeted 65.8 million. 

Office Depot (ODPapproved a reverse stock split at a ratio of 1-for-10 that will become effective after US equity markets close on June 30.

After today’s market close there are no expected corporate earnings reports to be had. Investors that wish to get a jump on the corporate earnings reports to be had next week should visit Nasdaq’s earnings calendar page

On the Horizon

  • Dates to mark:
      • June 29: Pending Home Sales, Dallas Fed Manufacturing
      • June 29: IBio (IBIO) will join both the Russell 2000 and Russell 3000 indexes before the market open.
      • June 30: Case-Shiller Home Prices, MNI Chicago PMI, Consumer Confidence
      • June 30: Before the market open, TopBuild (BLD) will replace Tech Data (TECD) in the S&P MidCap 400 while Retail Properties of America (RPAI) replaces TopBuild in the S&P SmallCap 600. 
      • July 1: ADP Employment Report, Markit Manufacturing PMI, Construction Spending, ISM Manufacturing, Wards Vehicle Sales
      • July 2: Nonfarm Payrolls, Unemployment Rate, Durable Goods, Capital Goods, Factory Orders

Thought for the Day

“Today’s good mood is sponsored by coffee.” ~ Anonymous

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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