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Daily Markets: Equities Hit by the Fed’s Cold Glass of Water

Today’s Big Picture

Equities in Asia closed down across the board today led by respective declines of 1.5% and 1.3% Hong Kong’s Hang Seng and China’s Shanghai Composite. By mid-day trading, European equities were mostly lower as well and U.S. futures point to a weak open when those markets open later this morning.

There are several factors at play, including the U.S. suspending its extradition treaty and ended reciprocal tax treatment on shipping with Hong Kong even as Chinese Ministry spokesman Gao Feng said China and the U.S. will hold trade talks in “coming days” to review phase one trade deal. Also, the People’s Bank of China held its benchmark interest rates steady for the fourth straight month, leading to the growing view it will not lower its reserve requirement ratio again in 2020.

The larger factor weighing on equities is yesterday’s July Federal Reserve FOMC meeting minutes, which shared the Fed’s latest views on the economy. In a nutshell, it was a glass of cold water for the stock market that led the S&P 500 to retreat from a potential record high yesterday. In our view, the Fed’s comments and concerns were none too surprising to those who have been tracking the data vs. staring at the stock market’s continued climb. In the July meeting minutes, the Fed shared its view that the outlook for the economy will depend on the course of the virus, and that’s seen a “highly uncertain.” Its concerns include additional waves of outbreaks, the possibility the government’s fiscal support for households, businesses, and state and local governments might not be enough, and the labor market is “a long way from full recovery even after the positive May and June employment reports.”

That’s right, Toto, we’re a long way from things being back to normal. And on that note, Salesforce (CRM) has extended its work-from-home option for all workers until at least August 2021.

Data Download

Coronavirus

This week has been a grim one with respect to the pandemic. Texas, California, and Arizona all reported one of their biggest one-day death tolls this week. The same goes for Spain, which just reported the highest level of deaths since May. The number of daily new cases in France reached the highest level since the easing of the lockdown in mid-May.

International Economy

Germany’s PPI fell 1.7% YoY in July after falling 1.8% in June and compared to expectations for a second 1.8% decline.

Construction Output in the Euro Area fell 5.9% YoY in June vs. the expected 7.8% drop, and the revised fall of 10.5%in May.

Domestic Economy

Yesterday’s Cass Transportation Index Report for July found that Shipments were up 4.8% MoM but remain down 13.1% YoY and 18.2% over the past two years. This is an improvement from last month when shipments were down 17.8% YoY. Expenditures rose 2.8% MoM but remain down 14.3% YoY and down 15.5% over the past two years. Overall, July was better than expected in the trucking market and rail traffic continues to improve, but everything is still below year-ago volume levels.

The Federal Reserve’s release of its July meeting minutes showed that officials continue to believe the level of economic uncertainty is “very elevated” and that several suggested “additional accommodation would be required to promote economic recovery and return inflation to the committee’s 2% objective.

Later today, we will get the usual weekly jobless claim report, the August read of the Philly Fed index, and the weekly EIA Natural Gas Stocks report.

Markets

Yesterday was a down day pretty much across the board after first rising to new intraday highs that were reversed in the final hours of trading, with the Nasdaq 100 down 0.7% and the Nasdaq Composite losing 0.6%. The S&P 500 and S&P 500 Equal-Weight both fell 0.4% while the Russell 200 lost 1.0% and the Dow fell 0.3%. The move lower was exacerbated by yesterday’s minutes release from the Federal Reserve’s July meeting of the Open Market Committee (FOMC), after which the U.S. dollar rose sharply higher, the Treasury curve steepened, and U.S. equities took a hit. The 10-year Treasury yield rose 0.02% and the US dollar index rose 0.9%.

The reason for the decline, the FOMC didn’t not determine that further aggressive moves were necessary, although they were not ruled out for future meetings. The FOMC also expected that there would be another round of meaningful fiscal stimulus, which has yet to materialize, and now that the Senate has recessed until mid-September, it is not likely that a deal will get hammered out before their return.

Stocks to Watch

Apple (AAPL) closed yesterday up 0.1% after having briefly seen its market capitalization rise above $2 trillion, the first U.S. public company to do so.

Alibaba (BABA) reported the June quarter EPS of CNY14.82 vs. the CNY13.56 consensus. Revenue for the quarter rose 33.8% YoY to CNY153.75 billion, well ahead of the CNY147.3 billion consensus. Annual active consumers on the company’s China retail marketplaces reached 742 million, an increase of 16 million QoQ. The company’s Mobile MAUs on its China retail marketplaces reached 874 million in June 2020, an increase of 28 million QoQ. In the June 2020 quarter, cloud computing revenue grew 59% YoY due to strength in the company’s public cloud and hybrid cloud businesses. The company’s digital media and entertainment business, Youku, saw its daily average subscriber base increased by over 60% year-over-year during the quarter.

BJ’s Wholesale (BJ) reported better than expected July EPS of $0.77 vs. the $0.60 consensus. Revenue for the quarter jumped 15.7% YoY to $3.87 billion vs. the $3.74 billion consensus. Comparable club sales for the quarter, excluding gasoline sales, increased by 24.2% YoY, which includes the company’s digital sales that rose over 300% YoY. Comparable club sales, excluding the impact of gasoline sales, for the second quarter of fiscal 2020 increased by 24.2% YoY.

Estee Lauder (ELreported June quarter results that missed both top and bottom-line expectations for the quarter. The company also issued guidance for the current quarter that is below consensus expectations with EPS of $0.80-0.85 vs. the $1.21 consensus and revenue of $3.39-3.43 billion vs. the $3.46 billion consensus. The company shared its performance was impacted by the closure of retail stores during the quarter as a result of the pandemic and noted that nearly all locations in Asia/Pacific have re-opened while exiting June roughly 15% of retail locations in Europe, the Middle East & Africa and 20% in the Americas had yet to re-open.

NVIDIA (NVDAreported July quarter EPS of $2.18 per share, $0.50 better than the $1.68 consensus of $1.68 as revenue rose 50.1% YoY, topping the $3.66 billion consensus forecast. The company noted recently-acquired Mellanox contributed 14% of revenue for the quarter. By reportable segment, Gaming revenue for the quarter rose 26% YoY to $1.65 billion vs. the $1.41 consensus; Data Center came in at $1.75 billion vs. the $1.71 billion consensus; Professional Visualization revenue fell 30% YoY to $203 million, missing the $299 million consensus; and Auto-related revenue fell 47% YoY to $111 million but even so beat out the $99 million consensus. NVIDIA issued upside guidance for the current quarter with revenue of $4.40 billion +/-2% compared to the $4.0 billion consensus.

L Brands (LBreported July quarter EPS of $0.25 vs. the -$0.42 consensus as revenue for the quarter fell 20.1% YoY to $2.32 billion vs. the $2.17 billion consensus. Total Bath & Body Works sales for the quarter in the U.S. and Canada were $1.197 billion, up 13% YoY while total Victoria’s Secret sales in the U.S. and Canada were $977.5 million, a 39% drop YoY. Sales at the Victoria’s Secret direct business rose 65% YoY.

International Game Tech (IGT) inked a long-term sports betting technology agreement with Boyd Gaming (BYD) in which Boyd will utilize IGT’s PlaySports platform to support Boyd Gaming’s retail sportsbooks throughout Nevada, along with its Nevada-based mobile sports app and online sports betting portal. Additionally, Boyd Gaming will deploy IGT’s self-service PlaySports Kiosks throughout its Nevada-based gaming venues.

Shares of AMC Entertainment (AMC) rose in aftermarket trading following CEO Adam Aron’s interview on CNBC’s Closing Bell ahead of today’s reopening of more than 100 U.S. theaters.

Facebook (FB) has won preliminary approval from a federal court to settle a lawsuit charging the company with illegally collecting and storing users’ biometric data without consent. Illinois users accused the social-media company of violating the state’s Biometric Information Privacy Act. That accusation was linked to Facebook’s “Tag Suggestions” feature, which allowed users to recognize Facebook friends from previously uploaded photos.

IBM (IBM) and the Los Angeles city attorney’s office have settled a privacy lawsuit brought after The Weather Channel app was found to be selling user location data without proper disclosure.

Airbnb confidentially submits a draft registration statement on Form S-1 relating to a proposed IPO

After today’s market close, OSI Systems (OSI) and Ross Stores (ROST) will report their quarterly results. Investors looking to get a jump on those and other upcoming reports should visit Nasdaq’s earnings calendar page.

On the Horizon

  • Dates to mark:
      • August 21: Manufacturing PMI, Markit Composite PMI, Services PMI, Existing Home Sales and Options Expiration
      • 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

“Vision is a destination – a fixed point to which we focus all effort. Strategy is a route – an adoptable path to get us where we want to go.” ~ Simon Sinek

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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