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Daily Markets: Investors Pause as Political Battles Heat Up

Today’s Big Picture

Shares in Asia, for the few exchanges open today, closed mostly in positive territory, and the Tokyo stock exchange experienced its worst outage since shifting to fully electronic trading in 1999, wreaking havoc on a day of key economic data releases and portfolio re-balancing. The exchange announced the halt shortly before the open and later said the closure would last the entire day, blaming a piece of hardware. A press conference to discuss the matter was slotted for later today. In addition to that unforeseen closure, equity markets in Hong Kong, China, and South Korea were closed today.

By mid-day trading, European equities were higher, and U.S. equity futures pointed to a positive open led by a combination of sequentially improving economic data out of Japan and the Eurozone and renewed hopes for a U.S. fiscal stimulus plan. Late Wednesday, President Trump extended an offer for more than $1.5 trillion in stimulus following reports that stimulus conversations between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin were set to continue. While the outcome of those conversations will likely impact the direction of equity markets near-term, odds are the rash of U.S. economic data today and tomorrow will factor into September quarter GDP expectations as well as the direction of stocks.

While the pandemic pushed the once headline-dominating Brexit talks to the back burner, that hot mess is heating up again this week. Brussels is now suing the UK over plans to violate last year’s withdrawal agreement, which could end up putting the UK before the European Court of Justice. This comes before the draft bill that would allow for the violation has even been voted into law. Why is Brussels doing this, you ask?

According to Ursula von der Leyen, the EU Commission president, “This draft bill is by its very nature a breach of the obligation of good faith laid down in the withdrawal agreement, and moreover, if adopted as is, it will be in full contradiction to the protocol on Ireland/Northern Ireland.”

The UK has one month to respond, and in our view, the timing that coincides with what is likely to be a contested 2020 U.S. prudential election increases the odds of a volatile market ahead. And why not, right? There really hasn’t been nearly enough pain in 2020.

Data Download

International Economy

Mixed manufacturing data for September out of Australia today with the AI Group Manufacturing Index falling to 46.7 from 49.3, but the Markit Manufacturing PMI rose to 55.4 from 53.6, slightly below the expected increase to 55.5.

South Korean exports rose 7.7% YoY in September, much improved from the prior 10.1% decline, and beating expectation for just a 2% YoY increase. Imports also were better-than-expected, rising 1.1% YoY after a 15.8% contraction in August, much stronger than the expected 4.9% contraction. This was the first time export growth has been positive since the start of the pandemic, a positive sign for the global economy.

Tankan and Jibun data out of Japan for Q3 this morning showed improvement, but levels remained significantly depressed and were generally weaker than expected.

  • Large Manufacturers Index rose to -27 from the prior 11-year low of -34, below expectations for -23. This was the third consecutive read below 0.
  • Large Manufacturing Outlook rose as expected to -17 from -27.
  • Large Non-Manufacturing Index missed expectations for an increase to -9, rising to the -12 from the prior -17.
  • Non-Manufacturing Outlook rose to -11 from -14, again below the expected increase to -9.
  • Small Manufacturers Index rose only slightly to -44 from -45, well below the expected increase to -38.
  • Large All Industry Capex rose 1.4%, down from the prior 3.2% increase but better than the expected 1.3% increase.
  • Jibun Bank Manufacturing PMI (final) for September rose to 47.7 from 47.2, beating expectations for an increase to 47.3 but still in contraction (anything less than 50 is a contraction).

Mixed bag for Markit manufacturing data in the Euro Area for September:

  • Manufacturing PMI for the Euro Area rose to 53.7 as expected from 51.7
  • Spain’s PMI was better than expected, rising to 50.8 from 49.9 (contraction) versus expectations for 50.5.
  • France’s PMI was stronger than expected, rising to 51.2 from 49.8 (contraction) versus expectations for 50.9.
  • Italy’s PMI was weaker than expected, rising to just 53.2 from 53.1 versus expectations for 53.5. On a more positive note, this was the highest level in 27 months as Italy’s manufacturing sector grew more quickly than France’s or Spain’s thanks to fewer Covid-19 infections and restrictions.
  • Germany’s PMI was weaker than expected at 56.4 from 52.2 versus the expected increase to 56.6.

Unemployment in the Euro Area rose to 8.1% in August from 8.0% in July.

  • Spain has the highest unemployment rate at 16.2%
  • Italy is second at 9.7% in August from 9.8% in July versus expectations for an increase to 10.1%.
  • Germany has the lowest rate at 4.4%.

Inflation remains relatively non-existent in the Euro Area, with its Producer Price Index (PPI) rose just 0.1% in August MoM, down 2.5% YoY.

Domestic Economy

After Tuesday night’s debate, yesterday brought more political theater in which the powers that be on Capital Hill looked to have engaged in intense negotiations for another stimulus package, but ended the day with no clear accomplishments. We remain skeptical that anything will get passed before the election and possibly not until early 2021. The markets look to be internalizing that likelihood.

This morning, President Trump signed a stopgap funding bill that will keep the federal government open for business through December 11. Government funding ran out last night at midnight.

Yesterday the Commerce Department issued an update on second-quarter GDP to a decline of 31.4% versus the prior estimate of 31.7%, which given the magnitude of the decline, is a relatively meaningless change.

The Chicago MNI PMI came in well above expectations, hitting the highest level since December 2018, which is great news given that it has the best correlation to the more widely-followed ISM PMI.

Pending home sales are on a tear, rising 8.8% in August, hitting a record high.

ADP’s Private Sector Payroll report saw an increase of 749,000 jobs in September, beating expectations for an increase of just 600,000 driven by strength in manufacturing hires of 130,000 during the month. This serves as a preview for Friday’s Nonfarm Payroll report from the Bureau of Labor Statistics, which is expected to see an increase of 800,000 jobs, down from August 1.37 million increase.

This morning’s Challenge Job Cuts for September came in at 118.8K versus expectations for 120K and 115.8K in August.

Later today in the U.S., we will get Personal Spending and Personal Income, PCE Price Index, the usual weekly Initial Jobless Claims, Bloomberg Comfort, Markit Manufacturing PMI, ISM Manufacturing, and Construction Spending.

Markets

Wednesday, the Dow was the strongest of the major domestic equity indices, close up 1.2% while small caps were the weakest with both the Russell 2000 and S&P 600 gaining just 0.2%. As we mentioned yesterday morning, the S&P continues to struggle with its 50-day moving average. The index peaked just before 2:30 pm and then slid back below its 50-day to close up just 0.8% on the day. The Nasdaq 100 also gained 0.8% on the day while the Nasdaq Composite rose 0.7%.

Yesterday was also the close of the third quarter on a year that frankly, we think most of us would be ok with having missed. Putting that aside, here are the year-to-date returns for the major U.S. equity indices:

  • Nasdaq 100 +30.1%
  • Nasdaq Composite +24.5%
  • S&P 500 +4.1%
  • S&P 500 equal weight -6.3%
  • Dow -2.7%
  • Russell 200 – 9.6%
  • Gold +22.7%

Yesterday the Investment Company Institute reported weekly flows for mutual funds and ETFs, which found $15.7 billion being pulled out of domestic equity ETFs, the bottom 1.2 percentile of all readings, and the largest outflow since August of 2019. On the other hand, Commodity Mutual Funds and ETF and Municipal Bond Mutual Funds and ETFs enjoy large inflows in the top 93.6 percentile and 75.5 percentiles, respectively of all readings.

Stocks to Watch

The FDA is expanding its probe into a patient’s adverse event in AstraZeneca’s (AZN) coronavirus trial. The patient reportedly fell ill with transverse myelitis last month, a rare neurological condition in with both sides of one section of the spinal cord become inflamed, interrupting the messages the spinal cord nerves send throughout the body.

The U.S. extended its ban on cruising through the end of October, a blow to the likes of Royal Caribbean Group (RCL), Carnival Corp (CCL), Norwegian Cruise Line Holdings (NCLH), and Lindblad Expeditions (LIND), whose shares are already down -50.9%, -69.8%, -70.7%, and -48.0% YTD.

Bed Bath & Beyond (BBBY) reported better than expected revenue and EPS for its August quarter as comp sales growth rose 6% YoY led by the 89% YoY increase at its Digital Channels. Citing the pandemic, no forward guidance was issued.

Shares of Bayer AG (BAYRY) are down in European trading following the company sharing its see its 2021 sales at approximately 2020 levels despite significant headwinds from the COVID-19 pandemic, especially in the agricultural market. The company also announced additional targeted operational savings of more than 1.5 billion euros annually by 2024, which is in addition to its 2.6 billion euros cost reduction plan targeted for 2022.

PepsiCo (PEP) reported stronger than expected September quarter results led by organic growth of 4.2% YoY vs. the consensus forecast that called for 1.6% YoY. For all of 2020, the company now sees organic revenue growth of ~4% and core earnings EPS of $5.50 vs. $5.53 in 2019.

Gaming revenue in Macau fell 90.0% in September to $280 million as the pace of recovery was slower than anticipated. Expectations call for some improvement in October given eased visa restrictions and the Golden Week holiday. Investors will want to watch comments made during the upcoming September quarter earnings season from companies that include Wynn Resorts (WYNN), MGM Resorts (MGM), and Melco Resorts & Entertainment (MLCO).

STMicroelectronics (STM) boosted its outlook for the September quarter and now revenue of $2.67 billion vs. the $2.46 billion consensus and its prior guidance of $2.45 billion. For 2020, the company boosted its revenue forecast to revenue above $9.65 billion vs. the $9.45 billion consensus.

H&M Hennes & Mauritz (HNNMY) reported its 3Q sales fell 16% YoY. At the beginning of the quarter, ~900 of the company’s 5,000 stores were temporarily closed, but at the end of the quarter, just over 200 stores were temporarily closed. September sales fell 5% YoY.

Morgan Stanley (MS) has received regulatory approval from the Federal Reserve to acquire E*TRADE Financial (ETFC). The transaction is expected to be completed on October 2.

American Airlines (AAL) CEO Doug Parker shared the airline will move ahead with plans to furlough 19K workers today, but will be prepared to reverse course should a deal for more government aid be reached.

United Airlines (UAL) filed plans yesterday to borrow up to $7.5 billion from the U.S. government, a 67% increase from its original target.

AMC Entertainment (AMC) will resume operations at 14 more theaters in California and Michigan beginning this weekend. Those openings will bring AMC’s open US theaters to 80%.

AMAG Pharma (AMAG) is reportedly in discussions to be acquired by Apollo Global Management’s (APO) Covis Pharma.

Mission Produce (AVO) priced a downsized 8 million share IPO at $12.00 per share, below the expected range of $15-17.

After today’s market close, Smart Global (SGH) will report its quarterly results. Investors looking to get a head start on the deluge of corporate earnings to be had in the coming weeks should visit Nasdaq’s earnings calendar page.

On the Horizon

    • October 2: Nonfarm Payrolls, Unemployment Rate, Average Hourly Earnings, University of Michigan Sentiment, Factory Orders, Durable Goods, Capital Goods
    • October 5: Before US equity markets open, SailPoint Technologies (SAIL) will replace Sally Beauty (SBH) in the S&P MidCap 400, and Sally Beauty Holdings will replace Oasis Petroleum (OAS) in the S&P SmallCap 600. Markit Services PMI and ISM Services
    • October 6: Trade Balance and JOLTS Job Openings
    • October 7: MBA Mortgage Applications, Consumer Credit, FOMC Meeting Minutes
    • October 8: Initial Jobless Claims, Bloomberg Comfort
    • October 9: Wholesale Inventories, Wholesale Trade Sales
    • October 13: NFIB Small Business, CPI, Real Hourly Earnings, Budget Statement
    • October 14: MBA Mortgage Applications, PPI
    • October 15: Initial Jobless Claims, Bloomberg Comfort, Empire Manufacturing, Import/Export Prices, Philly Fed Outlook
    • October 16: Options Expiration Day, Retail Sales, Industrial Production, Business Inventories, University of Michigan Consumer Sentiment, TIC Flows
    • October 19: Home Builder Sentiment
    • October 20: Building Permits and Housing Starts
    • October 21: MBA Mortgage Applications, Fed Beige Book
    • October 22: Initial Jobless Claims, Bloomberg Comfort, Leading Index, Existing Home Sales, Kansas City Manufacturing
    • October 23: Preliminary Markit PMIs
    • October 26: Chicago Fed Activity, New Homes Sales, Dallas Fed Manufacturing Activity
    • October 27: Durable/Capital Goods, FHFA Home Prices, Case-Shiller Home Prices, Consumer Confidence, Richmond Fed Manufacturing
    • October 28: MBA Mortgage Applications, Wholesale Inventories, Retail Inventories
    • October 29: Initial Jobless Claims, Bloomberg Comfort, GDP, Personal Consumption, Pending Home Sales
    • October 30: Personal Income, Personal Spending, PCE Deflator, Employment Cost, MNI Chicago PMI, University of Michigan
    • October 31: Boo!

Thought for the Day

“The way to get started is to quit talking and begin doing.” – Walt Disney

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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