Today’s Big Picture
Welcome back from the U.S. Independence Day holiday. We hope you enjoyed the U.S. market breather and hope you are recharged and ready for the current quarter. The June quarter earnings season will shortly be upon us, and we’ll likely see a pronounced uptick the 2020 U.S. presidential campaign cycle. In addition to keeping a watchful eye on U.S.-China relations, we’ll expect to see the incoming data starting to show the impact of the renewed surge in U.S. COVID-19 cases that is building a strong headwind to economic growth in the current quarter as several states tighten coronavirus-related restrictions.
For the June 2020 quarter, consensus EPS estimates call for a 43.8% drop in the S&P 500, and even though S&P 500 EPS are expected to bounce back in the second half of the year, EPS expectations for the full-year are down some 22% vs. 2019. While the outlook for 2021 calls for a continued rebound, the reality is EPS growth for the S&P 500 over the 2019-2021 period is all of 0.2%.
Against the backdrop of record-making surges in the major stock market indices during the June quarter, that even led the CNN Money Fear & Greed Index to slip back into Neutral from Greed just a month ago, we continue to see the June quarter earnings season setting the direction for the stock market’s next move. Before that drink from the firehose begins, shares in mainland China and Hong Kong enjoyed their biggest 1-day increase in over a year today with China’s CSI 300 gaining 5.8% and Hong Kong’s Hang Seng rose 3.7%. The surge is attributed to pushes by state media to push the rally further, urging investors to pile into the market. By mid-day trading, equity indices in Europe were higher, and U.S. equity futures point to a positive move when those markets open later this morning.
Global coronavirus cases are now over 11.5 million, with nearly 540,000 lives lost to Covid-19. The 7-day moving average for daily new cases continues to rise and is now 58% higher than it was a month ago. July 3 saw a new record-high of over 210,000. On a more positive note, the 7-day moving average for the number of deaths per day has fallen from its June 22 peak of 4,820 and is now 4,530. We’ll take improvements where we can find them. The top five most affected countries are now in order of the number of cases: U.S., Brazil, India, Russia, and Peru. Italy, which was once the epicenter for the western world, is down to 10th place, with about 44% of the cases the U.S. has and 53% of Brazil’s, adjusted for population.
The U.S. has over 2.9 million confirmed cases and over 130,000 deaths from Covid-19. In the first four days of July, more than 12 states experienced record highs for daily new cases. Houston, Texas, is warning that it will run out of hospital beds in two weeks. Arizona is seeing nearly 25% of those tested coming back positive, and its ICUs are already at about 90% capacity. The governors of at least 20 states have mandated masks.
While the battle over to-mask or not-to-mask wages on, Dr. Fauci, the director of the National Institute of Allergy and Infectious Diseases, has warned that there is evidence the virus may be mutating and becoming more easily transmissible, but the research is still in early stages. This new strain of the virus has become more prevalent than the one that first emerged in Wuhan, China, at the end of 2019.
Gilead Sciences (GILD) announced that the European Commission has granted conditional marketing authorization for Veklury (remdesivir) as a treatment for SARS-CoV-2 infection. Under the authorization, the treatment is indicated for adults and adolescents (aged 12 years and older), with pneumonia requiring supplemental oxygen.
In Germany, new manufacturing orders rose 10.4% MoM in May, the first increase since January, after falling 26.2% in April, 15% in March, and 1.2% in February. Factory orders remain down nearly 30% from Q1 and YoY. German car production is expected to fall by 25% this year, according to the auto industry association.
Spain saw Industrial Production decline 24.5% YoY, up from the prior 34.1% contraction, but the fifth consecutive decline.
The Construction PMI in the Euro Area remained in contraction territory in June, rising to 48.3 from 39.5, the fourth consecutive month in contraction. Italy and France both enjoyed expansionary Construction PMIs in June, up to 51.6 from 51 for Italy and up to 53.8 from 32.4 for France. Germany remains in contraction at 41.3, barely up from 40.1.
Retail Sales in the Euro Area rose a record-breaking 17.8% MoM in May after falling 12.1% in April but remain down 5.1% YoY. France saw retail sales increase 25.6% MoM in May after falling 19% in April, but remain down 12% YoY. In Spain, sales rose 18% MoM, 14% in Germany, and 9% in the Netherlands. In the UK, sales rose 11.1% MoM, but are down 12.4% YoY.
Fujitsu (FJTSY) has said it plans to halve its office space in three years as it developed new ways for employees to work in this new normal” of the pandemic. Its roughly 80,000 employees in Japan would work flexible hours, and work-from-home would be standard wherever possible. In addition, the company plans to launch satellite offices, using shared workspace providers, in areas where many employees reside.
That U.S.-China trade war may heat up again as the economic wallop caused by the pandemic make it questionable that China will be able to buy the U.S. goods it committed to under the phase one trade deal. The latest data on U.S. exports show that China has bought only $2 billion worth of energy products from the U.S. through May, far from the $25 billion it’s agreed to purchase in 2020. China has only purchased $5.4 billion of agriculture goods compared with the $33 billion goal and has bought only $19.5 billion of manufacturing goods, far short of its goal of $84 billion for the year.
Thursday’s jobs report was a pleasant surprise to the upside, adding 4.8 million jobs in June versus 3.2 million expected, but before we break out the bubbly, employment is still about 10% below where it was in February. Digging into the details, May and June collectively added about 3 million jobs in the restaurant industry, reversing nearly half of the losses from March and April. The same story applies to retail. While on the surface, that looks great, but the data on restaurant reservations and brick and mortar retail don’t indicate that this level of staffing is necessary, and restaurant diners in parts of the country have been declining (again) in the past few weeks.
When the pandemic hit the U.S., those sectors were workers are in close proximity to customers, (restaurants/bars, retail, hotels, live sports, and personal services such as salons) were hardest hit with employment in these vulnerable areas falling by 32% by the end of April. While these sectors accounted for less than 30% of total employment at the start of the year, they were responsible for about 60% of the jobs lost through April. Keep in mind that the survey which was used to generate the BLS’s June employment report was conducted June 7 through June 13. Since that time, the number of new daily cases is more than double what it was back then, and while yes, testing has increased, the percent of tests coming back positive has also increased from 4.4% during the survey to 4.7% last week.
Overall, just one-third of the jobs lost have been recovered, which means the economy is still down 14.7 million jobs and payrolls since February have contracted at a 26.2% annualized rate. During the Great Financial Crisis, the worst this got was -6.6%. Putting it into a further historical perspective, the level of employment is below where it was in March 2014. Also, keep in mind that while white-collar jobs saw a lot fewer cuts in the early months of the pandemic, as the lockdowns and economic slowdown drag on, they will become increasingly more vulnerable as well.
We’d note over the weekend Goldman Sachs (GS) cut its GDP forecast for the current quarter to +25% from +33% given the combination of tighter state restrictions and voluntary social distancing following the dramatic resurgence of the coronavirus in the US over the last two weeks. Per Goldman, the “healthy rebound in consumer spending seen since mid-April will likely stall in July and August,” but the firm suspects the recovery in manufacturing and construction should be largely unaffected.
Later today, in the US, we will get the Markit Services PMI for June and the ISM Non-Manufacturing report for June.
Despite the better-than-expected June jobs report on Thursday (markets were closed Friday for Independence Day), markets closed only slightly in the green with the Dow ending the day up 0.4%, the S&P 500 and the Nasdaq Composite up 0.5%.
Stocks to Watch
Fabless semiconductor company Himax Technologies (HIMX) now expects its Q2 revenue to be $187M, up 1.3% QoQ), vs. prior guidance that called for a slight sequential decrease and the consensus of $175.18 million. The company now sees its gross margin for the quarter hitting ~21% vs. prior guidance of 20.2%-20.6% with diluted ADS around $0.08 compared to its previous guidance for a loss of $0.005-$0.015 per diluted ADS.
Berkshire Hathaway Energy, a subsidiary of Warren Buffett’s Berkshire Hathaway (BRK.B) announced it had executed a definitive agreement to acquire Dominion Energy’s natural gas transmission and storage business. The assets include over 7,700 miles of natural gas transmission lines, with approximately 20.8 billion cubic feet per day of transportation capacity and 900 billion cubic feet of operated natural gas storage with 364 billion cubic feet of company-owned working storage capacity, and partial ownership of a liquefied natural gas export, import, and storage facility. The transaction has an enterprise value of approximately $9.7 billion.
Bloomberg reports Uber Technologies (UBER) has agreed to acquire privately-held on-demand food delivery company Postmates Inc. in a $2.65 billion all-stock takeover that could be announced as early as today. Uber Eats head Pierre-Dimitri Gore-Coty is expected to continue to run Uber’s combined delivery business.
Beauty salon owner and franchisor Regis (RGS) announced 84% of its system-wide salons were open as of July 1 and that it closed on the sale of 88 company-owned locations to franchisees during June. As of July 1, 88% of franchise salon locations were open, and 68% of company-owned salons were open.
Sally Beauty (SBH) issued an interim update that included June quarter revenue guidance of ~$705 million vs. the $653.36 million consensus. The company also shared it has substantially completed its retail and wholesale store reopening process in the U.S., Canada, the European Union, and the UK. A small portion of the store fleet, in parts of Mexico and South America, is expected to reopen in the next 60 days.
Ryanair Holdings (RYAAY) and Irish Pilots entered into a 4-year agreement that includes a 20% pay reduction, which is expected to be restored over four years, as well as productivity improvements on “rosters, flexible working patterns and annual leave to minimize Irish Pilot job losses.” Ryanair has also signed agreements with the Fórsa union for its Irish based cabin crew and the UNITE union for its UK cabin crew for up to 10% pay reductions that will be fully restored over four years as well as productivity improvements to save jobs. Per reports, the cabin crew agreements are currently out to ballot.
According to The Sunday Times and The Daily Telegraph, the British government is drawing up plans to strip Huawei gear from its 5G networks by the end of this year. This compares to the ‘limited role’ previously assigned to the Chinese telecom equipment giant with the change due to a new report that uncovered “severe” security issues following the U.S. banning Huawei from using American components. Over the last year, bad news for Huawei has led investors to revisit shares of Ericsson (ERIC) and Nokia (NOK).
Bankruptcy filings were up 26% YoY in the first half of 2020, according to Epiq Systems. Included in that group of companies were J.C. Penney (JCP), Hertz (HTZ), Chesapeake Energy (CHK), Quorum Health (QHC), Pier 1 Imports (PIRRQ), Frontier Communications (FTR), 24 Hour Fitness, J. Crew, and CEC Entertainment, the parent company of Chuck E. Cheese. More recent additions to that list include NPC International, a large franchisee of Yum Brands (YUM) and Wendy’s (WEN), and Lucky Brand. Reports suggest the Simon Property Group (SPG) backed SPARC Group is among the potential bidders for Lucky.
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 this week should visit Nasdaq’s earnings calendar page.
On the Horizon
- Dates to mark:
- July 7: Redbook, IBD/TIPP Economic Optimism, JOLTs Job Openings
- July 8: 30 Year Mortgage Rate, Mortgage Applications, Consumer Credit
- July 9: Jobless Claims, Wholesale Inventories, Bloomberg Comfort
- July 10: PPI, Baker Hughes Rig Count
- July 13: Budget statement
- July 14: NFIB Small Business, CPI, Real Average Hourly Earnings
- July 15: MBA Mortgage Apps, Import/Export Prices, Empire Manufacturing, Capacity Utilization, Industrial Production, Fed Beige Book
- July 16: Retail Sales, Philly Fed Outlook, Initial Jobless Claims, Bloomberg Comfort, Business Inventories, Homebuilder Sentiment, TIC Flows
- July 17: Options Expiration, Building Permits, Housing starts, Univ of Michigan Consumer Sentiment
- July 21: Chicago Fed Activity
- July 22: MBA Mortgage Apps, FHFA Home Prices, Existing Home Sales
- July 23: Initial Jobless Claims, Bloomberg Comfort, Leading Index, Kansas City Fed Manufacturing
- 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
“All we get is time and choices. Be wise with both.” ~ Anonymous.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.