December 4, 2020

Daily Markets: Investor Sentiment Cools as Central Banks Stay the Course

Today’s Big Picture

Markets today are mostly weaker after the Federal Reserve disappointed the markets by not gearing up its massive bond-buying program further. The major equity markets in Asia closed mostly in the red with Hong Kong’s Hang Seng leading the decline, down 1.6%, both South Korea’s Kospi and Australia’s ASX 200 fell 1.2%, Japan’s Nikkei 225 dropped 0.7%, and China’s Shanghai Composite closed down 0.4%.

The major European equity indices spent the morning in the red, all down over 0.8% by midday trading. Futures point to a drop at the open for the U.S. markets.

While we remembered the tragic events of 9/11 earlier this month with regret and some bitterness, September 17, 2001 marks another key milestone. It was the day that reminded the world just how resilient U.S. equity markets were and still are, when they re-opened for the first time after the attacks. That day represented, for many in the industry, a form of hope for some path to normalcy back into the world. 

Data Download

International Economy

Singapore’s non-oil domestic exports rose more than the expected 3.7%, up 7.7% in August after rising 5.9% in July. The nation has experienced the strongest export growth in its region in 2020.

The Bank of Japan followed in the Fed’s footsteps, keeping policy steady. Its monetary policy statement commented that while the economy has started to strengthen, it remains in a severe situation due to the impact of the pandemic both domestically and internationally.

This morning the Bank of England left interest rates and its current pace of asset purchases unchanged with all members of the voting committee agreeing to keep the main lending rate at 0.1%. After the economy contracted a record 20.4% in Q2, the UK faces dual headwinds from the pandemic and risks of a no-deal Brexit.

New Zealand’s economy fell 12.2% in the three months ending June QoQ, suffering its most severe contraction on record and putting the nation in its first recession in a decade after declining 1.4% in Q1.

Australia’s unemployment rate fell to 6.8% in August from 7.5%, beating expectations for an increase to 7.7% while the participation rate also rose to 64.8% from 64.7% where it was expected to stay.

New car registrations in the Euro area fell 18.9% YoY in August after falling 5.7% in July and 22.3% in June. Construction Output in the area fell 3.8% in July after a 4.8% decline in June. The inflation rate fell to -0.2% in August from the prior 0.4% increase.

Italy’s Construction Output fell 1.1% in July after a 5.6% decline in June and a 16.0% decline in May.

Domestic Economy

Yesterday’s results from the Federal Reserve Open Market Committee meeting were released, the first such release after the introduction of its new Longer Run Policy Goals. The bottom line is that the Fed expects to keep rates at zero until the labor market returns to pre-Covid levels and until core PCE (its preferred inflation measure) is above 2% and likely headed higher for a meaningful period of time. The U.S. unemployment rate was less than 4% pre-Covid, and the new Summary of Economic Projections from the Fed doesn’t forecast 4% until the close of 2023. No rate change is expected for at least three more years, which is consistent with market pricing.

Fed Chair Powell commented during the press conference that regulation and supervision are the main tools for financial stability, meaning changes with respect to those two factors are likely to happen before a rate hike. He emphasized the need to restrict the spread of the coronavirus – wearing masks, social distancing – to help the economy and added that a vaccine is necessary to return to any sort of normal economy. He also stated that further fiscal stimulus is likely necessary.

Yesterday’s retail sales report found that consumer spending took a hit as the weekly $600 unemployment benefits expired. Headline retails sales rose 0.6%, well below expectations for a 1.0% increase. Retail sales ex-autos and sales ex-autos and gas were both up 0.7% versus expectations for 1.0% and 0.9%, respectively. July’s headline number was revised lower to 0.9% from 1.2%. While the overall numbers were weaker than expected, the trends show consumers are moving back towards more normal spending habits. The strongest sector was Bars and Restaurants, with a 4.7% MoM increase. Non-Store (Online) sales were basically flat. For the YTD through August, online sales were up over 22% YoY while all other sales were slightly down, which means all of the growth in retail sales has come from online. With respect to eating in versus eating out, over half of the shift to eating in has been reversed since the extreme levels of eating in.

Yesterday the Census released its monthly report on business inventories, which found that aggregate inventories are at a 5-year low relative to sales. Wholesalers over the past few months were at more normal inventory levels, relative to sales, but that ratio has been falling fast. The bottom line here is that inventory levels are quite tight and will need to be replenished if we get the kind of demand expected coming out of the pandemic-induced shutdowns. That buildup will be a tailwind for Q3 GDP, which has seen estimates grow from a low of 20% GDP growth to yesterday’s 31.7% offered by the Atlanta Fed.

Later today, we will get data on Building Permits, Housing Starts, the Philadelphia Fed Outlook, and the usual weekly Jobless Claims and Bloomberg Comfort Index.

Markets

While the U.S. equity markets started out in the green yesterday, ten minutes into Federal Reserve Chair Powell’s press conference, they reversed course. In the last 90 minutes of the day, large-cap stocks fell 1%. The tech sector was the weakest on the day, falling 1.6% with Communication Services second-worst at -1.2%. The strongest sector was energy, which rose 4.0% at WTI gains just under 5% for its best day since June, followed by Financials, which rose 1.1%.

Stocks to Watch

There has been a lot of talk about the markets being frothy lately, but yesterday’s Snowflake (SNOW) IPO was an entirely new level of off-the-charts enthusiasm. The company’s IPO priced at $120 Tuesday night, which was more than 50% above where it was expected to price just a few weeks back. Yesterday morning trading opened at $245, more than 200% higher than the IPO price, and rose to as high as $319 and closed the day at $253.93. Relative to trailing twelve months revenue, shares closed yesterday at a multiple of 174.9x. 

Bespoke Investment Group ran the numbers (hat tip) and found that if investors were to sell their shares in SNOW at a 5x multiple in 10 years, the company would have to generate sales growth of 47% every year for the next ten years based on today’s purchase price of $240/share. SNOW’s TTM revenue today stands at $402.6 million, which would translate to revenue of $18.6 billion by 2030, an increase of 4,612%. For context, the fastest operating revenue increase Apple (AAPL) has ever generated over ten years as a publicly-traded company was 2,626% in 2012.

Qantas Airways (ASX:QAN) is getting creative. It will offer a 7-hour scenic tour of Australia from the air to boost sales. The flight will take off from Sydney on October 10, will include kangaroo PJs, and will allow passengers to collect air miles. Kangaroo PJs, how can you resist?

Twitter (TWTR) and WebMD (WBMD) announced a content partnership that will bring more WebMD content right to the Twitter feed with video content and Twitter Moments that educate consumers on health topics and highlight patient stories on what it’s like to live with and manage chronic conditions and other health issues.

Royal Caribbean International (RCL) and its subsidiary Celebrity Cruises announced they will be suspending all sailings departing from Australia and New Zealand on or before December 31, 2020, in alignment with the Australian Government’s recent decision to extend the suspension of cruise tourism. Additionally, Carnival Cruises (CCL) unit P&O Cruises confirmed an extension to its pause in operations until early 2021.

The ongoing saga that is the lawsuit involving the anticipated $16.2B acquisition of Tiffany & Co (TIF) by LVMH (LVMUY) got another chapter. In response to LVMH’s request to delay the trial, Tiffany maintains its position that they have not only managed the business well during the pandemic and any claim of “material adverse effect” is “baseless” but that under the terms of the agreement that LVMH should provide funding for any future dividends and generally, they want (understandably) to close the deal as soon as possible.

In another ongoing saga, at a White House briefing yesterday, President Trump said he expected to be briefed by his advisors this morning concerning the deal struck between Oracle (ORCL) and Bytedance property Tik Tok and has not signed off on any deal just yet. He said if the deal does not involve the definitive sale of Tik Tok assets, he would not be ok with it. Assuredly, there will be more to come.

Apogee Enterprises (APOG) announced Q2 (Aug) earnings of $0.73 per share, $0.44 better than the consensus estimate for $0.29 as revenues fell 10.4% YoY to $319.8 M as compared to the $315.89 M expectation. The company noted that while still not at pre-Covid levels, results continue to improve quarter-over-quarter and that “each of our four segments delivered increased revenue and profitability in the second quarter compared to the first quarter.” Despite withholding detailed guidance, the company did expect fiscal 2H 2021 to continue to improve over H1.

After today’s market close, Vendata Limited (VEDL)Fluor Corp (FLR), Acutus Medical Inc (AFIB), and Scholastic Corporation (SCHL) will be announcing earnings. Investors looking to get the nitty-gritty on those reports and the sea of others to be had later today should visit Nasdaq’s earnings calendar page

On the Horizon

    • September 18: Options Expiration, University of Michigan Sentiment
    • September 21: Chicago Fed Activity
    • September 22: Existing Home Sales, Richmond Fed Manufacturing
    • September 23: IHS Markit Flash PMI data (September), FHFA Home Prices, MBA Mortgage Applications. Samsung (005930:KS) Unpacked event
    • September 24: Initial Jobless Claims, Bloomberg Comfort, New Home Sales, Kansas City Fed Manufacturing
    • September 25: Durable Goods, Capital Goods
    • September 28: Dallas Fed Manufacturing
    • September 29: Trade Balance, Wholesale Inventories, Retail Inventories, Case-Shiller Home Prices, Consumer Confidence
    • September 30: Caixin China General Manufacturing PMI (September), ADP Employment, GDP, Personal Consumption, MNI Home Sales, Pending Home Sales
    • October 1: Personal Spending, PCE, Initial Jobless Claims, Bloomberg Comfort, Markit Manufacturing PMI, ISM Manufacturing, Construction Spending
    • October 2: Nonfarm Payrolls, Unemployment Rate, Average Hourly Earnings, University of Michigan Sentiment, Factory Orders, Durable Goods, Capital Goods

Thought for the Day

“Life starts all over again when it gets crisp in the fall.” F. Scott Fitzgerald

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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