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Daily Markets: Don’t Break Out the Brexit Champagne Just Yet

Daily Markets: Don’t Break Out the Brexit Champagne Just Yet

Today’s focus will be on 11th hour Brexit negotiations for which reportedly a draft agreement has been reached by late morning UK time, pushing the major European indices into the green. Next up are flushing out the details and then achieving buy-in from both the EU and UK Parliaments, which is by no means a given. This could be another buy the rumor and sell the news moment.

This draft puts a hard border between Northern and The Republic of Ireland, which is going to be a very tough sell and has led to the Northern Irish Democratic Unionist Party already rejecting today’s deal. UK opposition Labour party announced this morning that, “…from what we know, it seems the Prime Minister has negotiated an even worse deal than Theresa May’s, which was overwhelmingly rejected.” Prime Minister Johnson has under UK law until Oct. 19 to pass some sort of agreement before he is required to request yet another extension to the departure date of Oct. 31. TBD if the EU has become Hotel California. Tired of Brexit, you aren’t alone.

US equity futures are in the green after yesterday’s drop in the major indices thanks to disappointing retail sales for September, which declined -0.3% versus expectations for an increase of +0.3%, which outweighed any positives from earnings season thus far. This was the weakest print relative to expectations since February but was the first decline in the past seven months. Eight sub-sectors declines while just five saw an increase month-over-month. In keeping with our Digital Lifestyle investing theme, department stores were particularly hard hit during September, while digital commerce continued to gain consumer wallet share.

Markets in Asia closed mixed on fears of slowing global growth combined with optimism concerning measures to ease a housing shortage in Hong Kong that could help to calm the ongoing protests. China again reiterated today that it would not increase its agricultural purchases from the US until the US removes tariffs, making last Friday’s celebration on reaching a mini-deal premature.

Both gold and the US dollar are slightly down this morning.

Data Download

On the domestic economic data front today, we will receive September Housing Starts and Building Permits, Industrial Production and Capacity Utilization for September, the Philadelphia Fed Index for October, and the weekly Initial and Continuing Claims. After the release of the Fed’s Beige Book yesterday, which downgraded the pace of domestic growth, investors will be looking today for any hints that faster-paced growth may be in the works.

The Atlanta Fed’s GDPNow forecast for real GDP growth rose to 1.8% for the September quarter yesterday, a tick higher than its Oct. 9 forecast of 1.7%. Despite the upward revision, the Atlanta Fed’s forecast remains below the 2.03% September quarter GDP forecast offered by the New York Fed’s Nowcast model.

After yesterday’s disappointing retail sales and Fed Beige Book, the market’s odds for a rate hike later this month rose. The market will be paying closer attention to speeches today from The Fed’s Bowman, Evans and Williams.

In the rest of the world:

Overnight data revealed that the unemployment rate in Australia fell slightly, but mostly thanks to a drop in the participation rate with the increase in employment coming in weaker than expected. As a proxy for China’s economy, this is consistent with the narrative of a slowing economy as the trade war takes its toll.

Construction Output in the Eurozone grew at less than half the pace expected in August, rising just 1.2% year-over-year versus 2.6% forecast. Italy’s trade surplus rose significantly less than expected to €2.6 billion versus expectations for €4.7 billion – another sign of weaker global trade.

Unlike yesterday in the US, retail sales ex-fuel in the UK surprised to the upside in September, rising 3.1% year-over-year versus expectations for 2.8%.

Stocks to Watch

The earnings before today’s market open that investors will focus on are:

  • Ericsson (ERIC): On the back of the burgeoning 5G market, Ericsson reported year over year revenue gains and boosted its 2020 revenue outlook and reiterated its 2020 operating margin goal of 10%.
  • Taiwan Semiconductor (TSM): Beat consensus expectations by $0.02 with Non-GAAP EPS of $0.62 for the September quarter. Revenue rose 12.6% year over year, coming in ahead of expectations. The company issued upside revenue guidance for the current quarter of $10.2-$10.3 billion vs. the consensus of $9.63 billion. TSM also boosted its 2019 capital budget to $14-$15 billion and shared its 2020 spending will be similar, which bodes well for semi-cap companies such as Applied Materials (AMAT) and Lam Research (LRCX).
  • Honeywell (HON): The company beat bottom-line expectations by $0.07 per share for the September quarter on revenue that fell 16% year over year, coming in modestly below the consensus forecast. Honeywell trimmed back its revenue expectations for 2019, and that will be a focus on the company’s earnings call later this morning.
  • Philip Morris International (PM): This tobacco products company reported Non-GAAP EPS of $1.84, $0.07 ahead of expectations despite revenue that came in shy of expectations as cigarette shipment volume fell 5.9% year over year. PMI revised its full-year 2019 reported diluted EPS forecast to be at least $4.73 at prevailing exchange rates vs. the prior forecast of $4.94 and $5.08 in 2018.

While the share performance of the FAANG stocks has been less than stellar over the past few months and Netflix (NFLX) stock has certainly struggled, late yesterday, the company reported third-quarter earnings that beat guidance and sales that met forecasts. Quarter over quarter, membership growth rebounded; however, the breakdown was a mixed bag with domestic growth lagging plans by around 300,000 while international growth bested expectations. Shares rose as much as 10% late Wednesday on the news.

Excluding certain items, IBM (IBM) reported EPS of $2.68 vs. $2.67 consensus for the September quarter. Despite that bottom line positive, IBM once again missed on its top line, and that sent shares lower in aftermarket trading last night. That marked the fifth sequential quarter for declining revenue and raises concerns over the speed of the company’s transformation to cloud from hardware and related services.

Despite reporting weaker than expected September quarter earnings and reducing its outlook for the balance of 2019 “due to macroeconomic headwinds and trade tensions,” Alcoa (AA) shares popped in aftermarket trading last night following the announcement of a strategic asset portfolio review.

Tesla (TSLA) has been approved by China’s industry ministry to begin production at the Gigafactory it is building in Shanghai. We’d note this is the first fully-foreign owned car plant in China.

Following the recent sale of its dermatology business for $10 billion, Nestle SA (NESN:SA) announced its intent to return as much as $20 billion to shareholders by 2020 through a combination of a share buyback program and special dividends.

General Motors (GM) and the UAW reached a tentative agreement that could end the monthlong strike at GM. Details of the proposed four-year deal were not disclosed. Now to wait for the ratification of the UAW leadership-approved tentative agreement.

McKesson (MCK)Cardinal Health (CAH) and AmerisourceBergen (ABC) have begun talks to settle opioid litigation for $18 billion.

Earnings after today’s market close include:

  • E*Trade (ETFC): While the company is expected to deliver EPS of $1.02 on revenue of $742 million, the focal point will be the company’s comments on the recent industry move commission-less trades for stocks and ETFs and the impact on its guidance.
  • Intuitive Surgical (ISRG): EPS of $2.99 on revenue of $1.06 billion.

On the Horizon

Index additions and deletions:

  • Before the open on Friday (Oct. 18), Glu Mobile (GLUU) will replace SolarEdge Technologies(SEDG) in the S&P SmallCap 600 Index. SolarEdge is moving to the S&P MidCap 400 Index to replace International Speedway (ISCA), which is being acquired by Nascar Holdings.

Upcoming IPOs this week:

  • Bellring Brands, Inc (BRBR), a subsidiary of Post Holdings and maker of PowerBar products, is expected to begin trading on October today on the NYSE. Post Holdings sold about 34.3 million shares at $14 each yesterday, well below the expected priced range of between $16 and $19 per share.
  • Innate Pharma SA (IPHA), a French biotechnology company focused on therapeutic antibodies for the treatment of cancer, priced its (American Depository Shares) ADS today at $5.50 (versus plans for $7.50) and €4.97 this morning on a capital increase of 12,500,000 new shares (versus plans for 10.67m).

Dates to mark:

  • Oct. 18: Date the US is expected to impose tariffs on $7.5 billion in aircraft, food products and other goods from the European Union, including, much to our despair: Scotch, Italian cheese, and French wine. Quel dommage! For perspective, according to the Financial Times, four bottles of Scotch are exported to the US every second!
  • Oct. 18: UAW meeting in Detroit.
  • Oct. 18-20: Annual meeting of the World Bank Group and the International Monetary Fund in Washington, DC.
  • Oct. 23 – Facebook (FB) CEO Mark Zuckerberg is due to testify before the House Financial Services Committee
  • Oct. 27 – Saudi Arabian oil company Aramco (ARMCO) is expected to publish its IPO prospectus, in what could be one of the largest offerings of the year.
  • Oct. 29-30: Federal Reserve monetary policy meeting where expectations for a rate cut are currently over 70%.
  • Oct. 31: Brexit?

Thoughts for the Day

“If you keep doing what you’re doing, you’re going to keep getting what you’re getting. You want change, make some.” – Courtney C. Stevens

What do you get when you cross a joke with a rhetorical question?

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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