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Morning Note: Negative Earnings Pre-Announcements And Services Data Take Center Stage

Morning Note: Negative Earnings Pre-Announcements And Services Data Take Center Stage

Today’s Big Picture

Barring any new developments on the trade wars or impeachment inquiry front, investors are focused on the release of September services data for the US and Europe. Has the weakness in manufacturing around the world expanded has into services?

Stocks in Asia again were in the red today on news that the US will be imposing additional tariffs on European Union goods by mid-October. Markets in China and South Korea are closed today for holidays. Japan’s Nikkei 225 lost over 2% as did Australia’s S&P/ASX 200.

European equity markets are mixed with little movement in either direction. Commodities are mostly lower. The dollar is relatively unchanged against most currencies and bond yields in the US and Europe are fallingUS equity futures are in the green.

Data to Watch

With all the ongoing protests in the region, retails sales in Hong Kong fell 25% in August to the lowest level on record. Hong Kong accounts for 5%-10% of global luxury goods sales, so this is bound to sting luxury goods companies such as Prada (PRDSY)LVMH Moet Hennessy Louis Vuitton (LVMUY), and Kering (PPRUY).

Services PMI in Japan came in as expected, declining from 53.3 in August to 52.8 in September with an increase in New Orders that was weaker than earlier in the year. Employment growth was only slightly better than August’s 18-month low.

Australia’s exports declined 3% in August from July with imports flat.

Russia’s IHS Markit Services PMI rose for the third consecutive month in September with the fastest reading in 6 months. New Orders improved slightly, but at a weaker pace than earlier in the year and backlogs continued to decline.

Inflation in Turkey slowed in September with the year-over-year inflation rate hitting 9.3%, the lowest rate since January 2017, versus expectations for 15.51% and year-over-year PPI fell to 2.45%, the lowest inflation rate since September 2016, from the prior 13.45%.

The Markit Service PMIs for the Eurozone, France, and Germany all came in weaker than expected. Italy’s Markit/ADACI Service PMI for September was slightly better than expected. Markit/CIPS UK Services PMI was also weaker than expected and fell into contraction territory.

Retail Sales for the Eurozone matched expectations for a +0.3% month-over-month increase in August after a -0.5% decline in July. Year-over-year sales beat expectations, rising +2.1% versus expectations for +1.9%, but down from July’s +2.2%.

The deflationary trend continued with Eurozone PPI falling to -0.8% year-over-year in August from +0.1% in July and compared to expectations for -0.5%.

UK Prime Minister Boris Johnson’s proposal to Brussels yesterday for how to handle the Irish border post-Brexit has not been summarily dismissed, (a good sign for talks). It is, however, viewed as being awful for the Irish economy and implementation highly impractical in less than two years. Both sides look to be genuinely trying to avoid a hard Brexit at the end of the month, but any middle ground remains elusive. This one stays on the back-burner for now but could rattle markets later this month.

Today investors will be looking to see if the service side of the US economy is weakening along with manufacturing with the Markit Service PMI and the ISM Non-Manufacturing Index reports. We’ll also get data on Factory Orders, Durable Goods Orders, Capital Goods Orders as well as the usual weekly jobless claims numbers.

We’ll also hear from Federal Reserve Chicago President Evans (FOMC Voter), Vice Chair Quarles (FOMC Voter), Cleveland President Mester (FOMC Voter), Dallas President Kaplan (FOMC Voter) and Vice Chair Clarida (Voter) today. After the grim ISM Manufacturing data, rate cuts are now back on the table with the odds of a cut in October rising to 65% from 40% earlier this week.

Stocks to Watch

Earnings before the market open include:

  • Constellation Brands (STZ): Consensus expectations call for EPS of $2.62 on revenue of $2.4 billion. Investors will be sipping on comments to see if the beer market headwind is abating and if consumers are continuing to favor premium beer, wine, and hard seltzer products.
  • PepsiCo (PEP): Consensus expectations call for EPS of $1.51 on revenue of $16.9 billion. Investors will be watching for comments on dollar headwinds and input costs and how the company’s efforts to re-shape its beverage and snack offerings is progressing as consumer increasingly shun sugar and artificial sweeteners.

Effective before the market opens today, Las Vegas Sands (LVS) will replace Nektar Therapeutics (NKTR) in the S&P 500 as Nektar Therapeutics replaces Sotheby’s (BID) in the S&P MidCap 400.

Despite setting new records for quarterly vehicle production (96,155 units) and deliveries (roughly 97,000), Tesla’s (TSLA) September quarter deliveries fell short of the expected 100,000 unit mark sending the shares lower in after-market trading yesterday.

GoPro (GPRO) shares dropped 13.9% in after-market trading yesterday following the release of updated full-year guidance that included a “significant revenue shift” between the September and December quarters due to a late-stage production delay with HERO8 Black shipments. In updating its guidance, GoPro cut its EPS forecast to $0.33-$0.39 from $0.37-$0.49.

Shares of AXT Inc. (AXTI) plunged -11.9% after-hours as the company slashed September quarter revenue guidance due to a weaker than expected demand environment, particularly for data center connectivity and LED applications. AXT now expects revenue for the quarter of $19.6-$20 million vs. its July guidance of $24.5-$26 million.

Analyst reports point to Apple’s (AAPL) supply chain partners are increasing their production schedules and forecasts as Apple sees stronger-than-expected demand for the iPhone 11 and iPhone 11 Pro.

Shares of UK apparel chain Ted Baker Plc (TED:LN) plummeted following the company warning that it is facing several headwinds including price competition, the shift to online shopping, and the political as well as economic uncertainty from Brexit that have put the consumer into a spending funk.

Arguing that the cables and computer servers that allows Netflix (NFLX) to stream content to 1.4 million users in the country are a local physical presence, Italian prosecutors have opened an investigation into alleged tax evasion targeting the company.

According to Europe’s top court, EU countries can order Facebook (FB) to take down posts, photographs and videos and restrict global access to that material.

Starting January 1, Walmart (WMT) will begin several healthcare pilot programs for its US employees as it looks for ways to tackle one of its largest expenses after wages, namely healthcare costs.

As part of its ongoing effort to keep a lid on costs, Kroger (KR) is evaluating middle-management roles and laying off hundreds of employees across the family of grocery that include Kroger, Harris Teeter, Ralphs, Fred Meyer, has 443,000 full-time and part-time employees.

As its core business continues to come under attack, Uber (UBER) is launching Uber Works, a new app that will match temporary workers looking for shift work with businesses.

Costco Wholesale (COST) will report after the market. Consensus expectations call for EPS of $2.55 on revenue of $47.7 billion. In addition to consumer-facing data to be shared, key areas of focus will be prospects for Costco’s membership revenue, which is a key profit driver for the company, as well as its plans for new store openings, a harbinger of membership fee growth to be had in the coming quarters.

On the Horizon

  • October 4: September Employment Report
  • October 10-11: US-China trade talks resume in Washington, DC
  • October 29-30: Federal Reserve FOMC meeting

On the IPO front this week:

  • Aprea Therapeutics (APRE), a Phase 3 biotech developing targeted therapies for cancer, raised $85 million by offering 5.7 million shares at $15, the midpoint of the $14 to $16 range and will list today on Nasdaq.
  • Viela Bio (VIE), a late-stage biotech company that is developing antibodies licensed from AstraZeneca, raised $150 million by offering 7.9 million shares at $19, the low end of the range of $19 to $21 and will list on the Nasdaq.
  • MetroCity Bankshares Inc (MCBS) a Georgia bank focused on serving Asian-American communities in the Eastern US and Texas, raised $26 million by offering 1.94 million shares at $13.50, below the range of $14.50 to $16.50. At the offer price, it commands a market cap of $342 million and will list on the Nasdaq.
  • Frequency Therapeutics (FREQ), which is developing a regenerative therapy for hearing loss, raised $84 million in a downsized IPO by offering 6 million shares at $14, the low end of the range of $14 to $16. The company initially planned to offer 6.7 million shares and will list on the Nasdaq.

Canceled IPOs:

  • ADC Therapeutics, a Swiss biotech developing next-gen antibody drug conjugates for difficult cancers, withdrew its plans for an initial public offering on Wednesday, citing adverse market conditions. The company had expected to list under the symbol ADCT on the NYSE.
  • Monopar Therapeutics, which is developing therapies for chemotherapy-induced mucositis and cancers, postponed its IPO on Wednesday, citing market conditions. It had filed to raise $40 million by offering 4.4 million shares at a price range of $8 to $10. The company had planned to list on the Nasdaq under the symbol MNPR.

Yesterday’s Highlights

The September ADP Employment Report showed the pace of hiring is slowing with private payrolls rising by 135,000 versus estimates for 125,000. The monthly average for 2019 is now down to 145,000 compared to an average of 214,000 in 2018. The weaker pace in job growth adds to the worries that the global economic slowdown is spreading to the US, while companies are increasingly feeling the pinch of trade war tariffs.

On a positive note for households, yesterday’s MBA Mortgage applications rose for the second time in three weeks with mortgage applications now running stronger than housing sales (new and existing combined) since Q4 2018. This tells us that the housing market momentum is likely to continue. Since the amount of cash being pulled out of home equity is very modest, home price appreciation is not being used to artificially boost spending, also a good sign. The monthly mortgage payment performance data from Black Knight shows that the total number of properties that are either delinquent or under foreclosure continues to fall – more good news for housing.

Following the World Trade Organization ruling in favor of the US yesterday, the Trump administration announced it will impose tariffs on $7.5 billion in aircraft, food products and other goods from the European Union starting on October 18. Yet another headwind for the global economy and that sent domestic equity indices sharply lower yesterday. The S&P 500 suffered its first back-to-back 1%+ declines since December 2018:

  • Dow Jones Industrial Average: -1.86%
  • S&P 500: -1.79%
  • Nasdaq Composite Index: -1.56%
  • Nasdaq 100: -1.74%
  • Russell 2000: -0.92%

Those declines were widespread with all 11 S&P industry sectors in the red, with ten of those sectors down between 1.3% (utilities) and 2.6% (energy).

Treasury yields continued their fall from Tuesday with the 2-year falling to 1.482%, the 10-year to 1.594% and the 30-year to 2.085% on concerns the economy is weaker than expected.

Thoughts for the Day

  • “Don’t be discouraged. It’s often the last key in the bunch that opens the lock.” – Unknown
  • “If you think you are too small to make a difference, try sleeping with a mosquito.” – Dalai Lama

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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