(Thursday Market Open) More coronavirus cases and deaths in China helped send Hong Kong shares down 2.6% overnight, and that’s a tough lead-in for U.S. markets today. Amazon (NASDAQ:AMZN) reports after the close and we’re still digesting some other key earnings releases. Normally that might be the focus, but the virus is taking up all the room.
The fear meters swung back up this morning as investors sought potentially safer climes, with the Cboe Volatility Index (VIX) charging above 17 and the 10-year Treasury yield hitting a nearly four-month low of 1.57%.
In fact, the 10-year Treasury yield fell below the three-month yield this morning for the first time since October as investors fled to Treasuries. That might be a psychological issue for some of the big bank stocks today, because banks have trouble turning profits when shorter-term yields rise above longer-term ones.
Another worry—beyond the obvious human toll of the sickness—is how the virus might affect Chinese economic growth. A think tank came out yesterday saying China’s Q1 gross domestic product could fall to 5% or worse. Remember, it was 6% in Q4, but that was before the virus and even that number was the lowest since the 1990s.
On the ground in China, the death toll hit 170, with 7,700 cases so far. British Airways suspended all flights to mainland China and Russia closed its border with the country. Meanwhile, the World Health Organization is having a meeting today to decide if coronavirus is a public health emergency of international concern. That declaration, if it happens, could mean new travel restrictions, media outlets reported. A WHO emergency declaration today might add to worries, perhaps putting more pressure on the market.
The Shanghai exchange is still closed for a holiday. It could be interesting to see how stocks there perform when the exchange opens up again, with a lot probably depending on the virus situation by then.
On the data front today, the first read on U.S. gross domestic product (GDP) for Q4 came in at 2.1%, right where analysts had expected. GDP for the full year rose 2.3%. Weekly jobless claims of 216,000 were also in line, so the numbers probably aren’t going to influence things much today.
Some analysts are worried GDP in the current quarter could fall below 2%, in part due to the Boeing (NYSE:BA) 737 MAX production shutdown.
Earnings Round-Up
Investors await Amazon earnings after the close today. The company had a tough outing its last time out, so the question is whether Q4 marked a turnaround. We know people were out shopping last quarter, at least judging by early returns from the holidays, but AMZN could shed more light on its call.
Seeing yesterday’s impressive cloud results from Microsoft’s (NASDAQ:MSFT) Azure public cloud business—where growth came in above consensus at 62%—probably sets up a strong challenge for Amazon Web Services, the leader in cloud infrastructure. Watching these two behemoths go up against each other is like seeing a boxing match for the heavyweight title. AMZN is still ahead, but MSFT looks like a worthy contender and shares are on the rise this morning.
Visa (NYSE:V) is another one to consider keeping an eye on this afternoon for a look into consumer spending. Mastercard (NYSE:MA) reported a strong quarter yesterday—beating the consensus on earnings and coming in as expected on revenue—but the stock barely moved in post-market trading. Maybe that’s because purchase volume rose only 11% and analysts had expected 13%, Barron’s noted. The company’s guidance was right where people had expected.
Facebook (NASDAQ:FB) fell 7% in pre-market trading Thursday even though they beat on the top- and bottom-lines, and on all the user metrics. The problem is, it looks like they aren’t out of the woods on costs and regulatory issues, and U.S. ad revenue took a hit. They also had a 51% rise in expenses last quarter. On the earnings call, their CFO talked about revenue growth slowing as the year continues and privacy regulations having a bigger impact.
Tesla (NASDAQ:TSLA) bucked the lower trend this morning, rising more than 9% in premarket trading as investors reacted positively to earnings. This stock has doubled since Dec. 1, so anyone thinking of trading it should consider taking extra care. As an astute father once told his son, “You don’t have to be the first one to the party or the last one.”
Does Fed See Consumer Stepping Back?
The Fed’s revised statement yesterday hardly changed from December, but one interesting transition is how the Fed described consumer spending as “moderate,” not strong. They said “strong” in December.
Low rates and a booming jobs market are two reasons consumers were out there spending last year. Consumer confidence readings are still high, and the housing market is mostly looking solid even though December new home sales released this week missed the Street’s consensus.
If consumers are slowing down a bit, as the Fed seems to think they are, that wouldn’t be the end of the world. However, it could play into analysts’ thinking that economic and earnings growth this year might not be as firm as they originally thought. Some of those estimates have already been coming down, not the best news for a stock market that’s valued very high historically.
The coronavirus is another wildcard here. The Fed only referred to U.S. consumer spending, but things in China aren’t looking too rosy at this point. Many businesses there are shut down due to the illness, including thousands of Starbucks (NASDAQ:SBUX) branches. If Chinese consumers start cutting back just when many analysts had been thinking consumers there were turning a new page, that might be another factor that slows company investment both here and across the Pacific.
If companies continue to grow their businesses slowly, the ultimate effect could be less consumer spending if people start worrying about their jobs. But that’s a long way of explaining the worst possible scenario. The best-case is that the virus starts to peak and slow down from here, but that’s not something we can necessarily count on. One media report this morning said “specialists” speculate that the peak of virus transmission might come in around two weeks.
CHART OF THE DAY WEAK CLOSE, WEAK OPEN. Though there were several factors driving markets down this morning, one might be the weakness heading into the close yesterday. The futures on the S&P 500 Index (/ES—candlestick) gave back all the day's gains and settled near the low of the day, and the Cboe Volatility Index (VIX—purple line) settled on the highs. Many traders see such late-day price action as a clue to how the next session might start. Data sources: CME Group (NASDAQ:CME), Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
What’s Next With Rates? After the Fed’s non-action Wednesday, chances of rates staying at current levels through mid-year stood at around 51%, according to futures. That was down from 60% earlier this week, so it doesn’t look like anything Fed Chair Jerome Powell said yesterday had too big an impact. The odds were just over 38% that the Fed would put through at least one 25-basis point cut by June, up from 32% earlier this week. Chances of a rate hike by mid-year are now rated at zero, vs. their previous 8%.
Looking out past the election toward the end of 2020, investors now expect the Fed to turn dovish. The market builds in around 87% odds of at least one cut by December, up from 70% before Wednesday’s meeting. One question might be whether rate cut chances start to fall a bit if we get past this coronavirus without too much more market drama. That’s another thing it’s impossible to know at this point. In fact, trying to predict where rates might be so many months from now is probably a losing battle, virus or no virus.
“Could Have Been Worse” Department: While some might have been surprised to see BA shares climb yesterday after the company’s earnings landed with a thud, it really isn’t too shocking when you think it through. BA shares fell sharply early this month, so the bad news might have been built in a bit. Also, the company’s charge related to the 737 MAX wasn’t as large as some analysts had expected, and it stuck to its mid-2020 timeframe for getting the plane back into the skies, Briefing.com noted. General Electric (NYSE:GE) was another company where you could find stuff to complain about with earnings (mainly GE’s earnings per share guidance for fiscal 2020), but investors appeared to focus instead on improved cash flow generation in the latest quarter and decent free cash flow guidance. Overall, the way investors responded to earnings yesterday—overlooking a few rough spots and focusing on the positive—could be seen as a hopeful sign. When the mood is like this, it often means people will find reasons to buy shares and give companies the benefit of the doubt. We’ve had other earnings seasons recently where it seemed like investors were out to find flaws and then punish. Things could change, but that’s not how it feels right now.
What You Don’t Know: A popular market watcher on one of the big financial networks glanced at results from a company earlier this week and noted the stock was down despite strong earnings and guidance. Right there on national television, he told his audience “I don’t know” why the stock is down. By doing that, he reminded investors of an important principle: Admitting when you don’t know something is a huge step for anyone trading the markets.
No matter how much of an expert you might think you are, you’ll always be able to find something out there you don’t understand, whether it’s the minute-by-minute action of a single stock or why a certain sector can’t keep up with others. This can happen even to analysts who are paid to know what’s going on, so it certainly can happen to any of us. Knowing what you don’t know and understanding that you can learn from mistakes without letting losses demoralize your thinking can be the difference between constructive trading or just feeling lots of frustration.
Good Trading
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