Morning Markets Brief 5-1-2020

Summary and Price Action Rundown

Global risk assets are retreating this morning as sobering earnings reports and renewed threats of US tariffs on China weigh on sentiment, while economic data remains grim. S&P 500 futures point to a 2.2% lower open, which would extend yesterday’s 0.9% loss and pare the index’s 2.7% gain this week, which has put year-to-date downside at 9.9% and the decline from February’s record high at 14.0%. With Amazon and Apple earnings reports highlighting the challenging outlook and intensifying White House rhetoric on Chinese culpability for the pandemic, an upbeat week of trading is set to conclude on a downbeat note. Many overseas equity markets are closed for holidays. Longer duration Treasury yields continue to hover near their lows, with the 10-year yield at 0.61%, while a broad dollar index is pausing its recent decline. Crude oil is retracing a portion of its recent recovery from nearly 20-year lows.


High-Profile Earnings Releases and Guidance Rekindle Investor Caution

Amid mixed first quarter (Q1) earnings, solid reports from IT giants had provided support in recent days, but nuanced results from Amazon and Apple have emphasized downside risks. With Netflix, Google, Facebook, and Microsoft all posting robust Q1 results, analysts had been looking for Apple and Amazon to similarly impress after yesterday’s closing bell. Amazon, however, undershot its earnings estimates, and management provided a sobering outlook for the coming quarters. Although revenue of $75.5 billion, up 26.5% year-on-year (y/y), handily beat expectations CEO Jeff Bezos suggested that Amazon shareholders “may want to take a seat” and said that in Q2 the company will prioritize “Covid related expenses, getting products to customers, and keeping employees safe,” mostly at the expense of Q2 operating profit. While estimates trended around $4 billion for Q2 operating profit, Amazon stated it could see losses of $1.5 billion to gains of $1.5 billion, underlining the deep uncertainty over operating conditions moving forward. Amazon shares are -5.0% in pre-market trading but still retain dramatic outperformance year-to-date (ytd), with upside of 33.9% thus far in 2020. Meanwhile, Apple topped both earnings and revenue forecasts but suspended guidance amid scant visibility for the coming quarter. Despite the pandemic, Apple managed to grow in Q1, attributing its success to Wearables and Services, but sales of its flagship iPhone declined. While other companies slashed or suspended dividends this quarter, Apple issued a 6% increase of dividends to shareholders. Apple stock is down -2.9% in early trading after closing yesterday’s session flat ytd. Lastly, Visa beat consensus earnings and revenue estimates but stated that underlying business drivers slowed during the quarter as a result of the pandemic. Regarding Q2, management noted that US spending volumes contracted 19% through April 28. Shares of Visa are 3.2% lower in pre-market trading and -4.9% ytd. With 264 of the S&P 500 companies having reported, 65% have surprised to the upside on sales and 69% have topped earnings expectations. However, aggregate earnings have come in 1.8% below estimates thus far.

Economic Data Remains Dismal Ahead of Next Week’s April Jobs Figures 

Poor economic data continues, but the prospects for a second half recovery remain the more potent driver of price action and investor sentiment. Last week 3.8 million Americans filed for unemployment benefits for the first time, compared to 4.4 million in the prior week and above market expectations of 3.5 million. This brings the total reported since the beginning of the coronavirus crisis to over 30 million, suggesting layoffs have started to spread to industries that were not initially directly impacted by Covid-19. The largest increases were seen in Florida, California, Texas, Georgia and New York. Based on this data, economists are projecting an official unemployment rate around 20%. April nonfarm payroll data will be in focus next week. Meanwhile, Personal Income in the US declined by 2.0% month-on-month (m/m) in March, after a 0.6% increase in February and below market expectations of 1.5%, while Personal spending in the US dropped 7.5% m/m, after rising 0.2% and also below -5.1% consensus. This was the largest decline in personal spending on record, as the coronavirus crisis hit households’ demand. Spending on services fell 9.5% m/m while goods spending fell 2.2% m/m. The Core Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred inflation metric for which it targets 2%, fell 0.1% m/m to 1.7% y/y, down from 1.8% in February.

Additional Themes

Trump Targets China – Investors are noting President Trump’s hardening posture against China, with reports that he is considering an executive order to prevent a US government employee savings plan from investing in Chinese assets. Yesterday, he mused about retaliatory tariffs and continued to suggest that Covid-19 emanated from a virus lab in Wuhan.

European Central Bank (ECB) Tweaks Policy – The ECB left rates on hold and announced modest policy enhancements yesterday. EU markets registered a degree of disappointment, with the euro turning higher against the dollar, peripheral debt selling off, and stocks falling.