The Market Today
Mixed Corporate Earnings; Brexit Back-and-Forth; U.S.-China Trade Talks
by Craig Dismuke, Dudley Carter
Consumer Confidence: At 9:00 a.m. CT, the University of Michigan will revise its October report on consumer confidence. The initial estimate showed a second month of rebound from the August report (the weakest since the 2016 elections).
Corporate Earnings Show Mixed Results, Positive Earnings, Future Uncertainty: A handful of corporate earnings reports will roll in today. With 200 S&P 500 companies having reported, 63% have beaten sales expectations and 81% have beaten earnings projections. For a second consecutive quarter, the bigger news has been weaker outlooks citing continued global uncertainty. Larger, publicly-traded companies have weathered the late cycle environment better than smaller companies, but the global uncertainty continues to weigh on their future outlook.
YESTERDAY’S TRADING ACTIVITY
Stocks Ended Mixed on Peak Day For Corporate Earnings: Multiple forces pushed and pulled markets in different directions as corporate earnings ramped up and Brexit headlines continued to drive prices of U.K. assets. According to CNBC, 45 companies within the S&P 500 reported earnings Thursday, making it the busiest day of the quarter. The results sent the major indices in opposite directions but left the S&P 500 0.2% higher by the close. The Dow dropped 28 points, or 0.1%, as the health care sector weakened and 3M, the biggest drag on the index, tumbled more than 4% after posting weaker-than-expected guidance for the full year. Tech companies, however, notched solid gains after Microsoft beat even the most optimistic analyst estimate for revenue and earnings. The Nasdaq outperformed with a 0.8% gain.
Treasury Yields Recovered Higher to End Little Changed: Treasury yields spent most of Thursday lower but recovered steadily in the afternoon to end the day little changed. Before the session opened, the ECB kept monetary policy unchanged, and economic data showed U.S. business equipment investment has softened more than expected. Later in the morning, Markit data signaled some economic stability at subdued levels (more below). However, Treasury yields turned higher as stocks climbed into the close. Outside of the U.S., U.K. yields tumbled on persistent uncertainty around the rapidly-approaching Brexit deadline. PM Johnson called for snap elections on December 12th, a move that will require two-thirds support in a vote scheduled for Monday. Labour leader Corbyn, however, complicated matters by making his party’s support for elections contingent on the government taking a no-deal exit off the table.
OVERNIGHT TRADING ACTIVITY
Global Equities Mixed As Earnings Flow Continues: Corporate earnings continued to roll in around the globe against a backdrop of Brexit and trade uncertainty. The net effect of Friday’s earnings reports was mixed results from Asia and a largely down day for Europe’s major indices. Despite the Stoxx Europe 600 sliding 0.3%, U.S. equity futures were mixed around 7 a.m. CT with the S&P 500 set to inch marginally higher at the open. Despite a relatively-quiet day for U.S. earnings, the follow through from yesterday’s busy calendar could remain a driving force. After markets closed yesterday, shares of Amazon tumbled more than 6% after the company missed on current quarter earnings and guided fourth quarter expectations below analysts’ estimates.
Brexit and Trade Remain a Focus: On Brexit and trade, uncertainty continued to be the key phrase. The EU countries widely agreed to give the U.K. an extension past the October 31 deadline but decided to wait and determine the length of the delay until after parliament votes Monday on PM Johnson’s request for mid-December elections. U.K. yields were leading an uptick in sovereign yields across Europe but the pound continued to edge lower away from last week’s five-month high. Top officials from the U.S. and China are set to talk by phone Friday in hopes of making further progress on the phase one trade deal. Multiple news outlets, however, have reported that China will ask for some form of tariff relief in exchange for increased agricultural purchases. U.S. equity futures and Treasury yields were little changed around 7:30 a.m. CT.
Preliminary October PMIs Signal Stability at Subdued Levels: Partially softening the negative tone from September’s durable goods orders report released earlier in the morning, the preliminary Markit PMIs pointed to stability in business activity in October. The economy-wide composite index rose 0.2 points to 51.2 as services picked up in line with estimates and manufacturing posted a surprise improvement to a six-month high. The services index inched up to 51.0, its best level since July, despite employment falling to a new low since 2009 and new business activity cooling to its weakest reading in the survey’s history. More positively, manufacturing index posted a 0.4-point increase to 51.5 as new orders and employment both rose at their best levels in several months. While the headline indices improved and offered some encouraging signs of life for manufacturing, both remained subdued and the weakness in key services sub-indices provided reasons for continued caution.
New Home Sales Strengthened in 3Q as Mortgage Rates Declined: New home sales cooled as expected in September to a still solid annualized pace of 701k annualized units. In addition to the current-month decline, there was a small downward adjustment of 8k units to the cumulative sales in the prior two months. However, sales rose 4.5% in 3Q and averaged an annualized pace of 691k, near its best three-month average pace of the cycle. Sales have steadily improved in 2019 as mortgage rates have pulled back and next week’s first glance at 3Q GDP could finally break a six-quarter streak of housing contraction.