Fixing Zion’s Shoe Was Easy. Now to the Hard Part: Taking Stock

(Bloomberg) -- Remember when basketball star Zion Williamson’s Nike sneaker blew out seconds into the start of a game last month?

Analysts covering the stock certainly remember, and when the company posts earnings after the bell, they will likely ask a few questions about that. The Duke star returned last week and was as good as ever, but can the company assure its product quality is consistent and safety procedures are in check? Did the shoe mishap set the stage for a longer-term reputation blow that could jeopardize a string of sales beats? (Nike, for its part, sent representatives to China to help make Zion a more fortified shoe.)

Then there’s a whole other suite of questions that could be tougher to answer, and they have a lot to do with international growth. Regions outside North America are responsible for ~60% of the retailer’s sales, and economic expansion overseas is slowing.

Concern about growth is especially pronounced after everyone from Fitch Ratings to the Fed chairman issued dour outlooks about global expansion pick-up. The former warned about a “sharp deterioration” in foreign growth as it cut its 2019 global GDP forecast to 2.8% from 3.1%. The latter said that global risks weigh on the economic outlook and slowdown in global growth remains “somewhat more than expected.”

One of the key concerns is, of course, China, whose athletic market will remain Nike’s largest growth opportunity, says Bloomberg Intelligence’s Chen Grazutis. Asia seems particularly attractive considering the next two Olympics will happen in the region (in Tokyo in summer 2020 and Beijing in winter 2022) and the sportswear powerhouse will likely want to be there for all the sponsorship deals. The stock fell 1.1% yesterday after hitting a record on Monday, and is up 17% in 2019 -- that’s the best start to a year since 2003.

Growth? What Growth?

The tape has been all over the place all morning, with futures swinging between gains and losses and currently down 0.2%. That’s the aftermath of yesterday’s market action, when the Fed delivered a dovish jolt as it left the key rate unchanged. “Those who thought it was impossible for the Fed to be even more dovish (or even justify the recent rally) were disappointed,” says BMO Capital Markets’ Ian Lyngen, but that gave the S&P 500 only a temporary lift. Stocks fell 0.3% on weakness in the financial sector amid the biggest rally in Treasuries since the end of May.

President Donald Trump’s announcement that tariffs will stay in place until China complies with the trade deal didn’t help the tape. Caterpillar ended the day 0.9% lower after CFO said the firm may see “indirect” impact from trade tariffs later this year. On the bright side, Starbucks closed at a record amid an announcement it created a $100 million venture fund to seek out new growth ideas. And Micron is climbing pre-market after saying it’s cutting production in response to a slump in demand for its key products.

Bank and real estate stocks reacted to a surprisingly-dovish Fed and slipping 10-year Treasury yields in classic fashion: Banks suffered their ugliest close since Dec. 4, with the BKX sliding 3% to its lowest since Feb. 11. The prospect of even-lower rates, and growth fears, once again weighed heaviest on regional banks. REITs did indeed climb, but just a bit, (with the S&P 500 real estate index up 0.4%), as they weren’t completely spared from concern about the economy’s health.

With 10-year Treasury yields off about 1 basis point early Thursday, banks may be set for another down day; BofA, Citi and JPMorgan are all falling 0.6% pre-market and Goldman is down 0.7%.

Sectors In Focus Today

• Micron is up 3.5% pre-market, and the stock’s advance in the cash session could push the Philadelphia Semiconductor Index closer toward a record. The company’s forecast was below expectations, but investors will likely look past negative near-term results if smartphones and Data Center spending ramps up.
• Watch home construction companies ahead of Friday’s economic data on home sales. The SPDR S&P Homebuilders ETF is sliding back to its 200-day moving average after trading lower since February, a close below that level could trigger a further slump.

Notes From the Sell Side

Micron analysts had something of a mixed reaction to the company’s results and outlook, with a number of firms raising their price targets and affirming bullish views, saying that it was taking the right steps to confront a difficult demand environment -- particularly for DRAM memory chips--– and that there could be a rebound in the second half of the year. However, Citi was not convinced by the print, downgrading the stock to sell and cutting its price target to a Street-low view of $30. While Micron “believes that the memory market will improve” in the second half of the year, analyst Christopher Danely wrote, “based on our checks and our supply/demand model,” the second half will represent the bottom for average selling prices, not the recovery.

ConocoPhillips was raised to overweight at Piper Jaffray, which sees strong free cash generation at the oil company with Brent at $60 a barrel, a price forecast it sees as conservative. The firm sees “ample upside” with Brent at that level, and even more potential should Brent trade around $65 throughout 2019 and 2020.

Tick-By-Tick to Today’s Actionable Events

• 8:30am -- Philadelphia Fed Business Optimism
• 8:30am -- RAD extraordinary shareholders meeting
• 8:30am -- Initial Jobless Claims, Continuing Claims
• 8:30am -- Darden Restaurants earnings conference call
• 9:45am -- Bloomberg Consumer Comfort Index
• 10:00 --- Leading Index
• 4:15pm -- Nike earnings
• 5pm -- Nike earnings conference call
• March 18-22: Game Developers Conference (GDC) runs in San Francisco

--With assistance from Felice Maranz and Ryan Vlastelica.

To contact the reporter on this story: Elena Popina in New York at epopina@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Catherine Larkin

©2019 Bloomberg L.P.