(Bloomberg) -- Thursday’s session was the first day in seemingly forever that the buy-the-dip contingent was invisible -- to be clear, I’m talking about the action in the S&P 500 lately, not the headline-grabbing Dow streak of eight losses -- and the first day in a long time that the small caps underperformed (Russell 2000 was up ~11% since the beginning of May going into Thursday’s session vs S&P 500 +4.5%).
We ended up going out near the worst levels of the day, and smack dab at the low end of our recent 2,750-2,800 range. This seemed inevitable from the get-go this week (see Monday’s Taking Stock: "Buying the Dip May Get a Lot Tougher Going Forward") as trade war fears became the main, and pretty much the only issue, that market participants had to talk about after the various macro, economic and geopolitical catalysts from last week passed.
Add to that the shock $400 billion tariff threat thrown around by Trump (CAT -7% and BA -5.7% in the past four days), the recent souring of equity strategists this week, and the Daimler’s trade-induced profit cut, and it can’t be too surprising that we are where we are -- which is still relatively elevated, but perhaps in a bit more of a precarious position than a week ago.
Though we’re already seeing a sizable bounce this morning, with the S&P Futures up ~13 handles, even after a first round of stress tests that received some negative reviews, a whiff in the cloud space with Red Hat plunging more than 13% pre-market (may hit shares of ServiceNow, VMware, Salesforce, and Splunk; note Micro Focus saw sympathy weakness in London trading), and a looming OPEC decision (recall energy stocks were the worst performers on Thursday by a mile).
Our scoop on attempts by some White House officials to restart talks with China and some better-than-expected manufacturing & services data out of Europe (one of the rare times in recent memory that data out of the region beat expectations) may be helping sentiment, plus the fact that no major company pulled a Daimler profit warning tape bomb, though that could change next week.
Who Could Be the Next Daimler?
Given the inordinate amount of attention paid to Daimler, which gave us something real when it comes to trade tensions, something to hang our hat on, something more than just world leaders spewing threats (the first prominent company to slash its profit forecast as a result of the tariffs - this hit FCAU -5.9%, TSLA -4.1%, GM -2%, F -1.4%), I figured it’d be worth a look at which companies are potential candidates for similar warnings and/or cautious commentary next week given their exposure to China:
- Carnival Corp. (CCL), with ~15% revenue exposure to Asia & Australia, releases numbers Monday pre-market; the stock, and the cruise line space in general, has underperformed ever since Morgan Stanley made waves with an uber-cautious note in early June, specifically citing China weakness as one bullet point of the thesis
- Gentherm (THRM), a small-cap auto parts name with just under 10% of revenues tied to China in 2017, hosts a strategic update Monday afternoon; short interest in this name has surged over the past few months (SI more than 8% of float, according to Markit)
- Lear (LEA), a $13b market cap auto parts supplier to Daimler with more than 12% exposure to China, hosts an investor day on Wednesday
- Nike (NKE), which had ~12% revenues tied to China in 2017 (according to our data), reports earnings Thursday after the close; the stock fell 1% yesterday after a UBS valuation downgrade
Also on Tap for Next Week
Aside from the China-levered names mentioned above, the other big catalysts to watch include the EU leaders gathering in Brussels, a second round of Fed stress tests (this is CCAR vs yesterday’s DFAST), and a smattering of inflation and housing data.
On the corporate side of things, we’ll get earnings from a couple homebuilders (LEN and KBH) to pair with the data, as well as from new Dow Jones Industrial Member member WBA (technically the change isn’t effective until Tuesday). We’ll also get more results in the consumer space, specifically in retail (BBBY, PIR), restaurants (SONC plus a CMG "special mid-quarter investor" call), staples (GIS, STZ and CAG, which we reported yesterday had approached PF for a deal), and $7b market cap pot stock Canopy Growth (ticker WEED CN).
Notes From the Sell Side
Red Hat catches the Street off guard:
- BTIG downgrades to neutral as the multiple even after today’s pullback leaves little room for error going forward; "we are left wondering if this speed bump doesn’t warn of more to come"
- Deutsche Bank (buy) says that while the company occasionally posts weak billings followed by a snap-back quarter, "this felt different as the more steady subscription revs growth rate also slowed," though the print doesn’t seriously damage several pillars of the bull case
- Nomura Instinet (buy) says the reality of the earnings setup is that flawless execution is required when shares are up almost 40% year-to-date, and "any noise, even if FX-driven, will be met with a shoot-first, ask question later response"
- Mizuho (neutral) sees three items potentially awakening the bears: 1) momentum in middleware slowing, 2) slower ramp of Openshift over next few quarters, 3) renewal pipeline appears a bit weaker for the next few quarters
Stress Test concerns :
- Deutsche says DFAST was worse than expected, as minimum capital levels were lower than expected for many banks under coverage, raising concern that buybacks may disappoint
- Morgan Stanley expects higher volatility over the next week as stressed capital ratios were significantly lower than expected; potential winners are ALLY, BBT, BK, HBAN, NTRS, and USB
- Goldman saw first round as indicating a more difficult test, though most banks should be able to meet return expectations
Goldman recommends GE suspend its dividend for 18 months to solve two issues at the same time: Shore up its balance sheet and reduce near-term noise around the company’s credit worthiness.
BofAML double downgrades HZN to an underperform on increasing uncertainty of earnings growth, and slashes OLLI to an underperform as well on near-term risks to 2Q same-store sales growth. And the upgrades in heavy machinery keep coming, with Jefferies on TEX and JPMorgan on MTW yesterday and now UBS raising URI to a buy as cyclical and cost concerns are overdone.
Tick-by-Tick Guide to Today’s Actionable Events
- Today -- American Diabetes Association Meeting day one
- Today -- IPO lockup expiry SGBX
- 7:00am -- BB earnings
- 7:10am -- Fed’s Tarullo on Bloomberg TV
- 7:35am -- KMX earnings
- 8:00am -- BB earnings call
- 8:00am -- World Cup: Brazil vs Costa Rica
- 9:45am -- Markit PMI
- 11:00am -- BABY annual meeting/proxy fight
- 11:00am -- World Cup: Iceland vs Nigeria
- 11:40am -- Mike Pompeo speaks at SelectUSA Investment Summit
- 11:55am -- Wilbur Ross closing remarks at SelectUSA Investment Summit
- 2:00pm -- World Cup: Switzerland vs Serbia
- Tonight -- Russell index reconstitution
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