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Capital 19 Catch-Up – Sep 24

Despite some relatively intense events occurring over the course of the last week, Wall St remained relatively muted, again just falling short of all-time highs.

Overall the small stocks were the worst performers of the week with the Russel 2000 index dropping 1.2%. It wasn’t too much worse than the Dow however which lost 1.1%. The Nasdaq dropped 0.7%, while the S&P500 was the best of the major indices, losing only 0.5%.

The week was bookended by down days on Monday and Friday, with an attack on Saudi Oil fields spooking markets early in the week, while the trade war did the same thing on Friday. In between this, we saw the markets move sideways as the Reserve Bank met for their all-important September rates meeting.

 

The effect of drone strikes on Saudi oil

It was always going to be a difficult start to the week after drone strikes in Saudi Arabia took out almost half of that country’s oil production.  The oil price spiked by almost 20% during the trading session but eventually settled to finish14% higher. The Dow’s oil components Exxon Mobil (XOM) and Chevron (CVX) rose by more than 1%, but their gains weren’t enough to stop the Dow having its first losing session from the last nine.

What’s good news for the oil companies is bad news for the rest of the market, however. Higher oil prices can be a major anchor on economic health, as it takes money out of the hands of the consumer, while products become more expensive at the same time. While a 14% spike is considered a bit of a scare it is believed that a rise of 90% or more is required to trigger a recession. It’s safe to say we were a long way from needing to panic here.

The airlines always seem to be the hardest hit, with oil prices being crucial to their running costs. American Airlines (AAL) lost 7.3% for the day while JetBlue (JBLU) and United Airlines (UAL) fell by around 3% each. Freight transportation stocks also have a hard time for the same reason. C.H. Robinson Worldwide (CHRW) lost 2.1%, while Expeditors Int of Washington (EXPD) fell 1.1%.

In the past, a similar event would have rocked the world to a much greater extent than it does today. Importantly for the US they are now able to supply much of their own oil needs and can ramp up production at any time if it is needed.  They were ready to do just that, however, Saudi Arabia managed to get much of their production back up and running very early on in the week and it became unnecessary.  Oil prices bounced back by more than 5% in the Tuesday session.

 

US rate cuts

Following the oil drama, Wall St went straight into Fed watch as the FOMC meeting began to decide what they would be doing with interest rates. As expected they dropped rates by .25% to a range of 1.75%-2.00%. Interestingly there were three dissenters, the most since the December meeting of 2014. One wanted a larger cut of .5%, while two wanted no cut at all.

For future cuts, the Fed is again of mixed opinion. Of the 17 voting members, we have five that think we will remain at the current level of 1.75%-2.00%, another seven who want to see a cut to 1.5%-1.75%, while a further five predicting a move back up to 2%-2.25%. Markets were flat following the decision and then mixed again on the Thursday session. There are two more meetings to be held this year, on October 30 and December 11. Check out the odds on an October rate cut below.

 

The end to the week saw another move lower as trade talks continued to worry investors. A delegation of Chinese officials cut short their visit to U.S. farms on Friday in a sign that things weren’t going as well as expected. The current talks are expected to lay the groundwork for high-level talks at the start of October.

The previous day had seen the major indices pull back after Chinese reports stated that a Trump advisor had threatened them with high tariffs if a deal wasn’t done soon. Which prompted Chinese media to advise the US not to “misread China’s goodwill” as a weakness, and that  “China is not as anxious to reach a deal as the US side thought”. There’s still a way to go here I suspect.

FedEx (FDX) has admitted the trade wars have had an impact on their business as they released earnings last week that were way off expectations.  Estimates for profits of $3.20 per share were down at $3.05, while revenue which was expected at $17.14 billion only came in at $17.05 billion.

Besides the weakening economic environment, they blamed the loss of a “large customer”, presumed to be Amazon (AMZN), who are attempting to provide their own supply network going forward. Full-year profit is now estimated to be 22% lower than expected with their CEO stating “Our performance continues to be negatively impacted by a weakening global macro environment driven by increasing trade tensions and policy uncertainty”. FedEx was down 13.8% for the day.

The week ahead is another on the quiet side. Earnings from Nike (NKE) will be closely watched as to whether its China business is also being impacted by the trade war. Last quarter its CEO Mark Parker denied they would be heavily impacted stating: ” We are, and remain, a brand of China, for China.” We might find out after the market closes on Tuesday. Other companies that are also reporting include Micron technologies (MU), and Matthew’s favourite phone company Blackberry (BB).

Consumer confidence and durable goods orders will be the main attractions on the data front, while Europe’s PMI’s come out at the start of the week. There are also multiple talks from FOMC board members throughout the week, as well as ECB President Mario Draghi who speaks on Thursday.

Company-wise Amazon will hold their hardware media event on Wednesday. It’s much like the Apple (AAPL) version, but not as interesting or exciting. They are expected to release a refresh of its Amazon Echo product line and to the Amazon Fire, and they are also rumoured to be announcing new content for its Amazon Prime streaming service, just in time to welcome its newest competitors Apple and Disney to the market.

Starbucks (SBUX) will be sweating over an EU tax ruling on Tuesday which could see them having to pay EUR 30million in back taxes. Fiat Chrysler (FCAU) are in the same boat for a similar amount. Ikea and Nike (NKE) are also targeted. No doubt the Australian government will be watching closely for tips on how to handle our own multinational tax dodgers.

Take a look below for a more detailed list of earnings announcements and economic data releases.

Hope you have a great week.

Cheers, Paul.

 

Earnings:

  • Tuesday: Nike (NKE), Blackberry (BB), Autozone (AZO), CarMax (KMX)
  • Wednesday: KB Homes (KBH)
  • Thursday: Micron Technologies (MU), Carnival PLC (CCL), ConAgra Brands (CAG)
  • Friday: Vail Resorts (MTN)

 

Economic Data:

  • Tuesday: Case-Shiller home price index, Consumer confidence index
  • Wednesday: None scheduled
  • Thursday: Weekly jobless claims, GDP revision, Advance Trade in goods, Pending home sales
  • Friday: Durable goods orders, Core capex orders, Personal income, Consumer spending, Core inflation, Consumer sentiment index.

 

 

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