The Renewed S&P 500 Upswing Is Knocking on the Door

As expected, the S&P 500 closed back above the mid-June highs resistance yesterday. The volume slightly rose but I wouldn’t read too much into it – after all, the early June highs of around 3230 should provide for a bit stiffer battle. How the market reached the current 3160-ish levels, is what counts more.

And after the daily ride higher throughout the Independence Day week, we’re experiencing a shallow sideways correction now. When we look in retrospect, will it remind us of bullish flag? In other words, can we expect the market to power higher and soon?

I think so. Higher stock prices are likely despite the high yield corporate bonds having lagged yesterday, or the investment grade corporate bonds suffering a rare daily decline. Market reaction to today’s unemployment claims won’t probably support the bulls to a great extent, yet I expect the push higher in stocks to continue.

In today’s analysis, I’ll cover the reasons why, and also discuss the non-confirmations that I would like to see resolved constructively.

I think the breakout will be confirmed shortly, and that the bulls will prevail in the clashing narratives and facts on the ground:

(…) I say so despite the uptrend in new U.S. Covid-19 cases that has many states stepping back from the reopening, rekindling lockdown speculations. I say so despite the Fed having its foot off the pedal in recent weeks, which makes for more players looking at the exit door as the rising put/call ratio shows.

The dollar is taking it on the chin, and emerging markets are seeing stellar gains, boding well for the U.S. markets. V-shaped recovery being real or not, corona vaccine hype or not, stocks love little things more than the central banks standing ready to act. And the punch bowl isn’t about to be removed any time soon.

The only policy risk is a lockdown miscalculation – did you see how the ASX 200 Composite (take that as Australia’s S&P 500) took to Victoria’s 6-week lockdown institution? Thankfully for the U.S. economy, Larry Kudlow (speaking for Fox Business) is in no mood for a second nationwide lockdown.

Yes, corona cases are rising, but testing has risen too. What about deaths? As the below CDC chart seen on OffGuardian shows, any news of their spike would be an exaggeration, as Mark Twain would probably say.

Food for thought and inquisitive minds. Sticking with the markets, let’s check upon yesterday’s S&P 500 performance.

S&P 500 in the Short-Run

I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):

On Wednesday, prices rose back above the horizontal line connecting mid-June tops, on a not so extraordinary volume. But is that a necessarily bearish omen? I don’t think so – the swing structure gives the bulls the benefit of the doubt. Please note that in the latter half of May (when stocks were peeking above the late April highs), the volume on those days wasn’t outstanding either.

Such were my yesterday’s thoughts as to the daily indicators:

(…) Both the CCI and Stochastics keep supporting the upside move – it’s only the RSI that feels tired. This doesn’t concern me that much – it’s not flashing a bearish divergence, it isn’t languishing at an extreme reading. In short, it doesn’t preclude the rally from going on once the current breather is over.

And until I see credible signs that the markets are getting spooked by corona, botched policy responses or anything else, there is little point in acting as if the sky is falling. It isn’t the case – to be clear, the time to turn really bearish would come, but we’re not there yet.

Whenever markets start acting jittery, it pays to remember the big picture:

(…) Recapping the obvious, stocks are on the upswing after the bears just couldn’t break below the 200-day moving average, which means that the momentum is with the bulls now. The daily indicators keep supporting the unfolding upswing, and volume doesn’t raise red flags either.

Let’s check the credit markets’ message next.

The Credit Markets’ Point of View

Yes, high yield corporate bonds (HYG ETF) scored an upswing yesterday, but are still trading below Monday’s closing prices. Please visit this free article on my home site so as to see more of the discussed charts. To justify turning more bullish on stocks, renewed animal spirits in the junk corporate bonds arena would be needed.

And not only in junk corporate bonds – it’s that the investment grade ones (LQD ETF) have wavered yesterday. But similarly to the HYG ETF move, the volume in LQD ETF hasn’t been remarkable, which is why I am not jumping to conclusions (and definitely not bearish ones) just yet.

The respective ratios (HYG:SHY and LQD:IEI) mirror that short-term indecisiveness perfectly. A daily increase in one, and a daily decline in the other. The overreaching dynamic is though one of an uptrend, which is why I look for the daily non-confirmation to be resolved with an upside move.

Encouragingly, the ratio of high yield corporate bonds to all corporate bonds (PHB:$DJCB) has turned higher yesterday. That’s a gentle nod in favor of the HYG:SHY ratio’s upswing.

As said, I don’t see a proof that the sky is falling – should I see one, I’ll change my mind and let you know about it. With the Fed waiting in the wings, the path of least resistance remains higher. And don’t forget about the infrastructure bill or the second stimulus check either.

If you look at the HYG:SHY chart with the overlaid S&P 500 closing prices, you’ll see that stocks didn’t really get more extended than they were since the late June bottom. While this condition might not last all too long into the future, I don’t expect stocks to be brought immediately down courtesy of this factor alone.

From the Readers’ Mailbag

Q: Although SPX and NDX keep rallying as you predicted, RUT is not participating much and most of the stocks other than major stocks are not rising with the index. Does that concern you? When do you think RUT will participate in the rally in significant way? Does it have to wait until COVID second wave is resolved in some way or after the second quarter reports are out?

A: Thank you, technology (XLK ETF) has indeed reached new 2020 highs yesterday, and it’s leading the index higher. In a sign of confirmation, semiconductors are also challenging their early June highs.

Russell 2000 (IWM ETF) has been indeed underperforming since the March 23 bottom. But the caption says it all – both indices have been climbing higher nonetheless. Of course, the S&P 500 outlook would be more bullish if e.g. IWM ETF traded also above its 200-day moving average.

Given the unfolding S&P 500 upleg and recovering risk appetite (see e.g. the PHB:$DJCB ratio, or the room for growth in XLF:XLU and XLY:XLP), I think it’s a question of time when Russell 2000 breaks above its 200-day average too.

But this isn’t strictly about the underperformance for any S&P 500 investor to get spooked by. I would focus on whether I see signs of distribution in the IWM ETF. There are none currently.

If I saw IWM ETF weakening while the individual stock heavyweights in the S&P 500 went higher still, that would be concerning. That’s because once the smallcaps roll over to the downside, the S&P 500 would follow eventually as the generals wouldn’t just prop it up indefinitely. And this isn’t happening.

I think the Covid-19 second wave fear is a distraction – smallcaps can rise regardless. Any policy missteps would be more concerning for small- and medium-sized businesses. The same goes for the Q2 earnings and the usual games around bringing down previously upbeat expectation in order to have a better chance to exceed them. In other words, it’s the P that counts for more in the P/E ratio.

Summary

Summing up, Tuesday’s decline in the S&P 500 was indeed merely of short-term nature, and the credit markets tentatively support the stock upswing to go on. Market breadth isn’t at daily extreme readings, emerging stocks are outperforming, and the dollar isn’t an obstacle to further stock gains. I look for the breakout above short-term resistance formed by the mid-June tops to succeed shortly as the rally’s internals including technology, semiconductors and risk-on metrics are improving.

I encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

 

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

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All essays, research and information found above represent analyses and opinions of Monica Kingsley and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Monica Kingsley and her associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Ms. Kingsley is not a Registered Securities Advisor. By reading Monica Kingsley’s reports you fully agree that she will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Monica Kingsley, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Walgreens Boots Flips to Loss in Q3; Target $50 in Bull Case and $30 in Bear

Walgreens Boots Alliance Inc, a global retail pharmacy provider, reported a loss in the third quarter compared with a profit a year earlier, hammered by non-cash impairment charges of $2 billion in Boots UK as the ongoing COVID-19 pandemic severely impacted businesses worldwide.

The company reported an operating loss of $1.6 billion, compared to operating income of $1.2 billion a year ago; Adjusted operating income decreased 46.5% to $919 million on a reported basis, down 46.4% on a constant currency basis, the company said.

Walgreens’ loss per share was $1.95, compared to earnings per share of $1.13 a year ago; Adjusted EPS decreased 43.8% from $1.47 to $0.83, down 43.4% on a constant currency basis; Results reflected $0.61 to $0.65 per share estimated operational impact from COVID-19.

Both operating income and adjusted operating income included an adverse impact of $700 million to $750 million from the above items, or $0.61 to $0.65 per share, excluding impairment charges. Walgreens Boots Alliance Inc also announced plans to reduce 4,000 workforce at pharmacy chain Boots UK.

Executive comment

“Prior to the pandemic our financial performance for fiscal 2020 was on track with our expectations. However, this unprecedented global crisis led to a loss in the quarter as stay-at-home orders affected all of our markets. I’m very proud of how all of our teams mobilized and adapted to deliver essential services in our communities across the world,” Executive Vice Chairman and CEO Stefano Pessina said in a press release.

“Shopping patterns are evolving more rapidly than ever as consumers further embrace digital options, spurring us to accelerate our ongoing investments in digital transformation and neighbourhood health destinations. This includes our two recent announcements: a significant expansion of our primary care clinics collaboration with VillageMD, and our strategic partnership with Microsoft and Adobe to launch a personalized omnichannel healthcare and shopping experience.”

Walgreens Boots’ stock price forecast

Four analysts forecast the average price in 12 months at $47.75 with a high forecast of $50.00 and a low forecast of $45.00. The average price target represents a 12.91% increase from the last price of $42.29. All four analysts rated ‘Hold’, none rated ‘Buy’ or ‘Sell’, according to Tipranks.

Morgan Stanley target price is $45 with a high of $58 under a bull scenario and $30 under the worst-case scenario. BofA Global Research cuts price objective to $43 from $44 and Mizuho cuts target price to $48 from $53 and Cowen and Company cuts price target to $48 from $54.

It is good to hold now as 50-day Moving Average and 100-200-day MACD Oscillator signals a selling opportunity.

Analyst view

“Walgreens Boots Alliance operates a top 2 retail pharmacy chain in the U.S. as well as Boots Pharmacy and Alliance drug distribution in Europe. FY20 guidance calls for a turnaround in core US business but delivering on EBIT outlook relies on improving fundamentals which are out of the company’s control, including better script trends, brand inflation, and front end,” Ricky Goldwasser, equity analyst at Morgan Stanley noted in June.

“Walgreens has the balance sheet to deploy capital into M&A, as well as the strategic optionality to potentially reposition its portfolio of assets in a changing healthcare marketplace. Unveiling a new strategy that provides a roadmap to future growth is a potential catalyst for shares,” she added.

Asia-Pacific Indexes Up Across the Board Led by Gains in China

The major Asia-Pacific stock indexes were higher on Thursday, led by fresh gains in China. European shares are also rising following a two-day setback. The price action indicates that investors are looking past simmering U.S.-China tensions and renewed coronavirus lockdowns to upcoming company earnings, hoping that global stimulus efforts will yield upbeat outlooks.

On Thursday, the Nikkei 225 Index settled at 22529.29, up 90.64 or +0.40%. Hong Kong’s Hang Seng Index finished at 26210.16, up 80.98 or +0.31% and South Korea’s KOSPI Index closed at 2167.90, up 9.02 or +0.42%.

China’s Shanghai Index settled at 3450.59, up 47.15 or +1.39% and Australia’s S&P/ASX 200 Index finished at 5955.50, up 35.20 or +0.59%.

COVID-19 Update

The number of cases in the U.S. surpassed the 3 million mark, according to Johns Hopkins University. As cases and deaths rise, data compiled by Apple Maps shows driving activity is slowing down across the country, which could be a warning sign for the economic comeback.

Globally, more than 11.88 million people have been infected while at least 545,398 lives have been taken, according to data compiled by Johns Hopkins University.

China Reports Inflation Data

In fresh inflation data out of China early in the session, the country’s producer price index was down 3% year-on-year in June, compared to expectations for a 3.2% decline according to analysts polled by Reuters.

The consumer price index, meanwhile, fell in line with Reuters-polled expectations, rising 2.5% year-on-year for the month.

Australian Share Market Closes Higher

The Australian share market closed higher, after shares in Afterpay led a rally among tech stocks, while mining and energy stocks also boosted the market.

Mining and energy stocks led the broad-based rally. Technology shares surged, led by buy-now, pay-later operators Afterpay and Zip Co.

Corporate News

Rio Tinto said more than 2,000 jobs would go in New Zealand, as it announced plans to close its aluminum smelter in the country because of high power prices.

Meanwhile, Afterpay shares hit a fresh record high above $75 following an upgrade from Morgan Stanley. Analysts there raised their price target on the stock to $101, saying the company’s latest earnings were much stronger than expected.

For a look at all of today’s economic events, check out our economic calendar.

U.S. Stocks Set To Open Higher As Continuing Jobless Claims Report Beats Expectations

Initial Jobless Claims Decline To 1.31 Million

The U.S. has just provided new Initial Jobless Claims and Continuing Jobless Claims reports.

Initial Jobless Claims declined from 1.41 million to 1.31 million. Analysts projected that Initial Jobless Claims would total 13.75 million.

Continuing Jobless Claims report was much better than expected as Continuing Jobless Claims declined to 18.1 million compared to analyst estimates of 18.95 million.

The decrease in Continuing Jobless Claims supports the thesis that the U.S. economy is rebounding faster than previously expected.

Not surprisingly, S&P 500 futures are gaining ground in the premarket trading session after the release of these reports, and the market looks ready to continue the upside trend.

Fed’s Bullard Believes That Unemployment Rate Will Materially Decline By The End Of The Year

Despite the recent surge in the number of new coronavirus cases in the U.S., St. Louis Fed President James Bullard thinks that Unemployment Rate will decline to 7 – 8% by the end of this year.

This optimism is based on the current momentum since Unemployment Rate has declined from 14.7% in April to 11.1% in June. Back in February, when the economy did not suffer from the coronavirus pandemic, Unemployment Rate was just 3.5%.

The road to such levels may be a long one, but a return to Unemployment Rate of 7 – 8% will be a major move forward for the U.S. economy.

Such projections from Fed officials provide additional support to stocks which continue to ignore worrisome news on the coronavirus front.

Oil Continues To Trade In a Very Tight Range Near The $40 Level

Oil stays above the $40 level for the sixth session in a row but fails to get above the $41 level. Such a tight range is highly unusual for a volatile commodity like oil.

Meanwhile, major oil stocks like Exxon Mobil, Chevron or BP are slowly trending down in absence of additional upside catalysts.

In my opinion, the quiet trading in oil cannot last much longer so oil will be ready to break out of the coming range in the upcoming trading sessions, with the corresponding impact on oil-related stocks.

For a look at all of today’s economic events, check out our economic calendar.

The Remarkable Gold Index Sign Vs. the Miners’ Strength

We started yesterday’s Gold & Silver Trading Alert with the Gold Miners Bullish Percent Index, and we’ll start today’s analysis in the same way. We’ll do so, because we received a question about whether gold miners stayed overbought for a long time, while they kept pushing to new highs – just like what markets sometimes do (especially the general stock market) when a given indicator (say, RSI) is already overbought.

In short, no.

The only other case when the index was at 100, was in mid-2016. We marked this situation with a vertical dashed line. Did miners continue to move higher for a long time, or did they move much higher? No.

Precisely, the index reached 100 on July 1st 2016, and gold mining stocks moved higher for two additional trading days. Then they topped. This was not the final top, but the second top took miners only about 5% above the initial July high.

This year, the index reached the 100 level on July 2nd – almost exactly 4 years later, and once again practically exactly in the middle of the year. Yesterday was the third day after this move. It’s not justified to assume that the delay in the exact top would be 100% identical, but it seems justified to view it as similar. Two-day delay then, and three-day delay now seem quite in tune.

There’s also one additional case that we would like to emphasize and it’s the previous high that the index made on November 9, 2010. That was the intraday top, so there was no additional delay. There was one additional high about a month later, in December, but miners moved only about 1.5% above the initial high then.

One might ask if mining stocks are really overbought right now given the unprecedented quantitative easing, and the answer is yes. Please note that in 2016 the world was also after three rounds of QE, which was also unprecedented, and it didn’t prevent the miners to slide after becoming extremely overbought (with the index at the 100 level). The 100 level in the index reflects the excessive optimism, and markets will move from being extremely overbought to extremely oversold and vice versa regardless of how many QEs there are. People tend to go from the extreme fear to extreme greed and then in the other way around, and no fundamental piece of news will change that in general. The economic circumstances change, but fear and greed remain embedded in human (and thus markets’) behavior.

It’s unlikely that gold miners would wait as long before declining profoundly, or that there would be another move higher before the bigger decline. Why? We already wrote about that this week – for instance, because of gold’s long-term turning point and because of USD’s mid-year turning point:

Gold’s very long-term turning point is here and since the most recent move was to the upside, the implications are bearish. They are particularly bearish since gold just invalidated the tiny breakout above its November 2011 high.

Naturally, everyone’s trading falls within their responsibility, but in our opinion, if there ever was a time to either enter a short position in the miners or to increase its size if it wasn’t already sizable, it’s now. We made money on the March decline and on the March rebound (buying miners on March 13th), and it seems that another massive slide is about to start. When everyone is on one side of the boat, it’s a good idea to be on the other side, and the Gold Miners Bullish Percent Index literally indicates that this is the case with mining stocks.

We used the purple lines to mark the previous price moves that followed gold’s long-term turning points, and we copied them to the current situation. We copied both the rallies and declines, which is why it seems that some moves would suggest that gold moves back in time – the point is to show how important the turning point is in general.

The take-away is that the long-term turning point is a big deal, and that gold could fall significantly before it soars due to its extremely positive fundamental outlook. This also means that the downside target of $1,400 or slightly lower (the 2016 – 2018 highs) is well within the range of the possible moves.

Thank you for reading today’s free analysis. Please note that it’s just a small fraction of today’s full Gold & Silver Trading Alert. The latter includes multiple details such as the interim target for gold that could be reached in the next few weeks.

If you’d like to read those premium details, we have good news. As soon as you sign up for our free gold newsletter, you’ll get 7 access of no-obligation trial of our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits: Analysis. Care. Profits.

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Did COVID Kill LNG Natural Gas Dreams?

The current minimum amount of positive figures or green shoots are swiftly removed by new depressing figures of crude oil stock volumes in USA or lower estimates of OECD and MENA region GDP figures for 2020. The total impact is still unclear, but one thing has become obvious, energy demand and supply is under pressure, but not yet balancing out the right way.

At present, the main focus when talking about energy demand destruction is on crude oil and its products. Clearly, oil is struggling, but its sister, natural gas is totally on life-support.

The Golden Age of Gas, as presented by the International Energy Agency at the beginning of the 21st Century, seems to be a very short Age, as we are now entering a possible Ice Age of Gas. Demand worldwide is fledgling, main consumer markets are showing no increased demand figures, while the future demand is in doubt.

With being promoted worldwide as the energy transition fuel, natural gas and LNG have been promoted exponentially. The world’s leading oil and gas companies, such as Shell, ENI, Total, in cooperation with national oils QP, ADNOC, Gazprom and others, all have made the ‘rational’ choice to invest in the natural gas E&P sectors from the end of the 1990s onwards.

Success seemed inevitable, as natural gas or LNG was the preferred fuel of choice.

Nobody expected however a main competitor on the horizon, US shale gas. The latter’s revolutionary capture of the global market destabilized the projected gas market fundamentals and brought price levels down substantially. Demand still grew, as prices were very competitive, but supply continued to outpace it.

Still, investments in on- and offshore gas projects kept pouring in, as seen in East Med, offshore Nile Delta Egypt, Australia and Qatar. The global gas market shook on its fundamentals. The emergence of COVID-19 however could be a major shock to its total future. At present, a long list of gas producers is filing for bankruptcy, such as US company Chesapeake and more than 200 US shale producers, or are considering a total reassessment of ongoing and future investment projects.

The Golden Age of Gas has become an Ice Age of Gas.

The latter is for sure the case for LNG projects worldwide, that are not only confronted by COVID-19 but a total out of touch with the market supply volume the coming years. Without COVID-19 the market already would have been hitting a major slump due to overproduction and sluggish demand growth.

New projected production volumes, especially in East Med, Mozambique, Brazil, Australia and even in the GCC (Qatar, Saudi Arabia, Abu Dhabi), are going to be very hard to sell at commercial price levels. Some even expect that if no real measures are being taken, and production expansion continues, major LNG and gas producers could be facing the same dark scenarios as WTI in April. Negative prices are not out of reach, if the market refuses to go to a restructuring very soon.

Non-American gas producers should understand that with oil prices hovering around $40 per barrel Brent additional shale oil and gas production will come again online. Higher price settings for crude oil and NGLs will boost US shale gas production for sure. Without increased US domestic demand the only way is out, entering the global markets.

Future investment projects in Qatar, Saudi Arabia and East Med, are facing enormous challenges. Qatar’s LNG strategy has been working for decades, proponing the Peninsula into the Ivy League of gas producers, but now could become a boomerang full of pain. The end to the Qatari production moratorium, in principle a wise choice, however has come at the wrong time. Demand for these additional volumes doesn’t exist.

The multibillion investments presented by Doha in E&P and additional LNG carriers could be a major blow to its commercial existence. The same is the case for the high-profile East Med gas adventures of Egypt, Israel and Cyprus. The continuing exploration success stories presented by Italy’s ENI, French major Total and others in Egypt or Cyprus have become a new version of a Pyrrhic victory. Giant reserves are being found, LNG production is available, but customers are hiding or retreating even. Domestic regional demand will not be enough to counter supply, while European customers can receive LNG volumes at lower prices.

This time success or a Golden Age scenario has turned into a major black hole. Investments are made, commitments are there, reserves proven but demand is down, due to a virus. Not even Asia’s gigantic markets are able to take advantage, as their own situation is also dire.

Some analysts warned already in the 1990s that the high profile transition from oil to gas producer, as stated by Shell, BP and others, could backfire. Current financials are not yet showing it in full, but profit margins of the main gas producing oil majors will be lower for a longer time. No option anymore to counter lower gas prices by higher oil margins, as they have lost a pivotal oil market position since years.

National oils, especially QP, ADNOC or its counterparts Gazprom and others, are in the same boat. Gazprom reported, as shown by Russia’s Federal Customs Service (FCS), that it being hit by lower export gas prices and volumes. FCS data show that the company’s gas export revenues in the first five months of the year plunged 52.6% to $9.7 billion, while shipments declined 23% to 73 billion cubic meters (Bcm). May’s export revenues came to $1.1 billion – which is 15% lower than April. Physical exports were down 1.7% m-o-m to 11.9 Bcm. When compared to 2019 figures, Gazprom’s May 2020’s export revenues were 61% lower and volumes were 24% down.

Going for the well-known transition fuel natural gas is currently putting these companies on a rowing boat and not anymore a speedboat. Profitability of the natural gas upstream and downstream sector has always been low, especially when looking at the crude oil hey-days. Investors now also will start to reassess their involvement.

Lower ROIs, a bleaker future than presented and a still continuing immense gas supply glut, is not something investors are happy about. Seems that IOCs and NOCs are now looking at a home-made Sword of Damocles. COVID-19 even can make it worse if major economic policies, such as the EU’s Green Deal, are going to be implemented earlier. Without even the option of being the energy transition’s fuel of choice, natural gas could be put on a slow burner for the next decade. The current bearish gas market, due to prices averaging under $2/MMBtu in 2020, no light is at the end of the tunnel.

LNG’s overall situation is even worrying, as costs are higher than commercials are offering at present.

Worldwide LNG projects are also partly doomed, as LNG price settings are either putting projects on ice or major delays of FID is to expected. Global Energy Monitor reports in its Gas Bubble 2020 report that LNG projects that are still within the pre-construction phase have experienced a “widespread pullback, including the quiet abandonment of a large number of projects.” The same report reiterated that for the period between 2014 and 2020, the failure rate for proposed LNG export terminal projects is 61%.

It also identified 29 LNG export terminal projects that have since 2014 either been delayed, cancelled, abandoned or are facing substantial challenges. The report also states that in total, companies had announced plans to build $758 billion of projects that are as yet in the pre-construction phase. But with 20 projects now in jeopardy, including nine in the United States, that planned capital outlay could be reduced by $292 billion, or 38%, if the delays persist indefinitely.

Uber Beefs up for Food Fight with $2.65B Acquisition

After the announcement, Uber’s stock jumped six percent on Monday, bringing its advance to nearly 129 percent since its record low on March 18. Having gained over 10 percent since the extended 4th of July weekend, Uber’s shares have also outpaced the week-to-date gains seen respectively in the S&P 500 and the Nasdaq.

Shareholders are hoping that this acquisition would also bolster Uber’s plans for reaching its first-ever quarterly profit, with such ambitions derailed after its global ride-hailing business fell by 70 percent in the wake of the pandemic. Gross bookings registered its first-ever quarterly drop in the January-March period this year, as the orders to stay at home dealt a massive blow to the travel and transportation industry.

Growing appetite for food deliveries, and more

The pandemic however boosted demand for food deliveries, which soared by 52 percent in gross bookings to US$4.68 billion in Q1. The segment also accounted for 23.1 percent of Uber’s gross revenue for the quarter, higher compared to the 18 percent contribution in the prior three-month period, according to Bloomberg data. Postmates’s food-delivery bookings rose about 67 percent in Q2, according to Uber CEO Dara Khosrowshahi.

Set against such a context, it’s of little wonder that Uber is willing to place a bigger bet on the food deliveries segment, as its core offerings contend with the strong headwinds stemming from the pandemic. And with this consolidation in the food deliveries space, there could eventually be some upward pressure on prices as the market discovers its new equilibrium, which bodes well for this Uber segment’s top line.

Beyond bolstering its food deliveries segment, Uber is also hoping to leverage on Postmates’s strength in its online delivery offerings, which brings groceries and daily essentials, among other things, right to customers’ doorsteps. Also this week, Uber rolled out its in-app grocery delivery services for select Latin American and Canadian cities, as it partners with Cornershop, the Chile-based grocery delivery startup in which Uber agreed to take up a majority stake last year.

Uber’s emphasis on delivery-as-a-service should give the company another leg to stand on in its quest for profitability, especially if changed consumer habits from the lockdown-era (i.e. customers are less wiling to venture out of their homes) become sticky.

A sure path to profitability?

Back in May, Khosrowshahi said that the initial timeline for churning out the company’s first-ever adjusted quarterly profit has been pushed back from this year to 2021. To hasten its path to profitability, Uber has reduced over US$1 billion in expenses, getting rid of some non-core businesses while having shed more than a quarter of its staff.

While awaiting the potential synergies to materialize from this combo of profitless companies, with the deal only expected to be sealed in the first quarter of 2021, shareholders are likely to keep themselves busy in the interim, assessing how Uber is faring amid the double-edged sword that is the global pandemic. The impact of Covid-19 is likely to be more pronounced in Uber’s Q2 earnings release slated for August.

It remains to be seen whether shareholders will have the patience to wait for the promise of things to come, and potentially send Uber’s shares much higher from current levels. If it’s anything like I’ve discovered during quarantine, the wait can sometimes be agonizing, akin to trying to supress one’s hunger pangs while waiting for the food delivery order to arrive.

Written on 07/09/20 09:00 GMT by Han Tan, Market Analyst at FXTM


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Twitter Shares Climb On Subscription Service Speculation

Twitter, Inc. (TWTR) climbed over 7% Wednesday on speculation that the San Francisco-based company plans to launch a subscription service. The social media giant posted a job advert for an engineers to work on a subscription platform. “We are building a subscription platform, one that can be reused by other teams in the future,” the listing stated, per The Verge. The new web engineers will work on the company’s Gryphon team, which collaborates closely with the payroll team and the Twitter.com group.

According to Bloomberg, a person familiar with the matter said the company is exploring alternative revenue sources. The social media firm currently generates about 85% of its revenue from advertising. Therefore, a subscription service would help diversify the top line as businesses rein in their marketing budgets amid ongoing uncertainty. Despite Twitter adding 14 million new users in the first quarter, its revenues rose just 3% from the March 2019 quarter, the smallest increase in over two years.

Through July 8, Twitter stock is up 10.48% year to date, with the shares surging 27% in the past three months alone. The company looks fully priced from a valuation front, given it trades 52% above its five-year forward earnings multiple.

Wall Street View

Rosenblatt Securities analyst Mark Zgutowicz outlined to clients what a Twitter subscription service may look like. For instance, he believes the firm would be more likely to launch an offering utilizing its data and analytics, rather than moving to paid tiers for Twitter usage.

Sentiment among analysts skews toward a bullish outlook, with 24 ‘Hold’ ratings and nine ‘Buy’ ratings. Only four research gurus recommend selling Twitter stock. Furthermore, look for a string of analyst upgrades if the company does indeed announce a subscription service. Wall Street has a 12-month consensus price target of $33.14 – indicating 6% downside from Wednesday’s $35.41 close.

Technical Outlook

Twitter shares have formed a loosely constructed inverse head and shoulders pattern over the past nine months. The price tested the formation’s neckline in Wednesday’s trading session on the highest volume in nearly two years. Also, a likely cross of the 50-day simple moving average (SMA) above the 200-day SMA early next week adds to the bullish technical landscape. A clean breakout above $37 could see buyers run the stock up to around $46, where price encounters resistance from the 52-week high. Alternatively, a failure to push through this closely-watched resistance level could trigger a fall to horizontal trendline support at $28.5.

TWTR Chart

Rolls Royce drags on the FTSE100, as SAP Boosts the DAX

Investors appear to be making the conscious decision to find safety in the US trillion-dollar big caps rather than move their capital into the traditional safe haven of government bonds.

Asia markets have taken their cues from yesterday’s positive US session, despite the continued rise in coronavirus cases across the US, and which US Federal Reserve President Loretta Mester expressing concern that the rising virus count is introducing increased downside risks to the US economic recovery. On Wednesday we saw Texas set a new record for daily cases, hospitalisations hit a new high in California, while Arizona posted a new record number of deaths.

After two successive negative European sessions, markets here in Europe have taken their cues from yesterday’s recovery in US markets and this morning’s positive Asia session, opening modestly higher, though still well off their peaks from Monday, and struggling to make much in the way of headway early on.

If anything, the rising coronavirus case count in the US, is helping to weigh down any confidence in a more global recovery in equity markets, however on the plus side there doesn’t appear to be any evidence of a second wave here in Europe so far as various lockdown measures continue to get eased.

While this is positive for markets in Europe the lack of any imminent agreement between EU leaders on any pandemic recovery fund appears to be deterring a wholesale move of capital back into European markets for the time being.

The problems in the aerospace sector continued to be laid bare this morning as Airbus the European plane maker reported that it had failed to obtain any new aircraft orders for the third month in succession. This is equally bad news for Rolls Royce who have been having difficulties of their own, as they reported their latest first half numbers this morning.

Last Friday there were reports that Rolls Royce was looking at reinforcing its balance sheet further by raising additional capital, or disposing of some of its assets with ITP Aero, its Spanish operation one likely option. There was no mention of raising additional capital in todays’ Q2 update which has seen management say that they expect a better performance in the second half of the year.

Good progress has been made in reducing one-off costs with £300m achieved in H1, with another £700m expected by the end of 2020. The company also said it would be taking a charge of £1.45bn over the next 6 years, in respect of reducing the size of its hedge book, with £100m of that charge being taken this year and £300m in 2021 and 2022, and then £750m spread over 2023 to 2026.

The company also said that they had pro-forma liquidity of £8.1bn, including an undrawn credit facility of £1.9bn, and commitments for a new 5-year term loan facility of £2bn underwritten by a syndicate of banks and a partial guarantee from UK Export Finance. The company also took a £1.45bn write down in respect of hedges spread over 6 years.

Not all sectors are in the doldrums, with the increasing focus on cloud technology, helping to benefit the tech sector, as more and more business moves on line. This morning German software giant SAP reported an improvement on its Q1 numbers, with cloud revenues rising 21% in Q2, driven by improvements in its Asia markets.  This outperformance in SAP has helped underpin the DAX in early trade this morning.

Rio Tinto this morning announced it was closing its New Zealand operations as an aluminium supply glut takes its toll on its profits.

In the wake of yesterday’s budget measures on stamp duty, house builder Persimmon announced its latest first half update.

Unsurprisingly given the lockdowns in April total revenues fell to £1.19bn, down from £1.75bn in 2019, with completions sharply lower at 4,900, down from 7,584. On the plus side average selling prices were modestly higher at £225k, however higher costs are likely to eat away at overall margins in the months ahead, which could act as a drag on profitability.

Much will depend on whether the removal of stamp duty for properties up to £500k will offset any loss of confidence prospective buyers have about the economic outlook. Recent mortgage approvals data suggests that consumers are becoming much more cautious.

In terms of future expectations there does appear to have been a fairly strong rebound since sales offices reopened with forward sales up 15% from the same period last year, helping to push the shares higher in early trade.

Vistry Group also posted a positive first half update, delivering a total of 1,235 completions in H1, down from 3,371 a year ago, with an average selling price of £290k. Revenue was sharply lower at £344m, down from £854m in 2019. Forward sales saw an improvement to £1.66bn, up from £1.5bn at the end of May.

Real estate investment trusts have had a rough time of it recently, with Intu going into administration only recently. Workspace Group has been one of those companies that have done things a little differently over the last ten years, in terms of how it sold its office space, and that has helped cushion it to some extent, due to its focus on small or micro businesses, selling flexible office space, and short-term leases with superfast connectivity.

This does appear to be reflected in this morning’s Q1 update, which has seen the company report cash collection of rents at 75%, net of rent reductions and deferrals. The company has received 65% of rents due in Q2, compared to 80% a year ago. Activity in its business centres has remained low at 15% of normal. Demand is now picking up as lockdowns get eased further.

Building materials and DIY retailer Grafton Group has seen its shares rise in early trading after it reported H1 numbers, which saw revenues fall 19.4% to just over £1bn. June trading has proved to be more resilient, with revenues 11.4% higher than the same period last year.

Boohoo shares are also sharply higher this morning as buyers start to return after the precipitous falls of earlier this week, with some saying that the declines have been too severe, when set against the underlying long-term fundamentals.

US markets look set to open modestly lower against this morning’s rather indifferent European session, with the main focus once again set to be on the latest weekly jobless claims numbers, and in light of the recent re-imposition of lockdowns, the main focus will once again be on continuing claims and whether that number starts to edge up again in the weeks ahead. This could take some time to be reflected in the numbers with continuing claims expected to fall below 19m to 18.95m.

Weekly jobless claims are expected to fall to 1.37m.

Bed Bath and Beyond shares are also expected to be in focus after the company announced the closure of 200 stores over 2 years due to a 50% fall in sales.

Delta Airlines is also expected to give its latest Q2 update and it’s not expected to paint a pretty picture. Delta had a standout 2019 largely due to its reliance on sales of Premium class tickets. Business travel, which a lot of national carriers rely on, is likely to see a big drop off in the months ahead as companies realise that lots of meetings can take place just as easily on Zoom and other remote conferencing facilities.

Year on year revenue for Q2 is expected to decline by 90%, with the carrier losing 85% of its flight capacity at the height of the pandemic, while losses are expected to come in at $4.43c a share. Delta expects to add 1,000 new flights to be scheduled this month, and another 1,000 in August.

Dow Jones is expected to open 60 points lower at 26,007

S&P500 is expected to open 4 points lower at 3,166

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Stop Believing The “Economy” Is The Same As The Stock Market

Of late, almost all the “analysis” or comments you read or hear is based upon a superficial understanding of the market propagated through “common-speak.” And, that is exactly why they all seem to be so confused:

“The stock market is confusing a lot of people right now. It seems simple: news is bad, there’s a pandemic for the first time in generations, people are dying, and the economy has taken a beating for the ages. Stocks should go down, right? But they’re not. They’ve recovered so much of their March slide that they’ve produced the shortest bear market in history. The Dow Jones Industrial Average was in a bear market for just three days.”

”Less than a month ago, the stock market was in free fall, as a torrent of bad news about the coronavirus pandemic and its economic fallout drove investors to dump stocks. Just as swiftly, the market has rebounded, even as millions of people lose their jobs every week and the country is destined for a recession.”

”Cramer says he and hedge fund billionaire David Tepper are confused by the market’s recent rally.”

One of the many fallacies confusing the masses seem to be the expectation that one can invest in the stock market based upon their expectations for the economy. Many believe that if they follow unemployment, or GDP, or myriad other factors they will be able to glean what the stock market will do.

So, then why are those that invest in the market based upon the economy so confused?

All their confusion is based upon the fallacy of their underlying assumption that understanding the economy will allow you to understand the market. To be honest, the exact opposite is true. But, very few understand the truth of this perspective.

In the past, I have tried to explain why many view the causality chain backwards, but I will reiterate it here, since so many seem to be confused of late.

First, I want to start with the premise that the market is driven by mass sentiment more so than fundamentals. Rather, fundamentals follow the market, and do not lead it. This is why we often hear that the stock market is a leading indicator for the stock market.

So, taking this one step further, we understand that when a market reaches a maximum point of relative bullishness, it will top and turn in the opposite direction. The same applies when the market reaches a maximum point of bearishness, where it will bottom and turn in the opposite direction.

Even the “Maestro himself, Alan Greenspan, has stated the same:

“The cause of economic despair, however, is human nature’s propensity to sway from fear to euphoria and back, a condition that no economic paradigm has proved capable of suppressing without severe hardship. Regulation, the alleged effective solution to today’s crisis, has never been able to eliminate history’s crises.” Alan Greenspan – Financial Times – 2008

“It’s only when the markets are perceived to have exhausted themselves on the downside that they turn.” – Alan Greenspan – ABC interview – December 2007

With this in mind, let’s review how the stock market and economy relate to each other, and it will likely be quite eye opening, at least for those of you that have an open mind and seek intellectual honesty in your analysis. And, if you are closed minded to what I am saying (assuming you have even read this far), consider why your perspective has been so confused of late, and maybe then you will be willing to entertain another perspective.

I feel the following narrative explains the causality chain in a more accurate fashion:

During a negative sentiment trend, the market declines, and the news seems to get worse and worse. Once the negative sentiment has run its course after reaching an extreme level, and it’s time for sentiment to change direction, the general public then becomes subconsciously more positive. You see, once you hit a wall, it becomes clear it is time to look in another direction. Some may question how sentiment simply turns on its own at an extreme, and I will explain to you that many studies have been published to explain how it occurs naturally within the limbic system within our brains.

When people begin to turn positive about their future, they are willing to take risks. What is the most immediate way that the public can act on this return to positive sentiment? The easiest is to buy stocks. For this reason, we see the stock market lead in the opposite direction before the economy and fundamentals have turned. In fact, historically, we know that the stock market is a leading indicator for the economy, as the market has always turned well before the economy does. This is why R.N. Elliott, whose work led to Elliott Wave theory, believed that the stock market is the best barometer of public sentiment.

Let’s look at the same change in positive sentiment and what it takes to have an effect on the fundamentals. When the general public’s sentiment turns positive, this is the point at which they are willing to take more risks based on their positive feelings about the future. Whereas investors immediately place money to work in the stock market, thereby having an immediate effect upon stock prices, business owners and entrepreneurs seek loans to build or expand a business, which takes time to secure.

They then place the newly acquired funds to work in their business by hiring more people or buying additional equipment, and this takes more time. With this new capacity, they are then able to provide more goods and services to the public, and, ultimately, profits and earnings begin to grow – after more time has passed.

When the news of such improved earnings finally hits the market, most market participants have already seen the stock of the company move up strongly because investors effectuated their positive sentiment by buying stock well before evidence of positive fundamentals are evident within the market. This is why so many believe that stock prices present a discounted valuation of future earnings.

Clearly, there is a significant lag between a positive turn in public sentiment and the resulting positive change in the underlying fundamentals of a stock or the economy, especially relative to the more immediate stock-buying activity that comes from the same causative underlying sentiment change.

This is why I claim that fundamentals are a lagging indicator relative to market sentiment. . . This lag is a much more plausible reason as to why the stock market is a leading indicator, as opposed to some form of investor omniscience. This also provides a plausible reason as to why earnings lag stock prices, as earnings are the last segment in the chain of positive mood effects on a business growth cycle. It is also why those analysts who attempt to predict stock prices based on earnings fail so miserably at market turns.

By the time earnings are affected by a change in social mood, the social mood trend has already been negative for some time. And this is why economists fail as well – the social mood has shifted well before they see evidence of it in their “indicators.”

In fact, one commenter to one of my past articles noted the following:

“Having worked for many listed companies and regarded as an insider with access to company confidential information, I have sometimes struggled to understand the correlation between business results and the share price.”

So, for those of you that have been confused of late as to why the economy and the market are seemingly “disconnected,” I hope you begin to consider the significance that market sentiment plays within our market.

And, to drive home this point, allow me to provide you with one more quote. Bernard Baruch, an exceptionally successful American financier and stock market speculator who lived from 1870-1965, identified the following long ago:

“All economic movements, by their very nature, are motivated by crowd psychology. Without due recognition of crowd-thinking … our theories of economics leave much to be desired. … It has always seemed to me that the periodic madness which afflicts mankind must reflect some deeply rooted trait in human nature – a trait akin to the force that motivates the migration of birds or the rush of lemmings to the sea … It is a force wholly impalpable … yet, knowledge of it is necessary to right judgments on passing events.”

For those that have tracked our work for years, you would likely know that we have been extremely accurate in our analysis. While we certainly have not been perfect, we have provided our subscribers with forecasts which have protected them from major market downturns (like February and March of 2020), along with identifying where major market upturns will likely take hold (like at the end of March 2020).

While these are just two examples of how we have successfully used market sentiment to identify major turns in markets, we have been equally successful in identifying the major top in gold in 2011 and the major bottom in 2015, the major bottom in the US dollar in 2011 along with the major top in 2018, the major bottom in bonds in November 2018, and many other larger degree turning points across all major markets.

So, if you would like to learn a bit more about our methodology, I penned the following 6-part series to explain what we do in more detail. Here’s the first article.

In the meantime, I am expecting much more bad news to hit the wires in the coming months. And, if you continue to buy into those headlines and follow the “economy,” then you will likely miss out on the next major buying opportunity I expect to see as we head towards the fall of 2020. In fact, I am still of the belief that this buying opportunity will likely be your last before we begin our next multi-year stock market rally before we strike the top to the bull market which began in 2009.

By Avi Giburt, ElliottWaveTrader.net

Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets.

Rolls Royce Share Price: Rolls Royce Expects Better H2 as it Bolsters Liquidity

In 2016 the Rolls Royce CEO took the decision to execute a turnaround plan that saw underperforming areas trimmed back and the business focus on key growth areas of civil aviation and maintenance.

At the time it seemed the perfectly sensible thing to do with airlines expanding their fleets, and switching to new greener and leaner models of aircraft.

Soon after this it became apparent that its Trent 1000 engine, which powered the Boeing 787 Dreamliner was starting to develop problems, with cracks forming on the turbine blades, the costs of which started to spiral out of control, causing the company to post a £2.9bn loss in last year’s full year numbers. To compound this there appears to be another issue with this power unit in reports yesterday that suggested a problem elsewhere, within the turbine itself.

In 2018 this strategy of focussing its energies on civil aviation started to develop further problems, with the decision by Airbus to stop production of its A380 aircraft, resulting in further write-downs, of nearly £250m.

Recent events due to Covid-19 have compounded these problems as the wholesale grounding of aircraft across the world, and its customers taking steps to delay or cancel future aircraft orders, saw its revenue base clobbered hard.

The collapse in air travel has seen nearly half of its projected revenue disappear, as airlines ground their fleets, and the various travel bans bite.

In order to shore up its finances and preserve its cash flow the company had to defer bonuses for its CFO and CEO, pull the dividend for the first time since 1987, as well as securing an additional $1.5bn revolving credit line in April, in addition to the $2.5bn it secured in March.

Throughout all of this, the company also announced plans to cull 9,000 jobs in its civil aerospace division, out of a global workforce of 52,000. These plans drew the ire of the trade unions, however if the cash isn’t coming in and isn’t likely to either, furloughing staff merely delays the inevitable.

It is these concerns about the long-term durability of the company’s aerospace division, against a backdrop of much lower spending from Boeing and Airbus, that caused investors to take fright last Friday on reports that Rolls Royce was looking at reinforcing its balance sheet further by raising additional capital, or disposing of some of its assets with ITP Aero, its Spanish operation one likely option.

There was no mention of raising additional capital in todays’ Q2 update which has seen management say that they expect a better performance in the second half of the year.

Good progress has been made in reducing one-off costs with £300m achieved in H1, with another £700m expected by the end of 2020. The company also said it would be taking a charge of £1.45bn over the next 6 years, in respect of reducing the size of its hedge book, with £100m of that charge being taken this year and £300m in 2021 and 2022, and then £750m spread over 2023 to 2026.

The company also said that they had pro-forma liquidity of £8.1bn, including an undrawn credit facility of £1.9bn, and commitments for a new 5-year term loan facility of £2bn underwritten by a syndicate of banks and a partial guarantee from UK Export Finance.

With airlines likely to remain in defensive mode for at least another 12 months Rolls Royce cash flow is likely to remain constrained for a while yet, with full year revenues look set to be £4bn lower than last year, and unlikely to improve much in 2021.

In a sign that life can come at you fast, it was only at the end of February that CEO Warren East was proclaiming that free cash flow would be positive to the tune of £1bn by the end of this year.

Given recent events the company won’t even get close to that, with current estimates expected to see a total cash outflow of approximately £4bn.

While the defence business has remained resilient, the civil aerospace division is likely to remain constrained for some time to come, and while wide body engine flying hours are showing signs of picking up, they are still down 50% in the first half of this year.

As long-haul flights have started to increase in China, and the Asia Pacific region this figure should improve in the second half, however it is unlikely to improve significantly with flying hours expected to be down 55% over the rest of the year, and only at 70% of 2019 levels in 2021.

In terms of deliveries Rolls Royce continues to plan for 250 wide body engine deliveries in 2020, however as Boeing and Airbus have found out recently, and Airbus announced this morning, new orders are becoming hard to come by, and that’s before we consider the prospect of further cancellations, as airlines cut costs.

Rolls Royce defence has continued to perform well, last year the company won a new £350m contract from the Ministry of Defence to maintain and repair the engines of RAF Typhoon aircraft. Last month the company also won a host of US Navy contracts totalling $115.6m to build a variety of engines, propulsion units and services.

Today’s update goes some way to alleviating investor concerns about the company having to raise extra capital in the short term, however it is clear that a lot of things will have to go right over the next 12 months, for these concerns not to come back. There is also the prospect of further job losses, unless management can get better control of the company cash flow, with management targeting £750m of free cash flow by 2022.

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Europe Set to Rebound, US Jobs Data on Radar

Traders in this part of the world continue to monitor the situation in the US, where the majority of states continue to see the number of new Covid-19 cases increase. As of yesterday, the number of confirmed cases in the US exceeded 3 million. On Tuesday, the WHO cautioned there could be an increase in the fatality rate as there has been a rise in infections, but the death rate so far has lagged.

US-China tensions were doing the rounds yesterday. The decision by the Chinese government to introduce the national security law in regards to Hong Kong has sparked criticism from many countries around the world as it chips away at the principal of ‘one country two systems’.

Yesterday there was speculation the US government would hit back at Beijing by potentially undermining the Hong Kong Dollar (HKD) peg. It wasn’t that long ago that President Trump reiterated that the US-China trade deal was intact, so going after the HKD might be a useful tactic. The US leader might be hesitant about taking a very tough stance against the Beijing administration given that he’s not doing well in the polls and the Presidential election is in November.

The mini-budget from Rishi Sunak, the UK’s Chancellor of the Exchequer, made big political headlines yesterday, but it didn’t have a significant impact on the markets. Mr Sunak revealed £30 billion worth of schemes that are aimed at providing assistance to the UK economy. The furlough scheme will come to an end in October and £9 billion will be allocated to job retention. There will be a temporary cut to VAT for the tourism and hospitality sector.

In addition to that, there have been incentives offered for dining out too – the combined stimulus is worth £4.5 billion. Providing help to the battered hospitality sector is a sensible move, but people in the UK might be cautious about socialising given what has happened in places like Melbourne and the US in relation to a rise in new cases. As expected, the stamp duty threshold was upped to £500,000 from £125,000. One could argue that this tactic might not be as fruitful as the government are hoping as some people are likely to be cautious about purchasing a property on account of the huge economic uncertainty.

The health crisis in the US remained in focus. Oklahoma, California and Tennessee all posted a record daily rise in the number of new cases. States like Florida and Arizona continue to see higher case numbers too. Despite the pandemic, US equity benchmarks closed higher as the tech sector continued its bullish run. Amazon, Apple and Netflix all set new record highs. Raphael Bostic, the head of the Federal Reserve of Atlanta, said that some of the fiscal support programmes might need to be extended.

Overnight, China posted its CPI data for June and the level was 2.5%, while economists were expecting 2.5%. Keep in mind the May reading was 2.4%. The PPI metric was -3%, and the consensus estimate was -3.2%, while the previous update was -3.7%. The improvement in the PPI rate might bring about higher CPI in the months ahead. Stocks in Asia are up on the session, and European markets are being called higher too.

The US dollar came under pressure yesterday. It was a quiet day in terms of economic data so the move wasn’t influenced by economic indicators. Lately the greenback has been a popular safe haven for traders, it was showing losses during the day when European indices were in the red, and when US stocks were flickering between positive and negative territory.

Gold was given a hand by the slide in the US dollar. The metal topped $1,800, and it was the first time since September 2011 that it traded above that mark. The commodity is still popular with certain traders as there are concerns that a second wave of Covid-19 could be on the cards. The metal’s positive move is being partly fuelled by the belief that central banks will maintain very loose monetary policy. Some people are afraid an inflation rise is in the pipeline, so that is influencing gold too.

At 7am (UK time) Germany will post its trade data for May, and the imports and exports are tipped to be 12% and 13.8% respectively.

The US initial jobless claims is anticipated to fall from 1.42 million to 1.37 million. The metric has fallen for the past 13 weeks in a row. The continuing claims reading is tipped to drop from 19.29 million to 18.95 million. Keep in mind that last week’s reading actually ticked up. The reports will be posted at 1.30pm (UK time).

A eurogroup video conference meeting will be held today and traders will be listening out for any potential progress being made in relation to the region’s recovery fund.

EUR/USD – since early May it has been in an uptrend, but it has been trading sideways recently. If it holds above the 1.1168 zone, it could target 1.1495. A break below the 1.1168 area might pave the way for 1.1042, the 200 day moving average, to be targeted.

GBP/USD – since late June it has been in an uptrend, and should the positive move continue, it might target 1.2687, the 200-day moving average. A move through that level should put 1.2812 on the radar. A drop below 1.2251, might bring 1.2076 into play.

EUR/GBP – Tuesday’s daily candle has the potential to be a bearish reversal, and if it moves lower it might find support at 0.8935, the 50-day moving average. A retaking of 0.9067 could see it target 0.9239.

USD/JPY – has been drifting lower for the last month and support could come into play at 106.00. A rebound might run into resistance at 108.37, the 200-day moving average.

FTSE 100 is expected to open 34 points higher at 6,190

DAX 30 is expected to open 153 points higher at 12,647

CAC 40 is expected to open 46 points higher at 5,027

For a look at all of today’s economic events, check out our economic calendar.

By David Madden (Market Analyst at CMC Markets UK)

Wall Street Gains after Overcoming Mid-Session Weakness

The major U.S. stock indexes closed slightly higher in choppy trading on Wednesday, once again supported by technology shares as early signs of an economic rebound offset concern about further lockdowns due to a jump in coronavirus cases across the country.

In the cash market, the benchmark S&P 500 Index settled at 3169.94, up 24.62 or +0.82%. The blue chip Dow Jones Industrial Average finished at 26067.28, up 177.10 or +0.70% and the technology-based NASDAQ Composite closed at 10492.50, up 148.61 or 1.57%.

Quick Recap

The markets opened under pressure early Wednesday as investors stayed on the sidelines in the face of an alarming rise in coronavirus caseloads across the country that poses a risk to a recovery in business activity. However, new buying came in shortly after the opening to turn stocks higher as we approached the mid-session.

Stocks gave back those earlier gains and turned lower for the session shortly before 16:00 GMT after a senior Fed official said the central bank may slow the pace of its corporate bond purchases. This news spooked traders because the announcement by the Fed on March 23 that it would start buying corporate debt helped put in the bottom of the stock market.

Investors Rattled after Fed Official Said Central Bank May Slow Pace of Corporate Bond Purchases

According to Dow Jones Newswires that broke the story, “A senior official at the New York Federal Reserve said the U.S. central bank could slow its pace of corporate debt purchases if financial markets continued to improve.”

Daleep Singh, head of the New York Fed’s markets group, noted the functioning of corporate credit markets had strengthened since the Fed unrolled its emergency lending backstops. Still, Singh said the central bank stood ready to tweak its approach given the uncertainty around a potential wave of bankruptcies from the economic impact of the coronavirus.

The reaction in the markets was swift especially by sellers who recognize we wouldn’t have a recovery in the stock market if it weren’t for the Fed’s swift interventions that helped stabilize the financial markets.

Singh went on to insure investors that a slowing in purchases “would not be a signal that the SMCCF’s (the Fed’s corporate purchase plan) doors were closed, but rather that markets are functioning well. Should conditions deteriorate, purchases would increase.”

Corporate News

Biogen Inc jumped 6.9% in premarket trading after the company said it submitted the marketing application for its experimental Alzheimer’s disease therapy, aducanumab, to the U.S. Food and Drug Administration.

Allstate Corp slipped 2.6% as the U.S. insurer said it would buy National General Holdings Corp for about $4 billion in cash, scaling up its auto insurance business at a time when the coronavirus has crushed traffic on roads and reduced claims.

Levi Strauss & Co fell about 5% as the denim apparel maker cautioned its business would be hit in the second half of the year, even as its sales have been improving at its reopened stores.

For a look at all of today’s economic events, check out our economic calendar.

Ford Motor’s China Vehicle Sales Rebound 3% in June Quarter as Coronavirus Restrictions Ease

Ford Motor Co, an American multinational automaker, said that its vehicle sales in mainland China rebounded in the June quarter, growing 3% from the same period last year, driven by strong demand following the lifting of COVID-19 pandemic restrictions.

That would be the first time in nearly three years, the automaker has registered a rise in quarterly sales. Total of 158,589 vehicles were sold during the second quarter, representing a 3% growth year-over-year and 78.7% sales increase compared to the first quarter of 2020.

Transit commercial vehicles experienced solid y/y growth of 60.9%, as did Lincoln luxury vehicles on gains of 12.0%, the company said. In the U.S., where business has been hit hard by the coronavirus pandemic, Ford’s sales fell more than 30% during the quarter.

On the other hand, Ford’s rival, General Motors’ sales declined 5.3% during the quarter in the world’s second-largest economy. Ford’s sales plunged 26% in 2019 and 37% in 2018.

Ford outlook and price target

Eleven analysts forecast the average price in 12 months at $6.24 with a high forecast of $8.00 and a low forecast of $3.50. The average price target represents a 2.46% increase from the last price of $6.09. From that eleven, three analysts rated ‘Buy’, six rated ‘Hold’ and two rated ‘Sell’, according to Tipranks.

Morgan Stanley target price is $8 with a high of $12 under a bull scenario and $4 under the worst-case scenario. Ford Motor had its price target lifted by UBS Group from $4.30 to $6.70. UBS Group currently has a neutral rating on the auto manufacturer’s stock. JP Morgan raised the target price to $7 from $6. Ford Motor was given a $7.50 price target by analysts at Jefferies Financial Group Inc. The firm currently has a buy rating on the stock.

It is good to hold now as 50-day Moving Average and 100-200-day MACD Oscillator signals a selling opportunity.

Analyst view

“We raise our 2020 Ford EPS forecast to ($0.90) vs. our prior forecast of ($1.30), while for 2021 and 2022 our EPS rises to positive $0.75 and $1.25 vs. our prior forecast of $0.30 and $0.80 respectively. On our revised price target of $8, Ford trades at just over 10x our 2021E EPS. Currently, the stock trades at just over 9x our revised 2021 EPS forecast,” Adam Jonas, equity analyst at Morgan Stanley noted in June.

“We raise our 3Q N. American Ford volume forecast to negative 12% Y/Y vs. down 15% previously. Our 4Q volume is revised to down 3% vs. down 5% previously. This slight upward adjustment reflects stronger than expected US SAAR, a rebound in used vehicle prices, and more supportive auto credit vs. our prior forecasts,” he added.

European Equities: Economic Data and COVID-19 to Test the Majors

Economic Calendar:

Thursday, 9th July

German Trade Balance (May)

The Majors

It was another bearish for the European majors on Wednesday, with no stats or positive news to shift the mood from Tuesday. The CAC40 fell by 1.24%, with the DAX30 and EuroStoxx600 declining by 0.97% and 0.67% respectively.

Rising COVID-19 cases across the U.S drew more attention than normal, as the number of cases rose to beyond 3m.

Reuters also published an article reporting that the WHO acknowledged “evidence emerging” of the airborne spread of the virus.

The accelerating spread of the virus brings into question the market’s optimistic outlook on economic recovery. All of this before earnings season kicks in next week…

The Stats

It was a particularly quiet day on the Eurozone economic calendar on Wednesday. There were no material stats to provide the European majors with direction.

From the U.S

It was also quiet through the U.S session, with no major stats from the U.S to shift sentiment late in the day.

The Market Movers

For the DAX: It was another mixed day for the auto sector on Wednesday. Continental slid by 2.54% to lead the way down. Daimler and Volkswagen saw more modest losses of 0.52% and 0.86% respectively, while BMW bucked the trend, with a 0.41% gain.

It was also another mixed day for the banks. Deutsche Bank rose by 0.89%, while Commerzbank slipped by 0.94%.

WIRECARD AG slid by 15.53% to partially reverse a 32.51% gain from Tuesday.

From the CAC, it was a bearish day for the banks. BNP Paribas and Soc Gen fell by 2.39% and 2.23% to lead the way down. Credit Agricole ended the day with a 1.42% loss.

The French auto sector struggled after a bullish start to the week. Peugeot and Renault slid by 4.20% and by 4.61% respectively.

Air France-KLM and Airbus SE fell by 2.21% and by 2.18% respectively, following on from a pullback on Tuesday.

On the VIX Index

A run of 2 consecutive days in the green came to an end for the VIX on Wednesday. Partially reversing a 5.33% gain from Tuesday, the VIX fell by 4.59% to end the day at 28.08.

After a bearish start to the day, the major U.S indexes bounced back to wrap up the day in positive territory.

Hope overshadowed the dire COVID-19 numbers from the U.S on the day, with no economic data to influence. Tech stocks led the way, delivering the NASDAQ with a solid gain on the day.

The S&P500 rose by 0.78%, with the Dow and NASDAQ ended the day with gains of 0.68% and 1.44% respectively.

VIX 09/07/20 Daily Chart

The Day Ahead

It’s a relatively quiet day ahead on the Eurozone economic calendar. May’s trade figures for Germany are due out later this morning.

We won’t expect too much influence from the numbers, however, which are now dated.

With the stats unlikely to garner too much attention, expect updates on Brexit and COVID-19 news to remain key drivers.

From the U.S

It’s also a relatively quiet day on the economic calendar, though we do expect the weekly jobless claims to influence.

Following a record jump in nonfarm payrolls in June, we have yet to see the weekly claims fall back to sub-1m levels.

With a number of the most populous U.S states hitting pause on reopening, this week’s figures could be alarming…

Anything under 1m initial jobless claims and the markets may breathe a sigh of relief.

The Latest Coronavirus Figures

On Wednesday, the number of new coronavirus cases rose by 222,368 to 12,130,571. On Tuesday, the number of new cases had risen by 227,176. The daily increase was lower than Tuesday’s rise while higher than 210,499 new cases from the previous Wednesday.

Germany, Italy, and Spain reported 986 new cases on Wednesday, which was up from 776 new cases on Tuesday. On the previous Wednesday, 1,062 new cases had been reported.

From the U.S, the total number of cases rose by 62,416 to 3,162,416 on Wednesday. On Tuesday, the total number of cases had increased by 67,655. On Wednesday, 1st July, a total of 51,607 new cases had been reported.

The Futures

In the futures markets, at the time of writing, the DAX was up by 127 points, while the Dow was down by 28 points.

For a look at all of today’s economic events, check out our economic calendar.

S&P 500 Price Forecast – Stock Markets Have Volatile Session Again

The S&P 500 has been very choppy during the trading session on Wednesday, as we continue to see a lot of volatility overall. The market seems to be paying quite a bit of attention to the 3150 handle, which breaking above there could open up the possibility of a move towards the 3200 level still. I see a lot of noise underneath, so keep in mind that the market has a lot of potential to find buyers between here and the 3000 level. Quite frankly, I like the idea of buying dips when they occur, with the 3000 level being thought of as a bit of a “floor” in the market. To the upside, the 3200 level continues to be very resistive, so I think we are carving out a sloppy range in 200 point increments.

S&P 500 Video 09.07.20

We do have earnings season coming in a little over a week, so that could have an effect on what happens in the market next, but I think at this point you still have to think about the Federal Reserve more than anything else and they are clearly helping out Wall Street as much as they can. As the Federal Reserve works for Wall Street, it is obvious that even if we get some type of major meltdown there would be multiple areas where they might step in by adding more “liquidity measures.” As we had had several green candles in a row, it should not be thought of as overly bearish to pull back a bit from here. A little bit of patience could reap rewards by finding value underneath.

For a look at all of today’s economic events, check out our economic calendar.

E-mini S&P 500 Index (ES) Futures Technical Analysis – Lower on Corporate Bond Purchase News

September E-mini S&P 500 Index futures are trading higher shortly after the opening on Wednesday after rebounding from pre-opening losses. Shares of major tech companies such as Apple and Microsoft gained 2% and 1.7%, respectively. Netflix and Alphabet both climbed at least 0.8%.

Names that would benefit from the economy reopening turned around and added to the gains. Carnival Corp, Norwegian Cruise Line and Royal Caribbean gained 2.4%, 1.7% and 2.3%, respectively. Retailer Kohl’s climbed more than 5%.

At 14:57 GMT, September E-mini S&P 500 Index futures are trading 3152.75, up 16.25 or +0.54%.

Heightened volatility remains at the forefront with the economic data continuing to indicate a V-shaped recovery, while the rise in COVID-19 cases suggests this is the beginning of new economic headwinds.

“No one’s denied we’ve had a huge jump in cases in certain hot spots,” Kudlow said Wednesday. However, “one cannot rule out:  There’s a lot of scenarios here. We really don’t have any real experience in econometrics modeling for this type of thing. Because so much is generated by the virus. At the moment, we’ve created 8 million new jobs the last couple of months…Virtually every piece of data shows a V-shaped recovery.”

There is breaking news that the Fed is limiting the amount of its corporate bond purchases. This news is bearish.

Daily September E-mini S&P 500 Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart, however, momentum may be starting to shift to the downside with the formation of the potentially bearish closing price reversal top on Tuesday.

A trade through 3184.00 will negate the closing price reversal top and signal a resumption of the uptrend. The main trend will change to down on a trade through 2983.50.

The closing price reversal top will be confirmed by a break through yesterday’s low. This won’t change the main trend, but it could lead to a 2 to 3 day correction.

The first downside target zone and potential support is 3107.00 to 3072.00.

The second downside target is the 50% level at 3053.75.

Daily Swing Chart Technical Forecast

A confirmation of the closing price reversal top will signal that the selling is greater than the buying at current price levels. If this continues to generate enough downside momentum then look for a minimum break to 3107.00.

We could see a technical bounce on the first test of 3107.00. However, it is also the trigger point for an acceleration to the downside with 3072.00 and 3053.75 the next potential downside targets.

For a look at all of today’s economic events, check out our economic calendar.

Walt Disney Struggling To Rebuild Lost Revenue Streams

Dow component Walt Disney Co. (DIS) will reopen Florida’s Disney World resort and theme park this weekend, despite a raging COVID-19 epidemic in the Sunshine State. The decision highlights the entertainment giant’s struggle to rebuild lost revenue, with movie production, sporting events, live broadcasting, cruise ships, theme parks, and theater chains still closed or operating with limited capacity in many parts of the world.

Disney Pandemic Headwinds

The pandemic’s perfect storm forced Disney to suspend payment of its semi-annual dividend when it reported a mixed first quarter in May. The company earned just $0.60 per-share in fiscal Q2 2020, missing Wall Street estimates by $0.30, while revenue beats expectations with a 20.7% year-over year increase. However, the bulk of revenue was booked in the first half of the quarter, before the closing of major income sources.

Wells Fargo’s Steven Cahill recently offered a sobering view of Disney’s profit outlook, despite raising their price target from $107 to $118. He warned that “we think financial progress could be choppy. Nationwide hot spots could render Walt Disney World (WDW), the driver of Parks operating income, severely capacity-constrained for some time. WDW and Disneyland park-goers may spend fewer hotel nights with rates softer due to recession, and cruises are unlikely anytime soon.”

Wall Street And Technical Outlook

Wall Street consensus is evenly divided, with 8 ‘Buy’ and 11 ‘Hold’ ratings, while two analysts recommend that investors hit the sidelines. Price targets currently range from a low of $85 to a street high $146, with the stock trading about 8 points below the median $122 target on Wednesday morning. These numbers look high after factoring in the current state of the pandemic in the United States, with many venues reporting out-of-control infections that have forced local officials to shut down all but essential operations.

Disney’s technical outlook looks bearish because the first quarter decline triggered a failed breakout though 4-year resistance around 120. The stock bounced back to that price level in the second quarter and reversed, reinforcing a barrier than could take several years to overcome. In addition, accumulation readings are stuck in the mud despite the oversold bounce, indicating that many investors are sitting on their hands, waiting for the pandemic to run its course.

The Renewed S&P 500 Upswing

The S&P 500 recovered from yesterday’s premarket slump and tried reaching for Monday’s highs again before losing altitude. Have we seen a daily reversal, and if so, how serious is this?

Given for example the weak showing in high yield corporate bonds yesterday, I think that it’s now the bears who have the opportunity to show us what they’re made of. The price action before the closing bell certainly validated my earlier decision to take the nice long profits off the table.

So, stocks have declined below the mid-June tops, yet are kissing that line again in today’s premarket trading. A little breather following the string of five consecutive days of solid gains wasn’t really unimaginable, but isn’t close to over now?

Birthing troubles or not, I still think the unfolding rally has legs enough to confirm this breakout shortly.

Such were my yesterday’s reasons why:

(…) I say so despite the uptrend in new U.S. Covid-19 cases that has many states stepping back from the reopening, rekindling lockdown speculations. I say so despite the Fed having its foot off the pedal in recent weeks, which makes for more players looking at the exit door as the rising put/call ratio shows.

The summer months will be one heck of a bumpy ride, and the bullish picture is far from complete as the lagging Russell 2000 shows. But emerging markets are on fire, not too far from their February’s lower high already – Monday’s boon in the China recovery story keeps doing wonders. That’s wildly positive for world stock markets, including the U.S. ones.

V-shaped recovery being real or not, corona vaccine hype or not, stocks love little things more than the central banks standing ready to act. And the punch bowl isn’t about to be removed any time soon. Let’s take the most recent Fed policy step, which was the decision to start buying individual corporate bonds. So far, less than half a billion dollars has been deployed to this purpose – but the corporate bond market is firmly holding up nonetheless, with the Fed waiting in the wings.

With the exception of emerging markets consolidating gains yesterday, the above points remain valid also today – and likely throughout this data-light week too.

But let’s check upon yesterday’s market performance so as to form a momentary, spot-on picture.

S&P 500 in the Short-Run

I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):

Monday’s breakout has given way to yesterday’s close back below the horizontal line connecting mid-June tops, but the conviction behind the move lower isn’t there at this moment. That’s what the low daily volume says.

Both the CCI and Stochastics keep supporting the upside move – it’s only the RSI that feels tired. This doesn’t concern me that much – it’s not flashing a bearish divergence, it isn’t languishing at an extreme reading. In short, it doesn’t preclude the rally from going on once the current breather is over.

And until I see credible signs that the markets are getting spooked by corona, botched policy responses or anything else, there is little point in acting as if the sky is falling. It isn’t the case – to be clear, the time to turn really bearish would come, but we’re not there yet.

Whenever markets start acting jittery, it pays to remember the big picture:

(…) Recapping the obvious, stocks are on the upswing after the bears just couldn’t break below the 200-day moving average, which means that the momentum is with the bulls now. The daily indicators keep supporting the unfolding upswing, and volume doesn’t raise red flags either.

Let’s check the credit markets’ message next.

The Credit Markets’ Point of View

High yield corporate bonds (HYG ETF) have broken the string of quite a few daily gains in a row, and closed not too far from their Friday’s finish. For a meaningful reversal though, I would like to see much higher volume – it’s evident that yesterday’s desire to sell doesn’t compare to the late June buying spree.

This goes to highlight that Tuesday’s setback likely has a limited shelf life.

Notably, the ratio of investment grade corporate bonds to longer-dated Treasuries (LQD:ÏEI) hasn’t turned lower yesterday. Neither have the investment grade corporate bonds themselves (LQD ETF). Please visit this free article on my home site so as to see more charts – feel free to let me know should you wish to see them included in full here, on the site you are reading this analysis now.

The action in investment grade corporate bonds is thereby telling me that the credit markets’ setback yesterday isn’t turning into a full blown concern.

On the surface, this is a concerning chart. It’s true that the ratio of high yield corporate bonds to all corporate bonds (PHB:$DJCB) has seen better days. Will the breakdown attempt below the rising support line connecting its March, April and May intraday bottoms succeed? And if so, will it drag the S&P 500 lower?

Since mid-April, stocks have refused to follow the ratio much lower, and that’s an understatement. Stocks are not diving or starting to dive as they did back in February while the ratio was already trending lower. Looking at the real world situation back then and currently, we’re better prepared to deal with the challenges now, once the lockdown costs in terms of economic activity and human toll have become apparent. There is less appetite for that, thankfully.

Therefore, I think that once we see policy misstep risks removed (it’s not just about the Fed returning among the buyers. Trump’s Mount Rushmore speech helps recall the values and inspiring successes of prior generations, so I naturally wonder about the upcoming stimulus plans), the ratio will turn higher again so as to support the stock upswing that got a little ahead of itself recently when viewed by this metric alone.

Smallcaps, Tech and Other Clues in Focus

The Russell 2000 (IWM ETF) keeps underperforming, and turned lower yesterday to a greater degree than the S&P 500 did. That doesn’t bode well for the short-term.

Technology (XLK ETF) also turned down yesterday, yet the downswing’s volume was lower than that of the preceding upswing. Coupled with the semiconductors not having retreated to such a degree, that’s a short-term bullish sign, and it does outweigh the Russell 2000 non-confirmation.

Volatility ($VIX) has slightly risen yesterday, but the dollar having again stalled is supportive for stocks.

Such were my thoughts about the short-term flies in the bullish ointment:

(…) Nothing unsurmountable, and definitely not overshadowing improving market breadth in the S&P 500 or the still very low bullish sentiment that can power stocks higher – you know what they say about the times when everyone moves to the same side of the boat…

Summary

Summing up, yesterday’s decline in the S&P 500 appears merely of short-term nature, as the credit markets show there is no real willingness to sell. Investment grade corporate bonds are trending higher, and the one-day decline in high yield corporate bonds has only so much power to rock the bullish boat. I look for the breakout above short-term resistance formed by the mid-June tops to succeed shortly, and the rally’s internals including emerging markets, semiconductors and the dollar keep supporting more gains to come.

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For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

* * * * *

All essays, research and information found above represent analyses and opinions of Monica Kingsley and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Monica Kingsley and her associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Ms. Kingsley is not a Registered Securities Advisor. By reading Monica Kingsley’s reports you fully agree that she will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Monica Kingsley, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Levi’s Outlook for Revenue Growth And Margin Opportunities Appear Intact: Morgan Stanley

Levi Strauss & Co, an American clothing company known worldwide for its Levi’s brand of denim jeans, warned after its net revenue plunged over 60% in the second quarter that the effect of the coronavirus would negatively impact their businesses even in the second half of this year.

Net revenue declined 62% to $497.5 million, largely due to the temporary closure of company-operated, franchise and wholesale customer retail locations as a result of the COVID-19 pandemic, partially offset by the company’s e-commerce business which grew 25% for the quarter, with sequential month-over-month acceleration to nearly 80% growth for May, the company said.

The company recorded a net loss for the quarter of $364 million and an adjusted net loss of $192 million. Gross margin decreased 19.2 percentage points on a reported basis to 34.1%. Adjusted EBIT was a loss of $206 million.

The company also said that it would reduce our non-retail, non-manufacturing workforce by about 700 positions, or roughly 15%, which we expect will generate annualized savings of $100 million.

“Below-expectation 2Q20 results and challenging 2H20 likely pressure the stock near-term. However, e-commerce acceleration and expense cutting initiatives leave us constructive on Levi’s long-term margin story. Raise price target $1 to $18; remain equal-weight (EW),” Kimberly C Greenberger, equity analyst at Morgan Stanley noted.

“The company is in early innings as it executes its LT growth strategy and navigates softer U.S. wholesale. Levi’s experienced senior management team has proven it can deliver results. DTC, international, and underpenetrated category growth all present runways for revenue growth. Gross margin is the likely driver of EBIT margin expansion, though we do not expect further SG&A deleverage. Levi’s strong balance sheet and FCF growth should allow it to increase share buybacks and/or engage in potential organic M&A,” the analyst added.

While Levi has not yet re-closed any retail doors, the company closely monitors coronavirus trends for signals that may prompt re-closing. At this time, management indicates 40 doors are in areas of worsening virus trends. Even if stores do not re-close, deteriorating virus trends may dissuade consumers from shopping in-store – a potential headwind to expected 3Q revenue performance, Morgan Stanley noted

Morgan Stanley target price is $18 with a high of $25 under a bull scenario and $6 under the worst-case scenario. However, Telsey Advisory Group lowered its target price to $17 from $20 and UBS cuts price target to $25 from $27.

Three analysts forecast the average price in 12 months at $20.50 with a high forecast of $25.00 and a low forecast of $16.00. The average price target represents a 48.23% increase from the last price of $13.83. All those three analysts rated ‘Buy’, none rated ‘Hold’ or ‘Sell’, according to Tipranks.

However, we expect it is good to hold now as 50-day Moving Average and 100-200-day MACD Oscillator signals a selling opportunity.