Capital had been flowing into Europe. The virus seemed under control. Markets seemed valued appropriately, in relative terms. How quickly things like this can change. The virus spreads across the continent once again. Suddenly capital flows out of Europe. Most European equity indices trade at or close to five month lows as new infections hit five month or even all-time (since the onset of this pandemic) highs. Europe is in a jam. It's not like we aren't. Get out?
Out of everything? The term is "risk-off." That means that there will be some flight to safety. Notice I did not write "flight to quality." Yes, there will be reallocation into precious metals and other hard assets. Quality. There will also likely be some movement into sovereign debt and crypto-currencies. Some quality there. Some questions too, and not just about the crypto-currencies. We're seen some of this behavior in the U.S. of late. We're seeing more of it overnight. Not good you say? It's obvious but you can say it. I said it. Not good. No, not in the least. European equity markets have opened down significantly on Wednesday morning, a third consecutive day of declines, dragging U.S. equity index futures lower as well.
The deal is this... BFM TV in France is reporting that the government there is considering a second national lockdown to try to slow the rate of infection. President Emmanuel Macron will address the nation on Wednesday evening presumably to discuss the matter. Speculation has it that schools might remain open, but beyond that, citizens will be confined to their homes on weekends, non-essential businesses could be closed, and the already existent curfew (9 pm to 6 am in major cities) could be expanded upon. For those not following the data (I happen to be a numbers nerd), France has the potential to become Europe's next Covid-19 epicenter. That nation has suffered 523 new related deaths over the latest 24 hour period, which has been the deadliest 24 hour period for France since late April. According to Johns Hopkins University, France, whose method for reporting new infections is admittedly uneven, reported an incredible 124,905 new infections on Monday. France does not report numbers on weekends, so Mondays appear as spikes on their charts. Still, quite awful.
Elsewhere on the continent, German tabloid BILD is reporting that Chancellor Angela Merkel may also have to announce new restrictions on personal movement later on Wednesday as well in response to spiking cases of Covid-19 in that country. Several EU nations as well as the UK have either already, or are preparing to possibly take further restrictive actions if it becomes clear that Autumn will not be kind, from a public health, nor from an economic perspective. The European Central Bank meets on policy tomorrow (Thursday) morning. Nothing new had been expected in the way of new stimulus until later this year. I would think that this week's meeting, by necessity... just became more interesting.
By Any Name
What did you call it? The "Work From Home" trade? The "Economic Lockdown" trade? The "Need For Speed" trade? By any name, investors have to at least be thinking in such ways as U.S. markets lined up on Tuesday, after a severe "risk-off" day on Monday as if the U.S. were about to follow Europe down the path of increased spread (already here), and policy (public health) response. There would need to also be an accompanying fiscal policy response. On that matter, we already know that we have been forsaken by both sides in DC until at least one finds political benefit in moving forward. (For those of you staunchly supporting one side or the other, there is a great personal freedom in disliking everyone. I strongly recommend it.)
It would appear obvious that here in the U.S., increased fiscal support will arrive only after there has been highly visible economic damage, not before. The public health response will also for the time being remain patchwork, and regionally isolated. About the only thing western civilization has going for it now, that it did not have back in the spring is that folks don't travel. This will help slow the spread to some degree. Folks do not move across national borders, and folks do not travel for business nor for pleasure (unless absolutely oblivious). I honestly do not think that I have been more than 30 miles from home since March, and that was only because a childhood pal had found a store near his home with cleaning supplies in stock and was nice enough to share.
So, how does the trader/investor survive this environment? How did markets react on Tuesday? The way they had more or less for months before the shaky rotation into cyclicals. Small to mid-caps and Transports? Sold to you, take badge 986. Large-cap indices more balanced toward international trade, or industrials, financials, and energy? Sold! Mega-cap big tech, software, and internet type names? Oh yeah. might just need a few of those. Take 'em.
Could Be Longer
That part of our marketplace that caters to working remotely, and even hygiene as well as some Staples may just be the parts of this dip to actually buy. Overall breadth was truly awful on Tuesday at the New York Stock Exchange on stagnant trading volume. Uptown however, the activity that I am trying to illustrate here was evident. Losers beat winners quite decisively at the Nasdaq Market Site. That said, trading volume was flat, while advancing volume ended the day just about even with declining volume. What that means is that there was far more trading volume in the fewer issues that traded higher. Portfolio managers appear, if this is more than a one day behavioral anomaly, to be narrowing their focus. In other words, the "work from home" or "economic lockdown" trade is close to being back on. There is already movement in that direction, with perhaps a number of managers aimed at their target, finger on the trigger, but with the thumb still on safe... for the moment.
You may have noticed that Apple (AAPL) , Amazon (AMZN) and Microsoft (MSFT) all traded higher through Tuesday's regular session. All are lower overnight, just an FYI, as Microsoft reported last night, and Apple and Amazon will both report on Thursday afternoon, but chart watchers can see visible demand over the second half of the day. On Wednesday morning it would appear that the Nasdaq Composite will put the 50 day SMA to the test as that line has been pierced, but so far not broken...
...while the Dow Industrials and S&P 500 will likely only be able to wave at that mark in the rear-view mirror...
You know what to do. Helmets on. Chinstraps buckled. Two sources of water. Break up your C-Rats (MREs for the kids), tape down anything loose. Oh, and don't forget clean socks. Be prepared to spend at least a week out there. Could be longer. Will be longer.
This And That
While September Durable Goods Orders were quite constructive, and probably reflective of an incredible Q3 GDP print on Thursday, can this economic rebound be trusted? I'll be honest with you. Consensus for our first look at Q3 GDP is around 31% to 32%. I am even higher. Sarge does his own modeling? What did you think, I play Strat-O-Matic baseball all day? I am up above 35% for this print. Just look at those numbers ex-defense, or for core capital goods. I am not alone. The Atlanta Fed's GDPNow model is even higher than I am.
That said, this very shaky recovery only continues unabated into the fourth quarter if this viral spread can slow. There was some disappointing news released on Tuesday at least as far as timing the medical suppression of this spread is concerned. Both Eli Lilly (LLY) and Pfizer (PFE) reported on Wednesday. Eli Lilly missed the numbers, and lowered guidance. That was not the headline. Pfizer beat by a penny, but missed on revenue. Still, that was not the headline. As far as LLY is concerned, the monitoring board run by the National Institute of Allergy and Infectious Diseases (Dr. Anthony Fauci's outfit) recommended that hospitalized Covid-19 patients no longer be dosed in Eli Lilly's clinical trials for the firm's investigational monoclonal antibody LY-CoV555 as there is a low likelihood that it will demonstrate a therapeutic benefit.
The issue with Pfizer is not necessarily a negative. It could very well be a positive. The issue is timing. I first read it in STAT. Pfizer revealed that trials for the first of the vaccines that the firm is collaborating on with BionTech (BNTX) have not produced enough new cases of Covid-19 across its 42K participants to be evaluated for efficacy versus a placebo. As of now, only 32 participants have become infected. The goal had been 150 in order to have enough cases to truly measure the group dosed with the vaccine candidate against the group dosed with the placebo. Hence, the much awaited data from these trials will take a little longer than hoped for. That's the negative. The positive might be that they are having trouble getting people infected.
Economics (All Times Eastern)
08:30 - Good Trade Balance (Sep-adv): Expecting $-85B, Last $-83.11B.
08:30 - Wholesale Inventories (Sep-adv): Expecting 0.2% m/m, Last 0.4% m/m.
10:30 - Oil Inventories (Weekly): Last -1.001M.
10:30 - Gasoline Stocks (Weekly): Last +1.895M.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)