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Losing Steam

Email sent: May 19, 2020 8:24am

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Global markets sag after Monday's vaccine-hyped rally as investors refocus on economic challenges ahead.

The Express | Insight Before the Bell

By Caleb Silver, Editor in Chief

& Deborah D'Souza, News Editor

 Tuesday's Headlines

1. Asian markets climb, but Europe and the US can't hold gains

2. UK unemployment claims jump 70%

3. Nasdaq tightens IPO rules for Chinese companies

4. Institutional investors are still bearish


Markets Today

European markets and U.S. futures are lower this morning, unable to build off of Monday's steep rally, as investors refocus on the economic challenges ahead. Asian markets did manage strong gains, as economies in the East come back to life. Oil demand in parts of China is close to returning to pre-pandemic levels, which is helping to keep prices well above $30 per barrel for the second straight day.


U.S. Fed Chair Jay Powell will take questions from the Senate Finance Committee today and is sure to reiterate that the Federal Reserve is nowhere close to running out of monetary policy ammunition to support the recovery. The Fed's next steps may be supporting states and cities through the municipal bond market and loans to small businesses. Treasury Secretary Steve Mnuchin will also take questions from the Committee on how the government has doled out the initial $2 trillion in stimulus payments, and the effectiveness of the CARES Act programs. With another $2 trillion bill up for a contentious vote, today's hearings will be important. 


U.S. exchanges are tightening restrictions on Chinese listings as the Nasdaq plans new rules on IPOs. This is an important first swipe in what could turn into a brawl between the public markets of the two superpowers, with investors caught right in the middle.


  • Shares of Walmart are on the rise as the retail giant crushed earnings estimates and reported a doubling in online sales. Walmart has kept its stores open throughout the pandemic and hired an additional 200,000 workers to clean and stock shelves.
  • Home Depot’s net income was weaker than expected despite strong sales as the home improvement retailer spent more on operating through the lockdowns last quarter. The company is suspending its 2020 guidance due to uncertainty related to the coronavirus pandemic. 
  • Carnival’s debt rating was cut to junk by Moody's Investors Service. Moody’s gave the cruise company the highest junk grade and lowered its rating on senior unsecured notes by one notch to the same level. The cruise giant is losing billions in revenue during the pandemic, but the company says demand is strong for 2021.
  • Jobless claims in the U.K. jumped 70% in April from March, the fastest increase since records began in 1971. Last month, 856,500 more people sought unemployment benefits, bringing the total claimant count to nearly 2.1 million people, the highest it has been since 1996. The unemployment rate was at 3.9% in Q1, but keep in mind the lockdown only began on March 23.
  • SmileDirectClub has sued NBC and one of its reporters for making defamatory claims about the treatment it offers. The direct-to-consumer platform for teeth straightening says the network's report caused its market cap to fall by $950 million, and it is seeking approximately $2.8 billion in damages.
  • SoftBank is selling a "sizable" part of its stake in T-Mobile through a secondary offering, according to CNBC. This is in addition to the shares it is selling back to T-Mobile parent company, Deutsche Telekom.
  • Longtime Disney executive Kevin Mayer has been named TikTok's CEO and  parent company ByteDance's COO. Mayer was head of Disney's streaming and international media business. Disney announced Rebecca Campbell will take his place, and Josh D’Amaro will succeed CEO Bob Chapek as Chairman, Disney Parks, Experiences and Products.
  • Moderna has priced its underwritten public offering of 17,600,000 shares at $76 per share. Gross proceeds will be approx. $1.34 billion and the funds will be used in the manufacturing of mRNA-1273, its vaccine candidate against COVID-19. Yesterday shares closed 20% higher after it announced positive data from a Phase 1 study. They are around 5% lower pre-market today.

Side note on Moderna: Moderna is no ordinary biotech company. It is a venture capital backed company that has core technology designed to help people make medicines within their own cells, rather than create something in a lab which patients need to ingest or inject, according to Fortune. The U.S. government invested $480 million in the company, and a former top executive Moncef Slaoui was appointed to co-chair the White House coronavirus vaccine project. CNBC reported yesterday he still owns more than 155,000 options in Moderna, which has seen its stock price jump more than 300% year-to-date.

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Image courtesy:  Produzioni Europee Associate, United Artists/ Giphy

The Big Story

China Suspicions Perk Up on Wall Street

The U.S. may be building a wall to keep out Chinese stocks. Nasdaq, the second-largest stock exchange in the world, is looking to tighten rules for initial public offerings, according to SEC filings seen by Bloomberg. Proposed regulations include minimum fundraising thresholds (at least $25 million or a quarter of their post-listing market capitalization) and stricter requirements for auditors. The report noted that Chinese companies would probably be most affected. Forty of the 155 Chinese companies listed on the index since 2000 grossed IPO proceeds below $25 million, according to Refinitiv data. The index also listed China as one of four jurisdictions that don't share company financial records and details of audits with the Public Company Accounting Oversight Board (PCAOB) (the others are Belgium, France and Hong Kong).


According to U.S. federal law (the Sarbanes-Oxley Act), auditors of all public companies trading in U.S. capital markets must be registered with the PCAOB who inspects their work. However, Chinese authorities have blocked the non-profit organization's access, which means investors do not have anyone overseeing the audits of these firms.


As relations between the U.S. and China get more tense, it appears Chinese firms will be the next target. Last week President Trump told Fox Business his administration is looking "very strongly" at requiring Chinese companies to follow U.S. accounting standards. He also ordered the Federal Retirement Thrift Investment Board to stop its plans of investing according to the MSCI ACWI ex USA index with exposure to Chinese companies. As of February 2019, there were 156 companies based in China that were listed on U.S. stock exchanges with a total market capitalization of $1.2 trillion, according to the U.S.-China Economic and Security Review Commission.


Chinese companies have been in focus for alleged fraud lately. Coffee chain Luckin Coffee executives inflated 2019 sales by $310 million, an internal probe found in April. Activist short seller and hedge fund Muddy Waters, who had raised the alarm about fraud at Luckin based on an anonymous report, is now shorting online education company GSX, it revealed yesterday. "We conclude that at least ~70% of its users are fake, and we think it’s quite likely that at least ~80% of its users are fake," it said in a report.


Note: Muddy Waters was featured in financial documentary "The China Hustle," a worthwhile watch on Netflix for anyone interested in the subject.

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Image courtesy: BofAML

The Big Number: 68%

That's the percentage of fund managers who believe this is just a bear market rally, according to the May Global Fund Manager Survey from BofAML. Three quarters of respondents expect the economic recovery to take a U-shape or W-shape, versus 10% who expect a V-shaped recovery. Just 25% predict a new bull market.


Average cash balance remained elevated at 5.7%, a sign of bearishness. It is at the highest level since the 9/11 terrorist attacks. (see chart below) Sixty percent are long U.S. tech & growth stocks, and the report noted that the last time this many investors expected value to underperform growth was Dec. 2007. Global growth expectations jumped, but investors don't expect global manufacturing PMI to rise back above 50 before November. They are underweight cyclical assets (energy, equities, Europe) & overweight defensive assets (healthcare, cash, bonds). Seventy-three percent said corporations should reduce debt, 15% said increase capex, 7% said buyback stocks, increase dividends.


The biggest tail risk for investors is a second COVID-19 wave. The greatest structural shifts expected in a post-pandemic world are supply chain reshoring, protectionism, and higher taxation.

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Image courtesy: BofAML

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