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October 4th, 2019

Markets Remain Nervous

By PRATTE

Blogue 17 mai EN

The fear of an imminent recession gave investors cold sweat this week. Wall Street is experiencing its worst beginning of the quarter since the 2008 crisis and the month of October is historically volatile. Here is what happened this week in the markets.

Markets Brief

Stock markets were up at the open on Monday, following a poor performance last week; the Dow Jones had fell by 0.4%, the NASDAQ by 2.2% and the S&P 500 lost 1.0%. Stocks were down late Friday afternoon after reports that the US administration was considering reducing US investment in China. A spokeswoman from the Treasury Department, however, tweeted on Saturday that “the (US) administration was not planning to block Chinese companies from US markets at the moment. We appreciate investments in the United States.” Early Monday, several Chinese stocks had benefited directly from this retraction; Alibaba gained 1.7%, JD.com 1.4% and Baidu was up 0.8%. Wall Street ended the last session of the third quarter accumulating several gains.

The trade war has been weighting on the US economy announcing this week a significant decrease in its manufacturing activity. The news hit the indexes hard on Tuesday, while they were up at the open, they all fell drastically after the report. The ISM (Institute for Supply Management) index fell to 47.8 in September, its lowest level since June 2009, against 49.1 the previous month. Timothy Fiore, chair of the ISM’s survey committee said that “Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019. Overall, sentiment this month remains cautious regarding near-term growth.” The tumble continued throughout the session as the three major indexes ended the day down. The Dow lost 1.28%, the NASDAQ fell 1.13% and the S&P 500 shed 1.23%.

Stock markets resumed their fall at the open on Wednesday, as investors were still shocked by the latest ISM data. For Patrick O’Hare of Briefing, this market reaction can be explained “not only because it is the second month of contraction in a row, but also because it has intensified concerns regarding the capacity of the US economy—and the American consumer—to stay isolated from the slowdown in the global economy.” The three major US indexes ended the session in the red. The Dow was down 1.86% to 26,078.62 points, its biggest drop in more than a month, same for the S&P 500, which closed down 1.79%. The NASDAQ lost 1.56% as the fear of an imminent recession worried investors.

For a third day in a row, financial markets opened down on Thursday after the publication of lower than expected economic data. The ISM trade association revealed data showing that growth in US service activity was down in September. “The most recent economic data is raising fears that the economic slowdown, which has been largely confined to the manufacturing sector, is expanding into consumption as the Sino-US trade war drags on,” said Art Hogan from National. However, Wall Street was able to finish the session higher on Thursday, as many investors are predicting that the FED could lower their interest rates following the release of several disappointing indicators.

Stocks were back up on Friday following the release of the US jobs report revealing strong data as the unemployment rate is at its lowest in 50 years. The Dow was up 190 points while the S&P 500 and the NASDAQ were both up 0.7%.

In Canada, the Toronto index finished lower on Monday, pulled down by the health, material and energy sectors. However, the TSX managed to accumulate a gain of 1.7% for the third quarter, adding up 16.3% since the beginning of the year. On Monday, Aurora (-4.9%) and Canopy Growth (-3.8%) declined while Kinross Gold Corp fell 4.1% and Barrick Gold lost 2.3%. It was a return in the green early in the session on Tuesday for the Toronto Stock Exchange, which began the first day of the last quarter up 32 points. However, the ISM publication also affected the TSX, which finally pulled back, ending Tuesday’s session with a loss of 210.97 points. The Toronto stock market began the day Wednesday down also driven by the latest manufacturing data and a decline in the price of oil. The TSX was flat at the open on Thursday, as gains in cannabis producers and miners offset early weakness following poor data from the U.S. services sector activity. Aurora Cannabis gained 4% after the company provided positive updates on global operations while shares of Aphria Inc and Canpoy Growth were up 2%. The TSX was up on Friday at the open helped by the latest US economic data.

WeWork

The coworking space giant has been forced to postpone its IPO to an unknown date. Expected last week, its introduction was delayed after many investors were questioning the value of the company and its business model. Last week, WeWork’s controversial CEO stepped down adding pressure on a possible IPO. “WeWork is emblematic of a systemic problem in Silicon Valley. We are seeing a beginning of a correction, a back to sanity moment,” said Megan Bent, managing partner at venture capital firm Harbinger Ventures.

The decision from WeWork to postpone its IPO could give the company some time to improve its business model. “We have decided to postpone our IPO to focus on our core business, the fundamentals of which remain strong,” WeWork co-CEOs Artie Minson and Sebastian Gunningham said in a statement Monday. “We are as committed as ever to serving our members, enterprise customers, landlord partners, employees and shareholders. We have every intention to operate WeWork as a public company and look forward to revisiting the public equity markets in the future.”

Manufacturing Activity

For a second month in a row, the manufacturing index fell in the United States, dropping to 47.8 in September, its lowest level since June 2009 when the United States had just emerged from the financial crisis. The index, which is closely scrutinized by investors, led to the decline of the three major US indexes on Tuesday. The manufacturing index fell in August after worries regarding trade negotiations and slowing economic growth surfaced.

“Respondents’ comments reflect a continuing weakening of business confidence,” said Timothy Fiore, ISM survey manager. Timothy Fiore, chair of the ISM’s survey committee said that “Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019. Overall, sentiment this month remains cautious regarding near-term growth.” Only three of the 18 manufacturing industries surveyed in September reported growing. “Manufacturing weakness is approaching a dangerous level,” said Chris Low, FTN economist. “Historically, an indicator below 46% means a recession. If the manufacturing sector is a small part of the economy, it is a vital sector, especially in the Midwest,” adds the expert.

Tesla

The electric car manufacturer delivered a record of 97,000 vehicles in the third quarter. Despite this impressive quantity, the company did not meet investors’ expectations who had anticipated 99,000 units. These numbers cast doubt on Musk’s year-end goal of delivering a total of 360,000 to 400,000 new electric vehicles this year. To fulfill its goal, Tesla is expected to deliver at least 105,000 units in the fourth quarter, which seems almost impossible to reach for many investors.

Tesla said Wednesday it received record net orders in the third quarter and is entering the fourth quarter with an increase in its order backlog. In order to achieve their targets, the company adjusted the price of its Model 3. In addition to this, the company announced back in September that their customers would receive several benefits, including unlimited free supercharging for two years. Tesla’s stock fell 3% following the news on Wednesday while its stock has lost more than 27% since the beginning of the year.

 

 

Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
Intended to provide general information about markets and securities and not to meet your specific needs, this report is the result of the author’s only work. The opinions (including any recommendations, if any) expressed in this report are those of the author only and do not necessarily represent those of Pratte Portfolio Management and do not constitute securities investment advisory activities designed to meet your specific needs.
The information contained in this report is derived from sources believed to be reliable, but the accuracy and completeness of this information can not be guaranteed and, in providing the information, the author and Pratte Portfolio Management assume no liability whatsoever. This information was current as of the date indicated in this bulletin, and neither the author nor Pratte Portfolio Management assumes any obligation to update it or to report any new developments with respect to this information. This report is intended for distribution in jurisdictions where the author and Pratte Portfolio Management are registered for trading in securities. Any distribution or diffusion of this report in another territory is forbidden. The author, Pratte Portfolio Management, its affiliates and their respective directors, officers and employees, and the companies with which they are associated may, from time to time, hold securities referred to in this report.
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