foxex: Dangerous Escalation

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Friday's Headlines

1. U.S. markets sell off on U.S. strike on an Iranian military leader

2. Oil spikes close to 4%

3. Apple hits another all-time high

4. What usually happens to stocks following Middle East unrest

5. What to expect next week

Markets Closed

Dow
28,634.88 -0.81%

S&P
3,234.85 -0.71%

Nasdaq
9,020.77 -0.79%

VIX
14.02 +12.43%

Bitcoin
$7,299.40 +4.52%

US 10-Yr Yield
1.788 -4.99%

Year-to-Date

Dow
28,634.88 +0.34%

S&P
3,234.85 +0.13%

Nasdaq
9,020.77 +0.54%

Russell 2000
1,660.87 -0.10%

Crude Oil
$63.05 +2.96%

US 10-Yr Yield
1.788 -6.83%

Image: AAMIR QURESHI / GETTY IMAGES

Markets Today

In the past 24 hours we've gone from trade war headlines to war headlines. U.S. markets were under pressure all day following the news of a U.S. strike that killed Iran's top military leader. Iranian Supreme Leader Ayatollah Ali Khamenei promised #SevereRevenge in a twitter post, and international leaders warned of the impacts of this "dangerous escalation." That pushed oil prices up close to 4% as fears of unrest in the Middle East drove traders to buy the commodity. That translated into a sell off for airline stocks and other industries that are heavily dependent on fossil fuels. It also pushed investors into gold, the age-old safe haven that investors flock to in times of turmoil. Defense stocks rallied, as you might expect.

In an afternoon press conference, Trump said the deadly airstrike was carried out in order to "stop a war", and warned Iran not to retaliate.

Stocks closed the session off their lows for the day, but uncertainty has made a loud appearance in the markets on only the second trading day of the year.

Welcome to 2020.

Headlines

Apple has signed a five-year production deal with a former chairman and CEO of HBO. Richard Plepler leads New York-based production company Eden Productions and will develop new original series, feature films, and documentaries for the tech giant's streaming service. Shares of Apple hit another all-time high today.
Samsung shipped more than 6.7 million Galaxy 5G smartphones globally last year. As of November 2019, Samsung accounted for 53.9% of the global 5G smartphone market, according to Counterpoint Research. Apple is expected to launch its 5G models in September.
Disney+ will have over 25 million subscribers by the end of the first quarter, according to a survey by Rosenblatt Securities. The company has not released any official numbers lately, but 10 million people signed up on the day of the launch of the service. Disney expects to have 60 million to 90 million subscribers globally by the end of FY2020.
Tesla is cutting the price of its China-made Model 3s by 16%. The price reduction is partly a result of government subsidies the electric car maker was granted. The company also announced that it delivered 112,000 cars in Q4 2019, totaling 367,500 for the year, a 50% increase from last year. This met CEO Elon Musk's goal of delivering 360,000-400,000 cars in 2019.
The Wall Street Journal revealed today that former Nissan CEO Carlos Ghosn, who is facing charges of financial crimes in Japan, was smuggled onto a private jet to Turkey and eventually to his home country of Lebanon, inside one of those large black cases that band roadies use to transport audio equipment.
The Institute for Supply Management's purchasing managers' index fell in December to its lowest level since June 2009. This marks the fifth-consecutive month of declines, as uncertainty over trade has suppressed manufacturing activity in the U.S.
The U.S. Federal Reserve released the minutes of its last FOMC meeting on interest rates today. They revealed that there was near consensus in maintaining the Federal Funds Rate in the 1.5%-1.75% range, and plan to keep it there in 2020 as long as inflation stays muted.

How Mideast Conflict Impacts Markets

Today's losses notwithstanding, conflicts in the Middle East have historically caused knee-jerk reactions in the stock market, but rarely cause long-term losses. They do, however, have a larger, and longer lasting impact on oil, as you might suspect.

CNBC pulled the data from recent military actions in the region and calculated the impact across asset classes.

chart courtesy CNBC.com

Now, the world has changed over the past three decades, notably the U.S. dependence on Middle East oil. The U.S. is, or is close to becoming a net exporter of crude oil, depending on who you ask. Still, Middle East conflict brings about a whole nest of uncertainties that have unknown effects until they have manifested in the global economy.

Today's market reaction across sectors shows us the early read from investors, but it's still early.

As mentioned, airline stocks, particularly American Airlines (AAL), suffered the biggest loss on the day, falling 6% at its lows, then recovering slightly. Airlines typically buy oil and oil futures way in advance of filling their tanks, and if the expectation is that oil prices will go higher from here as the conflict escalates, their costs will be going up.

charts courtesy YCharts

Oil refining stocks like Valero (VLO) and Phillips 66 (PSX) fell today as higher oil prices on the horizon will hurt their profit margins given higher input costs.

Defense stocks, on the other hand, traded higher. The prospect of a prolonged conflict with Iran and its allies drove investors to buy the biggest names in defense like Northrup Grumman (NOC) and L3 Harris (LHX). It's not that these companies will be immediate beneficiaries of the escalation in tensions. They are long-cycle businesses which take months, even years to deliver equipment to the military. But the smell of a potential war in that part of the world whets the appetite for defense oriented investors.

What to Expect from the Week Ahead

There are a few companies reporting earnings for the prior quarter that will release results next week. Some of those include Walgreens (WBA), Bed Bath and Beyond (BBBY), Constellation Brands (STZ), and WD-40 (WDFC), the American classic. All those results are from 2019, but investors will want to hear the outlooks from these companies going into 2020.

Here are some of the key economic events on the calendar for the week ahead:

Monday January 6

Eurozone Services Purchasing Managers' Index (PMI) (Dec.)
U.K. PMI (Dec.)
Japan Services PMI (Dec.)
U.S. Services PMI (Dec.)

Tuesday January 7

Eurozone Consumer Price Index (CPI) (Dec.)
Eurozone Retail Sales (Nov.)
U.S. Trade Balance (Nov.)
U.S. Factory Orders (Nov.)
U.S. Institute for Supply Management Non-Manufacturing PMI (Dec.)
Canadian Ivey PMI (Dec.)

Wednesday January 8

German Factory Orders (Nov.)
U.S. ADP Nonfarm Employment Change (Dec.)
China CPI (Dec.)
China Producer Price Index (PPI) (Dec.)

Thursday January 9

German Industrial Production (Nov.)
Eurozone Unemployment (Nov.)
European Central Bank Publishes Account of Monetary Policy Meeting
Bank of Canada Interest Rate Statement
Japan Household Spending (Nov.)

Friday January 10

Brazil CPI (Dec.)
U.S. Average Hourly Earnings (Dec.)
U.S. Nonfarm Payrolls (Dec.)
U.S. Unemployment Rate (Dec.)
Canada Employment Change (Dec.)

Inflationary China:
China has struggled with rising inflation from a doubling of pork prices due to African swine fever killing off roughly a quarter of the world's pigs over the past year. This pushed inflation up to 4.5%, near an 8-year high. Beijing has kept its inflation target of 3% stable, despite slowing growth, believing that inflation will not continue as pork prices normalize. Keep an eye out to see if inflation continues to rise both this month, and in the months to come. This could indicate that inflation in China may have more enduring causes than the spike in pork prices.

Deflationary Europe:
Europe has also dealt with slowing growth, but its worry is deflation, not inflation. After suffering multiple periods of deflation in the past decade, Europe is eager to avoid another relapse. The European Central Bank relaunched its quantitative-easing program of bond purchases last year, and the decision to do so has angered some members of the ECB governing council. In November, inflation was 1%, below the target of roughly 2%, but still not falling back into inflation. Be on the look out to see which way December numbers trend.

More News:

Is It Time to Sell Advanced Micro Devices Stock?

Pharmacy Chains Could Reward Bottom Fishers in 2020

Volatility Ahead

(chart courtesy YCHARTS)

Potato processing company Lamb Weston jumped over 11% today after an earnings beat and a guidance increase. Fashion company L Brands rose today after its stock was upgraded by Bank of America from neutral to buy. Increased tensions with Iran resulting from the U.S. killing an important Iranian general pushed up defense stocks with Northrup Grumman, Lockheed Martin, and L3 Harris Technologies seeing the biggest gains. The tensions also drove up oil prices, which benefited oil producers with production outside of the middle east such as Concho Resources and Hess.

Biotech company Incyte dropped dramatically after its experimental drug itacitinib failed in a recent clinical trial. Refiners were hurt by the spike in oil prices, with HollyFrontier, Marathon Petroleum, and Valero Energy hurt the most. Also hurt by the spike in oil prices, American Airlines, for whom fuel is a major cost.

Word of the Day

Supply Shock

A supply shock is an unexpected event that suddenly changes the supply of a product or commodity, resulting in an unforeseen change in price. Supply shocks can be negative, resulting in a decreased supply, or positive, yielding an increased supply; however, they're often negative. Assuming aggregate demand is unchanged, a negative (or adverse) supply shock causes a product's price to spike upward, while a positive supply shock decreases the price.

Today in History

January 3, 2009

Today in 2009, Satoshi Nakamoto released the very first block of bitcoin. This block, reverently referred to by cryptocurrency fans as "the genesis block," was the first ledger in the bitcoin blockchain. It contains 50 bitcoins, that due to a quirk of the code, cannot be spent. This first block also contained the sentence "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks," written into the code. This was the title of the cover story of the Times of London on the date of the release. At time of writing there are now over 18 billion bitcoins valued at $132 billion.

Source: https://www.investopedia.com/terms/g/genesis-block.asp