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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. US markets dip as economic data saps rally

2. Existing US home sales plunge 18% as prices soar

3. 2.4 million new weekly jobless claims

4. Borrowers claim financial hardship on credit cards and auto loans

5. German restaurants are reopening

Markets Closed

Dow
24,474.12
−101.78 (-0.41%)

S&P
2,948.51
−23.10 (-0.78%)

Nasdaq
9,284.88
−90.90 (-0.97%)

VIX
29.11
+1.12 (+4.00%)

Bitcoin
$9,030.49
−$480.42 (-5.05%)

US 10-Yr Yield
0.677
−0.003 (-0.44%)

Image credit: vm/Getty

Markets Today

Global markets sagged today and U.S. markets followed, as the crush of more weak economic data may have sapped investors' appetites. Rising tensions between China and the U.S. may have also played a part, as the U.S. Senate passed a bill that could ban Chinese companies such as Alibaba and Baidu from remaining listed on U.S. exchanges.

Weekly U.S. jobless claims totaled 2.4 million people, bringing the nine-week total to 36.8 million Americans suddenly out of work. The only positive news is that we have seen a steady decline in initial claims for the past seven weeks, although continuing claims are on the rise. Even as economies go back to work, with all 50 states reopening in some form or another, hiring will be slow until demand returns in force.

The high levels of unemployment are impacting U.S. households, with many experiencing job losses or expecting them in the next few weeks. We are seeing that translate to credit card and auto loan payment delays due to financial hardship.

That's a term we are going to hear a lot more of in the coming months as the U.S. and other developed economies paddle hard to get back into the current, bringing their workforces with them.

Headlines:

China announced dramatic plans to rein in dissent by writing a new national security law into Hong Kong's charter, which could threaten its independence as a financial center. Chinese lawmakers were preparing to soon pass measures that would curb secession, sedition, foreign interference, and terrorism in the former British colony, according to the South China Morning Post.
U.S. private sector firms reported a slightly slower rate of contraction in activity in May, according to latest PMI data from IHS Markit. The firm said its flash manufacturing purchasing index rose to 39.8 in May from 36.1 in April. Meanwhile, the flash services purchasing managers index rose in May to 36.9 from 26.7. Any reading below 50 indicates worsening conditions.
Facebook will ramp up its hiring of remote workers and allow certain existing employees to continue working remotely moving forward after coronavirus restrictions ease, CEO Mark Zuckerberg said. The company expects 50% of employees to work remotely within the next five to 10 years as a result of this decision, Zuckerberg said.
Canadian cannabis company Aurora Cannabis (ACB) is entering the U.S. by acquiring Reliva, a leading hemp-derived cannabidiol retail brand. Reliva stakeholders will receive $40 million in Aurora common shares. There is a potential earnout of $45 million if Reliva achieves certain financial targets. Shares of Aurora jumped 30% today.
Amazon just launched its first big-budget video game, Crucible. The team-player shooter game is available for free on PC via Steam and is being compared to other popular titles like Fortnite, Dota, and League of Legends. The company is taking pre-orders for New World, which will be released in August. Amazon also owns Twitch, a video live streaming platform used by gamers.
The U.S. automotive industry has collectively borrowed $155 billion between bonds and loans amid the coronavirus outbreak. The $44 billion of bonds sold in the period is greater than the industry's issuance in any single quarter. The $111 billion of loans raised in the period could match the sales of $133 billion seen in 2019 once about $18 billion of pending deals get completed, according to Bloomberg.
AstraZeneca has received more than $1 billion from the U.S. Department of Health. The funds are for the development, production, and delivery of the University of Oxford's COVID-19 vaccine candidate. The British firm also said it has completed agreements to deliver at least 400 million doses starting in September and has secured total manufacturing capacity for one billion doses so far.
Sales of existing homes fell 17.8% month-to-month, and were 17.2% lower than April 2019, seasonally adjusted, according to the National Association of Realtors. That puts the annualized pace at 4.33 million units, the slowest sales pace since Sept. 2011. These numbers are based on closed sales, not signed contracts, so they represent contracts signed in late February and March.
The latest U.S. Census Bureau Household Pulse Survey gives us a look at how Americans were coping with the pandemic between May 7 and May 12. Forty-eight percent said their household has seen a loss in employment income since March 13, and 37% expect a loss of income in the next four weeks. Around 40% have delayed medical care and a little over 10% said they could not get enough food. See chart below (Week 1 is data collected between April 23 and May 5).

Weekly Claims

Weekly jobless claims totaled 2.4 million for the week ending May 16, bringing the total number of claims filed since late March to 38.6 million. The U.S. labor force stood at 155 million people at the beginning of the year, so around 25% of all working Americans are now out of a job. This doesn't count so-called gig workers, or independent contractors who are off of employer payrolls. As of May 2, there were 6.1 million in that category.

Continuing Claims Keep Climbing

For the week of May 9, continuing unemployment claims, reflecting people who collected benefits for at least a second week, rose to 25.1 million, an increase of 2.5 million from the previous week. This number is going to keep rising until hiring begins anew. The problem, of course, is that businesses are going to be reticent to hire until demand returns. Demand is predicated on progress towards a vaccine and no resurgences of the virus once social distancing requirements are relaxed. That's going to take some time.

It's More Complicated Than That

We need to see demand return, but industries have been profoundly changed by this pandemic. Social distancing, to some degree, is going to be the new normal. Industries from meat processing plants to auto factories to restaurants are having to rethink how they operate. As Deutsche Bank's research team puts it, "it's not just layoffs/lockdowns, it's a more permanent reallocation of workers away from jobs in industries that require a high degree of face-to-face and close physical interaction."

That's making the unemployment situation worse in U.S. states, like Georgia and Kentucky, that have a heavy concentration of industries that require close proximity between workers and customers.

chart courtesy TransUnion

All of This Is Catching Up to Consumers

While consumers here in the U.S. and in other developed economies haven't been spending like we used to, there are troubling signs in the credit market starting to emerge. Millions of people are behind on their credit-card and auto-loan payments, according to recent data from TransUnion.

Lenders in April had nearly 15 million credit cards in "financial hardship" programs, such as deferral programs that let borrowers temporarily stop making payments.

The numbers have surged from a year ago, when 0.03% of credit cards and about 0.5% of auto loans were in financial-hardship programs. The spike in unemployment is starting to strain people's ability to make their monthly debt payments. To make matters worse, Americans were tapping credit cards and auto loans at record levels even before the pandemic struck to deal with rising costs and stagnant incomes.

chart courtesy OpenTable

Dinner in Berlin

For a little dose of good news, it's nice to see restaurant activity waking up in Germany. The country had an aggressive social distancing policy in place early, and its economy is slowly coming back to life, as seen through OpenTable restaurant reservation data.

Prost!

More News:

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(chart courtesy YCHARTS)

Shares of L Brands are up by 18.5% after the fashion retailer announced it was closing 250 Victoria's Secret stores. This move was seen by investors as affirming L Brands' commitment to separate its successful Bath & Body Works brand from the struggling Victoria's Secret. Gap's stock price rose by 11.5% as the clothing and accessories retailer quickens its rollout of robotic assemblies for its warehouses. This will allow Gap to meet rising online orders while still abiding by social distancing.

Shares of National Oilwell Varco are down by 7% after the oilfield services and equipment provider announced it would no longer be paying its dividend. Shares of TakeTwo (TTO) fell 6% following its quarterly earnings release on concerns that growth won't be sustained once the pandemic has subsided.

Word of the Day

Credit Card Delinquency

Credit card delinquency occurs when a cardholder falls behind on making required monthly payments. While being 30 days late is generally considered delinquent, it typically takes two months of missed payments before the information is reported to credit reporting agencies. If an account is reported delinquent, the event can have a negative effect on your credit score and curtail your ability to borrow in the future.

image courtesy Yale.edu

Today in History

May 21, 1720:

The earliest known "blind pool" appears, as the London Daily Post advertises a prospectus offering stock in a "Proposal for raising the sum of Six Millions sterling to carry on a design of more general advantage...and of more certain profit...than any undertaking yet set on foot." There is no record of whether the investors who bought this pig in a poke ever earned any money, but we can safely assume that the "general advantage" and "certain profit" went to the promoters, not to the public.

John Carswell, The South Sea Bubble