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Before & After

Our twice weekly show looks at the upcoming events and announcements that will shape your portfolio in the days, months and years to come. Then we come back with Refinitiv’s best-in-class data in hand and reassess. Powered by Real Vision.

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06:12

Episode 16 - Part 1

SHK – Is Hong Kong property on the slide?

Published on: February 25th, 2020 • Duration: 6 minutes

In this episode, we discuss how Lowe’s stock has rallied 30% in the past year and what is driving that price movement. Is Lowe’s now a safety stock or is the stock’s movement indicative of the American economy? We then share how Sun Hung Kai Properties is expected to announce their earnings this week. SHK Properties is one of the most significant real estate developers in Hong Kong, so what does its stock’s recent weak performance mean for Hong Kong’s economy? Finally, we review the US Manufacturing PMI Index numbers.

  • This is Before and After from Refinitiv. I'm your host, Johanna Botta. This week, we'll be investigating two companies in our Before section that are both dependent on real estate and construction. Lowe's is based in the US, and Sun Hung Kai Properties is from Hong Kong. In the After section, we'll be reporting on the U.S. Markit Manufacturing PMI. 

    The first of the companies we're going to take a look at today is home improvement retail giant Lowe's. Last Thursday as the S&P and pretty much every major index in the world sold off, Lowe’s, made all-time highs and climbed over 2% on the day. The stock is up over 5% so far in 2020, and that's after a 30% rally in 2019. But what is driving the big rally in Lowe's? Is this a real canary in the coal mine of how the actual economy in the U.S. is doing? Or are they now a safety stock catching the passive bid? Lowe's can take the benefit of being a duopoly with Home Depot, that has a clear value proposition and a strong underlying housing market. In a sector dominated by attracting the most possible passive flows, Lowe's is both a retailer in which it has a dominant position, and a housing stock. In fact, it's 4.4% of the XHB ETF, which is the S&P Homebuilders ETF. And guess what? Both Lowe's stock and the XHB have tracked very well. The only real disconnect was how bad the rest of housing performed in the financial crisis, while Lowe's stayed relatively steady. But now we are at all time highs, and as American's focus on funding home improvement with cheap rates, the question is how long will the party last? The company's earnings might be an early indicator for what is to come for the rest of the economy. The stock is expecting fireworks post earnings with a 7% move priced in the next trading day. Lowe's is expected to earn $16 billion in the last quarter, with 90% of this made in the United States. This will very much be a domestic report card. 

    Before Coronavirus escalated, another type of storm was brewing in Hong Kong. 2019 was the year that China sought to exert its mandate and control over Hong Kong, and that resulted in strong protests in what many regard as the financial capital of Asia. So, of course, it's of particular interest to pay attention to the Hang Seng Index, and with one prominent member reporting this week it's as good a time as any. Sun Hung Kai properties or SHK for short is one of Hong Kong's most important real estate developers. It invests in properties that span from hotels to parking garages and transportation infrastructure. With a $42 billion market cap the company is no small player. And yet it's the inverse of Lowe's in the U.S., where the stock is outpacing an already torrid performance by the broader markets. We can see that SHK Properties is closer to Lowe's and if anything, a drag on the index. But doesn't that make sense? Isn't that a more severe indication of the real state of the Hong Kong economy? Hong Kong is notorious for the nosebleed prices of properties, and it has consistently ranked at or near the top of the world's most expensive cities. Late last year, a poll conducted by the South China Morning Post said: "Luxury homes and high street shops are to bear the brunt. Prices of luxury homes to fall by 20%, while rents for high street shops to fall by 10 to 30%. This month, we've seen Hong Kong rental prices at two year lows, and all of this already underway before the pandemic even began. So that leaves us with SHK earnings, which are expected to come in at 102 billion HKD in revenue. As wealthy Chinese postpone transactions, Sun Hung Kai is also at risk of missing a 40 billion HKD target of luxury property sales. Of particular note will be what the projections are, and any sense of longer term lingering ramifications of Coronavirus should be expected. A big miss and profit warning would see the stock break lower past 110, which is a level it's bounced off numerous times since the beginning of 2019. The next key support would be 100, which held during October 2018's a sell off. 

    U.S. economic output shrank for the first time since October 2013 as the service sector reported its worst performance for four years. According to IHS Markit Purchasing Managers Index data, the composite output index fell to 49.6 from 53.3 in January, reaching a 76 month low. The drop was driven by services, which fell to 49.4. Manufacturing also fell to 50.8, down from 51.9 in January, a six month low. Any figure under 50 indicates a contraction, while any over over 50 represents growth. The dollar fell against most major currencies, particularly after Germany's manufacturing PMI came in stronger than expected, and briefly bucking the dollar uptrend that has been accelerating as the virus has gone global. The decrease in business activity ended a near four year sequence of expansion, thanks to the decrease in services output and a slower rise in manufacturing production due to supplier delays following the Coronavirus outbreak. The PMI survey data is consistent with GDP growth slowing from just above 2% in January to a crawl of just 0.6% in February. 

    So there it is. Lowe's and Sun Hung Kai and the Before and U.S. Markit Manufacturing PMI in the After. Refinitiv data throughout. This has been the Tuesday episode of Before and After. Please subscribe and hit the notification bell to ensure that you're alerted to all of Refinitiv's future market updates. 

    Have a great week and we'll see you on Friday. 

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06:33

Episode 16 - Part 2

Coronavirus and What We Need to See Play Out Before You Buy The Dip

Published on: February 28th, 2020 •

In this episode, we discuss if the US dollar is breaking out and what all the indicators are currently saying. Should you buy the dip? Is the coronavirus the black swan event? We then talk about what investors need to see in terms of how the coronavirus plays out to determine whether they should buy the dip or not. In the After section, we review the numbers from Lowe’s earnings report.

  • This is Before and After from Refinitiv. I'm your host, Johanna Botta. This week, we'll be covering the signals to look out for in the event of a dollar break and BTFD - of which more of later!  In the After section, we'll be reporting on Lowe's results. 

    Everyone in Macro has an opinion on the dollar, but they usually are imposing 'their' scenario on the currency rather than identifying what conditions and triggers could lead to the dollar moving. For our purposes as trend followers, we say it could take off. And here's why. The first point of interest is the Bank of Japan coming back with liquidity to offset sales tax slowdown, although it has rebounded to some extent. The BOJ has been in pumping mode for some time, so it's difficult to assign how much Yen driven liquidity leads to Dollar strength, but it does fit with the rest of the picture. The second point of interest is that the Coronavirus supply chain effects continue to hit Germany keeping the Euro soft. And thirdly, the emerging market risk off is sparked by a continued run out of the Korean Won. As the investment world can't get enough gold in this risk off environment, emerging markets can't have enough dollars, and that alone should support a bid. 

    As the grim news has come out of Korea about their number of Coronavirus cases, we've seen the Won weaken and USD/KRW rip 5% this year, with multi-year highs right around the corner. So whether it's the Euro or emerging market currencies selling off, either can create a panic in the DXY. FX is always a relative game.... So we've seen the dollar strengthen in 2019 on the back of emerging market weakness, but we began 2020 with dollar rallying on Euro fragility. Perhaps the crisis will cost both Euro and emerging market weakness simultaneously. We have also seen oil and copper stress taking out key support levels, which could also create a dollar squeeze. There's no doubt that we're dealing with an A-typical Macro environment these days. 

    But as WTI crude plunged through 50 earlier this week, we look at a longer-term key level of 42.5 as the next support. The collapse of oil could also just be the spark to ignite the DXY. 

    Everyone now is suddenly a pandemic expert, and almost everyone can rattle off some scary exponential growth formula that you should be aware of. And then there is a group of people that just apply a flat strategy to all scenarios/market conditions/news events -  the 'Buy The Dip Crowd'. 

    Somewhere between the doomsday preppers and those walking around waiting for a 2% correction to buy more, exists a measured approach. We all know that in what has been an extremely long and resilient market, there have been many moments of doubt and panic, all of which were, in hindsight, great opportunities to Buy The Dip! But what is it that we're looking at with a Coronavirus? Is this perhaps the black swan event that pulls apart at the seams of an already shaky global economy? These are the key questions investors should be asking themselves right now. So let's examine the scary unknowns of Coronavirus, potential government efforts and long term ramifications. First, we need to understand why 1.7 trillion dollars of market cap went to money heaven on Monday. What had changed? Well, to be blunt, what triggered the Western markets to finally react was that people started to die from Coronavirus outside of China. So that brings us to our first sign that you're getting closer to 'Buy The Dip'. Sign One:  The fatality rate in the West dips sub 2%. If the treatments are more effective and some of the sheer horror aspects of the virus are lessened, that would be a good start. Sign two: The outbreak in Europe is contained and doesn't spread like wildfire from Italy. The worst-case would be a cluster of countries in every continent spreading. Over the weekend there was a breakout near Milan. As of the production of this show, in Italy, the epicenter of Europe's outbreak, the death toll rose to 12 amid more than 300 confirmed infections. Austria, Croatia, Greece and Switzerland reported their first cases, most of which health authorities linked to Italy. Sign three: we'd like to see the Fed come out and hint at a near term cut. The treasuries market has been bid on hope that the FED would cut rates with likelihood rising to 72% of a cut by April's meeting. And perhaps more importantly, will the Federal Reserve keep its repo liquidity spigots fully open? Not only that, the markets have to deal with the global spread of the virus this week. But the worst declines came after Chairman Powell suggested that the FED would now start dialing back its accommodation. For the last three months the weekly performance of the S&P 500 has ebbed and flowed with the rise and fall of the Fed's balance sheet. In markets like these, things turn on a dime, and the FED could be forced into action sooner rather than later. But either way, it would feel a lot safer to BTFD with the full force of the United States Federal Reserve providing cover.... The market has a way of throwing tantrums to influence policy, and in this crucial election year, they might not be the only ones throwing a fit if the selling gets too severe. 

    Even a hot housing market couldn't rescue Lowe's sales last quarter. Revenue came in at sixteen billion versus a sixteen point two billion expected. One key retail metric that Lowe's missed on was same store sales, which came in at 2.5% versus a 3.7% projection. Rival Home Depot reported earnings the previous day, and had same store sales growth of 5.2%. So perhaps this is an execution problem rather than one directly tied to housing. This is not the environment to miss earnings, and Lowe's was punished down over 5% in the following session. And over 11% of the highs it made just last week. We'll see if the recent collapse of mortgage rates softens the blow of this earnings mess as a home-owners refinance and move to capitalize on cheap money. 

    There it is. The dollar and BTFD in the Before and Lowe's results in the After. Refinitiv data throughout. This has been the Friday episode of Before & After. Please subscribe and hit the notification bell to ensure that you're alerted to all of Refinitiv's future market updates. 

    Have a great weekend and we'll see you next week.

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Each week we examine major themes driving the markets and use Refinitiv’s best-in-class data to assess the risks and the opportunities for investors.