Let’s review, the Trump stock market rally ended in early March and has continued to behave in a corrective manner that is likely to resolve itself in the next week or two. Earnings season is 90% finished and the results were largely in line with an improved Q2 GDP over a weak Q1 – not bad. However, there is continued weakness in the retail sector which may be attributable to competitive pressures from Amazon and the internet, however, I do think we are beginning to see consumers trim back on their consumption. In the last two recessions, retail has always be the canary in the coal mine so that is a sector to watch carefully.
As of the close on Friday, there is no clear signal as to which way the market will go but the downside could be as much as 1,000 points on the Dow. The small cap Russell 2000 has done nothing all year and the NASDAQ moves higher on fewer and fewer stocks as each week passes. There is no significant economic data on the calendar and earnings are largely out for all to judge. So, its tough to find a catalyst as a lot of the news is priced into the markets. Once all the indices converge in terms of direction (up or down) we can get a clearer read for how to position for the remainder of 2017.
Economic & Central Banking Snippets
- US producer prices rebounded in April, climbing by the most in three months amid an increase in food and energy prices and signaling that the previous month’s decline was short-lived. The data come as the Federal Reserve continues to monitor inflation as it mulls its next interest rate rise and considers when to begin unwinding its balance sheet. (FT)
- Retail sales rose 0.4% in April on a 0.7% gain in autos, 1.2% jump in home improvement stores, 0.2% uptick in gas stations, and 0.2% rise in the core retail control gauge excluding those categories.
- The Bank of England (BOE) has opted to keep its record low interest rates on hold in May as expected. The bank’s monetary policy committee voted in favor of holding steady at 0.25%. (FT)
- Inflation in Sweden jumped to its highest level since February 2012 as consumer prices rose 1.9%. The krona’s sharp depreciation late last year helped to boost inflation by increasing the price of imports. According to the minutes of its latest policy meeting, the executive board was worried that the krona would strengthen too quickly if they were to raise interest rates before the European Central Bank (ECB). (FT)
- Germany’s economy expanded 0.6% for Q1 and outstripping its major rivals in a key election year for chancellor Angela Merkel. Germany’s economy has been enjoying rising growth, expanding trade, and falling unemployment. The quarterly growth contrasts with a slowdown in France in Q1 and means Germany expanded at twice the pace of the UK and more than three times that of the US. (FT)
Politics! Politics! Politics!
- Emmanuel Macron swept to victory in France’s presidential election, beating far-right candidate Marine Le Pen and clinching 65% of the vote. Macron wants a tougher EU as he will push the bloc to adopt a stricter stance on trade and foreign investment in an early bid to win over domestic critics calling for greater protectionism. (FT, Guardian,BBC)
- South Korea has chosen an advocate of engagement with Pyongyang as its president, in a vote that draws a line under almost a decade of conservative rule but which could also increase tensions with the US.
- China has agreed to open up its market to US credit rating agencies and credit card companies as well as resume imports of US beef, part of a package hailed by the Trump administration as the first step in redefining the trade relationship between the world’s two largest economies. It would also open up the US market for Chinese banks and cooked poultry. (FT)
- Mexico has meanwhile sent a stark message to the U.S., saying an upcoming visit by government officials to China showed the country had other places to export to if NAFTA gets torn up. “We will use (the China visit) geopolitically as strategic leverage,” declared Mexican Economy Minister Ildefonso Guajardo. “It sends the signal that we have many alternatives.”
Chart Time!
Market Snippets
- Facebook is closer than expected to making a big push into television, according to Business Insider, with plans to premiere its slate of programming in mid-June. The company will have roughly two dozen shows of two types: shorter ones of five-to-10 minutes in length and others similar to traditional TV entertainment. (FT)
- Amazon.com Inc. is due to unveil a new Echo speaker with a screen that will incorporate video calling capabilities, according to people familiar with the matter, keeping the online retailer one step ahead of tech rivals in seeking to control smart homes. (FT)
- Looking to better compete with Amazon, Wal-Mart and Target plan to test a next-day home delivery service for household essentials ordered online that will be packaged at a nearby store and delivered for a flat fee. (FT)
- The maker of the Snapchat app tumbled by almost 25% after its first earnings report fell short of Wall Street’s expectations. Analysts are not expecting Snap to post a profit until 2019, at the earliest. (FT)
- Young people on the latest HIV drugs now have near normal life expectancy because of improvements in treatments, a study has found. Newer medications have fewer side effects and are more efficient at stopping the virus. (BBC)
- Scientists studying mice have discovered that the active ingredient in cannabis, THC, helps reverse brain aging and restores learning and memory in the elderly — the opposite of its influence on the young. And they think it may have the same effect on humans. (New Scientist)
- The cost of insuring debt for Macy’s and three other major US department stores swelled on Thursday, indicating that jitters over disappointing quarterly sales results were not isolated to the equities market. Traders sent the spread on credit default swaps that protect Macy’s debt against default for five years up 25 basis points to 252 bps. It was one of the four biggest rises over the past 12 months, according to Bloomberg data.
- Macy’s, Kohl’s and Dillard’s reported another quarter of steep declines in comparable sales, sending stock prices lower as evidence mounts that retailers’ horrible 2016 is following them into 2017. (FT)
- Apple made the first investment from its new $1B US “advanced manufacturing” fund into the multibillion-dollar company that has provided the iPhone’s glass screen for the last decade. Corning, a public company with a market capitalization of $26B that was founded more than 165 years ago, will receive $200mm from Apple to help develop its facility in Harrodsburg, Kentucky. Apple’s investment will be focused on research and development and capital investments in Kentucky, in the hopes of benefiting its own products while also making Corning more competitive in a global market.
- Wells Fargo is hoping to sell MBSs this year (without government guarantees) for the first time since the financial crisis, according to the head of the bank’s consumer lending division. “There’s been many many years since Wells Fargo (NYSE:WFC) has participated in any kind of private label market,” Franklin Codel told investors. We are trying to “see what we can do there to help bring confidence back.” (FT)
International Snippets
- ChemChina and Sinochem are planning to merge next year, creating the world’s largest chemical group with $100B of revenues, according to several senior bankers in Asia. The merger would follow ChemChina ’s $43B purchase of Swiss agrochemicals leader Syngenta amid more general consolidation of the global agrochemicals industry.
- Volkswagen said it is confident it will “leapfrog” the competition and become a leader in electric cars by 2025 as it redirects its attention to battery-powered vehicles and emerges from the 2015 diesel emissions scandal. The VW brand, by far the biggest company in the 12-brand Volkswagen Group, said it would target 1mm electric car sales by 2025. This would put it on a clear path to clash with Tesla, the US electric carmaker that sold fewer than 80,000 units last year but has pledged to build 1mm a year by 2020. (FT)
- The exodus of finance jobs from Britain is starting to take shape and Europe will be the beneficiary. Separately, a growing number of European citizens are applying for British passports ahead of the UK’s departure from the EU, in an unexpected counter to the flood of applications by Britons for citizenship of other EU countries since the Brexit vote. (Reuters, FT)
- Uber should be regulated as a transport company rather than a tech group, according to a non-binding opinion by the Advocate General at the EU’s top court. The US ride hailing app “must be classified as a ‘service in the field of transport’”, which would leave the US group open to tighter regulation in Europe if the opinion were to be followed in the final judgment at the European Court of Justice later this year.
- There’s a fresh record high for Bitcoin as it soars past $1,800, only two days after breaking the $1,700 level. Drivers? Japan recently legalized the cryptocurrency as a payment method, and Russia is looking to do the same.