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Leigh Baldwin & Co.

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Day Traders Diary

11/2/18

 

Stocks fell on Friday following conflicting U.S.-China trade reports and softer-than-expected sales guidance from Apple (AAPL 207.48, -14.74, -6.6%). Futures rallied overnight on a Bloomberg report indicating U.S. President Trump asked his cabinet to draft a trade deal, but stocks eventually fell into negative territory after White House officials denied the report.

The S&P 500 lost 0.6%, the Dow Jones Industrial Average lost 0.4%, and the Nasdaq Composite lost 1.0%. Small caps outperformed, with the Russell 2000 adding 0.2%. All four major indices closed solidly higher for the week, adding between 2.4% and 4.3% apiece.

Director of the United States National Economic Council Larry Kudlow confirmed in a CNBC interview that the cabinet was not asked by President Trump to draw up a trade plan for China. Later, as stocks traded at session lows, President Trump reiterated his belief to reporters that the U.S. will reach a trade deal with China. This led stocks to cut their losses in late afternoon trading.

In earnings, Apple raised some red flags after forecasting weaker-than-expected sales for the holiday quarter and announcing it will no longer provide unit-sales data for the iPhone, iPad, and Mac moving forward. The company did beat both top and bottom line estimates though.

On the other hand, energy Dow components Exxon Mobil (XOM 81.95, +1.28, +1.6%) and Chevron (CVX 114.73, +3.56, +3.2%) rose after both reported above-consensus earnings. The energy sector showed relative strength, but still lost 0.1%. On a related note, WTI crude extended its recent downward trend, losing 0.9% to $63.20/bbl and reaching its lowest level since April.

Highlighting Friday's batch of economic data was the influential Employment Situation report for October, which showed a nonfarm payrolls increase of 250,000, higher than the Briefing.com consensus of 190,000. Also, as expected, average hourly earnings increased 0.2%, and the unemployment rate remained at 3.7%.

In short, the strong jobs report validated labor market trends that will keep the Federal Reserve on a tightening path. The CME FedWatch Tool indicated a 80.7% chance of another Fed rate hike in December, up from a 74.5% chance the previous day. The Fed will meet next week, but no rate hike is expected.

Treasuries sold-off with equities on Friday, pushing yields notably higher across the curve. The Fed-sensitive 2-yr yield and benchmark 10-yr yield spiked seven basis points each to 2.91% and 3.21%, respectively, compared to 2.81% and 3.08% yields last week. Also, the U.S. Dollar Index added 0.2% to 96.48.

Reviewing Friday's economic data, which included the Employment Situation report for October, the Trade Balance report for September, and the Factory Orders report for September:

  • October nonfarm payrolls increased by 250,000 while the Briefing.com consensus expected an increase of 190,000. The prior month's increase was revised to 118,000 from 134,000. Nonfarm private payrolls rose by 246,000 while the Briefing.com consensus expected an increase of 185,000. The previous month's increase was unrevised at 121,000. Average hourly earnings increased 0.2% (Briefing.com consensus +0.2%), while the previous month's increase was unrevised at 0.3%. The average workweek was reported at 34.5 (Briefing.com consensus 34.5). The unemployment rate remained at 3.7% in October (Briefing.com consensus 3.7%).
    • The key takeaway from the October employment report is that it is consistent with labor market trends that will keep the Federal Reserve on a tightening path
  • The Trade Balance Report for September showed a widening in the trade deficit to $54.0 billion (Briefing.com consensus -$53.4B) from a downwardly revised $53.3 billion (from -$53.2 billion) in August.
    • The key takeaway from the report is the same as last month in that it has yet to confirm the tariff actions are succeeding in cutting the trade deficit with China specifically and in general.
  • Factory orders increased 0.7% in September (Briefing.com consensus +0.4%) following an upwardly revised 2.6% increase (from +2.3%) in August. Excluding transportation, orders were up 0.4% for the second straight month.
    • The key takeaway from the report was the understanding that shipments of nondefense capital goods excluding aircraft -- the component that factors into GDP forecasts -- declined for the second straight month.

Looking ahead, investors will receive the ISM Non-Manufacturing Index for October on Monday.

  • Nasdaq Composite +6.6% YTD
  • Dow Jones Industrial Average +2.2% YTD
  • S&P 500 +1.9% YTD
  • Russell 2000 +0.8% YTD

Week-In-Review: Stocks Stage Rebound Following October Sell-Off

The S&P 500 staged a rebound effort this week, tallying a 2.4% weekly gain. The continued expectation that the market was due for a bounce-back after last month's sell-off, compounded with mostly upbeat earnings and easing trade tensions underpinned the rally. As for the other major averages, the blue-chip Dow Jones Industrial Average gained 2.4%, the tech-sensitive Nasdaq Composite gained 2.7%, and the small-cap Russell 2000 gained 4.3%.

Cyclical sectors were largely the best-performing groups this week, with the lightly-weighted materials sector (+6.1%) and the heavily-weighted financials (+4.4%) sectors leading the advance. The consumer discretionary sector (+4.0%) also had a notable gain. On the downside, utilities was the only group to settle in the red, losing 0.6%.

U.S.-China trade tensions eased this week, with U.S. President Trump saying that he had a "long and very good conversation" with China's President Xi, adding that the two leaders will be getting together at the upcoming G-20 summit in Argentina. There were some conflicting reports as to whether Mr. Trump has asked his cabinet to begin drafting a trade deal, but the president did say he thinks a deal will eventually be reached.

On the earnings front, Facebook's (FB) third quarter report was "good enough" to temper negativity surrounding the stock, helping to ease growth-related worries. Apple (AAPL), on the other hand, raised some red flags after forecasting softer-than-expected revenue guidance for the holiday quarter and announcing that it will no longer provide unit-sales data for the iPhone, iPad, and Mac.

Other notable companies to report earnings this week included Pfizer (PFE), Coca-Cola (KO), Chevron (CVX), Exxon Mobil (XOM), General Motors (GM), eBay (EBAY), T-Mobile US (TMUS), DowDuPont (DWDP), and Starbucks (SBUX), all of which beat estimates. Conversely, results from General Electric (GE), Kellogg (K), Spotify (SPOT), and Wayfair (W) came in below consensus.

In M&A news, IBM (IBM) acquired Red Hat (RHT) over the weekend for an all-cash offer of $190 per share; that represents a 63% premium over Red Hat's October 26 closing price.

Highlighting this week's batch of economic data was the Employment Situation report for October. Nonfarm payrolls increased by 250,000, higher than the Briefing.com consensus of 190,000, while average hourly earnings increased 0.2% as expected. The unemployment rate remained at a nearly 50-year low of 3.7%. The key takeaway from the report is that it is consistent with labor market trends that will keep the Federal Reserve on a tightening path. The U.S. Federal Reserve will be meeting next week, but no rate hike is expected until December.

Overseas, European and Asian stocks rose with Wall Street this week. In Germany, Chancellor Angela Merkel announced that she won't be seeking re-election as head of the CDU, following disappointing results for her party in a regional election. Her plan, however, is to remain Chancellor until 2021. Meanwhile, the Bank of England and the Bank of Japan released their latest policy decisions, keeping interest rates unchanged.

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    • Headlines provided by Briefing.com
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