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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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The Week In Review

5/25/18

 

The stock market ended Friday on a mostly lower note, but managed to keep in positive territory for the week. The S&P 500 declined 0.2% on Friday, closing the week higher by 0.3%. The Dow also dropped 0.2% on Friday, trimming its weekly gain to 0.2%, while the Nasdaq ticked up 0.1%, extending its weekly advance to an impressive 1.1%.

North Korea-U.S. relations were in focus once again on Friday after a North Korean official responded with a conciliatory tone to President Trump's Thursday decision to cancel his scheduled summit with North Korean leader Kim Jong Un, saying that North Korea is still willing to meet with the United States. President Trump later revealed that communication has reopened with North Korea, adding that the summit could still happen -- possibly even on the originally scheduled date of June 12.

Separately, the Trump administration has reportedly reached a deal with Beijing to save struggling Chinese telecom company ZTE that involves ZTE paying a fine, hiring compliance officers, and changing its management. There were also reports that, in connection with the ZTE deal, the U.S. is pushing for approval of the proposed Qualcomm (QCOM 59.96, +0.88)/NXP Semi (NXPI 116.79, +5.28) merger. The merger has been approved by eight of the nine required global regulators, with Chinese approval still pending.

Energy shares dropped sharply on Friday, pushing the S&P 500's energy sector lower by 2.6%. The energy sell off coincided with a tumble in crude oil futures, which further retreated from Monday's three-and-a-half year high following reports that Saudi Arabia and Russia are thinking about reducing supply constraints to make up for any production fallout in Iran and Venezuela. West Texas Intermediate crude futures lost 4.0% on Friday, settling at $67.91 per barrel, marking a fresh three-week low.

Outside of energy, most S&P 500 groups finished within 0.4% of their flat lines. Within the consumer discretionary space (+0.2%), retailers were all over the place following another batch of earnings reports. Ross Stores (ROST 77.34, -5.62) and Gap (GPS 28.15, -4.80) dropped 6.8% and 14.6%, respectively, after missing earnings estimates for the first quarter, while Foot Locker (FL 55.74, +9.35) surged 20.2% after beating both top and bottom line estimates.

In the bond market, U.S. Treasuries extended their weekly gains, sending yields lower across the curve, thanks to some inflows from European investors, who sought some security from continued political uncertainty within the region following reports that the main opposition party in Spain is seeking to remove Prime Minister Mariano Rajoy. The yield on the benchmark 10-yr Treasury note finished Friday five basis points lower at 2.93%, closing the week with a loss of 13 basis points.

Elsewhere, the U.S. Dollar Index advanced 0.4% on Friday to 94.13, marking its best close since mid-November. 

Reviewing Friday's economic data, which was limited to April Durable Orders and the final reading of the University of Michigan Consumer Sentiment Index for May:

  • April durable goods orders fell 1.7%, which is more than the 1.6% decrease expected by the Briefing.com consensus. The prior month's reading was revised to +2.7% (from +2.6%). Excluding transportation, durable orders increased 0.9% (Briefing.com consensus +0.6%) to follow the prior month's revised increase of 0.4% (from 0.0%).
    • The key takeaway from the report is that it will factor as a positive input for Q2 GDP forecasts since shipments of nondefense capital goods, excluding aircraft, rose 0.8%. It also conveyed a modest pickup in business spending, evidenced by the 1.0% increase in new orders for nondefense capital goods, excluding aircraft.
  • The final reading of the University of Michigan Consumer Sentiment Index for May slipped to 98.0 (Briefing.com consensus 98.8) from 98.8 in the preliminary reading.
    • The key takeaway from the report is that consumers expect smaller income gains than they did a month ago, or a year ago, despite thinking the unemployment rate will stabilize at its 18-year low of 3.9%.

U.S. markets will be closed on Monday in observance of Memorial Day.

  • Nasdaq Composite +7.7% YTD
  • Russell 2000 +6.0% YTD
  • S&P 500 +1.8% YTD
  • Dow Jones Industrial Average +0.1% YTD

Week In Review: Unfazed

Equities finished the week a tick higher, unfazed by what seemed like a continuous flow of geopolitical headlines. Most of the news centered on U.S.-China trade relations and the U.S.-North Korea summit -- which, as of Thursday, is "officially" canceled, but more on that later. The Dow settled the week up 0.2%, the S&P 500 added 0.3%, and the Nasdaq outperformed, jumping 1.1%.

The week began on a positive note following weekend comments from Treasury Secretary Steven Mnuchin, who said that a U.S.-China trade war has been put "on hold" while the two nations continue to try and work out their differences, and following news that last week's trade talks ended with China agreeing to buy more goods from the U.S. in an effort to reduce its trade surplus. China followed up that pledge by announcing early on Tuesday that it will be cutting import tariffs on U.S. automobiles (to 15% from 25%) and on some U.S. auto parts (to 6% from 8-25%).

However, the upbeat vibes faded later on Tuesday when President Trump revealed that the White House has yet to reach a deal with Beijing to save struggling Chinese telecom company ZTE. The news didn't sit well with investors, who had been expecting the president to use ZTE, which has been severely hurt by U.S. sanctions, as a bargaining chip in trade negotiations with Beijing. Reports on Friday indicated that President Trump and China have finally reached a tentative deal on ZTE, but by then the focus had largely shifted to the ongoing situation in North Korea.

President Trump canceled his June 12 summit with North Korean leader Kim Jong Un on Thursday, stating in an open letter to Mr. Kim that he felt the meeting was "inappropriate" based on the "tremendous anger and open hostility" displayed in a recent statement from a North Korean official directed at Vice President Mike Pence. However, the president has left open the possibility of meeting with Mr. Kim, saying on Friday that dialog with North Korea has reopened and that the summit could still happen.

In other political developments, President Trump officially signed the Dodd-Frank reform bill on Thursday, which rolled back regulations on small and medium-sized lenders put in place following the 2008 financial crisis. The president also added that the rollback may be extended to larger banks in the future. Separately, The Wall Street Journal reported that the Trump administration is considering import tariffs on automobiles that could be as high as 25%.

Investors received on Wednesday afternoon the FOMC minutes from the May meeting, which came in more dovish than expected, helping to fuel a late-session rally. The minutes pointed to a rate hike at the June meeting, as expected, and suggested that the Fed may not be as aggressive with its rate-hike path as many had previously thought. The latter takeaway stems from the acknowledgement in the minutes that officials would be content to let inflation briefly run above their 2.0% target.

Overseas, the prospect of a populist government coming to power in Italy weighed on Italian debt, pushing the yield on Italy's 10-yr BTP higher by 25 basis points to 2.47%. A flight to safety pushed both German and U.S. debt higher -- thereby reducing bond yields. The 10-yr German bund yield dropped 18 basis points to 0.40 this week, and the 10-yr U.S. Treasury note yield dropped 13 basis points to 2.93%. Investors also expressed concern over the ongoing situation in Spain following Friday reports that the country's opposition party is looking to oust Prime Minister Rajoy.

Meanwhile, reports that Saudi Arabia and Russia will soon relax their crude oil supply constraints to compensate for any production fallout in Venezuela and Iran sent crude prices sharply lower this week. West Texas Intermediate crude futures hit a fresh three-and-a-half year high on Monday, but finished Friday 6.4% below that level at $67.91 per barrel. A rise in the U.S. dollar also didn't help matters, making commodities, which are priced in U.S. dollars, more expensive for holders of foreign currencies. The U.S. Dollar Index jumped 0.6% this week to 94.13, its highest level since mid-November.

Back on Wall Street, retailers dominated the earnings front once again, with Lowe's (LOW), TJX (TJX), Target (TGT), Ross Stores (ROST), Best Buy (BBY), AutoZone (AZO), Tiffany & Co (TIF), Gap (GPS), Kohl's (KSS), Advance Auto (AAP), and Foot Locker (FL) reporting their quarterly results. The results come in mostly better-than-expected, but a few companies missed bottom-line estimates, including Lowe's, Target, and Gap. The SPDR S&P Retail ETF (XRT) settled the week higher by 0.3%.

The S&P 500 sectors finished the week on a mostly higher note, with seven of the eleven settling in the green. The rate sensitive utilities space (+3.1%) led the charge, underpinned by the decline in Treasury yields, while the energy sector (-4.5%) was by far the weakest group, suffering from the drop in crude prices. The other sectors finished with weekly gains/losses of 2.0% or less.

Headlines provided by Briefing.com