The GENERAL MARKET
Solid Gains at Wall Street
The bullish sentiment returns to Wall Street with the U.S. stocks posting its strongest week in months and the main benchmarks closing higher on Friday. The week also saw two of the three indexes post record levels after a period of volatility and weakness.
The Nasdaq Composite Index hit all-time peaks this week, while both the Dow Jones Industrial Average and the S&P 500 Index are trading at multi-month highs. The solid gains have come despite uncertainty over trade policy and other geopolitical issues. Investors are particularly worried over the summit to be attended by the leaders of the Group of Seven (G7) industrialized nations in Canada on June 8 and 9.
The Dow Jones advanced 75.12 points (+0.3%) on Friday to close at 25,316.53. The blue-chip index posted its third straight positive session and closed at its highest level since March. The S&P 500 rose 8.66 points (+0.3%) to 2,779.03 while the Nasdaq Composite climbed 10.44 points (+0.1%) to 7,645.51.
For the week, the Dow Jones advanced 2.8% which is its biggest weekly gain since March. The S&P gained 1.6% and the Nasdaq rose 1.2%. Both posted their third straight weekly gain. Investors suddenly improved their view on the equity market.
Showdown at G7 Summit
Tensions were high when G7 leaders met United States President Donald Trump for the first time since U.S. tariffs on steel and aluminum imports from Canada, Mexico, and the European Union were imposed last week.
Trump maintained his tough line on trade as he wants to bring down the huge trade deficits with trading partners as the gap climbed to a nine-year high of $807 billion in 2017. He also invoked national security concerns to justify the U.S. tariffs.
China accounted for 47% of the U.S. trade deficit in goods in 2017 last year. On the G7 countries side, Germany ran the biggest trade surplus with the U.S. and the U.K. is the only country with which the U.S. has an overall surplus.
G7 advocates “rules-based trading system”
Leaders of the G7 nations issued a joint communique advocating a “rules-based trading system” which Trump endorsed at the conclusion of the summit held in Quebec, Canada.
However, Trump retracted his endorsement after leaving at the summit while accusing Canada of “dishonesty”.
Trump complains of “piggy bank” treatment
While all the G7 leaders agreed on the need for “free, fair, and mutually beneficial trade” and the importance of fighting protectionism, Trump accused his G7 counterparts and other nations of “unfair” trade practices and of treating the US like a “piggy bank”.
Trump said, “The United States has been taken advantage of for decades and decades.” He reiterated his long-standing view that Washington has been on the losing end of existing trade arrangements. He is blaming former U.S. presidents of past decades and not the G7 leaders for the “unfair” trade deals.
EU & Canada Retaliates with Tariffs on U.S. Goods
The European Union is responding to the Trump administration’s decision to impose tariffs on steel and aluminum imports from some of its closest allies.
The bloc confirmed that effective early July, they will slap tariffs on nearly €2.8 billion ($3.3 billion) worth of American goods. Among the targeted products from the U.S. are bourbon, denim, orange juice, motorcycles, peanut butter, motorboats, and cigarettes.
Canadian Prime Minister Justin Trudeau described as “insulting” Trump’s decision to invoke national security concerns to justify the metals tariffs. Canada will be moving forward to impose retaliatory tariffs effective July 1st.
U.S. Reaches Deal with ZTE Corp. to Lift Ban
ZTE Corp. received a key concession with the Trump administration to lift the U.S. ban. The Chinese telecoms equipment maker has agreed to pay $1.4 billion as fine in exchange for the lifting of a ban that prevents ZTE buying American components.
US commerce secretary Wilbur Ross confirmed that the final deal had been signed with ZTE. On top of the upfront payment of the fine, ZTE would have to overhaul its board members and management team within 30 days.
The company was required to put an additional $400 million in escrow too. The deal also includes a new 10-year ban that is suspended unless there are future violations.
Apple’s Market Cap Nears $1 Trillion
Shares of Apple Inc. (AAPL) closed at a record-high of $191.83 on Monday. The stock’s rally because coincided with the start of 11th Worldwide Developer Conference (WWDC).
During the keynote speech of CEO Tim Cook, he announced the company’s latest software updates and its roadmap for the future. For Apple Inc. to become the first $1 trillion company, a further 6.1% gain from the current levels is needed. That would be history in the making.
Cannabis Act Approved with Amendments in Canada
By a final vote of 56-30, the Canadian Senate approved on Thursday, June 7 Bill C-45 which is also known as the Cannabis Act. However, because of several amendments, the bill will return to the House of Commons. The Liberals to where Canada’s Prime Minister Justin Trudeau belongs hold a majority. They will decide which of the amendments will be approved or rejected.
Information Technology Sector Highlights
S&P 500 Officially Welcomes Twitter Inc. (TWTR)
For the first time on Thursday, June 7, Twitter Inc. traded as part of the broader S&P 500 Index. TWTR replaced Monsanto Co. after the seeds maker was acquired by Bayer AG from Germany. Since June 1, the social networking service is on a hot streak.
From $36.65%, TWTR jumped 3.35% to $37.88 on June 4. It soared to 5.86% to $40.10 by mid-week. On the day it officially traded as a component of the S&P 500, the stock dropped to $39.70. But on Friday, TWTR rose 3.8% to finish the week higher at $41.21.
The closing price on Friday is still below TWTR’s opening day price of $46.88 dating back to November 2013. It can be recalled that the stock price of this social networking site on which users post and interact with messages known as “tweets” nearly tripled after its IPO.
In the two and a half years following, TWTR fell 80% to a low of $13 in May 2016 and has skyrocketed 208.46% from there before Thursday’s opening bell to 40.10. Twitter has finally gotten the recognition it deserves. TWTR is up +71.64% year-to-date, outperforming rivals Facebook Inc. (FB) and Snapchat parent Snap Inc. (SNAP).
In celebration of its entry into the big league, Twitter will sell $1 billion of bonds for its second-ever debt offering. The sale of the convertible note came a day prior before to being welcomed into the S&P 500 Index. The sale marks the coming of age for the microblogging site. The company is hoping the sale of the bonds can eventually convert into Twitter stock.
Microsoft Corp. (MSFT) – Buys GitHub +15 New Xbox Games in E3 2018
Microsoft Corp. made headline news on Monday after announcing it had reached an agreement to acquire open-source software development platform GitHub for $7.5 billion worth of MSFT. Microsoft CEO Satya Nadella issued a press release saying, “Microsoft is a developer-first company, and by joining forces with GitHub we strengthen our commitment to developer freedom, openness, and innovation.”
There are about 28 million developers coding openly on GitHub and by acquiring it, Microsoft’s can expect growth in programming and a brighter open-source future. MSFT was part of the tech rally that began on Monday, climbing to $102.49 on mid-week before dropping to $100.88 on Thursday when the rally ended. The stock ended higher at $101.63 to finish the week.
The software giant will also be taking part in the 2018 Electronic Entertainment Expo (E3) at the Los Angeles Convention Center from June 12 to 14. On June 10, Microsoft will host a conference as part of the world’s leading video game show expo.
During the media briefing, Microsoft through Xbox Head Phil Spencer will outline upcoming games, hardware, and other Xbox-related products. On the E3 stage, Microsoft will premiere 15 new games and a lot more.
Snap Inc. (SNAP) – BITMOJI vs. MEMOJI
The ‘battle of animated personalized emojis’ is on. Snap will be allowing Snapchat users to use Friendmojis outside of their core app in iOS. According to Engadget, Friendmojis are the Bitmoji stickers. It includes both the user and a friend. The standalone Bitmoji has long been available as stickers within iOS. Users must link their Snapchat accounts with Bitmoji in order to utilize the new feature.
Snap is taking defensive action because of Apple Inc.’s (AAPL) recent announcement that it will launch its own version of Bitmoji called Memoji. The feature is coming in IOS 12. But Snap will have to play defense, not just on one, but against two tech giants.
Facebook Inc. (FB) is currently working on its own personalized avatars. This would be part of the social giant’s latest features for users which FB allegedly copied from Snap. Bitstrips, the maker of Bitmoji personalized avatars, was acquired by Snap Inc. in March 2016. Bitstrips actually debuted on Facebook where users can create customized comic strips.
Financials Sector Highlights
Bank Stocks Surge This Week
The banking sector gained strong momentum this week to steal market leadership away from technology stocks. The bank stocks made a rally on mid-week where JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS) led the advancers.
The turnaround in the banking sector and the financials sector, in general, was because the benchmark 10-year Treasury yield reversed direction. Treasury yield sank in late May but the 10-year yield has gained about 20 basis points in the last week to yield 2.99% on early Thursday.
JPMorgan Chase & Co. (JPM)
$111.11 as of 06/08/2018 (+3.90% YTD)
JPM closed at $108.45 on Monday then jumped 1.76% to $110.36 on Wednesday. The stock finished at $111.11 to close the week.
JPMorgan’s strength lies in its retail banking sector. It is the core of their business, comprising credit cards to savings accounts. About half of American households and more than 4 million small businesses are the bank’s clients. JPM’s has the competitive advantage when it comes to the card business. The bank estimates that its credit card sales represent a 22% market share.
Goldman Sachs Group Inc. (GS)
$233.39 as of 06/08/2018 (-8.39% YTD)
GS dipped to -0.67% to $228.34 then climbed +1.70% to $232.23 on mid-week. The stock finished the week at $233.39. Goldman Sachs is living up to its image as the top investment bank. The bank continues to lead the market in mergers and acquisitions as well as equity underwriting.
Although its consumer banking business is still very much in its infancy stage, the long-term potential is promising. The launching of Goldman’s Marcus personal lending platform in late-2016 was a success. The bank was able to originate more than $3 billion in personal loans. Also, it added about $11 billion in consumer deposits since acquiring General Electric Co.’s (GE) deposit portfolio two years ago.
Other notable performers this week are the KBW Nasdaq Bank Index (BKX) and the Financial Select Sector SPDR® Fund (XLF). BKX posted its second-largest single-day gain in more than a month on Wednesday as it closed 2.07% higher. This week’s gains also sent the index higher by 2.87% in the last five sessions. The index is up +3.09% year-to-date.
XLF, whose major holdings include JPM, Bank of America Corp. (BAC), Berkshire Hathaway Inc. (BRK B), Citigroup Inc. (C), and Wells Fargo & Co. (WFC), rose 1.86% on Wednesday and climbed 0.39% in premarket trading Thursday. The ETF is up +0.61% year-to-date.
The ‘NEW’ Communications Services Sector
The Evolution of a ‘New’ Sector
Everything is set for a major shakeup in the U.S. stock market. The top corporate names from the Telecommunication Services, Information Technology, and Consumer Discretionary sectors will be banded together to form the ‘new’ Communications Services Sector.
Following their annual review of the Global Industry Classification Standard (GICS), the Dow Jones Indices and Morgan Stanley Capital International (MCSI) Inc. decided to make a sweeping reorganization and change certain aspects of the system.
The GICS is the system that is tasked to structure the publicly-listed companies and assign them to different sectors, industries, and sub-industries. However, according to the Dow Jones Indices and MCSI Inc., changes are necessary to reflect how some businesses have evolved in the last few years.
The Sector Composition
- Effective Friday, September 28, 2018, after market close, Wall Street will herald the birth of the new sector. The companies that will comprise the newly created communications services sector are undoubtedly among the hottest stocks in their respective sectors.
- Google parent Alphabet Inc. (GOOGL) and Facebook Inc. (FB), two of the revered FAANG stocks, will cease to be part of the top-performing technology sector. Activision Blizzard (ATVI) will be shifting as well. Their move from the information technology sector to join AT&T Inc. (T) and Verizon Communications Inc. (VZA) would result in a broadened telecommunication services sector.
- The mix is made even more interesting with the addition of well-known conglomerates from the consumer discretionary sector. Walt Disney Co. (DIS) Comcast Corp. (CMCSA) and other select companies like TripAdvisor Inc. (TRIP) will be included in the newly-defined sector.
- Another FAANG member and a consumer discretionary mover, Netflix Inc. (NFLX), will also be part of the core group. So by late September this year, the communications services companies will account for one-tenth of the S&P 500. Bank of America Corp. (BAC) fears that the changes will leave the newly-created sector more overbought than any other. That is because of the high concentration of popular stocks like FB, GOOGL, and NFLX.
- In order to counter the fear, Alibaba (BABA), eBay (EBAY), Mercado Libre (MELI) that all resides in the information technology sector will be moved. They will reinforce the consumer discretionary sector. Thus, high-flying tech names are now spread out between Consumer Discretionary and Communications Services sectors.
- The proponents of the change say the new sector is a diverse mix but the right one. ALL the companies in the star-studded line-up “facilitate communication and offer related content and information through various media.”
The Week Ahead
Optimism returned to Wall Street this week to help U.S. stocks move higher. There’s a renewed focus on positive economic fundamentals, particularly from the service sector. The good news was reflected on the Purchasing Managers’ Services Index which reached a three-year high.
The economic fundamentals are expected to continue improving. However, the market will be clouded by risks, including the uncertainty on trade disputes and the anxiety regarding the future path of both short- and long-term interest rates.
The bull market can run further because the positive fundamental backdrop could outweigh the current risks. The market found some footing although the road ahead isn’t as clear.
It will be another robust week on the economic front as the following reports will be released: May’s Inflation Report Tuesday; Federal Reserve’s rate decision Wednesday; and Retail Sales Report on Thursday.