Weekly Report / May 25 – June 1, 2018

THE GENERAL MARKET

 

May Jobs Report Outweighs Trade War Fears

 

The May jobs report presented by the U.S. Labor Department on Friday came out just what economists predicted. The addition of 223, 000 ‘new’ jobs last month shows the U.S. labor market remains strong. The unemployment rate dropped to an 18-year low of 3.8%. The wage growth showed the yearly rate of pay rising to 2.7% from 2.6%.

The Dow Jones Industrial Average climbed 219.37 points to recoup the substantial losses on Thursday. The blue-chip index booked a 1% monthly gain but ended the week 0.5% lower. The S&P 500 Index advanced 29.35 points to book a 0.5% weekly gain. The Nasdaq Composite Index climbed 112.22 points to end the week 1.6% higher. For May, the broader S&P 500 and the tech-heavy Nasdaq posted 2.2% and 5.3% monthly rise.

https://www.marketwatch.com/markets

Market Headlines

 

U.S. Metals Tariffs Disrupt Markets

The market was disrupted on Thursday when the White House that the exemptions on the steel and aluminum imports from Canada, Mexico, and the European Union will not be extended. The metals tariffs had come into effect on June 1st.

Over the weekend, U.S. President Donald Trump insisted on Twitter that the US had been “ripped off by other countries for years on trade”. He defended the steel tariffs by saying it will protect US steelmakers and are vital to national security. According to Trump, U.S. firms face barriers in Europe and elsewhere.

EU lodges a complaint with WTO

The European Union brought lodge a dispute settlement case at the World Trade Organization (WTO). The bloc will press on with countermeasures while alleging that Trump’s decision was “pure protectionist” and the imposition of the metals tariffs is illegal.

The European Commission, through its president Jean-Claude Juncker, said the bloc would move to implement tariffs that could affect $7.5 billion worth of US exports. The commission will also file a case with the World Trade Organization (WTO).

Trade War is on

Key allies Canada, Mexico, and the European Union wasted no time to respond to the new U.S. metals tariffs. All of them threatened to retaliate with punitive measures as well.

Canada’s Prime Minister Justin Trudeau strongly objected to the tariffs. He called them an “affront” to their nations’ military alliance. By July 1, the country will impose “trade-restrictive countermeasures” on U.S. goods worth $12 billion.

G7 Finance Ministers Angered

The finance ministers from the G7 nations sharply criticized U.S. Treasury Secretary Munchin over America’s imposition of new tariffs on steel (10%) and aluminum (25%) imports. France’s finance minister Bruno Le Maire was emphatic and warns the trade war with the U.S. could begin in “a few days.”

Trump breaks trade war truce with China

On Tuesday, the White House announced that the U.S. would impose tariffs on $50 billion worth of Chinese goods and restrict Chinese investment in the United States.

The news that Trump broke the trade war truce with China surprised investors. China’s foreign ministry said, “We want to reiterate that we don’t want a trade war, but we aren’t afraid of fighting one.” U.S. Commerce Secretary Wilbur Ross flew to Beijing and met with Chinese Vice to try to ease trade tensions.

https://www.marketwatch.com/story/us-stocks-poised-to-rebound-as-jobs-report-steals-focus-from-trade-wars-2018-06-01

Qualcomm-NXP Deal Still Under Anti-Trust Review

According to Reuters, China’s State Administration for Market Regulation (SAMR) is still conducting an anti-trust review of Qualcomm Inc.’s (QCOM) proposed $44 billion acquisition of NXP Semiconductors NV (NXPI).

The merger has been approved by eight of nine required global regulators. China is the only regulator that hasn’t given a clearance.

https://www.reuters.com/article/us-china-qualcomm-nxp/chinas-markets-regulator-says-still-reviewing-qualcomm-nxp-deal-idUSKCN1IX3WM

The creation of  the largest seeds & pesticides maker is almost done

The planned $62.5 billion takeover by Germany’s Bayer’s of seeds maker Monsanto Co. (MN) is set to close on Thursday next week. The agro-chemical tie-up will see Bayer combine its crop chemicals business with Monsanto’s industry-leading seeds business. Bayer CEO Werner Baumann said that Bayer will finally realize its goal of creating a leading company in agriculture.

https://www.reuters.com/article/us-bayer-monsanto-close/bayer-set-to-close-monsanto-takeover-on-thursday-report-idUSKCN1IZ0HZ

Starbucks Close 8,000 U.S. Stores for Anti-Bias Training

On Tuesday, Starbucks Corp. (SBUX) closed 8,000 company-owned U.S. stores for its anti-bias training program. Some 6,000 licensed Starbucks cafes remained open in locations such as grocery stores and airports. Training of employees in these locations will be scheduled at a later date.

http://www.businessinsider.com/starbucks-racial-bias-training-2018-5

Biotechnology Sector Highlights

 

Madrigal Pharmaceuticals Inc. (MDGL) Stock Pops 144.96%

 

On Thursday, it was proven that no sector in the stock market offers more risk or reward than biotechnology. The surge in the stock price of tiny drug developer Madrigal Pharmaceuticals could actually be good for the whole industry.

The price of MDGL soared 144.96% from $108.43 to $265.61 after the company released on Thursday positive results for a medicine it’s working on to combat a fatty-liver disease known as nonalcoholic steatohepatitis or NASH.  No treatment for the disease has been approved yet.

http://money.cnn.com/quote/quote.html?symb=MDGL

The price surge adds to MDGL’s more than sevenfold gains over the last year. It netted the eight-employee operation a market value of more than $3 billion. The incredible increase is a reminder that in the biotech sector, outsize returns are possible. Hard work and a determined scientific approach can pay off very handsomely.

Madrigal must perform a bigger final stage trial for MGL-3196 to secure the Food and Drug Administration (FDA) approval. Rivals like Intercept Pharmaceuticals (ICPT) have sputtered after early advances. While safety issues have emerged from other competitors’ results, none has appeared so far in Madrigal’s trials.

https://www.bloomberg.com/view/articles/2018-05-31/madrigal-pharmaceuticals-huge-gains-keep-biotech-dream-alive

Viking Therapeutics Inc. (VKTX) – Stock Soars 101.01%

 

Viking Therapeutics made no major announcement this week yet the stock soared 101.01%. VKTX closed at $4.97 mid-week then jumped to $9.99 on Thursday. The stock rode on Madrigal Pharmaceuticals’ positive phase 2 results. VKTX finished at $9.75 on Friday and climbed over 80% for the week.

Viking Therapeutics is also developing an experimental drug that holds the potential for treating NASH. The thyroid hormone receptor VK2809 is the biotech’s lead candidate. Investors are confident that if the trials of Madrigal’s MGL-3196 yielded positive results, Viking’s VK2809 could also be relatively safe and effective.

Viking is currently conducting a phase 2 study of VK2809 targeting treatment of high cholesterol and non-alcoholic fatty liver disease, which includes NASH and other related diseases. Results from this study are expected in the second half of 2018.

https://www.fool.com/investing/2018/06/02/3-biotech-stocks-that-soared-this-week-are-they-bu.aspx

Nektar Therapeutics (NKTR) – Files NDA for Opioid Candidate Drug

 

On Friday, Nektar Therapeutics announced they have submitted a New Drug Application (NDA) for its analgesic opioid candidate, NKTR-181. The drug is for the treatment of chronic low back pain. The candidate exhibited reduced incidence of euphoria associated with opioids, which can lead to abuse and addiction.

NKTR finished the week 12.56% higher at $90.35. The shares of the biotech firm have outperformed the industry so far in 2018 and its stock price has soared 34.5% compared with the broader industry’s decline of 6.5%.

Dr. Steve Doberstein, Chief Development Officer, said the drug is an opioid but observed, “This innovative investigation medicine separates analgesic efficacy from the high levels of euphoria that too often lead to the abuse and addiction of traditional opioids.”  

Investors are now hopeful that after the promising phase 3 clinical trials for NKTR-181, the U.S. Food and Drug Administration (FDA) will approve Nektar’s analgesic opioid candidate.

https://www.nasdaq.com/article/why-nektar-therapeutics-ambac-financial-group-and-zuora-jumped-today-cm972404

Retail Trade Sector Highlights

 

Sears Holdings Corp. (SHLD) – No Turnaround in Sight

The week magnified the grim consequences the American retail icon is facing. Sears Holdings reported a decline of 31.2% in revenue for the first quarter. The company cited the combination of store closures and an 11.9% comp sales decline.

SHLD closed at $3.49 before the Memorial Day weekend and when trading resumed on Tuesday, the stock fell in each of the trading session this week. On Friday, the stock sunk further -18.86% from $2.81 to $2.28. SHLD has tumbled 56.6% over the past 12 months through this mid-week.

https://www.nasdaq.com/article/sears-holdings-death-spiral-accelerates-cm972479

Investors didn’t like the latest round of bad news. Apart from the disappointing earnings report, CFO Rob Rieker said they have identified 100 non-profitable stores. He disclosed that Sears will begin closing 72 of them “in the near future.” However, over the weekend, the company said 48 Sears locations and 15 Kmarts would begin closing in early September.

The struggling department store chain is left with no choice but to do another round of store closings. Sears store sales dropped 13.4%, same-store sales fell 11.9% and Kmart store sales declined 9.5%. Revenue dropped from $4.2 billion to $2.89 billion. Store closures accounted for about two-thirds of the decline.

At this point when the company continues to experience very weak sales while losing hundreds of millions of dollars annually, there is no actual turnaround in sight.

Michael Kors Holdings Ltd. (KORS) – Guidance Fails to Impress

The situation of Michael Kors is far from the horrific state of Sears Holdings. Actually, Michael Kors beat market expectations for both its top and bottom lines during the fourth quarter. But investors weren’t delighted and remained concerned.

But what really failed to impress them was the company’s guidance for fiscal 2019. The management projects full-year sales of $5.1 billion or an 8% increase over last year. The Jimmy Choo acquisition is expected to bring in around $570 million to $580 million in sales.

As a result, KORS plunged 11.46% on Wednesday to $60.41 then slipped further to $57.39 the next session. The stock finished the week at $59.84.

Chairman & CEO John D. Idol said, “Looking to fiscal 2019, we have a number of initiatives planned to drive growth in both of our luxury brands. For Michael Kors, we expect growth to be led by our retail business, as we remain focused on executing initiatives across fashion luxury product, brand engagement, and customer experience.”

On the contrary, Michael Kors’s comps are likely to stay flat such that retail sales might be at the mid-single-digit rate level. Also, as the company continues to cut inventory to drive full- price sales, the wholesale revenue would slide to the same mid-single-digit rate.

https://marketrealist.com/2018/06/michael-korss-guidance-and-the-resulting-stock-plunge

Information Technology Sector Highlights

 

Nine Chinese Firms Now in World’s 20 Biggest Tech Companies

 

The presence of Chinese companies in the technology sector is rapidly growing and is almost at equal footing with the U.S. companies in terms of ranking in the list of the world’s largest tech companies.

Based on the published report from Kleiner Perkins Caufield & Byers partner Mary Meeker, U.S. tech companies lead Chinese companies 11 to 9 in the Top 20 Worldwide Internet Leaders. The companies, whether public or private, are ranked based on market valuation as of May 29, 2018.

The American companies still hold the top five rankings led by Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT), Alphabet Inc. (GOOG), and Facebook Inc. (FB).

China’s Alibaba (BABA) and Tencent (TCEHY) are ahead of Netflix Inc. (NFLX) at sixth and seventh places respectively. Chinese firm Ant Financial Services Group is ranked no. 9. Rounding up the top ten is American company eBay + PayPal.

https://www.marketwatch.com/story/china-has-9-of-the-worlds-20-biggest-tech-companies-2018-05-31

Ant Financial operates Alipay which is the biggest online payment platform in China. On May 29, the firm closed its latest funding round. It was able to raise $10 billion from a group of global and local investors.

Some of the well-known global sovereign wealth funds and private equity firms are the main investors. The group includes Singapore’s sovereign fund GIC Pte Ltd and state investor Temasek Holdings (Private) Ltd.  U.S. private equity firm Warburg Pincus LLC also joined.

https://www.reuters.com/article/us-ant-financial-fundraising/chinas-ant-financial-raises-10-billion-at-150-billion-valuation-sources-idUSKCN1IU0EZ

Meanwhile, 14th ranked Xiaomi Corp. filed for an IPO in Hong Kong in early May. Being one of China’s top smartphone makers, the listing is expected to be the world’s biggest initial public offering this year. The company is targeting a $70 to $80 billion valuation.

https://www.marketwatch.com/story/smartphone-giant-xiaomi-files-for-huge-ipo-in-hong-kong-2018-05-02

The most notable difference between China’s and America’s approach to tech is the fact that Chinese internet users are far more willing to share their data. The Meeker’s report was a revelation. Internet users who would share personal data such as financial or driving records receive  benefits such as lower prices or personalization await internet users who would share personal data such as financial or driving records. About 38% of Chinese internet users are sharing their data.

The Week Ahead

 

The mood at Wall Street was generally mixed. The Dow Jones Industrial Average declined slightly while the S&P 500 rose modestly. Both indexes ended at the level they began the week. The political uncertainty in the Eurozone and the reigniting of a trade war contributed to the market’s volatility.

However, the solid job growth that surpassed expectations and as shown by the May jobs report countered investors’ worries. With the forthcoming retaliatory tariffs from countries hit by U.S. tariffs, expect additional market volatility in the week ahead.

On the economic front, reports on Durable Goods Orders and the Purchasing Managers’ Index will be presented on Monday and Tuesday respectively.

https://www.edwardjones.com/market-news-guidance/recent-news/weekly-recap.html

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