11 Jun Capital 19 Catch-Up – Jun 11

The Dow managed to snap a six-week losing streak last week, also having its best weekly result since November of last year.  It gained an impressive 4.7% over the five sessions, while the S&P500 followed with a 4.4% rise, and the Nasdaq gained 3.9%.

The world’s two biggest companies helped lead the way. With Apple (AAPL) gaining a little over 8% and Microsoft (MSFT) notching a 6.3% lift. Microsoft has now inched over the Trillion dollar valuation mark again, having its third close over a 1 trillion market cap this year. It currently sits at  $1.016 trillion after last night’s session.

Bad news is good news again.

The lure of lower interest rates led Wall St higher for most of the week. There’s nothing investors love more than free money. Even if it comes at the expense of the economy. Bad news is good news again.

This was highlighted after last Friday’s nonfarm payroll numbers which showed only 75,000 jobs were added to the economy in May. Half the number that was expected by economists. Yet the market rallied regardless, believing this enhanced the chances of an interest rate cut by the end of the year. Analysts are now pricing in the odds of a rate cut by September at 80%.

The 10-year treasury yield fell to its lowest level since November 2016, a strong indicator that there is a rate rise in the offing. And despite the overall market rally, the banks suffered as a result with Citibank (C), JP Morgan (JPM) and Bank of America (BAC) all losing more than 1% for the week.

Tariffs

Now back on to our favourite subject – Tariffs! We suggested in last week’s Catch Up that Mexico would cave pretty quickly considering they had so much to lose in a tariff war with the US. And cave they did, with Trump confirming over the weekend that all tariffs would be suspended as talks had gone well. And as long as Mexico “tries very hard” to adhere to the deal, it will be “a very successful agreement for both the US and Mexico”.

There’s been no mention of what the deal is just yet. And considering it will have something to do with Mexico attempting to stop an inflow of illegal immigrants into the US, you would imagine any results will be difficult to quantify. It’s perfect for Mexico, who can agree to the deal, make it look like they are making an effort, but in reality, it will be business as usual. Trump gets to claim tariff war victory and impress his supporter base. Everyone wins.

Except for China, who now have an emboldened Trump with one less war to fight. The US President called into CNBC overnight espousing the many benefits of the trade war with China – “tariffs are a beautiful thing” – while Treasury Secretary Steve Mnuchin stated, “If China doesn’t want to move forward, then President Trump is perfectly happy to move forward with tariffs to re-balance the relationship”. It definitely sounds like the ball is in China’s court. At the G20 summit at the end of the month, all cards will be on the table.

Nevertheless, the US Chamber of Commerce hailed the Mexico deal as great news, while the car manufacturers breathed a sigh of relief. General Motors (GM) gained 1.47% and another .39% after-hours, while Ford (F) picked up 0.61% during the sessions and another .20% after the market closed.

Looking to the week ahead we’ll see some important inflation data coming out on Wednesday with the consumer price index numbers being released. This will show us whether the Fed is in the right environment to be reducing interest rates. An uptick will make the board nervous and muffle the excitement of a cut on Wall St.

Earnings

Earnings wise we have the last few companies giving us Q1 numbers. Athletic wear retailer Lululemon (LULU) is the biggest name amongst them, and they’ll be looking to expand on their massive growth over the last 12 months. Shareholders will be looking for revenue at around the $3.8 billion mark, with earnings per share around $4.50. Guidance will be as crucial as always, but the apparel maker has already blasted through 2020 targets, so much so that it introduced new 2023 targets at its last conference call. It will be interesting to see how they fare this time around. I’m predicting another surprise to the upside.

Take a look below for a more in-depth look at earnings and the economic data.

Have a great week.

Cheers, Paul.

Earnings:

• Tuesday: H&R Block (HRB)
• Wednesday: Sonoma Pharma (SNOA), Lululemon (LUL)
• Thursday: Finisar Corp (FNSR), Fred’s Inc (FRED)
• Friday:  Cyanotech Corp (CYAN)

Economic Data:

• Tuesday: NFIB small-business index, Producer price index
• Wednesday: Consumer price index, Core CPI, Federal budget
• Thursday: Weekly jobless claims, Import price index
• Friday: retail sales, Industrial production, Capacity utilization. Consumer sentiment index, Business inventories