Traders Smash Buy Buttons Despite No Deal on China: Taking Stock

(Bloomberg) -- S&P 500 futures are near overnight highs, and if all stays the same, we are looking to open at the highest since mid-March in an attempt to break above the recent 2,700-2,740 range. Most everything is green, aside from FB (down 1.3% on an NYT report shedding light on fresh privacy worries) and NXPI Semi (falling ~3% on China concerns).

Europe’s market continues to bounce (Stoxx 600 up 1.5% in two days), despite data that continues to underwhelm in the region: Sentix sentiment survey dropped to their lowest since August 2012 while PPI also came in below the consensus. Perhaps most importantly is the relative strength in the European bank sector, with Deutsche Bank up ~5% in two sessions and an M&A report lifting shares of SocGen and Unicredit.

Quick Rewind of What Happened

Here’s your quick rewind of need-to-know happenings over the past 60+ hours: U.S.-China talks ended without a resolution, China warned that any progress made so far will be wiped out if the U.S. makes good on its threat to impose tariffs on $50 billion of imports, the G-7 meeting singled out the Trump administration for its recent tariff actions and said "decisive action" is needed at the leaders summit this week, Canada launched WTO and Nafta cases against America as a result of the tariffs, the summit between Trump and Kim Jong Un looks like it’s still on for June 12, a similar Trump-Putin summit is reportedly in the works, Italy’s new populist government is bracing itself for a confidence vote, Trump tweeted this: "When you’re almost 800 Billion Dollars a year down on Trade, you can’t lose a Trade War!", someone paid $3.3 million to grab a bite with Buffett (that’s actually down ~$160k from the record), and the Warriors cruised to a 2-0 lead over the Cavs, though it’s unclear if JR Smith thinks the series is tied 1-1.

What Does It all Mean for the Market?

Well, if the past week is any indication, not a whole lot as stocks have taken a backseat to what’s going on in other asset classes, like the blowout in European sovereign-bond yields, the gyrations in the U.S. treasury market, the persistent strength in the dollar, and the ensuing pullback in crude oil.

While geopolitical pressures are causing many markets to make some sort of solidified move in one direction, the S&P 500 has been held hostage in its 2,700-2,740 range, which it hasn’t broken out of for over a month save for that one Italy panic day last week that looks to be nothing more than a blip for read-across reaction to the U.S. stock market.

On the contrary, Morgan Stanley chief U.S. equity strategist Michael Wilson is out this morning arguing that Italy’s political mess may lead to higher U.S. stock valuations in the short term due to its effect in halting the rise in 10-year yields. He also likes the technical set-up after what appeared to be a successful test of the 50- and 150-day moving averages as well as the downtrend from January highs. Wilson’s short-term target is 2,800-2,825 on the S&P 500 "before corporate buybacks shut down for 2Q earnings season."

And despite the lack of movement in the broader market, there are still interesting rotational pushes and pulls when you get a bit more granular. Here’s a look at sectors to watch over the next 24-48 hours:

  • Banks -- Easily one of the most volatile groups of recent, the banks have taken their cue from the hefty pullback in 10-year yields (~30 bps move from May 23 high to May 29 low) as well as the most recent bounce (~15 bps retracement in the prior three sessions). This should remain the focus for the BKX unless something dramatic and seismic hits the European bank sector, though those odds are creeping up between Deutsche Bank’s freefall and the M&A reports over Unicredit & SocGen.
  • Yield proxies -- On the flip side, the utilities, telecom, consumer staples, and REITs will likely continue to exhibit weakness (as opposed to the banks) if yields roar back to the 3% mark. Of those sectors, the first three mentioned were the worst performers of the eleven in the S&P for the entire month of May, by a mile (telecom -2.3%, staples 1.8%, utilities -1.7% vs S&P 500 +2.2%, and tech up a whopping 7.1%)
  • Large-cap tech -- Speaking of tech’s leadership, that’s been one constant for this market over the long haul. In fact, several of the FAANGs closed at records on Friday, including Facebook (up ~30% from its Cambridge Analytica low), Apple (on its way to $1 trillion market cap as WWDC gets under way today), and Amazon (inching closer to a market cap of $800 billions). Keep an eye on all things tech as BofAML’s three-day TMT conference starts tomorrow with NVDA, TXN, INTC, WDC, MSFT, CSCO, and SQ all listed as presenters.
  • Cybersecurity -- PANW surprised investors with a late Friday preannouncement coupled with CEO transition news one day ahead of its scheduled earnings. The numbers look good (billings up almost 33% y/y, or the fastest growth seen in the past six quarters, according to Keybanc) and could lift shares of cybersecurity peers like FEYE and PFPT, who both present at BofAML’s TMT conference tomorrow.
  • Biotech -- ASCO rolls on and our roundup of winners and losers is on the wire; so far MRK and LOXO are indicated up while NKTR, JNCE, and BLUE are poised to open lower

Notes From the Sell Side

Some of the biggest calls so far..

BofAML is telling clients to buy NVDA (top pick) and AMD after a review of graphics chip market trends, concluding that gaming is "picking up slack for crypto".. the bank is also double downgrading flow control name CFX to an underperform on FX and structural growth concerns..

Morgan Stanley sounds like they’re getting close to upgrading WMT ("risk/reward screens positive in the context of our equal-weight rating") after the company’s shareholders meeting...

Keybanc is lifting their price target on high-flier WWE to $71 (among the highest on the Street) from $49 on likeliness of TV rights for Raw and Smackdown greatly exceeding prior expectations..

And lastly, this one isn’t exactly sell-side (or buy-side any more, actually), but more of an ICYMI: Whitney Tilson, who held a short selling conference a month ago, says in a blast email that TSLA is no longer a bad short -- "The odds that the stock does a Valeant (that’s now a verb, meaning “to collapse by 97%”) have risen from 10% to 35%. But, as with Valeant, you don’t have to be a hero here. There will be plenty of time to get in on the short side if it really does go into full-scale collapse."

Tick-by-Tick Guide to Today’s Actionable Events

  • Today -- ASCO (may impact BMY, MRK, ABBV, AZN, Roche) and Digestive Disease Week (may impact PLX, LLY)
  • 7:00am -- DVMT earnings
  • 8:00am -- PANW earnings call
  • 10:00am -- Factory Orders, Durable Goods
  • 10:00am -- AFSI shareholder vote on go-private deal (Icahn involved)
  • 12:00pm -- TXMD investor day
  • 1:00pm -- Apple’s Tim Cook gives keynote at Worldwide Developers Conference
  • 2:00pm -- KRC investor meeting
  • 4:00pm -- NEWR investor day
  • 4:05pm (roughly) -- COUP, SMAR, ASNA, HQY earnings
  • 8:00pm -- Stanley Cup, Game 4: Vegas at Washington (Caps lead 2-1)
  • 9:45pm -- China Caixin PMI

©2018 Bloomberg L.P.