It Takes a Lot to Shock the Market at This Point: Taking Stock

(Bloomberg) -- The market didn’t put a whole lot of weight behind the G-7 being an impactful event, and rightfully so as we’re seeing zero reaction in the futures so far this morning -- and that’s even with Trump coming out of the summit swinging against Trudeau ("very dishonest & weak") and trade adviser Peter Navarro lashing out, saying there’s a "special place in hell” for the Canadian Prime Minister.

The somewhat-shocking outcome from the G-7 coupled with more awful data out of Europe -- U.K. factory production fell 1.4% month-over-month, the most since 2012, vs an expected gain of 0.3% -- isn’t budging the market in early trading, perhaps being offset by a massive rally in Italian stocks (FTSE MIB up more than 2%) after the finance minister committed to the euro.

At best, the G-7 event full of world leaders rubbing elbows (and barking at each other, in this case) was an appetizer, maybe even an amuse-bouche, to the Trump-Kim summit that is expected to be the main course.

Though what’s the consensus here in terms of moving the needle for the markets? Will an uber-aggressive handshake and a photo op be enough, or will we need some sort of deal on paper regarding nuclear arms to get an added bump in the tape?

Pompeo is already out this morning calling for sanctions to remain in place, and potentially be increased, until North Korea denuclearizes, so that drumbeat may get louder as the day wears on.

It’s clear, though, that we’re in some unchartered territory here, but if all stays the same and nothing disastrous comes out of the meeting in Singapore -- like what if it gets canceled at the last minute? or what if Trump pulls a G-7 and tweet-bashes Kim Jong Un on the ride back to the states? -- then equities may just continue to melt higher until we get something more concrete on the China and/or Nafta trade front.

Setting the Stage

Let’s set the stage heading into the world economy’s most important week of the year, which features the much-anticipated Trump-Kim summit, the monthly CPI data, the Fed & ECB meetings, and the deadline for U.S. to publish a final list of Chinese products subject to $50 billion in tariffs, among many other catalysts.

The S&P 500 is up 74 handles, or almost 3%, since the beginning of June after spending most of May in a sideways holding pattern. We’ve quickly moved towards the upper half of our new 2,750-2,800 trading range, and any break above this would put the target squarely on the all-time high of 2,873 (whose break is already a given for some strategists who took the opportunity last week to predict a continuation rally in the near term).

Buyers have stepped in almost immediately whenever news/tweets/speculation suggest trade talks are becoming unhinged, and that appears to be the case yet again coming out of the G-7 fiasco. Meanwhile, the last leg up in the tape has coincided with breakdowns in major bourses like Brazil and Italy (-7.2% and -3%, respectively, in the past four sessions), and it’ll be interesting to see whether any of the carnage in crypto land that played out this weekend (Bitcoin, ripple, ethereum, litecoin all down 12%-15% last night) can put any sort of dent in the stock market (I’d venture to say that it won’t).

And yet even with all of the tensions bubbling up around the world, the fears related to the European bank sector, the sovereign bond blowouts, and the whippy movements in Treasuries (33bps reversal in the 10-year yield from May’s peak to trough) and emerging market currencies, the market’s fear gauge (the VIX) is trading at levels unseen since before the market correction in early February, suggesting the short-vol trade is alive and well.

Tech still has the reins when it comes to leadership for this tape, though this looked a bit shaky over the past three days. Trader talk has surfaced about a rotation out of the sector, namely the large-cap names (the FAANGs and the SOX heavyweights), and into financials and energy over the past three days. We’ve seen some of this materialize in that timespan: FB -2%, GOOGL -1.6%, NFLX -1.4%, SOX -1.1%, AAPL -0.8% vs the KBW Bank index (BKX) +2.4%, thanks to the 10-year yield crawling back to 3%, and the energy SPDR ETF (XLE) gaining 1.8% with the crude pullback subsiding.

But if anything, it appears as though it’s much more than just those two sectors that have exhibited strength, as a number of underperforming/oversold groups have acted well in the days that tech hasn’t, such as the consumer staples, industrials, and health care names. Still, the moves haven’t been dramatic enough to emphatically say one way or the other that this trade is here to stay.

If it were a true rotation, it would mean that we’d need to see a much larger reversal in the large-cap tech stocks going forward, something that could kneecap the broader market’s move to the upside if the money coming out doesn’t get put to work in some of the other sectors mentioned above.

Notes From the Sell Side

The biggest calls of the day..

Nomura Instinet’s Romit Shah strikes a cautious tone on buy-rated Intel after their meeting with the company’s CEO: "We came away from a meeting with CEO Brian Krzanich last week believing that the burden is on revisions to drive continued outperformance; we are less confident about further multiple expansion."

Several calls in energy related to the Permian fears, with Jefferies calling the selloff overdone (upgrading XEC to buy, reiterating buys on FANG/CXO/CPE, and downgrading OAS) while Morgan Stanley says absolute valuations for related oil services stocks (like CJ, FTSI, FRAC) "imply too great a supply-demand dislocation."

On the solar front, Baird repositions ratings after the recent China-fueled knee-jerk reaction in the group, naming FSLR a "fresh pick" (on revenue visibility and substantial competitive advantage vs peers) and downgrading SPWR to neutral on potential oversupply conditions..

Goldman chief U.S. equity strategist David Kostin expects strong balance sheet stocks (basket GSTHSBAL) to continue outperforming weak ones (basket GSTHWBAL) due to record-high corporate leverage and persistent Fed tightening; stocks in the former basket include FB, NVDA, SWKS, ISRG, ALGN, MNST, CMG, and FAST vs those in the latter like VRSN, HPE, SYMC, AGN, CBS, CTL, AAL, FCX, and CHK..

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

• Today -- NYSE to start trading options on FANG+ Index
• Today -- Autoliv’s Veoneer when-issued trading to start (symbol VNE-WI)
• 8:30am -- AMTD monthly sales
• 9:00am -- FINL shareholder vote on JD Sports deal
• 10:20am -- CLDR, IMPV, VAC at Stifel Cross Sector Insight Conference
• 11:30am -- TEX, DF at Stifel Cross Sector Insight Conference
• 3:00pm -- CROX, GLUU at Stifel Cross Sector Insight Conference
• 4:01pm -- DTEA earnings
• 4:02pm -- LMNR earnings
• 4:05pm -- RH, PLAY earnings
• 4:15pm -- KMG earnings
• 4:30pm -- SBLK earnings (roughly)
• 9:00pm -- Trump and Kim Jong Un meet in Singapore

To contact the reporter on this story: Arie Shapira in New York at ashapira3@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Steven Fromm

©2018 Bloomberg L.P.