Payrolls Data Comes Up Against Trade War Artillery: Taking Stock

(Bloomberg) -- With ink still drying on the U.S.-China tit-for-tat tariffs, S&P futures are sending the signal that the market is looking for the next shoe to drop, be it nonfarm payrolls due out shortly or a further ratcheting up of tensions. Trade rhetoric has been fatiguing markets for months, but what is different now is the follow-through from the administration.

Strategists were mixed on how to play the development. Wells Fargo saw the damage as potentially “short-lived and contained,” whereas Credit Suisse was looking for the all-important details on implementation.

The final total on tariffs may reach as high as $550 billion, according to Trump’s earlier commentary, and a further cementing of that idea in the near-term could change the dynamic beyond the flattish-to-down futures we have on our hands Friday. But maybe the damage had been done and that’s why we’re not down even more. Trade and agricultural proxies Deere, Caterpillar and AGCO in 2018 are lower by 11, 14, and 15 percent respectively versus a positive S&P 500, so until there are new developments, we could be in “wait and see” mode.

The market could be reluctant to take positions in any particular direction as nonfarm payrolls loom. Barring any unforeseen tweet ahead of the data, the data at 8:30 a.m. could serve to break the market in a real direction after two weeks stuck within a 50 point range on the S&P. ADP figures and the FOMC minutes Thursday fell within market expectations, so we’ll be watching short-term support at 2721.50 as data comes in. Survey forecasts payrolls at 195k, down from 223k last month.

Tech shares are mixed early after leading the rebound Thursday as Micron allayed investor fears emanating from the China court injunction -- though that may be turned on its head today after Samsung’s results missed on the top and bottom line. Semiconductors could see today’s gains wiped out given the weak phone demand indicated in the results.

Tangible Tariff Tantrum?

While there have been some narratives that the markets don’t care about the tariffs (using evidence that the market closed Thursday near the highs of the week), the internals would appear to disagree. Defensive names took the mantle this week, as performance on the year improved the most among sectors like health care, telecom, real estate and utilities, with the latter two flipping their performance from negative in the first half of 2018 to positive ahead of the tariff implementation. With how futures are shaping up (currently hovering in the mid ~2730 area), all we’d need is to close down fewer than 15 points to end the week in the green.

Energy -- specifically crude -- dominated the headlines since last weekend, as President Trump sparred with multiple members of OPEC in efforts to drive crude prices downwards. Saudi Arabia made some concessions in pricing, but ultimately there’s no substitute for supply and demand, as evidenced by the surprise oil inventory build in the EIA data that sent WTI towards the lows of the week, leaving at least one sector casualty for the holiday week. TechnipFMC, Pioneer Natural and Cimarex Energy were among the largest loss leaders.

Banking on the Future

Unofficial kick-off to earning season begins next Friday with earnings reports from JPMorgan, Wells Fargo and Citigroup. The S5FINL index never really recovered from its historic streak of losses that came to a brief end last week when stress tests were released, so performance may be closed watched to change the narrative.

Banking stocks are "cheap" with balance sheets in better shape than at any other point in at least three decades, Oppenheimer analysts led by Chris Kotowski wrote earlier this week in a preview for earnings. Kotowski sees earnings growth in the sector as likely to grow faster than the overall market. Financials remain down 5 percent on the year, and will also be subject to key inflation data next week, which includes CPI and import prices.

Next week also brings more summits, including NATO and President Trump’s visit to the U.K. on July 13. New reports about suspected poisonings in the U.K. may boost tensions in discussion topics as Trump goes to Helsinki just days later to meet with Russian President Putin.

Notes From the Sell Side

Apple got a price target boost from Loop Capital, with analyst Ananda Baruah citing expectations for a stronger 2H 2018 given the implementation of its $100 billion buyback program and the introduction of a lower -priced LCD iPhone X. The new $210 price target reflects 13 percent upside to the current price and sits 11 percent below the Street-high of $235.

One of this year’s standout performers, WWE (up nearly 150 percent in 2018 and 267 percent over the past 12 months), galvanized another bull this morning, as BTIG boosted their PT to $92 (just $3 shy of the Street high) from $75. Prospects for WWE’s international business and secondary effects from its media rights plan confirmed last week make WWE among "the safest in media now," analyst Brandon Ross wrote.

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

  • Today -- U.S. scheduled to impose tariffs on $34 billion of Chinese goods
  • 8:30am -- Nonfarm Payrolls, Unemployment Rate, Trade Balance
  • 10:00am -- World Cup: Uruguay vs France
  • 2:00pm -- World Cup: Brazil vs Belgium

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