Wall Street Breakfast: Trade Talks Between U.S. And China Fire Up
A U.S. trade delegation that includes Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross, National Economic Council Director Larry Kudlow, trade representative Robert Lighthizer and policy adviser Peter Navarro have arrived in China for trade talks. Ahead of the talks, Chinese Foreign Ministry spokeswoman Hua Chunying presaged the negotiations by saying it isn't realistic to expect to have all the issues resolved with one set of meetings. Some economists anticipate that a short-term bargain involving the automobile industry and other previously announced moves could be struck. The yuan has weakened against the U.S. dollar for the fourth straight day with the trade talks just firing up.
Global markets might be waiting to take their cues from the tone coming out of the trade talks in Beijing. In Asia, the Shanghai Composite in China finished the day up 0.65%, while the Hang Seng Index fell 1.44%. The Nikkei in Japan edged down 0.16% and South Korea's Kospi index declined 0.73%. It's a quiet session at midday in Europe, with the Stoxx 600 down 0.23%. The dollar is trading softer against a basket of currencies. S&P 500 futures are up 0.22% heading into the Thursday trading session.
China isn't the only area of focus this week for U.S. trade representatives as the Trump administration seeks to achieve a NAFTA draft agreement by the middle part of May. Height Capital Markets expects that the Trump team values a pre-midterm election win high enough to push through on some automobile industry agreements, even if the terms don't tick every box. A NAFTA deal in any form is expected to be highly contested on Capitol Hill, adding to the pressure to start the debate process as early as possible. Although the Trump administration can trigger a NAFTA withdrawal through the Article 2205 mechanism, it still needs a vote by Congress to actually pull out of the deal on a permanent basis.
First-quarter demand for gold is the lowest it's been since 2008, according to a report from the World Gold Council. Total gold investment demand fell 7% to 973 metric tons, and demand for both physical gold and gold-backed ETFs is down, with ETF inflows taking a 66% hit. A strengthening yuan trimmed demand from China, the world's biggest bar and coin market.
Europe core consumer prices fell unexpectedly 0.7% in April compared to a year ago, according to Eurostat. Analysts expected a CPI mark of +0.9% for the month. Core consumer prices were up 1.0% in March. "The data affirms the narrative of Europe's soft patch, and bund futures are rising as a result," reports Bloomberg.
FOMC wrap: The Federal Reserve held interest rates steady after its two-day policy meeting and said it will monitor inflation. The policy-making committee used the word "symmetric" twice in relation to its inflation target, in a potential cue to bond traders that a small overshoot past the 2% inflation target will be tolerated. The Fed noted that risks to the economic outlook are roughly balanced. "The FOMC statement reinforced market expectation for another 25 basis points rate rise in its June meeting," said JPMorgan chief market strategist Tai Hui.
The U.S. trade gap for goods and services is expected to improve dramatically to a $49.9B deficit in March when the Commerce Department releases the monthly update this morning. The trade deficit rose to a nine-year high $57.6B deficit in February to mark the sixth straight month of a higher deficit, the longest streak since 2000. Expect politicians to focus on the new trade gap tallies with China and Mexico in particular. In February, the gap with China stood at $34.7B and the gap with Mexico was at $6.6B.
Crude oil prices are slightly higher a day after U.S. oil production hit a fresh record of 10.62M barrels per day. All eyes in the oil patch are now on U.S.-Iran relations, and if the 2015 international nuclear deal will be scrapped by the Trump Administration. Israeli Prime Minister Benjamin Netanyahu added a new wildcard to the discussion this week when he pointed to evidence that Iran maintained a secret plan to build nuclear weapons. WTI crude oil future +0.26% to $68.11/bbl at last check. Brent crude +0.16% to $73.48/bbl.
Never a dull moment: Tesla (TSLA) says it hit a Model 3 production run rate of 2,270 in April and recorded three consecutive weeks at over 2K/week. The company targeted hitting a 5K per week pace in about two months, and then in a "capital efficient manner" will add incremental capacity to ultimately get to a 10K unit weekly rate. Model 3 net reservations were over 450K at the end of Q1, according to the company. Margins and EPS surprised to the upside in Q1. Looking ahead, Tesla sees positive GAAP net income and positive cash flow in Q3 and Q4. Shares of Tesla fell back from an initial post-earning gain after an atypical performance by CEO Elon Musk on the earnings conference call. Watch today for a flurry of analyst notes out on the EV automaker.
Even as the battle for Flipkart (FPKT) heats up for Walmart (WMT) with Amazon (AMZN) now in the mix, Wolfe Research is out with a reminder that an even bigger deal could be on the way for the retail giant out of Bentonville. The firm said a significant partnership or outright purchase of Humana (HUM) could be good for Walmart shareholders and consumers. Humana's large Medicare Advantage business that skews to lower income seniors looks like a natural fit for Walmart and its large aging customer base. "Walmart's supercenters act as the center of commerce for many communities and we believe this can be leveraged by offering more health/financial services to a population that tends to be underserved in both areas," wrote analyst Scott Mushkin on a potential deal.
A filing in Hong Kong will result in the year's biggest initial public offering for smartphone maker Xiaomi (XI), which is likely seeking to raise $10B for a $100B valuation. The company will probably seek to list on the Chinese mainland later, using new-to-China depositary receipts. It lost about $6.9B last year on revenues that grew 67% to about $18B.
There could an automobile strategy reset out of Tokyo after sales of sedans in the U.S. were weak again in April. Japanese automakers Toyota (TM), Honda (HMC) and Nissan (OTCPK:NSANY) have been slower to react than their Detroit peers to the preference of U.S. drivers for SUVs and trucks on a painful bet that higher gas prices would push up demand for flagship sedans like the Camry, Accord and Altima. Despite marketing and technology investments in passenger cars, Nissan's total U.S. sales dropped about 28% in April, while Honda's sales were down 9.2% and Toyota's were off 4.7%.
The return of the Dragon cargo ship to the International Space Station has been delayed by NASA and SpaceX (SPACE) to May 5 due to rough seas at the capsule's Pacific Ocean splashdown zone. SpaceX also has a short launch window set for May 8 for the first launch of its next-gen Falcon 9 rocket called the Block 5. The rocket will carry a communications satellite for the Bangladesh Telecommunication Regulatory Commission. SpaceX was also mentioned during Tesla's post-earnings conference call yesterday. Musk said satellite bandwidth "might be" an area of potential collaboration between the two companies.
Founder Mark Pincus is doing away with Zynga's (ZNGA) dual-class share system, giving up voting control of the company along the way. Pincus has converted his high voting shares into class A shares; the move will cut his voting rights from 70% to about 10% and establish voting parity among all shareholders. He'll keep serving on the board as non-executive chairman effective immediately. Zynga is up 1.4% in premarket trading following its Q1 revenue beat and refreshed $200M share buyback plan.
C-Suite action: Scientific Games (SGMS) has appointed Barry Cottle to be the company's new president and CEO, effective on June 1. Cottle is currently the CEO of SG Interactive. Current CEO Kevin Sheehan will remain with the company as a senior advisor.
IPO watch: Security company Carbon Black (CBLK) is expected to price its IPO today. Carbon Black plans to sell 8M shares in a range of $17 to $19.
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Tesla (TSLA) -4% AH on Q1 earnings, conference call.
3D Systems (DDD) -2.4% AH on mixed Q1.
American International Group (AIG) -5.1% AH on Q1 miss.
Kraft Heinz (KHC) +3% AH on Q1 earnings beat.
Square (SQ) -5% AH despite beat and boosted guidance.
Zynga (ZNGA) +1.4% AH as company swings to profit.
MetLife (MET) +2% AH on mixed Q1 earnings.
Exelixis (EXEL) +6% AH on solid Q1 earnings.
Tableau Software (DATA) +6.2% AH on Q1 revenue beat.
In Asia, Japan closed. Hong Kong -1.3%. China +0.64%. India -0.41%.
In Europe, at midday, London -0.06%. Paris -0.24%. Frankfurt -0.24%.
Futures at 6:20, Dow +0.10%. S&P +0.13%. Nasdaq +0.09%. Crude +0.28% to $68.12. Gold +0.54% to $1,312.80. Bitcoin -0.03% to $9,178.
Ten-year Treasury Yield -1.1 bps to 2.953%
7:30 Challenger Job-Cut Report
8:30 Initial Jobless Claims
8:30 Productivity and Costs
8:30 International Trade
9:45 Bloomberg Consumer Comfort Index
9:45 PMI Services Index
10:00 ISM Non-Manufacturing Index
10:00 Factory Orders
10:30 EIA Natural Gas Inventory
4:30 PM Money Supply
4:30 PM Fed Balance Sheet
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