Closing Stock Market SummaryThe S&P 500 (+0.1%) and Nasdaq Composite (+0.2%) both set new closing, and intraday, records on Monday. It was a tight-ranged session, but positive economic data and the outperformance of the financial and communication services stocks helped maintain the market's bullish bias.
The Russell 2000 increased 0.4%, while the Dow Jones Industrial Average (+0.04%) finished fractionally higher.
The latest personal income and spending data helped advance the narrative that the U.S. economy seems to be benefiting still from solid consumer spending activity and muted inflation pressures.
Personal spending jumped 0.9% (Briefing.com consensus 0.8%) in March. The PCE Price Index, the Fed's preferred inflation gauge, was up 1.5% yr/yr in March while the core PCE Price Index was up 1.6% yr/yr in March -- both below the Fed's annual inflation target of 2.0%.
The positive data helped keep selling conviction to a minimum in front of a busy news week that will include another wave of earnings reports, U.S.-China trade negotiations, an FOMC meeting, and the April employment report.
At the same time, the outperformance of the S&P 500 financials (+0.9%) and communication services (+0.9%) sectors helped keep the broader market afloat.
Financial stocks benefited from some sector rotation and an increase in U.S. Treasury yields. The communication services sector was boosted by shares of Alphabet (GOOG 1287.58, +15.40, +1.2%), which outperformed in front of the company's earnings report.
On the other hand, the rate-sensitive real estate (-1.1%) and utilities (-0.6%) sectors showed some weakness amid the uptick in yields.
The 2-yr yield and the 10-yr yield increased three basis points each to 2.30% and 2.54%, respectively. The U.S. Dollar Index declined 0.2% to 97.87. WTI crude increased 0.4% to $63.44/bbl.
Reviewing Monday's economic data, which included the PCE Price Index for February and March:
- Briefly, personal spending increased 0.1% in February while the PCE Price Index and core PCE Price Index, which excludes food and energy, both rose just 0.1%. For March, personal income increased 0.4%, as expected, while personal spending surged 0.9% (consensus +0.8%). The PCE Price Index increased 0.2% while the core PCE Price Index was flat (consensus +0.1%).
- The key takeaway from the report is that this data was imputed in the first quarter GDP report, so it shouldn't be too surprising. Ultimately, it helps advance the narrative that the U.S. economy seems to be benefiting still from solid consumer spending activity and muted inflation pressures.
Looking ahead, investors will receive the following economic reports on Tuesday: the Conference Board's Consumer Confidence Index for April, the Employment Cost Index for the first quarter, the S&P Case-Shiller Home Price Index for February, the Chicago PMI for April, and Pending Home Sales for March.
- Nasdaq Composite +23.0% YTD
- Russell 2000 +18.5% YTD
- S&P 500 +17.4% YTD
- Dow Jones Industrial Average +13.8% YTD
Oil Volatility Picks Up, Putting 2019 Rally Under Scrutiny
Portfolio managers move into less-risky investments; prices swing with Trump pressure on OPEC and Iran
Volatility is picking up in oil markets following a powerful 2019 rally, prompting a retreat among portfolio managers into less-risky investments in a sector that many investors still view as hot.
U.S. crude fell as much as 0.9% Monday before closing slightly higher. Monday’s swings came on the heels of a nearly 3% slide Friday, oil’s largest one-day drop of the year, after prices earlier in the week had risen to their highest level in nearly six months.
The latest gyrations have followed comments from President Trump, who said he encouraged the Organization of the Petroleum Exporting Countries to increase supply and keep prices low.
Prices had climbed early last week after the Trump administration surprised some market participants by ending waivers on Iran sanctions that allowed some buyers to continue purchases from the Islamic Republic. Last week marked the first time in nearly two months that oil logged multiple moves of at least 2.5% in either direction.
The moves are putting investors on edge because of the narrow supply-demand balance heading into the U.S. summer driving season. The decision to end the sanctions waivers threatens to remove even more oil from global markets at a time when U.S. sanctions against Venezuela and a continuing conflict in Libya have already resulted in lower supply from those countries.
Even with the U.S. producing record amounts of oil, many investors remain unsure how quickly OPEC and its allies would fill any impending production gaps, opening the door to large price swings in either direction.
“That timing difference could cause a short-term spike in oil prices at a time when you’re going to start seeing summer vacations and the driving season begin,” said Rob Thummel, who manages energy assets for Tortoise, an asset manager based in Leawood, Kan.
At the same time, U.S. crude is still above $63 a barrel and is heading for its best performance in the first four months of a year since 1999, according to Dow Jones Market Data. Prices are up 40% for the year, after falling to the low $40s in a sharp 2018 rout. Some investors believe the large gains leave the crude price vulnerable to a sudden turn in sentiment, which happened in the fourth quarter of last year.
In response to the uncertainty, some investors are increasing bets on energy investments they consider more stable than crude futures, such as shares of oil producers or equipment providers. Others are trimming positions in the sector broadly with the belief OPEC will lift supply.
Sentiment for now remains positive. The ratio of bullish bets to bearish bets on U.S. crude-oil futures by hedge funds and other speculative investors rose for a ninth consecutive week to its highest level in seven months during the week ended April 23, Commodity Futures Trading Commission data show.
But bets on higher prices are still well below July’s peaks, a sign that many traders remain leery of a replay.
“It’s been a massive roller coaster over the last couple of months,” said Tyler Ellegard, an investment analyst at Gradient Investments, which recently increased positions in U.S. exploration and production companies Diamondback Energy Inc. and Concho Resources Inc.
A possible bidding war for Anadarko Petroleum Corp. that analysts say could trigger other energy deals has added to the mixed momentum signals, investors say, with perceived buyout candidates potentially rallying and buyers likely being hit for offering high prices. Occidental Petroleum Corp. offered to buy Anadarko for $38 billion last week, after the company previously agreed to be purchased by Chevron Corp. for roughly $33 billion.
Anadarko said Monday it was considering Occidental’s offer.
Meanwhile, investors are trying to assess whether OPEC and its partners will lift output to account for the latest shift in U.S. foreign policy. Goldman Sachs analysts estimate as much as 1.3 million barrels a day of Iranian exports could be lost and that Saudi Arabia has 1.24 million barrels a day of production it can quickly turn on in an emergency. Russia, the United Arab Emirates and Kuwait together have another 590,000 barrels a day of immediate spare capacity, the analysts estimate.
“Everyone is recalibrating to the new market dynamics,” said Rebecca Babin, a senior energy trader for CIBC Private Wealth Management. “The policy and political side of the equation has ratcheted up in complexity.”
Like stocks and other risk assets, oil has also benefited from the Federal Reserve’s pause in interest-rate increases and optimism about a U.S.-China trade agreement. Those developments have eased fears of a sharp slowdown in global economic growth and lower fuel demand, but also potentially tied oil more to the outcome of ongoing trade talks set to continue this week, investors say.
Even if the weekslong rally does continue, some analysts say it would have an end date should Brent crude, the global price benchmark, rise another 11% to $80 a barrel. Analysts and OPEC nations say that closely watched level starts to crimp global economic growth by pushing up gasoline and fuel costs.
“Once we get into the $80 range, you’re going to see Trump complaining,” said David Yepez, a portfolio manager at Exencial Wealth Advisors, which is taking profits on some positions in energy stocks it bolstered late last year. “It feels like there’s going to be a cap.”
WeWork Files for Initial Public Offering
The shared office space giant filed confidentially with the Securities and Exchange Commission in December; WeWork was last valued at $47 billion
Shared office space giant WeWork Cos. said Monday it has filed for an initial public offering, making it the latest highly valued startup to shoot for the public markets this year.
WeWork, which rebranded as the We Company early this year, said it filed confidentially with the Securities and Exchange Commission in December. The filing isn’t yet visible to the public because the confidential-filing provision enables the document to stay private until weeks before a planned stock-market listing.
The nine-year-old New York-based company was last valued in January at $47 billion in a deal with SoftBank Group Corp. That put its valuation at second among U.S. venture capital-backed companies, under ride-hailing company Uber Technologies Inc., which plans to hit the public markets this month at a value as much as $90 billion.
It is also the latest in a string of IPO candidates with giant-sized losses. WeWork, which subleases office space on a short-term basis to a variety of companies, previously reported a loss last year of nearly $2 billion on revenue of $1.8 billion.
Aveo may be working with preferred suitor on a deal
Aveo [ASX:AOG], an Australia-based retirement village business, may be working with a preferred suitor, The Australian reported. According to the report in the paper’s Dataroom column, speculation has emerged that the group is in talks to be purchased for between AUD 2.50 and AUD 2.70 per share.
The item noted that sources close to Blackstone, which was earlier thought to be interested in Aveo, said that the company is not preparing a bid. However, speculation continues that Blackstone remains interested in Aveo, it said.
The paper said that perhaps one reason for the conflicting messages is that Blackstone’s Arena Living, a New Zealand retirement villages owner, may be eyeing Aveo, rather than Blackstone itself. Blackstone purchased Arena Living in 2016, the item noted. The paper said that New Zealand retirement operations work under a different model than those in Australia and it is unclear if there would be major synergies between the portfolios.
The article also noted that Stockland [ASX:SGP] is searching for an investor for its retirement portfolio and there is speculation that buyers looking at those assets could also approach Lendlease [ASX:LLC] to see if it may be interested in selling its portfolio.
APG, a Dutch pension fund, purchased a 25% stake in Lendlease’s retirement portfolio in 2017 for AUD 425m (USD 300m), it said, adding that perhaps APG will also look to purchase Stockland’s assets. The paper said that Blackstone’s New Zealand operations could seek to buy Stockland assets as well as Aveo.
The item noted that JPMorgan and Credit Suisse are working on a deal for a potential buyer of Aveo, but it is unclear which parties they are advising.
The paper said that Malaysia-based Mulpha International [KLSE:MULPHA] owns 24.4% of Aveo and the company's future likely depends on the shareholder's intentions. The paper noted that a deal could involve Aveo being purchased in a 50/50 joint venture between Mulpha and a private equity firm.