Barron's : Brexit Looms Over British Stocks

Brexit Looms Over British Stocks

Bookmakers say the odds that Britain will vote to leave the European Union on June 23 are just 30%. Three stocks that could rise if Brexit is

The United Kingdom goes to the polls June 23 in a referendum to decide whether the country should remain in the European Union, a vote that could have profound implications if the electorate chooses to leave.

For the U.K., a vote for Britain’s exit from the EU—commonly referred to as Brexit—could be very damaging. The consequences of a withdrawal aren’t entirely clear, but it could prove costly due to a decline in trade, particularly with the EU, which accounts for more than 40% of British exports, lower foreign investment, and a weaker financial sector.

In the event of an exit, economists estimate that U.K. gross domestic product could shrink 2% to 4% in two to three years.

If the U.K. votes to leave, it could take two years of negotiations to untangle the country from the EU apparatus, but the impact could be more immediate.

The British pound could tumble sharply. RBC Capital Markets senior U.K. economist Sam Hill notes that Brexit could precipitate a 10% to 15% move lower in sterling exchange rates, “with the adjustment happening in weeks rather than months.” The pound has fallen 1.5% against the dollar in 2016 and Friday was trading at $1.45.

A steep drop in sterling could prompt a policy response from the Bank of England. An interest-rate cut could push U.K. sovereign bond yields lower. On Friday, U.K. government 10-year bonds yielded 1.33%. The coupon on German government debt with similar maturity was a paltry 0.1%.

A vote for the U.K. to leave would be a body blow for the EU. The departure would set a dangerous precedent and prompt anti-EU proponents in other countries to push for withdrawal, too, threatening political and economic union.

The vote is too close to call. Polls have narrowed in recent weeks, but a poll of polls suggests a razor-thin 51% to 49% victory for the U.K. to remain. It doesn’t offer a margin of error, and a significant portion of the electorate is still undecided. Bookmakers, whose track record in recent U.K. elections has been more accurate than pollsters, estimate that there is only a 30% chance of the U.K. leaving the EU.

The campaigns focus on the economic costs or benefits of leaving, and of migration. Claims are met with counter- claims. Each side accuses the other of scaremongering. Messages are muddied, voters are confused, and neither side has gained any real advantage.

For months, U.K. stocks have been off limits to international investors due to the uncertainty. Allocations to U.K. equities are at the lowest level in seven years, according to Bank of America Merrill Lynch’s latest monthly survey of European fund managers, even though more than 70% of respondents indicated that they thought it was unlikely the U.K. would vote to leave the EU. London’s benchmark FTSE 100 index is roughly flat in 2016, while the more domestically focused FTSE 250 index is down 2%. The Stoxx Europe 600 index is up 6.7% since Jan. 1.

Getting past the referendum, whatever the outcome, will remove the uncertainty. The FTSE 100 should hold up, even in the event of Brexit, since most of its constituents are multinational companies with limited exposure to the U.K. market. “We don’t think the U.K. is unique in its exposure to Brexit,” says Luiz Sauerbronn, who manages the Brandes International Equity fund. He argues that the domestic exposure of U.K.-based health-care company GlaxoSmithKline (ticker: GSK.UK), the fund’s largest holding, is “not that different to competitors based elsewhere.”

IN THE EVENT that the U.K. decides to remain, investment professionals could return to the market, and domestically focused stocks could be the biggest beneficiaries.

Grocer Wm. Morrison Supermarkets (MRW.UK) could be a winner. Morrisons fell out of favor along with the retail sector during the global financial crisis as established players conceded market share to discounters like Aldi and Lidl.

But Morrisons is fighting back. Aided by a loyalty plan, a revamped delivery service, and store improvements like self-service checkouts, Morrisons is regaining market share faster than its competitors. Like-for-like sales in the quarter through May 1 were up 0.7% from a year earlier.

Its shares are up 27% in 2016, closing Friday at £1.89 ($2.74). They trade for about 17 times estimated earnings for the next fiscal year, but Brandes’ Sauerbronn argues that it isn’t expensive. He sees downside protection from Morrisons’ valuable real estate portfolio.

One sector that could take a hit from Brexit would be the U.K. real estate market. Demand for property could erode, particularly in London. Real-estate investment trusts that could suffer include British Land (BLND.UK), Land Securities (LAND.UK), and Great Portland Estates (GPOR.UK).

NY Post : Martin Shkreli hit with another criminal charge

“The most hated man in America” was hit Friday with an additional criminal charge related to an $11 million Ponzi scheme he allegedly ran.

Federal prosecutors in Brooklyn filed a superseding indictment containing one count of conspiracy to commit securities fraud against Martin Shkreli, the pharmaceutical firm operator who made headlines for raising the price of a life-saving cancer drug by 5,000 percent.

Shkreli faces up to 20 years in prison for allegedly paying off debts from two failing hedge funds and covering up some personal expenses by skimming assets from Retrophin, a biopharmaceutical firm he ran.

The ex-chief executive of Turing Pharmaceuticals will appear in Brooklyn federal court Monday morning to possibly be arraigned on the new charge.

“There is nothing in the new indictment that changes the flawed theory of the case as applied to Mr. Shkreli,” said his lawyer Benjamin Brafman.

Shkreli is free on $5 million bond.

He and former Retrophin lawyer Evan Greebel are charged in the eight-count indictment.

NY Post : Ugly jobs report is even worse than it looks

The job market went ker-plop in May, which should send new college graduates to the beaches instead of gainful employment, and their tuition-paying parents to psychiatrists.

Let me get right to the bad news. And then I’ll give you even worse news, so you’d better pull up a beach chair.

The Labor Department reported on Friday that the nation’s economy added only 38,000 jobs in May. The experts expected a modest gain of 150,000 jobs, so the actual figure is like setting off a bomb at a gas station.

May’s gain was not only well below the consensus but much lower than the previous two months, whose figures were revised sharply downward. In total, there were actually 59,000 fewer new jobs in March and April than previously estimated.

But it gets even worse than that.

Of those 38,000 new jobs the government said were created in May, only 25,000 were in the private sector, which means that if it weren’t for the fact that governments somewhere found money to hire people, then growth would have been reduced by nearly a third.

And it gets even gloomier than that.

As I’ve been telling you, springtime is when the Labor Department assumes that there are jobs being created by newly “born” companies that can’t be surveyed in the regular way. Washington guesses at how many jobs these new companies might be adding.

In May, the Labor Department added 224,000 of these make-believe jobs to the total before seasonal adjustments. After these figures are adjusted, the guesstimate probably added 40,000 or so jobs to the headline figure.

So the 38,000 number that you’ll see in the headline is very misleading. The economy probably lost a small number of jobs last month after this wild estimate is eliminated. Next month the government will probably revise the May numbers down significantly.

Indeed, the 59,000 downward revision to the March and April number is likely the result of the Labor Department correcting its assumptions for those months.

Curiously, even as the job market is weakening — each of the last four months has shown less gains — the Labor Department has been boosting its guesstimates this year with the presidential election in full swing.

Before the latest lull, job growth had been much stronger than the overall economy, puzzling many Wall Street observers. They’ve questioned whether economic data like the measurement of Gross Domestic Product might be inaccurate.

As I’ve been saying, it is the employment statistics that are inaccurate, mainly because of ineptitude in collecting the data and overly optimistic assumptions that make the job market look healthier than it really is.

Remember, the expansion of the job market is not only necessary but it’s also the natural state for any economy. In fact, it’s believed that job growth of 150,000 a month is necessary just to get new workers into the flow as well as absorb people who have been laid off.

May’s 38,000 new jobs won’t only destine new college grads to a summer of unwanted leisure, but it will also leave the rolls of the unemployed undented — although you couldn’t tell that from the craziest figure put out by the Labor Department on Friday: the unemployment rate.

Even as job growth stalled, the government said that the nation’s unemployment rate fell to 4.7 percent from 5 percent. That figure is so odd that even Pollyanna’s optimistic sister wouldn’t brag about it.

As my readers already know, the unemployment rate is a perverse measurement of the economy because of the way it is calculated by the Labor Department. When people get so discouraged that they stop looking for work, they are no longer considered unemployed in the eyes of the government.

That’s what happened in May when a large number of people again left the workforce — and probably not because they are retiring en masse. That exodus also reduced the nation’s already low labor participation rate by another 0.2 percentage points.

It’s also interesting that the Labor Department chose to start its press release with the drop in the unemployment rate even though the weak job growth is really all that anyone was paying attention to.

The extremely disappointing job growth in May is already causing a lot of problems. For one thing, the stock market declined sharply on the number even though job growth was so bad that it caused grave doubts about whether the Federal Reserve will be able to raise interest rates in June.

The stock market doesn’t like rate hikes, so the job report would have been taken as good news if Wall Street wasn’t so concerned about the economy and the effect on corporate profits.

Janet Yellen’s Fed wants to raise rate and needs to raise them, but it can’t do so if the economy is looking too weak. Up until yesterday, the Fed seemed to have the go-ahead for a June rate hike because GDP, the broadest measure of the economy’s growth, seemed to be recovering from a horrible first three months of 2016.

And while the economy is far from booming, the GDP’s growth, an annual rate of around 2.5 percent in the second quarter, might have given the Fed enough cover to make its move.

The May jobs report just blew away that cover and the possibility of a June rate hike seems to have evaporated.

NY Post : Jewelry giant accused of swapping real stones for fakes

This may be the season of happily ever after, but Signet Jewelers is living a nightmare.

The owner of Jared, Kay Jewelers and Zales has been under fire since a report last month accusing the company of swapping real stones for fakes when customers brought their jewelry in for repairs.

These were not isolated incidents, according to BuzzFeed.

Customers flocked to social media to vent their frustrations, promising to sue the Bermuda-based company and to demand their money back.

“I bought my daughter a diamond ring when she graduated from high school and now it might be a fake this is not right I want my money back I paid too much for it!!!!!!!!!!!!” Yvonne Escalante wrote on Kay Jeweler’s Facebook page.

The report and the backlash helped send Signet shares down about 17 percent since the report first appeared on May 25.

The stock was also hurt this week by a report in Grant’s Interest Rate Observer, a financial tip sheet, questioning Signet’s business practices.

On Friday, the company responded to the uproar, blasting reports that diamond-swapping was systemic.

“We strongly object to recent allegations on social media, republished and grossly amplified, that our team members systematically mishandle customers’ jewelry repairs or engage in ‘diamond swapping,’ ” the company said in a statement.

The reheated diamond-swapping episode helped sink Signet shares on Friday.

They fell 4.4 percent, to close at $88.20. They are down 29 percent for the year.

The shares declined despite Signer reporting record first-quarter profits — including a 20.4 percent rise in adjusted earnings per share and a 3.2 percent increase in revenue.

>>> Monsanto suitor Bayer talks price discipline on roadshow

MergerMarket

Monsanto suitor Bayer talks price discipline on roadshow
Bayer [ETR: BAYN] has been seeking to reassure shareholders during its management roadshow that it will remain price disciplined in its pursuit for Monsanto [NYSE:MON], according to a person familiar with the matter and a top-15 shareholder in the German group.

The roadshow started on 24 May in London and is coming to an end in New York today, according to a second person familiar with Bayer. A lunch meeting in New York yesterday (2 June) saw around 70 attendees, the first person said.

On 24 May, Monsanto rejected Bayer’s proposed all-cash offer at USD 122 a share as it was deemed “incomplete and financially inadequate,” but the company remains open to discussing a potential path forward.

Bayer managers, including CEO Werner Baumann, displayed "reticence on raising the price" in meetings with shareholders this week, the person said.

Roadshow attendees were left with the impression Bayer was committed to securing Monsanto, but not at any price, the top-15 shareholder agreed. Bayer could conceivably shift to a level around USD 135 a share while still claiming to be price disciplined, the shareholder added. A bid of up to USD 140 a share might still be in this category, a second shareholder said.

But the attitude of management in meetings points to market speculation about bids of USD 150-USD 160 as being far-fetched, the top-15 shareholder said.

Baumann and other Bayer executives are excited about the Monsanto deal, but have said they do not class it as essential to complete the mega-merger, the person said.

The top-15 shareholder said he did not support the acquisition and would prefer Bayer to have a key focus on healthcare. Assuming the Monsanto deal closes, the group would be roughly 50% weighted to crops chemicals, the person said.

However, Bayer does not require shareholder backing to move ahead with a rights issue to part finance its move for Monsanto, the person noted. Management has blanket authorization to issue equity up to 25% of its current outstanding shares from its 2014 AGM, expiring on 28 April 2019.

The German group has reportedly secured a financing of approximately USD 63bn with JPMorgan Chase, HSBC, Goldman Sachs, Credit Suisse and Bank of America, with each willing to provide short-term loans of about USD 12.5bn, which can be increased if the group opts to raise its offer of USD 122 a share. In its 23 May proposal, Bayer said it would finance some 25% of the cash consideration with a rights issue.

The effort to curry favour with shareholders shows in Bayer's stock market price, the second person said.

Bayer shares were trading at EUR 100 before rumours of its Monsanto approach emerged. The stock closed today (Friday) at EUR 89.41, or 7.14% above its 52-week low of EUR 83.45, set on 24 May when Monsanto rejected the bid.

However, the share price move does not mean shareholders suddenly love the deal, the first person argued. Some shareholder anger about Bayer increasing its crops exposure versus pharma persists, as does frustration over the dilutive rights issue, the person said.

There has likely been a degree of churn with pharmaceuticals-focused investors selling out. With Bayer at a low ebb and not rushing back with a bid bump after 24 May, chemicals investors likely bought in, supporting the stock, the person added.

The share price moves more likely simply reflect market volatility, the two shareholders said.

Bayer has discussed with shareholders the disadvantages of pursuing a crops joint venture (JV) with Monsanto, rather than a full takeover, the person said.

Management indicated Bayer would have been happy with a Monsanto JV, but suggested it could not reach agreement with Monsanto on valuation of the relative segments, the person said. Bayer executives also raised risks of tax disadvantages from this choice, the person added.

Bayer has restated during the roadshow that its strategy of developing as a life sciences company remains intact, as both crop protection and pharma fall under this category, the second person emphasised.

The German group said it had been interested in pharma acquisitions, particularly in the US where it is underweight, the first person said. But during the roadshow, executives said there are more competitors with greater scale that can outbid Bayer in this space, the person added.

An acquisition in the crops space faced significantly less competition, the person noted.

Bayer declined to comment

>>> CEZ submits indicative offer to buy French EDF's Polish assets

CEZ submits indicative offer to buy French EDF's Polish assets
CEZ Group submits an indicative offer to buy French EDF’s Polish assets, CEZ said in a statement posted on the Warsaw Stock Exchange (WSE)

The indicative offer concerns four heating plants (at Gdynia, Gdańsk, Kraków, and Wrocław), four heating plants with a heat distribution system (at Zielona Góra, Ciechnica, Toruń, and Zawidawie), and service companies. The generating facilities have a total installed capacity of 1.4GW in electricity and 4.4GW in heat, ranking first in electricity cogeneration and second in heat generation on the Polish market.

“These facilities are highly efficient and supply heat and electricity to customers in major Polish cities. We have extensive experience in operating such generating facilities, including facilities in Poland,” says Daniel Beneš, CEO for ČEZ.


When seeking investment opportunities, ČEZ is focusing on countries that are politically and geographically close to it. Given the current electricity price outlook, the regulated heat sector represents an interesting growth opportunity.

As previously reported, the transaction for the sale of EdF’s Polish thermal and electricity plants could be worth PLN 2bn (USD 511.2m).

>>> Weekly Update

Weekly Market Update: Jobs Data Flop Delays Fed Hike; ECB and OPEC Stand Pat

Trading volumes were a bit light this week after the Memorial Day holiday weekend in the US, although markets did not lack for dramatic headlines. The ECB confirmed its corporate bond buying program will start next week. OPEC was unable to agree on any formal production quotas, but members showed they might be more cooperative in the future. In Japan, after months of prevarication, Prime Minister Abe confirmed he would delay a sales tax increase for 30 months. On Friday, the US May jobs report widely missed even the lowest estimates as non-farm payrolls came close to a six-year low and the prior two months were revised lower. After the very poor jobs numbers, Fed fund futures heavily discounted the chances of a rate hike in June and July. The dollar saw its steepest one-day plunge is six months while gold shot up 2.5%. Interest rates fell globally and the US Treasury curve held near some of the flattest levels seen since 2008. Bank stocks finished the week under modest pressure, giving back a portion of the gains seen after the hawkish April FOMC minutes. Nevertheless most major US indices remain within striking distance of all-time highs. For the week the DJIA slipped 0.4%, the S&P500 was flat, and the Nasdaq edged up 0.2%.

The May non-farm payrolls sank to 38K from 123K in April, widely missing expectations for a +160K advance. The unemployment rate dropped to 4.7%, the lowest since November 2007, as Americans left the labor force. The number of jobs added in April was also revised downward to 123K from 160K. The report indicated a broad hiring slowdown, including payroll declines in construction, manufacturing and mining. There was one bright spot in the report: average hourly earnings rose by 0.2% after a 0.4% gain in April. In the wake of the report, Goldman Sachs' Chief Economist Jan Hatzius said there was no chance for a Fed rate hike in June and only a 40% chance for a July hike. Fed fund futures rapidly repriced after the report, with traders seeing only a 4% chance of a June rate increase, down from a 25% probability earlier. The greenback had its biggest one-day decline in six months, as the dollar index dropped back toward 94 from 95.5. The EUR/USD spiked to 1.3500 from 1.1150, and the USD/JPY saw an over 2% move. Many emerging market currencies saw even larger gains against the dollar.

Fed Governor Brainard commented that the jobs report was disappointing and puzzling. She concluded that it would be advantageous to wait for more data before raising rates, saying the risk of waiting is less than the risk of raising rates prematurely. She also worried that an affirmative Brexit vote could cause a significant adverse reaction in the markets. Fed Chair Yellen will likely raise the same concerns in a speech coming up on Monday.

In other key US economic data, the April PCE inflation report was subdued, with no discernable pick-up seen in the Fed's key gauge of US inflation levels. The May Chicago PMI report and the Dallas Fed factory index both came in much more negative than expected, echoing the weak regional May manufacturing data seen over recent weeks. The ISM manufacturing index for May was a bit better than expected at 51.3, and looked much better than the various regional Fed factory production indexes. The new orders component held steady at a solid level of 55.7, while the production index slipped less than two points to 52.6.

On Wednesday, Japanese PM Abe set aside the third arrow of Abenomics and delayed the sales tax increase by 2.5 years, moving fiscal reforms to the back burner due to growing signs of weakness in the economy. The decision may help Abe cope with the expected decline in Q2 GDP and win votes at an upper house election on July 10, however doubts continue growing about Japan's huge public debt and ballooning social welfare costs. Moody's called the move a credit negative, while S&P said it does not believe the delay signals a lessening commitment to fiscal reform and would not have an impact on Japan's sovereign rating. Expectations of more Bank of Japan stimulus are running higher than ever, although some fear the BOJ will refuse to step in and save the government from its own mistakes. The BOJ's Sato, who voted against the January decision to adopt negative rate policy, commented after the tax delay that he was firmly opposed to cutting rates further into negative territory. The yen tightened quickly after Abe's decision, dropping back into the 108 handle, and then broke below 107 in the wake of the US jobs report on Friday.

Ahead of the US jobs report, GBP/USD had seen its biggest weekly decline since March as sentiment shifted against the view the UK would vote to remain in the European Union. Last week, the stay camp was looking much stronger in polling, but on Tuesday an ICM poll shifted in favor of "leave": 45% of telephone respondents and 47% of online respondents were in favor of leave, compared to 42% and 44%, respectively, in favor of stay. The bookmakers are stymied by Brexit: William Hill set odd for a "leave" vote at 11/4 (versus 6/1 a week ago), while Ladbrokes had the odds of "stay" at 11/4 as well (versus 7/2 earlier). Volatility in pound trading rose to its highest level in seven years: GBP/USD moved back toward 1.4400 from the 1.4700 handle through the first four days of the week. After the US jobs report, the pair retraced about half of that, returning to 1.4550.

There were no surprises in Thursday's ECB policy decision as the bank remains in wait-and-see mode. The two salient developments were disclosure of the timing of the corporate bond buying program and the absence of staff revisions to the inflation outlook. Draghi confirmed corporate bond purchases would begin next week under the stimulus program announced in March. Staff inflation projections were not revised higher at the far end of the policy outlook (2017-18), disappointing expectations for a slight upward revision. The euro strengthened modestly through the week heading into the decision, with EUR/USD retesting the mid 1.1220 area seen earlier in May, but gave up gains later on Thursday. Friday's post-US payrolls action saw EUR/USD spike rapidly back to levels last seen in mid-May, with the pair hitting 1.1350.

China May PMIs were mixed: the official non-manufacturing index slid to a three-month low and the manufacturing survey narrowly beat estimates to stay in expansion for the third straight month. In the manufacturing index, new orders hit a three-month low, inventories rose to a seven-month high, and employment rose to a one-year high. The Caixin manufacturing PMI surveying small companies was a less upbeat and fell into contraction. In Hong Kong, the May composite PMI contracted for 15th straight month, although the contraction narrowed somewhat. A Caixin economist warned that China's economy has not been able to sustain the recovery seen in the first quarter and called for Beijing to implement more fiscal policy measures to counter the economic slowdown.

OPEC failed to agree on a new production ceiling at its semi-annual meeting in Vienna. Nigerian candidate Mohammed Barkindo was chosen to be OPEC's new secretary general. Heading into the confab, Persian Gulf member states Saudi Arabia, Kuwait, and Qatar were leaning towards reinstating the OPEC output ceiling, while others such as Iran, Venezuela, and Algeria were insisting an output ceiling must be accompanied by a country-specific quota system. Members could not reach agreement on a renewed ceiling, but they took great efforts to appear more collegial than in the past, and generally expressed satisfaction that oil prices are on the rebound. There were signs that higher oil prices have enticed US frackers to restart some shuttered production: Friday's Baker Hughes data showed the first increase in the oil rig count in eleven weeks, and the largest weekly rise since December. Both Brent and WTI continued to trade this week within the $48-50 range seen since mid-May.

Australia reported first quarter GDP of +3.1%, the biggest rise in nearly four years thanks to particularly strong trade components. The rebound in commodities was a big driver, with exports contributing a full percentage point to the much stronger figure. Other aspects of the Australian economy were looking less good, with fixed capital formation falling 2.2% due to soft construction, and the separate AiG May manufacturing report still in expansion territory but still dropping to a seven-month low.

Salesforce.com reached a $2.8 billion deal to acquire Demandware, a cloud-based provider of e-commerce services to businesses big and small. Salesforce made its name with cloud-based software to help salespeople manage their leads and close deals, but the company took a big step into the business of sales itself. The $75/share cash offer for Demandware was a big premium on the company's current valuation. In other deal news, Great Plains Energy agreed to acquire utility Westar Energy for $60/share in cash, in a total deal valued around $12 billion. Jazz Pharmaceuticals agreed to buy Celator in a $1.5 billion deal.

>>> US Close Dow -0.18% S&P -0.29% Nasdaq -0,58% Russell -0,55%

 Market Summary: Equities Slip After Jobs Report

The stock market ended a flat week on a similar note as investors digested a below-consensus reading of the Employment Situation Report for May. The S&P 500 lost 0.3%, ending its week unchanged. Today's trade included weakening in the dollar, a downswing in oil, a rally in the Treasury complex, and the underperformance of the heavyweight financial (-1.4%), consumer discretionary (-0.6%), and technology (-0.4%) sectors. The Nasdaq Composite (-0.6%) finished behind both the benchmark index (-0.3%) and the Dow Jones Industrial Average (-0.2%).

Today's session began on a lower note as a disappointing Employment Situation Report for May altered rate hike expectations. The headline nonfarm payrolls reading (38K; consensus 155K) surprised to the downside while the remainder of the report provided little reprieve. Meanwhile, a larger-than-expected contraction in the ISM Services Index for May (52.9; consensus 55.4) also disappointed investors.

The negative datapoints altered participants' views of potential rate hikes in the coming months. Currently, the fed funds futures market reflects the odds of a rate hike at the June and July meeting of the FOMC at a respective 6.0% and 33.0%. This compares to yesterday's readings of 21.0% and 58.0%, respectively. As a result, the economically-sensitive financial sector (-1.4%) finished at the bottom of the daily and weekly leaderboard. 

The major averages notched a session low in the first hour of trading before equities steadily marched off their worst levels of the day. Four sectors ended in the green as countercyclical utilities (+1.7%) led materials (+0.8%), telecom services (+0.6%), and consumer staples (+0.6%). Conversely, the heavyweight financial (-1.4%) consumer discretionary (-0.6%), and technology (-0.4%) sectors rounded out the board. 

The financial space (-1.4%) displayed broad-based weakness as money center banks, investment brokerages, and life insurance names experienced sharper losses. In the group, Citigroup (C 45.39, -1.58) and Bank of America (BAC 14.42, -0.52) declined by 3.4% and 3.5%, respectively. Meanwhile, Dow component Goldman Sachs (GS 155.67, -3.61) finished at the bottom of the price-weighted index.

In the consumer discretionary space (-0.6%), media names underperformed with Time Warner (TWX 75.84, -0.91) and CBS (CBS 54.39, -1.01) losing a respective 1.2% and 1.8%. Elsewhere, the SPDR S&P Retail ETF (XRT 42.65, -0.30) ticked down 0.7% after gaining 1.2% yesterday. On the flipside, Gap (GPS 19.09, +0.76) jumped 4.2% after reporting above-consensus same-store sales for May.

Heavily-weighted Alphabet (GOOGL 735.86, -8.41) and Microsoft (MSFT 51.79, -0.69) underperformed in the technology space (-0.4%), declining 1.2% apiece. Separately, the high-beta chipmakers outperformed, evidenced by the 0.3% gain in the PHLX Semiconductor Index. Component Broadcom (AVGO 162.56, +7.65) outperformed, gaining 4.9% after topping analysts' estimates for the quarter.

Biotechnology displayed relative weakness in the health care space (-0.6%) as the iShares Nasdaq Biotechnology ETF (IBB 281.77, -4.51) trimmed its weekly gain to 2.0%.

The U.S. Dollar Index (93.93, -1.64) ended on its low as participants trimmed their exposure to a potential policy divergence trade. The euro lost 1.9% against the dollar (1.1364) while the dollar/yen pair ended lower by 2.1% (106.56).

The Treasury complex finished near its best level of the day as the yield on the 10-yr note settled at 1.70% (-10 bps).

Today's participation was above the recent average with more than 888 million shares changing hands at the NYSE floor.

Today's economic data included the Employment Situation Report for May,  the April Trade Balance, Factory Orders for April, and ISM Services for May: 

  • The May Employment Situation report will give a lot of people a lot to think about. That includes members of the FOMC, which will now most likely be thinking it is best to hold off on a rate hike at the June meeting.
    • Nonfarm payrolls increased by 38,000 (consensus 155,000). Over the past three months, job gains have averaged 116,000
      • April nonfarm payrolls revised to 123,000 from 160,000
      • March nonfarm payrolls revised to 186,000 from 208,000
    • Private sector payrolls increased by 25,000 (consensus 160,000)
      • April private sector payrolls revised to 130,000 from 171,000
      • March private sector payrolls revised to 167,000 from 184,000
    • Unemployment rate was 4.7% (consensus 4.9%) versus 5.0% in April
      • The U6 unemployment rate, which accounts for the total unemployed plus persons marginally attached to the labor force and the underemployed, was unchanged at 9.7%
      • Persons unemployed for 27 weeks or more accounted for 25.1% of the unemployed versus 25.7% in April
    • April average hourly earnings were up 0.2% (consensus 0.2%) after being up 0.4% in April
      • Over the last 12 months, average hourly earnings have risen 2.5%
      • Aggregate earnings were up 0.2% on top of a downwardly revised 0.4% increase (from 0.8%) for April
    • The average workweek was 34.4 hours (consensus 34.5) versus 34.4 hours in April
      • May manufacturing workweek was up 0.1 to 40.8 hours
      • Factory overtime was unchanged at 3.2 hours
    • The labor force participation rate was 62.6% versus 62.8% in April
  • The drop in the unemployment rate to 4.7% certainly stands out, and while it will be a positive talking point for the White House, it also comes with some hot air considering the participation rate fell to 62.6% in May
    • This follows a reading of 62.8% in April.
  • Additionally, it might also be touted that the number of unemployed in the civilian labor force declined by 484,000 in May.
    • The offset to that positive talking point is that the number of employed persons working part-time for economic reasons increased by 468,000 in May.
    • Average hourly earnings growth was up 2.5% year-over-year in May. That is a positive indication, yet it will get drowned out by the weak payroll growth.
  • The trade deficit widened to $37.4 billion in April (consensus $41.6 billion) from an upwardly revised $35.5 billion (from -$40.4 billion) in March. 
    • Exports and imports of goods and services for all months through March 2016 were revised with this report to incorporate annual revisions to the goods and services series; hence, the notable deviation from the consensus estimate and the notable revision for the March report.
    • The widening in the deficit between April and March was the result of imports increasing by $4.5 billion over March to $220.2 billion and exports increasing by only $2.6 billion to $182.8 billion.
    • It is encouraging to see a pickup in both imports and exports; moreover, the demand pickup for goods was broad-based in both instances.
    • The real goods deficit increased $1.5 billion to $57.6 billion, yet this will still compute favorably in Q2 GDP forecasts since it is below the first quarter average of $60.5 billion.
  • New orders for manufactured goods increased 1.9% in April (consensus +1.6%) on top of an upwardly revised 1.7% increase for March (from 1.1%).
    • That marked the first time that factory orders have increased in back-to-back months since June-July 2014.
    • Shipments also increased for the second straight month, rising 0.5% after increasing 0.3% in March.
    • Shipments of nondefense capital goods excluding aircraft -- a metric used in the GDP computation -- increased 0.4% after a downwardly revised 0.0% reading for March (from +0.5%).
    • Orders for durable goods jumped 3.4%, bolstered by a 65.3% increase in orders for nondefense aircraft and parts. Orders for nondurable goods increased 0.4%.
    • Total inventories for all manufacturing industries decreased 0.1% while the inventories-to-shipments ratio dipped to 1.36 from 1.37.
  • The Non-Manufacturing ISM Report on Business (aka The ISM Services Index) checked in at 52.9% in May, down from 55.7% in April. The consensus estimate was pegged at 55.4%.
    • May marked the 76th straight month of expansion in the non-manufacturing sector.
    • However, the trend here will nonetheless qualify as a disappointment since it points to a slowdown in activity for the largest side of the U.S. economy.
    • The downturn in April was driven by a drop in the indexes for New Export Orders (from 56.5 to 49.0), New Orders (from 59.9 to 54.2), Employment (from 53.0 to 49.7), and the Backlog of Orders (from 51.5 to 50.0).
    • The only indexes showing increases from April were Prices (from 53.4 to 55.6) and Supplier Deliveries (from 51.0 to 52.5).

There is no economic data of note scheduled for release on Monday. However, Fed Chair Yellen will speak before the World Affairs Council of Philadelphia at 12:30 ET.