Off to the Races: Vaccine Data, Powell Remarks Light Early Fire Ahead of Retail Health Check

Markets have a firm tone overseas and in U.S. futures trading this morning as investors focus on calming words from Fed Chairman Powell in an interview and hopes for progress on a vaccine.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Bank earnings weak.
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Key Takeaways

  • Firmer tone to start week amid excitement over early vaccine trial results

  • Huge week for retail earnings as Walmart and Target prepare to open books

  • Crude hits five-week highs early Monday as demand signals look stronger

(Monday Market Open) Auto racing returned over the weekend, but that isn’t the only reason the market looks like it could be off to a fast start Monday.

Focus ahead of the opening bell turned toward bullish hopes around reopenings and possible progress on the vaccine front. Overseas markets rose across the board and U.S. index futures saw strength overnight, extending their gains on positive results from a Phase 1 Covid-19 vaccine made by Moderna (MRNA). Shares of that company leapt 27% in pre-market trading.

It’s exciting to see data like this but it’s still very early in the process, so people might want to avoid getting carried away. Let’s hope future results continue to look this good. A vaccine would be huge news and these data are an incredibly positive sign, but that doesn’t mean this crisis would necessarily be over. It could also take a while before any vaccine is ready.

The big gains in index futures based in part on this one small data set do show how eager investors remain to buy based on any positive news around fighting the virus. As we’ve said, the market is headline-oriented and seems ready to plow ahead on any signs of normalcy returning.

Before the MRNA news, stocks had been rallying overnight based on Fed Chairman Jerome Powell’s interview on 60 Minutes Sunday. He gave a lot of assurances and sounded very confident about the economy.

While Powell said a full economic recovery may not be possible until a Covid-19 vaccine is available, he added, “In the long run and even in the medium run, you wouldn’t want to bet against the American economy. The American economy will recover.” Powell said if there isn’t a second-wave outbreak, he expects the economy to start to rebound in the second half.

Shopping Trip: Retail Dominates Earnings Calendar

Americans didn’t go shopping much in April, judging from last Friday’s horrendous retail sales data. This week, investors could get a better sense of what the retail market might look like in the months ahead as major big-box companies prepare to report earnings.

Walmart (WMT) and Target (TGT) dominate this week’s corporate calendar, with WMT reporting tomorrow morning and TGT the morning after. Other key retailers that report in the coming days include Nordstrom (JWN), Foot Locker (FL), and Kohl’s (KSS).

Also on the big box list are Home Depot (HD) and Lowe’s (LOW), which could provide insight on the demand for projects around those homes we’re all stuck in to some extent during the crisis.

Friday’s retail sales, which shrank more than 16% in April, gave some clues about where shoppers are congregating and where they aren’t. The hardest-hit retail areas included electronics, clothing, sporting goods, and furniture. None of this arguably bodes well for department stores or the FLs and Nikes (NKE) of the world.

However, non-store retail sales actually rose in April, which could be good news for WMT and TGT considering all the investments they’ve made in their internet platforms over the last few years. That said, higher labor costs and a shift in customer demand toward lower-margin items like food and paper goods might eat into profits for WMT and TGT. We’ll have to wait and see.

One thing to consider watching when WMT reports is the expenses side of things. Amazon (AMZN) said sales were great, but expenses were outrageous. The same thing is important to monitor with WMT. Are they spending more to support their operations amid all the current chaos? Also, when do they see normalcy returning?

So many retail stocks report this week, so the question to consider is what is the true health of retail? We may have a better idea by Friday.

This week isn’t only about retail. Earnings from Deere (DE), Medtronic (MDT), and Nvidia (NVDA) also hit the tape soon, providing a closer look into a cross-section of sectors including Materials, Information Technology, and Health Care. S&P 500 companies are on pace to see a 12.1% decline in Q1 profits, according to market data provider Refinitiv. The firm is bearish about earnings this quarter, seeing them down 42%.

Cruel April Data Keep Coming

The week that just ended wasn’t anything to write home about, as major indices lost ground. Obviously, worries about soft retail sales and industrial production didn’t help, though some market watchers are out there saying they think April may have been the worst of it for some of these metrics. That remains to be seen, as more April numbers await us with housing starts and building permits tomorrow (see more below).

One glimmer of light came from Friday’s University of Michigan report on consumer sentiment. The initial reading for May rose a bit from April, though it still remains down in the dumps, historically. The key takeaway, according to research firm Briefing.com, is that attitudes about current conditions improved while sentiment surrounding the outlook continued to deteriorate. Concerns about financial prospects were most notable among upper-income households, which could be a headwind for a pickup in consumer spending, Briefing.com noted.

You could argue that the old week wasn’t a total washout because the S&P 500 Index (SPX) made it back from lows below 2800 to close above a long-term support level near 2830. Still, it’s technically a little frustrating that the SPX continues to have a lot of trouble plowing past a technical resistance zone of between 2940 and 2950, which has now held for several weeks.

Powell’s bearish speech last week didn’t provide much in the way of traction for any bullish investors. It also didn’t help that another potential economic stimulus bill appears to be running into trouble in Washington and that new worries about technology trade with China arose.

Those China trade concerns hit the semiconductor sector pretty hard on Friday, and any sign of a cool-down there might be worrisome for the week ahead. It’s big-tech, led in part by the semiconductors, that’s helped keep the market running mostly higher over the last month.


CHART OF THE DAY: SOLO FLIGHT: Crude futures (/CL-candlestick) had another strong week last week even as the June contract expiration approaches. This separates crude from some of the other most closely-watched commodities, including copper (/HG-purple line), which has barely risen over the last month. Sometimes copper and crude march together as both can reflect global demand trends, but copper came under pressure last week on concerns about growing supplies, among other things. Data Source: CME Group. Chart Source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Banks Still Buried: After leading Thursday’s comeback, big bank stocks took it on the chin Friday as inventors examined the latest round of disappointing economic data. The Financial sector remains one of the worst performers on the scoreboard so far this year, down more than 30%, as worries about defaults and low interest rates plague many of the key banking stocks like JP Morgan (JPM), Wells Fargo (WFC), and Citigroup (C).

That said, it might be a bit early to count this sector out for the year, if only because many of the biggest banks came into this crisis with solid balance sheets and a record of cutting costs over the last few years. Also, many of these companies sport dividend yields that might start to look tempting for investors who increasingly seek yield in an environment where cash and bonds pay so little.

Crude Energized: Getting a little overshadowed was a nice rise in crude prices over the last week and early Monday even as tomorrow marks the last trading day for CME June futures. It looks now like this contract is going to get put to bed with a few less fireworks than we saw for the May contract last month when the price fell below zero. Open interest was down to around 75,000 contracts by Friday afternoon for June CME futures, and prices were roughly even with the July contract. That implies, but doesn’t guarantee, a smooth transition to July being the front month.Some of this might sound a little esoteric, but it definitely seemed to spook the stock market when May crude went off the board with all those headlines a month ago. That makes tomorrow’s crude expiration a potential event to watch even if you never trade futures. Crude’s strength could reflect growing Chinese industrial demand as that country continues the reopening process, analysts said.

Sifting the Numbers on Housing: It’s kind of a light data picture ahead, dominated the next few days by reports on the real estate sector. Housing starts and existing home sales could be interesting to check on, considering that mortgage rates are back near record lows and some real estate markets are reporting pretty vigorous interest from potential homebuyers despite the pandemic. April housing starts tomorrow could show whether that sector bounced back from a big drop in March. Building permits are also due tomorrow morning, a data point some analysts say is a good one to watch for a sense of how optimistic about the economy homebuilders might be.

It’s kind of fitting that HD earnings are on tomorrow morning’s calendar just as investors are on the lookout for the latest housing market data. HD’s stock has made an impressive comeback from the March lows as many investors started to look at the company as a “stay-at-home” firm that could be helped by people doing home projects when they had nowhere else to go. The HD stores stayed open during the crisis, which also helped. HD’s guidance still calls for sharper revenue gains in 2020 than in 2019, so consider watching tomorrow for any updates on that

.Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Firmer tone to start week amid excitement over early vaccine trial results

  • Huge week for retail earnings as Walmart and Target prepare to open books

  • Crude hits five-week highs early Monday as demand signals look stronger

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