December 3, 2018

Stocks surged at the open following a positive outcome at the G-20 meeting in Argentina over the weekend. The Dow is currently up 228 pts and the SPX is up .87%. Cyclical sectors (consumer discretionary, energy, industrials, tech, materials) are up over 1% in early trading. On the other hand, consumer staples and real estate sectors are in the red. European stock markets closed up about 1% and Asian markets were up 1-3% overnight. The dollar is weaker after the G-20 on reduced trade war tensions, and that’s giving some breathing room to commodities. WTI crude oil is up 3% to trade around $52.50/barrel. Despite the lower dollar, bonds are roughly flat on the day. The 5-year and 10-year Treasury yields are hovering around 2.83% and 2.99%, respectively.

Saturday night, President Trump and Chinese President Xi agreed to a temporary pause in their trade conflict. Both sides will delay any escalation of trade tariffs for 90 days. The time will be used to negotiate some type of longer term solution. Treasury Secretary Mnuchin calls this a “breakthrough moment,” saying, “This is the first time that we have a commitment from them that this will be a real agreement.” According to The Wall Street Journal, both sides have been communicating by phone over the last few weeks to try and find some common ground in terms of how to approach a new trade deal. This morning, the president Tweeted that China has now agreed to “reduce and remove tariffs on cars coming into China from the US.” He says China “will be opening up.” Even though a substantive deal to walk back the trade war wasn’t reached, this agreement to pause and negotiate is probably more constructive than Wall Street investors and commentators were expecting. CNBC’s Jim Cramer told viewers on Friday not to expect any deal at all. So this, coming on the heels of the Fed’s more dovish comments last week, will give the stock market an excuse for a year-end rally.

ISM’s US Manufacturing Index rose in November to 59.3 from 57.7 in the prior month. The index suggests improving business activity in the manufacturing sector even though economists anticipated slower growth. In particular, both the employment & new orders sub-components of the report improved markedly. And the prices-paid component, which measures input cost inflation, fell. So this is about as good a result as you could hope for.

Altria (MO) confirmed today it is negotiating to acquire Cronos Group (CRON), a provider of cannabis products in Canada. For years, investors have expected the major tobacco companies to invest in cannabis but prohibition at the federal level has delayed this. Perhaps Constellation’s (STZ) recent major investment in Canopy Growth (WEED) encouraged MO to go ahead. By the way, just last week, Bloomberg reported MO is also in talks to potentially buy a minority stake in Juul Labs Inc. Juul has an estimated 68% market share in the e-cigarette market. Juul is incredibly popular with teens and FDA regulators have pledged to restrict sale of the company’s fruit-flavored nicotine cartridges. But the reason Juul is so popular is that it can be used with cannabis cartridges. So now you see why MO is pursuing these acquisitions. The stock is up 1% today.

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