Schwab Market Update
Posted: 1/6/2016 4:15 AM ET
U.S. equities tacked on to the dismal start to 2016, as already-high geopolitical concerns increased on North Korea's claim of a successful hydrogen bomb test, adding to the continued worries over Chinese economic growth. Energy stocks were also under pressure amid crude oil's relentless decline. Treasuries finished higher amid the uneasiness, despite upbeat services sector reads and a better-than-expected employment report from ADP, while the release of the Fed's December meeting minutes showed some members' vote for the increase to the fed funds rate was a "close call." Meanwhile, gold was higher and the U.S. dollar was lower.
The Dow Jones Industrial Average (DJIA) tumbled 252 points (1.5%) to 16,907, the S&P 500 Index declined 26 points (1.3%) to 1,990, and the Nasdaq Composite lost 56 points (1.1%) to 4,836. In heavy volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $2.00 to $33.97 per barrel, wholesale gasoline lost $0.10 to $1.16 per gallon, while the Bloomberg gold spot price increased $16.17 to $1,093.85 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 99.21.
Chipotle Mexican Grill Inc. (CMG $427) estimated that 4Q same-store sales fell 14.6% year-over-year (y/y), versus the FactSet projection of a 10.5% drop, as the company was hampered by multiple foodborne illness incidents. Also, the company said it was served with a Federal Grand Jury subpoena in connection with an investigation relating to a norovirus incident at a restaurant in Simi Valley, California. Finally, CMG announced a $300 million addition to its share repurchase program. Shares were solidly lower.
Monsanto Co. (MON $95) reported a fiscal 1Q loss ex-items of $0.11 per share, versus estimates of a $0.23 per share loss, with revenues dropping 22.7% y/y to $2.2 billion, compared to the projected $2.4 billion. MON noted that it expects full-year earnings to be at the lower half of its current forecasts. Shares were lower.
Valeant Pharmaceuticals International Inc. (VRX $102) announced that it will appoint Howard Schiller as interim Chief Executive Officer (CEO) while current CEO Michael Pearson remains in the hospital, being treated with severe pneumonia. Shares finished higher.
Services sector activity continues to show expansion
The Institute for Supply Management (ISM) non-Manufacturing Index (chart) declined to 55.3 in December, compared to the Bloomberg forecast of an increase to 56.0, from 55.9 in November. New orders, business activity, and employment all showed growth accelerated, while supplier deliveries, inventories, prices and backlog of orders declined. The ISM said the majority of respondents remain positive about business conditions and the overall economy.
The final Markit U.S. Services PMI Index was revised to 54.3 in December from the preliminary level of 53.7, compared to the Bloomberg estimate of 54.0, but down from the 56.1 reading registered in November. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.
As noted in the Schwab Market Perspective: What Was, What Is, and What May Be, in contrast to a weakening manufacturing sector, the services side of the economy (representing 88% of U.S. activity) remained healthy throughout 2015 and looks to continue that performance entering 2016. Read more at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.
The ADP Employment Change Report showed private sector payrolls rose by 257,000 jobs in December, versus forecasts of a 198,000 increase, while November's rise of 217,000 jobs was revised to a 211,000 gain. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader December nonfarm payroll report, expected to show an increase of 200,000 jobs, while private sector payrolls are expected to rise of 198,000 (economic calendar).
Factory orders (chart) declined 0.2% month-over-month (m/m) in November, in line with expectations, while October's 1.5% gain was adjusted to a 1.3% rise. November durable goods orders—reported two weeks ago—were unrevised at the originally reported flat reading.
The trade balance (chart) showed that the deficit narrowed to $42.4 billion in November, compared to the $44.0 billion estimate. October's deficit was revised to $44.6 billion from the initially reported $43.9 billion. Exports declined 0.9% m/m to $182.2 billion, while imports fell 1.7% m/m to $224.6 billion.
The MBA Mortgage Application Index fell 11.6% last week, after dropping 17.4% in the previous week. The sharp decline came as a 12.4% drop in the Refinance Index was met with a 11.1% fall for the Purchase Index, while the average 30-year mortgage rate ticked 1 basis point (bp) higher to 4.20%.
The Federal Reserve's December meeting minutes, when the Central Bank raised rates for the first time since before the financial crisis, were released in afternoon action, indicating that all members of the Committee agreed that the conditions in order to raise the target for the fed funds rate were satisfied. However, too-low inflation readings caused some members to indicate their respective vote was a "close call", receiving pledges from colleagues to be diligent in monitoring its progress. As well, the Committee reiterated that any further increases, if necessary, would be gradual, and that rates would be low for "some time," As noted in the recent Schwab Market Perspective: What Was, What Is, and What May Be, at this point, the Fed has bent over backwards to soothe concerns by noting its desire to move gradually, allowing for the economy and markets to adjust. Slow rate hiking cycles have typically been positive for stocks, but with almost a decade having passed since the last hike, volatility is likely to persist. As well, Schwab's Chief Investment Strategist, Liz Ann Sonders, notes in her article, Said the Fed to the Markets, "Take a Hike", we believe the pace of the Fed's interest rate increases will remain a focus by investors in 2016; and is likely to contribute to some of the volatility we believe will persist across the equity and fixed income markets. A key determinant of the pace at which the Fed continues to raise rates is likely to center around the U.S. dollar, with continued strength likely slowing the pace, while any sustained countertrend moves in the dollar, commodity prices or inflation could trigger a faster pace. Read both articles at www.schwab.com/marketinsight, and follow Liz Ann on Twitter: @lizannsonders.
Treasuries were higher, as the yield on the 2-year note declined 4 basis points (bps) to 0.98%, the yield on the 10-year note fell 7 bps to 2.17%, and the 30-year bond rate was 6 bps lower at 2.94%, respectively.
The domestic economic calendar will slow down tomorrow, with only weekly initial jobless claims on the docket, forecasted to fall to 275,000 from the prior week's 287,000.
Europe and Asia lower on Chinese concerns and geopolitical uneasiness
The European equity markets traded solidly lower, led by basic materials and oil & gas issues amid festering Chinese growth concerns, exacerbated by the continued weakening of China's currency. Also, sentiment was stymied by North Korea's claim of a successful nuclear weapons test, which is elevating already heightened geopolitical concerns. Tech stocks tied to Dow member Apple Inc. (AAPL $101) were hamstrung on reports that the company will cut iPhone production. However, Markit's Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—was unexpectedly revised higher to 54.3 for December, from the preliminary level of 54.0, where economists had expected it to remain. A reading above 50 denotes expansion and the index improved modestly from November's 54.2 reading. Schwab's Director of International Research, Michelle Gibley, CFA, discusses Why Our Outlook for European Stocks Is Positive at www.schwab.com/oninternational, and be sure to follow us on Twitter: @schwabresearch. In other economic news, French consumer confidence surprisingly improved in December, while U.K. services sector activity remained in expansion territory. The euro ticked higher versus the U.S. dollar, while bond yields in the region moved lower.
Stocks in Asia finished mostly lower as Chinese growth concerns festered, while already heightened geopolitical concerns were exacerbated by anxiety toward North Korea. Japanese equities fell, with the yen showing some late-day strength to continue its rally, while reports of Apple's iPhone production cut weighed on the tech sector. Hong Kong's market dropped following a report that showed growth in Chinese services sector activity decelerated in December. However, continued measures by Chinese authorities to try to stabilize the markets helped mainland Chinese stocks to advance, rebounding from its recent tumble. For more on the recent drop, see our article from the Schwab Center for Financial Research, Chinese Stock Market Selloff: What's New, What's Notat www.schwab.com/marketinsight, and follow us on Twitter: @schwabresearch. Also, China's central bank continued to lower its reference rate for the yuan, and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers a look at the currency markets in his article, Decoding Devaluations: What Do Currency Moves Mean for Your Money?, at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop. Finally, stocks in Australia, South Korea and India all finished to the downside.
Tomorrow's international economic calendar will offer manufacturing orders and retail sales from Germany, and confidence data, retail sales and employment data from the eurozone.
Schwab Center for Financial Research - Market Analysis Group
©2016 Charles Schwab & Co., Inc., Member SIPC. All rights reserved.
Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.
Global Uneasiness Persists to Batter Stocks
U.S. equities tacked on to the dismal start to 2016, as already-high geopolitical concerns increased on North Korea's claim of a successful hydrogen bomb test, adding to the continued worries over Chinese economic growth. Energy stocks were also under pressure amid crude oil's relentless decline. Treasuries finished higher amid the uneasiness, despite upbeat services sector reads and a better-than-expected employment report from ADP, while the release of the Fed's December meeting minutes showed some members' vote for the increase to the fed funds rate was a "close call." Meanwhile, gold was higher and the U.S. dollar was lower.
The Dow Jones Industrial Average (DJIA) tumbled 252 points (1.5%) to 16,907, the S&P 500 Index declined 26 points (1.3%) to 1,990, and the Nasdaq Composite lost 56 points (1.1%) to 4,836. In heavy volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $2.00 to $33.97 per barrel, wholesale gasoline lost $0.10 to $1.16 per gallon, while the Bloomberg gold spot price increased $16.17 to $1,093.85 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 99.21.
Chipotle Mexican Grill Inc. (CMG $427) estimated that 4Q same-store sales fell 14.6% year-over-year (y/y), versus the FactSet projection of a 10.5% drop, as the company was hampered by multiple foodborne illness incidents. Also, the company said it was served with a Federal Grand Jury subpoena in connection with an investigation relating to a norovirus incident at a restaurant in Simi Valley, California. Finally, CMG announced a $300 million addition to its share repurchase program. Shares were solidly lower.
Monsanto Co. (MON $95) reported a fiscal 1Q loss ex-items of $0.11 per share, versus estimates of a $0.23 per share loss, with revenues dropping 22.7% y/y to $2.2 billion, compared to the projected $2.4 billion. MON noted that it expects full-year earnings to be at the lower half of its current forecasts. Shares were lower.
Valeant Pharmaceuticals International Inc. (VRX $102) announced that it will appoint Howard Schiller as interim Chief Executive Officer (CEO) while current CEO Michael Pearson remains in the hospital, being treated with severe pneumonia. Shares finished higher.
Services sector activity continues to show expansion
The Institute for Supply Management (ISM) non-Manufacturing Index (chart) declined to 55.3 in December, compared to the Bloomberg forecast of an increase to 56.0, from 55.9 in November. New orders, business activity, and employment all showed growth accelerated, while supplier deliveries, inventories, prices and backlog of orders declined. The ISM said the majority of respondents remain positive about business conditions and the overall economy.
The final Markit U.S. Services PMI Index was revised to 54.3 in December from the preliminary level of 53.7, compared to the Bloomberg estimate of 54.0, but down from the 56.1 reading registered in November. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.
As noted in the Schwab Market Perspective: What Was, What Is, and What May Be, in contrast to a weakening manufacturing sector, the services side of the economy (representing 88% of U.S. activity) remained healthy throughout 2015 and looks to continue that performance entering 2016. Read more at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.
The ADP Employment Change Report showed private sector payrolls rose by 257,000 jobs in December, versus forecasts of a 198,000 increase, while November's rise of 217,000 jobs was revised to a 211,000 gain. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader December nonfarm payroll report, expected to show an increase of 200,000 jobs, while private sector payrolls are expected to rise of 198,000 (economic calendar).
Factory orders (chart) declined 0.2% month-over-month (m/m) in November, in line with expectations, while October's 1.5% gain was adjusted to a 1.3% rise. November durable goods orders—reported two weeks ago—were unrevised at the originally reported flat reading.
The trade balance (chart) showed that the deficit narrowed to $42.4 billion in November, compared to the $44.0 billion estimate. October's deficit was revised to $44.6 billion from the initially reported $43.9 billion. Exports declined 0.9% m/m to $182.2 billion, while imports fell 1.7% m/m to $224.6 billion.
The MBA Mortgage Application Index fell 11.6% last week, after dropping 17.4% in the previous week. The sharp decline came as a 12.4% drop in the Refinance Index was met with a 11.1% fall for the Purchase Index, while the average 30-year mortgage rate ticked 1 basis point (bp) higher to 4.20%.
The Federal Reserve's December meeting minutes, when the Central Bank raised rates for the first time since before the financial crisis, were released in afternoon action, indicating that all members of the Committee agreed that the conditions in order to raise the target for the fed funds rate were satisfied. However, too-low inflation readings caused some members to indicate their respective vote was a "close call", receiving pledges from colleagues to be diligent in monitoring its progress. As well, the Committee reiterated that any further increases, if necessary, would be gradual, and that rates would be low for "some time," As noted in the recent Schwab Market Perspective: What Was, What Is, and What May Be, at this point, the Fed has bent over backwards to soothe concerns by noting its desire to move gradually, allowing for the economy and markets to adjust. Slow rate hiking cycles have typically been positive for stocks, but with almost a decade having passed since the last hike, volatility is likely to persist. As well, Schwab's Chief Investment Strategist, Liz Ann Sonders, notes in her article, Said the Fed to the Markets, "Take a Hike", we believe the pace of the Fed's interest rate increases will remain a focus by investors in 2016; and is likely to contribute to some of the volatility we believe will persist across the equity and fixed income markets. A key determinant of the pace at which the Fed continues to raise rates is likely to center around the U.S. dollar, with continued strength likely slowing the pace, while any sustained countertrend moves in the dollar, commodity prices or inflation could trigger a faster pace. Read both articles at www.schwab.com/marketinsight, and follow Liz Ann on Twitter: @lizannsonders.
Treasuries were higher, as the yield on the 2-year note declined 4 basis points (bps) to 0.98%, the yield on the 10-year note fell 7 bps to 2.17%, and the 30-year bond rate was 6 bps lower at 2.94%, respectively.
The domestic economic calendar will slow down tomorrow, with only weekly initial jobless claims on the docket, forecasted to fall to 275,000 from the prior week's 287,000.
Europe and Asia lower on Chinese concerns and geopolitical uneasiness
The European equity markets traded solidly lower, led by basic materials and oil & gas issues amid festering Chinese growth concerns, exacerbated by the continued weakening of China's currency. Also, sentiment was stymied by North Korea's claim of a successful nuclear weapons test, which is elevating already heightened geopolitical concerns. Tech stocks tied to Dow member Apple Inc. (AAPL $101) were hamstrung on reports that the company will cut iPhone production. However, Markit's Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—was unexpectedly revised higher to 54.3 for December, from the preliminary level of 54.0, where economists had expected it to remain. A reading above 50 denotes expansion and the index improved modestly from November's 54.2 reading. Schwab's Director of International Research, Michelle Gibley, CFA, discusses Why Our Outlook for European Stocks Is Positive at www.schwab.com/oninternational, and be sure to follow us on Twitter: @schwabresearch. In other economic news, French consumer confidence surprisingly improved in December, while U.K. services sector activity remained in expansion territory. The euro ticked higher versus the U.S. dollar, while bond yields in the region moved lower.
Stocks in Asia finished mostly lower as Chinese growth concerns festered, while already heightened geopolitical concerns were exacerbated by anxiety toward North Korea. Japanese equities fell, with the yen showing some late-day strength to continue its rally, while reports of Apple's iPhone production cut weighed on the tech sector. Hong Kong's market dropped following a report that showed growth in Chinese services sector activity decelerated in December. However, continued measures by Chinese authorities to try to stabilize the markets helped mainland Chinese stocks to advance, rebounding from its recent tumble. For more on the recent drop, see our article from the Schwab Center for Financial Research, Chinese Stock Market Selloff: What's New, What's Notat www.schwab.com/marketinsight, and follow us on Twitter: @schwabresearch. Also, China's central bank continued to lower its reference rate for the yuan, and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers a look at the currency markets in his article, Decoding Devaluations: What Do Currency Moves Mean for Your Money?, at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop. Finally, stocks in Australia, South Korea and India all finished to the downside.
Tomorrow's international economic calendar will offer manufacturing orders and retail sales from Germany, and confidence data, retail sales and employment data from the eurozone.
Schwab Center for Financial Research - Market Analysis Group
©2016 Charles Schwab & Co., Inc., Member SIPC. All rights reserved.
Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.
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