Early Resiliency Falls Flat

Charles Schwab: On the Market

Posted: 2/29/2016 4:15 PM ET

Early Resiliency Falls Flat

The early gains in U.S. equities dissipated as quickly as they occurred, with stocks closing at their lows, as another tumble in China and disappointing reads on the economic front overshadowed support from commodity-related issues amid a rise crude oil price and further stimulus measures from China. Treasuries were mostly higher, gold saw a nice gain, while the U.S. dollar was flat.

The Dow Jones Industrial Average (DJIA) declined 124 points (0.7%) to 16,516 and the S&P 500 Index was 16 points (0.8%) lower at 1,932, and the Nasdaq Composite lost 36 points (0.7%) to 4,558. In heavy volume, 1.3 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.97 to $33.75 per barrel, wholesale gasoline increased $0.02 to $1.32 per gallon, and the Bloomberg gold spot price gained $16.44 to $1,239.90 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 98.17.

Valeant Pharmaceuticals International Inc. (VRX $66) announced the return of its Chief Executive Officer (CEO), J. Michael Pearson, following his recovery from severe pneumonia and other complications, effective immediately. Also, Robert A. Ingram has been appointed Chairman of the Board as the company has separated the roles of Chairman and CEO. As a result, VRX withdrew its prior financial guidance as it will be rescheduling its previously announced call to discuss preliminary 4Q 2015 results, deliver a business review, and provide updated guidance for 2016. Separately, the company disclosed that it is under investigation by the Securities and Exchange Commission for a previously undisclosed inquiry. VRX has not indicated what the investigation is focused on. Shares were over 18% lower.

Berkshire Hathaway Inc. (BRK/B $134) traded nicely higher after the company posted stronger-than-expected 4Q earnings, on revenues that rose 7.0% year-over-year (y/y) to $51.8 billion.

Regional manufacturing and pending home sales reports miss forecasts

Pending home sales declined 2.5% month-over-month (m/m) in January, versus the Bloomberg projection of a 0.5% rise and following the upwardly revised 0.9% gain registered in December. Compared to last year, sales were 0.9% lower, versus forecasts of a 3.8% rise. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which unexpectedly rose in January.

The Chicago Purchasing Managers Index (chart) fell back into contraction territory (below 50), dropping to 47.6 in February from 55.6 in January, and versus expectations of a decrease to 52.5. The index has been in contraction territory for three of the last four months, as production and new orders posted "significant declines," while employment hit the lowest since November 2009.

The Dallas Fed Manufacturing Index improved to -31.8 for February from January's unrevised -34.6 level—which was the lowest since April 2009—with economists forecasting an improvement to -30.0. However, a reading below zero denotes contraction.

Today's February manufacturing reports come ahead of tomorrow's key national reads on the sector, headlined by the ISM Manufacturing Index, expected to tick higher to 48.5, from 48.2 in January, but remain in contraction territory (below 50) for the fifth-straight month. However, Markit's Manufacturing PMI Index is projected to remain in expansion territory (above 50) after being revised slightly higher to 51.2 from the preliminary reading of 51.0, but down from January's 52.4 level. In addition, construction spending will be reported, with economists expecting a 0.5% m/m increase for January, as well as February auto sales to be released throughout the day (economic calendar).

As noted in the Schwab Market Perspective: Confidence is Key, at this point the leading economic indicators continue to point to a decent U.S. economic picture. Further, other indicators are not consistent with an impending recession. U.S. consumers continue to improve their financial position and represent 69% of US GDP. The low unemployment rate and continued historically low initial claims for unemployment may finally be pressuring wages higher. This should help to boost consumer spending, illustrated by a nice gain in retails sales, which doesn’t foretell a coming recession. Read more at www.schwab.com/marketinsight, and follow us on Twitter: @schwabresearch.

Treasuries were mixed, as the yield on the 2-year note ticked 1 basis point (bp) lower to 0.79%, while the yields on the 10-year note and the 30-year bond fell 3 bps to 1.73% and 2.61%, respectively. For more on the bond markets see Schwab's Chief Fixed Income Strategist, Kathy Jones', article, Don't Look Back: Surviving in a Low-Yield World, at www.schwab.com/marketinsight, and follow Kathy on Twitter: @kathyjones.

Europe shows late-day charge to finish mostly higher, Asia lower

European equities finished mostly higher, courtesy of a late-session rally that was led by strength in the energy sector as crude oil prices gained ground. Also, stocks found some support from the announcement out of China of further stimulus measures in the form of a cut to its banking sector reserve requirement ratio. Traders digested some mixed economic data in the region, while some expressed disappointment with the lack of any concrete stimulus measures following the G-20 meeting in Shanghai over the weekend. Also, festering pressure on the financial sector hamstrung the markets, while political uncertainty in Ireland remained on the heels of its election results over the weekend. The Eurozone's Consumer Price Index (CPI) estimate declined 0.2% y/y, after January's 0.3% increase, and compared to the flat reading that economists had expected. In other economic news, German retail sales rose 0.7% m/m in January, after decreasing 0.2% in the month prior, and compared to the 0.3% gain that was projected. The euro traded lower versus the U.S. dollar, while bond yields in the region mostly moved to the downside.

Stocks in Asia finished mostly to the downside to begin the week, with the Chinese markets falling amid disappointment regarding the lack of an announcement of further stimulus measures over the weekend from the Chinese government and at the conclusion of the G-20 meeting in Shanghai. Also, global growth concerns remained ahead of this week's plethora of world economic data. However, after the closing bell, the People's Bank of China (PBoC) announced the reduction of the banking sector's reserve requirement ratio (RRR)—the amount that banks need to keep on reserve instead of being used in the financial system—by 50 bps to 17.00%. For our latest on China, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, 5 Reasons China Won't Crash the Global Economy in 2016, at www.schwab.com/oninternational, and follow Schwab on Twitter: @schwabresearch.

Japanese equities traded lower, with the yen rallying amid heightened risk aversion, while the nation posted some mixed economic data. The country's preliminary January industrial production rose 3.7% m/m, after dropping 1.7% in December, and compared to the expected gain of 3.2%. However, Japan's retail sales dropped 1.1% m/m last month, on the heels of December's 0.2% decline, and versus the forecasted 0.1% increase. Stocks in India decreased as traders digested the nation's key annual budget, with some expressing disappointment regarding the tax proposals of the report, per Bloomberg. Meantime, markets in Australia finished flat, while South Korean securities were lower.

Tomorrow's international economic calendar will offer the Markit Manufacturing PMI Index from China and Japan, while the island nation will also report personal income, and employment data, South Korea's trade balance, and building approvals from Australia. From across the pond will come trade data, the Ifo Business Climate Index and GDP from Germany, while France will report confidence figures.

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.