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Tuesday, March 15, 2016

Looming Policy Decisions Raise Investor Uncertainty

Charles Schwab: On the Market
Posted: 3/14/2016 4:15 PM ET

Looming Policy Decisions Raise Investor Uncertainty

U.S. equities finished mixed and very near the flatline in choppy action, as key monetary policy decisions scheduled this week from the Fed, the Bank of Japan and the Bank of England upped the uncertainty hanging over the markets. Meanwhile, a busy domestic economic calendar that begins to heat up tomorrow added more caution to the mix. Treasuries were higher, as was the U.S. dollar, while gold and crude oil prices were lower. Shares of Starwood Hotels got a boost after receiving a rival takeover proposal, while GW Pharmaceuticals surged over 120% on news of its epilepsy treatment.

The Dow Jones Industrial Average (DJIA) advanced 16 points (0.1%) to 17,229, the S&P 500 Index declined 3 points (0.1%) to 2,020, while the Nasdaq Composite inched 2 points higher to 4,750. In moderate volume, 858 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.32 to $37.18 per barrel, wholesale gasoline was $0.02 lower at $1.42 per gallon and the Bloomberg gold spot price lost $15.90 to $1,233.55 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 96.61.

Starwood Hotels & Resorts Worldwide Inc. (HOT $76) announced that it has received a proposal from a consortium of companies (the "Consortium"), said to be led by China's Anbang Insurance Group Co. Ltd, to acquire Starwood for $76.00 per share in cash, valuing the company at about $12.9 billion. The proposal comes as Starwood agreed in November to be acquired by Marriott International Inc. (MAR $71) for $63.74 per share in cash and stock, and Starwood would separately receive about $5.50 per share in either transaction from its agreed spin-off of its timeshare business and subsequent merger with Interval Leisure Group (IILG $14).

Starwood said its board has not changed its recommendation in support of its merger with Marriott, but it will carefully consider the outcome of its discussions with the Consortium in order to determine the course of action that is in the best interests of the company and its stockholders. Marriott today reaffirmed its commitment to acquire Starwood, adding that it is confident that the previously announced merger agreement is the best course for both companies. Shares of HOT were solidly higher.

GW Pharmaceuticals PLC. (GWPH $85) surged over 120% after the company announced that its experimental, cannabis-based treatment for Dravet syndrome, a rare form of epilepsy, achieved its primary endpoint of a significant reduction in convulsive seizures in children compared to placebo.

Economic front quiet today, but begins to heat up tomorrow

Treasuries were higher, while the U.S. economic calendar was void of any major releases today. The yield on the 2-year note was 1 basis point (bp) lower at 0.95%, while the yields on the 10-year note and the 30-year bond declined 3 basis points (bps) to 1.96% and 2.73%, respectively.

Beginning tomorrow, the domestic economic calendar will heat up, headlined by the releases of February retail sales and producer price inflation, along with a look at homebuilder sentiment in the form of March's NAHB Housing Market Index. Retail sales are projected to dip 0.2% month-over-month (m/m), but excluding autos and gas, sales are anticipated to rise 0.2%, on top of January's solid 0.4% increase. Wholesale price inflation is estimated to decline 0.2% m/m, after the prior month's 0.1% gain, while core inflation—excluding food & energy—is anticipated to tick 0.1% higher, on the heels of January's 0.4% rise. Homebuilder sentiment is expected is show more believe conditions are good versus poor (denoted by a reading above 50), rising to 59 from February's 58 level. Other reports on tomorrow's docket include: business inventories and the Empire Manufacturing Index.

However, this week global monetary policy will likely continue to garner the most attention, with Wednesday's U.S. Federal Open Market Committee (FOMC) rate decision being preceded by tomorrow's Bank of Japan's (BoJ) policy announcement. The Fed will deliver updated economic projections and Chairwoman Janet Yellen will conduct her press conference following its statement. The Fed is not expected to change its stance but its statement could be poised to command attention for clues on the Central Bank's outlook given the tough backdrop of heightened global volatility, signs of rising inflation, and the continued improvement in the labor market. As noted in the Schwab Market Perspective: Neutral Does Not Mean Boring, the Fed has been put into a bit of a pickle and is still biased toward normalizing policy, but the market may be underestimating the chances of further hikes this year, especially given the latest uptick in inflation. Read more at, and follow us on Twitter: @schwabresearch.

According to Bloomberg Intelligence, the BoJ is not expected to deliver additional stimulus at this meeting. The BoJ's late-January adoption of a negative interest rate policy (NIRP) and last week's move to go deeper into NIRP territory by the ECB have been met with disappointment and boosted global market volatility. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his article, Negative Interest Rate Policy Adds Up To Less than Zero for Investors, while the main economic risks of a NIRP have yet to be realized, increasingly negative interest rates may weigh more heavily on the stock market and pose a threat to the drivers of the global economy. Read more at Also, follow Jeff on Twitter: @jeffreykleintop.

Europe and Asia higher on ECB stimulus, China comments and data

European equities traded mostly higher, with positive comments out of China boosting Asian trading, while last week's delayed positive reaction to the European Central Bank's additional monetary policy stimulus measures appeared to carry over. Also, a stronger-than-forecasted read on eurozone industrial production for January helped sentiment, though oil & gas issues were hamstrung by weakness in crude oil prices. The euro traded lower versus the U.S. dollar and bond yields in the region were mixed, ahead of a plethora of global monetary policy decisions this week, with announcements from the U.S. and Japan being followed by Thursday's Bank of England meeting. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers analysis of the global monetary policy landscape in his article  Central Banks to the Rescue?, at Also, follow Jeff on Twitter: @jeffreykleintop. German stocks gained solid ground despite a flare-up in political uncertainty after German Chancellor Angela Merkel's party suffered some defeats in regional elections over the weekend.

Stocks in Asia finished mostly higher to begin the week, bolstered by Friday's apparent delayed positive reaction to last week's expanded stimulus measures from the European Central Bank. Also, comments from China's newly appointed securities regulator helped sentiment as he suggested that it was too early to talk about the nation's state rescue fund leaving the market and the country will take decisive actions if needed such as in the case of another flare-up in abnormal volatility. Mainland Chinese stocks and those traded in Hong Kong gained ground, despite some mixed February data over the weekend. China's industrial production and retail sales came in softer than expected, though fixed asset investment rose more than anticipated. For our analysis on reading Chinese data see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Trust but Verify: Five Independent Indicators of China's Economy, at, and follow Jeff on Twitter: @jeffreykleintop.

Moreover, data out of Japan was on the positive side, with the nation's January machine orders—a gauge of capital spending—jumping much more than expected, giving the island nation's market a boost, even as the yen showed some volatility. Australian equities increased and securities traded in India continued to rally, with traders digesting late-Friday's larger-than-expected drop in the country's industrial production for January and a cooler-than-expected read on February wholesale price inflation during today's trading session. After the closing bell, India's consumer price inflation rose at a smaller rate than projected for last month.

In addition to tomorrow's Bank of Japan's (BoJ) policy announcement, the Asian nation will also report industrial production, retail sales, and the Tertiary Industry index, while other reports slated for release on the international economic calendar include India's trade balance and CPI from France and Italy.

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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