Charles Schwab: On the Market

Posted: 4/11/2016 4:15 PM ET

Equities Drift Lower into the Close

Investors appeared to exude some caution in today's trading, with U.S equities finishing lower and near the flat line, as an empty economic calendar before a deluge of data coming later in the week, and a lack of equity news offered little help. As well, investors may be looking ahead to the start of 1Q earnings season that will unofficially begin after the close with Alcoa's results. Treasuries were nearly unchanged, the U.S. dollar was lower, while crude oil and gold prices were higher.

The Dow Jones Industrial Average (DJIA) lost 21 points (0.1%) to 17,556, the S&P 500 Index declined 6 points (0.3%) to 2,042, and the Nasdaq Composite fell 17 points (0.4%) to 4,833. In moderate volume, 893 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.64 to $40.36 per barrel, wholesale gasoline was $0.05 higher at $1.51 per gallon and the Bloomberg gold spot price jumped $15.06 to $1,255.75 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 93.95.

Canadian Pacific Railway Ltd. (CP $139) announced that it has terminated efforts to merge with Norfolk Southern Corp. (NSC $79), including the withdrawal of a resolution asking NSC shareholders to vote in favor of good-faith negotiations between the two companies. CP said no further financial offers or overtures to meet with the NSC board are planned at this time. Canadian Pacific added that it has long recognized that consolidation is necessary for the North American rail industry to meet demands of a growing economy, but with no clear path to a friendly merger at this time, it will turn all of its focus and energy to serving its customers and creating long term value for its shareholders.

Norfolk Southern commented by noting that its board is committed to enhancing value for shareholders and its new management team has been focused on implementing a strategic plan to streamline operations, reduce expenses and maintain superior customer service levels. CP finished higher, while NSC lost ground.

Hertz Global Holdings Inc. (HTZ $9) warned that it expects 1Q and full-year U.S. car rental revenue and earnings to be lower than previously expected, due to what it believes is excess industry capacity. Shares were solidly lower. 

Earnings and economic week set to heat up

Treasuries were nearly unchanged, as the U.S. economic calendar was void of any major releases today. The yields on the 2-year note and 10-year note, along with the 30-year bond, were flat at 0.69%, 1.72% and 2.56%, respectively. For more on fixed income investing, see Schwab's Director of Income Planning, Rob Williams', article, How to Build a Bond Portfolio, at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

This week's U.S. economic calendar will bring some key reads on the all-important consumer in the form of March retail sales and the preliminary April University of Michigan Consumer Sentiment Index. Also, the inflation picture will likely continue to garner heightened attention, courtesy of the releases of the March Consumer Price Index (CPI) and the Producer Price Index (PPI). However, some of the attention may be diverted to the start of 1Q earnings season, which will unofficially kick off with today's results from Alcoa Inc. (AA $9) after the closing bell, and be weighted toward the financial sector.

As noted in the Schwab Market Perspective: What a Quarter! What's Next?, the upcoming earnings season is projected to be relatively weak, with another negative growth rate expected. This sets up the potential for upside surprises, but with stocks at what we consider about fair value, stronger earnings are likely needed before stocks can move demonstrably higher. We’ll be watching the reporting season to see whether companies are seeing an uptick in demand and gaining any real measure of pricing power. We are starting to see signs of inflation ticking higher, which could help companies’ profit margins—although wages are also showing signs of moving higher, which could crimp earnings. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

However, the heavy docket will begin slowly with tomorrow's release of the NFIB Small Business Optimism Index, with economists anticipating an uptick in confidence to a level of 93.5 for March from February's 92.9 level, as well as the Import Price Index, forecasted to have risen 1.0% month-over-month during March following the 0.3% decline the month prior.

European markets mostly higher, Asia mixed

European equities finished mostly to the upside, with Italian banking stocks rallying to boost financials amid reports that Italy's Treasury and central bank officials will meet executives of major banks to discuss the creation of a fund that would buy bank shares and help companies tackle non-performing loans, per Bloomberg, which cited people familiar with the matter. Also, basic materials stocks gained ground after some relatively positive inflation data out of China. In economic news, Italian industrial production declined by a smaller amount than expected for February. The euro ticked higher versus the U.S. dollar, while bond yields in the region mostly moved to the upside.

Stocks in Asia finished mixed to start the week, with traders digesting data out of China and Japan. Mainland Chinese stocks and those traded in Hong Kong advanced, after March reports showed the nation's consumer price inflation remained at the prior month's 2.3% year-over-year (y/y) rise, versus the expected 2.4% increase. Also, China's producer price inflation dropped 4.3% y/y, after falling 4.9% in February, and compared to the forecasted 4.6% decline. However, producer prices rose 0.5% month-over-month (m/m), the first gain since September 2013, adding to recent data suggesting stabilization in the world's second-largest economy, per Bloomberg. The data kicks off a flood of data out of China slated for this week, headlined by the release of its 1Q GDP report, projected to show growth slowed slightly to 6.7% y/y, from 6.8% in 4Q. Be sure to read Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Trust but Verify: Five Independent Indicators of China's Economy, and 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 Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch.

Elsewhere, the continued rally in the yen weighed on export-related issues to lead Japanese stocks lower, along with a report that showed the nation's February machine orders—a gauge of capital spending—fell m/m after rising the prior two months. Weakness in consumer goods and financial stocks weighed on Australia's market, which dipped despite a solid gain for basic materials issues and an upward move for the oil & gas sector. Meanwhile, South Korean listings edged lower, but Indian equities finished higher, ahead of this week's start of the nation's earnings season, as the rally in emerging markets continued. As noted in the Schwab Market Perspective, emerging markets are attractive to many long-term investors. However, as we wrote last fall after a rebound, investors shouldn’t mistake the 20% rebound seen in emerging markets over the past two months as an all-clear sign to overweight this asset class in their portfolios. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The international economic calendar for tomorrow will offer retail sales, PPI and CPI out of the U.K., CPI from Germany, Australian business confidence, and India's trade balance.

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.