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Thursday, April 21, 2016

Disappointing Domestic Data Drives Stocks Down

Charles Schwab: On the Market
Posted: 4/21/2016 4:15 PM ET

Disappointing Domestic Data Drives Stocks Down

U.S. stocks finished to the downside, with the Dow closing back below the 18k mark as Travelers Companies' quarterly earnings report was a noticeable disappointment. In economic news, weekly jobless claims surprisingly fell, regional manufacturing activity dropped into contraction territory and building permits weighed on the Leading Index. Treasuries, gold and crude oil prices were lower, while the U.S. dollar ticked higher.

The Dow Jones Industrial Average (DJIA) declined 114 points (0.6%) to 17,983, the S&P 500 Index decreased 11 points (0.5%) to 2,092, and the Nasdaq Composite shed 2 points to 4,946. In moderately-heavy volume, 1.0 billion shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.00 to $43.18 per barrel, wholesale gasoline was $0.01 higher at $1.52 per gallon and the Bloomberg gold spot price ticked $5.55 lower to $1,249.80 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 94.62.

Dow member Verizon Communications Inc. (VZ $50) reported 1Q earnings-per-share (EPS) of $1.06, matching the FactSet estimate, as revenues rose 0.6% year-over-year (y/y) to $32.2 billion, versus the projected $32.4 billion. VZ maintained its full-year earnings outlook, but noted that due to the status of labor contract negotiations, there will be pressure on 2Q profits due to the timing of cost reductions. Shares traded lower.

General Motors Co. (GM $33) announced 1Q profits ex-items of $1.26 per share, north of the projected $0.99, as revenues grew 4.5% y/y to $37.3 billion, above the anticipated $34.8 billion. The automaker said it is gaining retail share in the U.S., outpacing the industry in Europe and capitalizing on robust growth in SUV and luxury segments in China. GM moved higher.

Dow component American Express Co. (AXP $66) posted 1Q EPS of $1.45, above the expected $1.35, with revenues rising 2.0% y/y to $8.1 billion, roughly in line with forecasts. AXP reaffirmed its full-year profit outlook and traded higher.

Dow member Travelers Companies Inc. (TRV $109) reported 1Q EPS ex-items of $2.33, below the estimated $2.55, due to an increase in catastrophe losses, mainly arising out of hail storms that occurred in Texas in late March. Net written premiums rose 5.0% y/y to $6.2 billion, compared to the forecasted $6.0 billion. TRV increased its quarterly dividend by 10.0% to $0.67 per share. Shares finished solidly lower.

YUM Brands Inc. (YUM $82) posted 1Q earnings ex-items of $0.95 per share, above the projected $0.83, with revenues roughly flat y/y at $2.6 billion, versus the anticipated $2.7 billion. The parent of Taco Bell, KFC and Pizza Hut said its worldwide same-store sales grew 2.0% y/y, below the 2.8% increase that was estimated, while its China division same-store sales rose 6.0% y/y, above the 2.2% increase that was expected. YUM raised its full-year profit outlook. Shares gave up early gains and closed lower.

Under Armour Inc. (UA $47) registered 1Q EPS of $0.04, two cents north of estimates, with revenues increasing 30.0% y/y to $1.1 billion, above the forecasted $1.0 billion. UA raised its full-year guidance and shares rallied.

United Continental Holdings Inc. (UAL $53) announced 1Q profits ex-items of $1.23 per share, beating the expected $1.18, with revenues decreasing 8.2% y/y to $8.2 billion, roughly in line with estimates. The airline posted a 7.4% y/y drop in passenger revenue per available seat mile (PRASM), as it continues to be driven by economic factors including a strong U.S. dollar and lower oil prices, while it saw a larger-than-expected decrease in close-in business travel during the weeks surrounding the Easter holiday and spring break. Shares traded noticeably to the downside.

For our latest analysis on earnings season, read Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Earnings Season for Investors: It's a Marathon, Not a Sprint, at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop.

Dish Network Corp. (DISH $48) was nicely higher and Viacom Inc. (VIAB $43) rallied after the companies announced a multi-year contract renewal agreement that provides DISH customers with uninterrupted access to Viacom networks. Details of the agreement were not disclosed.

Jobless claims surprisingly fall again

Weekly initial jobless claims (chart) dropped 6,000 to 247,000 last week, versus the Bloomberg estimate calling for claims to increase to 265,000, as the prior week's figure was unrevised at 253,000. The four-week moving average fell 4,500 to 260,500, while continuing claims decreased by 39,000 to 2,137,000, south of the estimated level of 2,173,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) rose 0.2% month-over-month (m/m) in March, versus the projected 0.4% increase, and compared to February's downwardly revised 0.1% dip. Stock prices, the yield curve and ISM new orders offered support, while building permits weighed on the index. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Recession: Your Time is Gonna Come … But Not Yet, leading indicators are not signaling a recession at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The Philly Fed Manufacturing Index (chart) in April fell back to a level depicting contraction (a reading below zero) dropping to -1.6 from 12.4 in March, and compared to estimates calling for a decline to 9.0.

Treasuries were lower, with the yield on the 2-year note gaining 1 basis point (bp) to 0.81%, the yield on the 10-year note rising 3 bps to 1.87%, and the 30-year bond rate increasing 4 bps to 2.69%. For our latest analysis on the bond markets see our latest video by Schwab's Chief Fixed Income Strategist, Kathy Jones and Schwab's Managing Director of Trading and Derivatives, Randy Frederick, titled, Rate Hike—No Rate Hike: What's the Smart Bond Move?, by clicking on the "Insights & Ideas" tab at www.schwab.com/marketinsight and continuing to the "Market Commentary" section. Also, Schwab's Director of Income Planning, Rob Williams, offers a look at bond investing for retirement in his article, Bond Ladders: A Useful Tool for Retirement Income. Follow Schwab, Kathy and Randy on Twitter: @schwabresearch, @kathyjones and @randyafrederick.

Tomorrow, the U.S. economic calendar will be light, with the sole release the preliminary Markit U.S. Manufacturing PMI Index for April, which is expected to have ticked slightly higher to 52.0 from the 51.5 registered in March, with a reading above 50 denoting expansion in activity.

Europe mixed as ECB holds policy steady, Asia mostly higher

European equities finished mixed, with the European Central Bank (ECB) keeping its monetary policy stance unchanged as expected after expanding its stimulus measures at its March meeting, including a further reduction of its negative deposit rate. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his article, why Negative Interest Rate Policy Adds Up To Less than Zero for Investors and Schwab's Director of International Research, Michelle Gibley, CFA, offers a look at the global monetary policy landscape in her article, Are Central Banks Out of Options?. Read more at www.schwab.com/oninternational, and be sure to follow Schwab and Jeff on Twitter: @schwabresearch and @jeffreykleintop.

During the customary press conference, ECB President Mario Draghi, noted that the risks to the eurozone growth outlook still remain tilted to the downside and inflation rates could turn negative again in the coming months before picking up in the second half of 2016. He noted that following its expanded stimulus measures in March, broad financing conditions have improved. Draghi added that the ECB continues to expect rates to remain at present or lower levels for an extended period of time, and well past the horizon of its net asset purchases, while reiterating that if warranted, the ECB will act further to achieve its objective of price stability. The euro gave up an early gain and dipped versus the U.S. dollar, while bond yields in the region mostly gained ground. In other economic news, U.K. retail sales fell more than expected in March, while French business confidence topped estimates for April.

Stocks in Asia finished mostly to the upside, with crude oil's solid resilience yesterday helping boost energy issues, while weakness in the yen supported a rally in Japan. Japanese equities captured solid gains as export-related issues were bolstered by the yen's pullback. Australian stocks rose with oil & gas and basic materials leading the way, which also helped boost securities trading in Hong Kong. However, the equities in mainland China dropped amid resurfaced liquidity concerns and as traders continued to assess the indexes recent rally that has come courtesy of a string of upbeat economic reports. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides analysis of China in his article, Trust but Verify: Five Independent Indicators of China's Economy, and Schwab's Director of International Research, Michelle Gibley, CFA, offers 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. Finally, stocks trading in South Korea and India traded to the upside.

The international economic docket for tomorrow will yield preliminary Markit business activity reports for France, Germany and the eurozone, as well as industrial orders and retail sales from 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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