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Tuesday, April 26, 2016

Glum Start to the Week

Charles Schwab: On the Market
Posted: 4/25/2016 4:15 PM ET

Glum Start to the Week

U.S. stocks began the new trading week lower, with crude oil prices seeing pressure and caution prevailing ahead of an active earnings season, as well as monetary policy decisions from the Fed and Bank of Japan later this week. On the equity front, Xerox fell short of expectations and Valeant Pharmaceuticals named a new leader. Treasuries were modestly lower as domestic new home sales and regional manufacturing activity both unexpectedly fell, while gold was higher, and the U.S. dollar lost ground.

The Dow Jones Industrial Average (DJIA) fell 27 points (0.2%) to 17,977, the S&P 500 Index declined 4 points (0.2%) to 2,088, and the Nasdaq Composite decreased 10 points (0.2%) to 4,896. In moderate volume, 863 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.09 to $42.64 per barrel, wholesale gasoline was $0.02 lower at $1.53 per gallon, while the Bloomberg gold spot price rose $4.67 to $1,237.70 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 94.85.

Xerox Corp. (XRX $10) reported 1Q earnings-per-share (EPS) ex-items of $0.22, one penny south of the FactSet estimate, as revenues declined 4.0% year-over-year (y/y) to $4.3 billion, above the expected $4.2 billion. The company said revenue declines in document technology remained in line with last quarter and continue to be pressured by weak developing markets economies. XRX added that is has accelerated its cost reduction efforts and expects to begin realizing the benefits in 2Q. The company issued 2Q EPS guidance with a midpoint below forecasts, while reaffirming its full-year profit outlook. Additionally, XRX said it remains on track to complete its planned separation into two independent, publically-traded companies by the end of the year. Shares were sharply lower.

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, and follow Jeff on Twitter: @jeffreykleintop.

Valeant Pharmaceuticals International Inc. (VRX $35) announced that Joseph Papa has been named its Chairman and Chief Executive Officer (CEO). Papa announced his resignation from Perrigo Co. PLC. (PRGO $101) today as the company issued softer-than-expected preliminary 1Q guidance. VRX was slightly lower, while PRGO fell over 15%.

New home sales surprisingly dip

New home sales (chart) declined 1.5% month-over-month (m/m) in March to an annual rate of 511,000 from February's upwardly revised 519,000 pace, and compared to the Bloomberg forecast of 520,000. The median home price decreased 1.8% y/y to $288,000. The supply of new home inventory rose to 5.8 months at the current sales pace as m/m gains in the Midwest and South were more than offset by flat sales in the Northeast and a tumble out of the West. New home sales are based on contract signings instead of closings.

The Dallas Fed Manufacturing Index declined to -13.9 for April from March's unrevised -13.6 level with economists forecasting an improvement to -10.0. A reading below zero denotes contraction.

Treasuries were lower, as the yields on the 2-year and 10-year notes, along with the 30-year bond, ticked 1 basis point higher at 0.83%, 1.90% and 2.72%, respectively. For our latest analysis on the bond markets see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, Mixed Signals From the Bond Market: Something's Got to Give, at and follow Kathy on Twitter: @kathyjones. For our latest analysis on the recent stock market rally see our video by Schwab's Chief Investment Strategist, Liz Ann Sonders and Schwab Center for Financial Research Senior Vice President, Mark Riepe, CFA, Is This Recovery for Real?, by clicking on the "Insights & Ideas" tab at and continuing to the "Market Commentary" section. Follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

Tomorrow's economic calendar will give investors a look at preliminary durable goods orders, forecasted to rise 1.9% m/m for March following the 3.0% decline in February. Excluding transportation, orders are projected to increase 0.5%, following the prior month's 1.3% fall. Demand for nondefense capital goods excluding aircraft is forecasted to increase 0.6%, after February's 2.5% decline. As well, Markit's preliminary Services PMI Index is expected to show activity ticked higher during April to a level of 52.0 from the 51.3 registered in March, while the S&P/CaseShiller Home Price Index and Richmond Fed Manufacturing Index are also scheduled for release.

Europe and Asia lower ahead policy meetings

European equities finished lower, with oil & gas and basic materials issues coming under pressure, while the global markets appeared to be treading cautiously ahead of this week's monetary policy meetings out of the U.S. and Japan. The euro traded higher versus the U.S. dollar, while bond yields in the region moved to the upside. The economic mood in the region was likely being dampened by a report showing German business confidence unexpectedly dipped in April. Also, automakers in the region were hamstrung by continued headlines regarding emission manipulations.

Stocks in Asia also finished mostly to the downside in cautious trading ahead of this week's monetary policy decisions out of the U.S. and Japan, while markets in Australia were closed for a holiday. Japanese equities declined, with the yen recovering from late last-week's weakness that came amid ramped up expectations that the Bank of Japan may deliver further stimulus measures following this week's monetary policy meeting. For our analysis of the global monetary policy front, see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, discusses article, why Negative Interest Rate Policy Adds Up To Less than Zero for Investors and Schwab's Director of International Research, Michelle Gibley's, CFA, commentary, Are Central Banks Out of Options?. Read more at, and be sure to follow Schwab and Jeff on Twitter: @schwabresearch and @jeffreykleintop. Mainland Chinese stocks, as well as those traded in Hong Kong fell amid waning expectations of accelerated stimulus measures from the country's central bank in the wake of the recent string of upbeat economic data, while resource-related issues found pressure as commodity exchanges announced measures to cool trading in raw materials, per Bloomberg. Elsewhere, South Korean securities and markets in India both traded lower.

The international economic calendar for tomorrow will be light, with 1Q GDP from South Korea and Hong Kong's trade balance slated for release.

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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