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Monday, May 16, 2016

A Positive Start to the Week

Charles Schwab: On the Market
Posted: 5/16/2016 4:15 PM ET

A Positive Start to the Week

Despite mixed domestic economic reports, and disappointing data out of China, U.S. equities rallied to begin the week. Dow member Apple gave the tech sector a boost after disclosure of Berkshire Hathaway's stake in the company, while crude oil prices extended last week's rally to give the energy sector a lift amid supply disruptions in Nigeria and a favorable outlook from Goldman Sachs. Treasuries were lower, gold was higher, and the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average (DJIA) rose 175 points (1.0%) to 17,711, the S&P 500 Index gained 20 points (1.0%) to 2,067, and the Nasdaq Composite advanced 58 points (1.2%) to 4,775. In moderate volume, 866 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil added $1.51 to $47.72 per barrel, wholesale gasoline increased $0.02 to $1.61 per gallon, and the Bloomberg gold spot price gained $1.07 to $1,274.52 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was unchanged at 94.56.

Dow member Pfizer Inc. (PFE $33) announced an agreement to acquire Anacor Pharmaceuticals Inc. (ANAC $101) for $99.25 per share in cash, in a total transaction value of about $5.2 billion. PFE noted that Anacor will be a strong fit, further supporting its strategic focus on inflammation and immunology, and is expected to enhance near-term revenue growth. PFE was slightly higher, while ANAC rallied over 50%.

Tribune Publishing Co. (TPUB $14) jumped over 20% after Gannett Co. Inc. (GCI $16), the parent company of USA Today, increased its all-cash offer to acquire the company to $15.00 per share, from $12.25 per share. TPUB noted that it will thoroughly review GCI's revised proposal. GCI also traded higher.

Dow member Apple Inc. (AAPL $94) was nicely higher in the wake of a regulatory filing showing Warren Buffett's Berkshire Hathaway Inc. (BRK/B $142) acquired a near $1.0 billion stake in the iPhone maker.

NY manufacturing activity unexpectedly contracts, homebuilder sentiment holds steady

The Empire Manufacturing Index showed output from the New York region fell back into contraction territory (a reading below zero) for May, after showing expansion the prior two months. The index fell to -9.0 from April's unrevised 9.6 level, with the Bloomberg forecast calling for a decline to 6.5.

The May National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month held at 58 for the fourth-straight month, versus estimates calling for an improvement to 59. However, builder confidence remained above 50, which separates good and poor conditions, for the twenty-third straight month. The NAHB said future sales expectations rose slightly this month, showing builders are confident that the market will continue to strengthen. However, the NAHB noted that builders are facing an increasing number of regulations and lot supply constraints.

Tomorrow, we will get a look at housing construction activity in the form of the release of April housing starts and building permits. Starts are projected to rise 3.3% month-over-month (m/m) to an annual rate of 1,125,000 units and permits are forecasted to grow 5.5% to an annual rate of 1,135,000 units. As noted in the Schwab Market Perspective: Corporate Caution…Global Recession?, the economy has recovered, employment has improved, housing has bounced back, and asset prices have appreciated. However, the economy is still not firing on all cylinders. As has been the case over the past couple of years, we expect economic activity to pick up in the second quarter from the weak first quarter, but whether it will be enough to allow the Fed to raise rates again, it’s too soon to tell. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Treasuries were lower, as the yield on the 2-year note rose 3 basis points (bps) to 0.77%, while the yields on the 10-year note and the 30-year bond gained 5 bps to 1.75% and 2.60%, respectively. For our latest analysis on the bond markets see the video by Schwab's Chief Fixed Income Strategist, Kathy Jones and Managing Director of Trading and Derivatives, Randy Frederick, titled Is the Market Underestimating the Fed?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick. Also check out Schwab's Senior Fixed Income Research Analyst, Cooper Howard's CFA, and Director of Income Planning, Rob Williams' article, 5 Cases Where Out-of-State Munis Might Make Sense, at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

For analysis on the stock markets see Schwab's Chief Investment Strategist, Liz Ann Sonders' article, Against the Wind: The Sentiment-Driven Rally Could Take a Breather, at www.schwab.com/marketinsight. Be sure to follow Liz Ann on Twitter: @lizannsonders.

In addition to the aforementioned housing data, a couple other key reports grace the domestic economic calendar, including the Consumer Price Index (CPI) forecasted to have increased 03% m/m during April, while excluding food and energy, the core rate is expected to have risen 0.2% m/m. As well as the Fed's industrial production and capacity utilization report will be released, with economists anticipating a 0.3% advance in production for April following the prior month's surprising 0.6% drop, while utilization is expected to inch higher to 75.0% from March's 74.8%.

Europe mixed in light volume, Asia mostly higher despite China data

European equities finished mixed, with oil & gas and basic materials issues moving higher, despite some disappointing Chinese economic data over the weekend. Oil prices got a boost from supply disruptions in Nigeria, as well as a raised oil price forecast for 2016 from Goldman Sachs, while key metals prices traded higher. Meanwhile, uncertainty regarding the potential for the U.K. to leave the European Union (EU), known as a Brexit, ahead of next month's vote, continued to hamper sentiment. Last week, the Bank of England cut its economic growth forecast and warned that a vote for a Brexit would hamper economic activity.

Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses the possible implications in his article, Brexit: 5 Things Investors Need to Know. The euro and the British pound ticked higher versus the U.S. dollar, while bond yields in the region moved mostly to the upside. Also, for our latest analysis on Europe, see Schwab's Jeffrey Kleintop's, CFA, article, Eight Years Later: Europe's Economy is Back and its Stocks are Leading Global Markets, and check out Schwab's Fixed Income Director Collin Martin's, CFA, latest article, The ECB's Latest Plan: What Does It Mean for U.S. Corporate Bonds?. Read all the articles at www.schwab.com/marketinsight, and follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch. Volume in the region was lighter than usual, with markets in Germany and Switzerland closed for holidays.

Stocks in Asia finished mostly higher to begin the week, even as some Chinese economic data released over the weekend missed expectations. Japanese equities advanced, with the yen dipping and amid a report from the Nikkei over the weekend that Prime Minister Abe will delay again a planned sales tax hike that is scheduled for April 2017. However, a Japanese government spokesperson denied the report.

Mainland Chinese stocks and those traded in Hong Kong rose, even as reports showed April industrial production, retail sales and fixed asset investment all grew at smaller-than-expected paces, possibly calming recent concerns that the government will pullback on its stimulus measures. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses China data in his article, Trust but Verify: Five Independent Indicators of China's Economy. Also, Schwab's Director of International Research, Michelle Gibley, CFA, offers 5 Reasons China Won't Crash the Global Economy in 2016. Read more at www.schwab.com/oninternational, and be sure to follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch. Also, sentiment got a boost from speculation that an announcement of an exchange trading link between Shenzhen and Hong Kong could be delivered this week, per Bloomberg.

Strength in basic materials and financials supported gains in Australia's markets, overshadowing some weakness in oil & gas and technology issues, and Indian listings increased, as energy and commodity stocks gained ground, despite late Friday's report that showed the nation's exports fell in April, while its imports tumbled. Finally, stocks in South Korea ticked slightly higher.

Tomorrow, the international economic calendar will offer industrial production out of Japan, trade data from the Eurozone, and PPI from Switzerland.

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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