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Tuesday, May 10, 2016

Blue Chips Three-peat

Charles Schwab: On the Market
Posted: 5/10/2016 4:15 PM ET

Blue Chips Three-peat

U.S. equities were solidly higher, with the Dow posting its third-straight day of gains, getting a boost from a rise in crude oil prices, the continued retreat in the yen, and upbeat domestic data that showed small business optimism and job openings both topped forecasts. Meanwhile, news on the equity front was a mixed bag of second-tier earnings reports. Treasuries were modestly lower and the U.S. dollar ticked higher, while gold also gained ground.

The Dow Jones Industrial Average (DJIA) rallied 222 points (1.3%) to 17,928, the S&P 500 Index jumped 26 points (1.3%) to 2,084, and the Nasdaq Composite was 60 points (1.3%) higher at 4,810. In moderate volume, 841 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.22 to $44.66 per barrel, wholesale gasoline gained $0.05 to $1.49 per gallon, and the Bloomberg gold spot price added $2.98 to $1,266.86 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 94.29.

Gap Inc. (GPS $19) reported an April same-store sales drop of 7.0% year-over-year (y/y), versus the FactSet estimate of a 1.6% gain. Sales at its Gap, Banana Republic and Old Navy units all declined. The company also issued much softer-than-expected 1Q earnings-per-share (EPS) guidance. Separately, GPS announced that it will take steps to better position the company for improved business performance, and that it is evaluating its Banana Republic and Old Navy fleets, primarily outside of North America. Shares were sharply lower.

Hertz Global Holdings Inc. (HTZ $9) announced a 1Q loss ex-items of $0.12 per share, compared to the $0.01 per share shortfall that was expected, with revenues declining 6.0% y/y to $2.3 billion, below the projected $2.4 billion. HTZ reaffirmed its full-year guidance. Shares finished higher.

Shares of SolarCity Corp. (SCTY $18) tumbled over 20% after posting a 1Q loss of $2.56 per share, wider than the $2.31 shortfall that was estimated, as revenues rose 81.6% y/y to $123 million, versus the forecasted $110.0 million forecast. SCTY projected a much larger-than-expected 2Q loss.

Small business optimism improves more than expected and job openings top forecasts

The National Federation of Independent Business (NFIB) Small Business Optimism Index for April rose to 93.6 from March's 92.6 level, and versus the Bloomberg forecast calling for a slight increase to 93.0.

Wholesale inventories (chart) ticked 0.1% higher month-over-month (m/m) in March, in line with forecasts, and compared to February's downwardly revised 0.6% decline. Sales rose 0.7% m/m, compared to the 0.5% increase that was expected, and the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at February's 1.36 months level.

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, showed 5.76 million jobs were available to be filled in March, versus forecasts of 5.45 and compared to the upwardly revised 5.61 million openings in February.

Treasuries finished slightly lower, as the yield on the 2-year note rose 2 basis points (bps) to 0.73%, the yield on the 10-year note ticked 1 bp higher to 1.76%, while the 30-year bond rate was flat at 2.61%. For our latest analysis on the bond markets see the video by Schwab's Managing Director of Trading and Derivatives, Randy Frederick, and Fixed Income Director Collin Martin, CFA, titled Yields Are Down, Prices Are Up: What Should Bond Investors Do?, at www.schwab.com/insights. Follow Randy and Schwab on Twitter: @randyafrederick and @schwabresearch.

For our latest analysis on the recent stock markets see Schwab's Chief Investment Strategist, Liz Ann Sonders' latest 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.

The only item on tomorrow's domestic economic calendar is MBA Mortgage Applications.

Europe led higher by oil and bank earnings, Asia also sees gains 

European equities traded higher, with oil & gas issues rebounding as crude oil prices gained ground, while financials showed some strength. Sentiment also got a lift from signs of progress being made in talks regarding the release of bailout funds and a debt relief program for Greece. Automakers found support from an upbeat April passenger vehicle sales report in China. In economic news, the U.K. trade deficit narrowed more than expected, and French industrial production and business sentiment missed forecasts.

Moreover, German industrial production fell more than expected in March, but the data is being overshadowed by the nation's separate report showing exports surprisingly rose solidly. For our latest analysis on Europe, see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, article, Eight Years Later: Europe's Economy is Back and its Stocks are Leading Global Markets. Also, 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 both articles at www.schwab.com/marketinsight, and follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch. The euro ticked higher versus the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mostly to the upside, with the extension of the yen's pullback from its recent surge boosting Japanese markets, registering back-to-back gains after falling for the previous six sessions amid the yen's rally. Chinese inflation data was in focus, with the nation reporting a 2.3% y/y rise in consumer price inflation for April, matching estimates and the prior month's increase. However, China's producer price inflation declined 3.4%, versus the expected 3.7% drop, and compared to the 4.3% fall posted in March. Deflation for China's wholesale prices decelerated ahead of a plethora other economic data that China is expected to report this week.

Mainland Chinese stocks finished flat, while those traded in Hong Kong gained ground, rebounding for a second day after recording its longest losing streak this year, per Bloomberg, amid heightened skepticism about a recovery for the world's second-largest economy. 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. Finally, Australian equities advanced, with weakness in basic materials and oil & gas stocks being overshadowed by a solid gain for the financial sector, while listings in South Korea and India finished higher.

Like the U.S. economic calendar, the international docket will be very light, with only the Leading Index from Japan 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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