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Monday, May 02, 2016

Gains to Start the Week

Charles Schwab: On the Market
Posted: 5/2/2016 4:15 PM ET

Gains to Start the Week

U.S. equities finished higher following favorable manufacturing reports out of China and the U.S., while activity across the pond accelerated more than original forecasts. Meanwhile, the equity front only offered a hodgepodge of events. Treasuries, gold, crude oil and the U.S. dollar were all lower.

The Dow Jones Industrial Average (DJIA) rose 117 points (0.7%) to 17,891, the S&P 500 Index added 16 points (0.8%) to 2,081, and the Nasdaq Composite increased 42 points (0.9%) to 4,818. In moderately-heavy volume, 969 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil was down $1.14 to $44.78 per barrel, wholesale gasoline was $0.04 lower at $1.56 per gallon, and the Bloomberg gold spot price declined $2.77 to $1,290.76 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 92.66.

Halliburton Co. (HAL $42) and Baker Hughes Inc. (BHI $47) announced that the companies have terminated the $28.0 billion merger agreement they entered into in November 2014. The companies said they came to the conclusion that terminating the deal was the best course of action amid challenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics. Shares of HAL were higher, while BHI was lower.

Sysco Corp. (SYY $49) reported fiscal 3Q earnings-per-share (EPS) ex-items of $0.46, above the $0.42 FactSet estimate, as revenues rose 2.2% year-over-year (y/y) to $12.0 billion, north of the projected $11.9 billion. Shares were nicely higher.

Brocade Communications Systems Inc. (BRCD $8) fell sharply after the networking solutions company lowered its 2Q EPS and revenue guidance. BRCD said its lowered guidance was consistent with the general softness in IT spending reported by many of its partners and peers, while IP Networking headwinds continue to negatively impact sales.

Manufacturing reports continue to suggest modest expansion

The Institute for Supply Management (ISM) Manufacturing Index (chart) in April remained in expansion territory (above 50) for the second-straight month after contracting from October 2015 through February 2016. The index declined to 50.8 from March's 51.8 level, and compared to the Bloomberg forecast calling for a dip to 51.4. New orders and production both declined but remained solidly above 50, while employment improved but continued to contract.

The final Markit U.S. Manufacturing PMI Index was unrevised at the 50.8 preliminary level for April, matching forecasts. The index was down the 51.5 level posted in March, though a reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Recession: Your Time is Gonna Come … But Not Yet, recession concerns have been renewed. However, the manufacturing rebound, leading indicators, non-excessive cyclical spending and signs from recession models all suggest although we’re unlikely to exit from a muddle-through state, the risk of recession is objectively low. Read more, as well as Liz Ann's latest article, Sign O' the Times: Sell in May and Go Away?, at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

Construction spending (chart) rose 0.3% month-over-month (m/m) in March, versus projections of a 0.5% advance, and following February's upwardly revised 1.0% gain from an initially reported 0.5% decrease. Residential spending grew 1.5% m/m, partially offset by a 0.4% decline in non-residential spending. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers in his latest Schwab Sector Views: A Housing Update—and Why It Matters, at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Treasuries finished lower, as the yield on the 2-year note was flat at 0.78%, while the yield on the 10-year note rose 3 basis points (bps) to 1.86% and the 30-year bond rate gained 4 bps to 2.72%. 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 www.schwab.com/marketinsight 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, titled Is This Recovery for Real?, at www.schwab.com/insights. Follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

There are no reports scheduled for release on tomorrow's domestic docket.

Europe mixed, Asia lower amid plethora of events

European equities finished mixed, though volume was lighter than usual with U.K. markets closed for a holiday. Automakers moved higher to help buoy the markets, aided by a favorable new car registration report out of France. However, oil & gas issues declined as crude oil prices moved lower and Italian banking stocks hamstrung the financial sector after a disappointing banking stock initial public offering (IPO) in the nation. In economic news, the final Markit Eurozone Manufacturing PMI Index was unexpectedly revised higher to 51.7 for April, from the 51.5 preliminary level, where economists had expected it to remain. A reading above 50 denotes expansion and the index accelerated slightly from the 51.6 level posted in March. The data was accompanied by relatively favorable U.S. manufacturing data and another relatively upbeat Chinese manufacturing report over the weekend that showed the sector clung to expansion territory after unexpectedly dipping. The euro gained ground on the U.S. dollar, while bond yields in the region dipped.

Stocks in Asia finished lower, led by a solid drop for the Japanese markets, which returned to action after being closed on Friday when the yen continued its rally to near an 18-month high versus the U.S. dollar. The yen has surged in the wake of last week's decision by the Bank of Japan to hold its monetary policy steady, disappointing the markets that were expecting further stimulus measures, as it assesses the impact of its recently adopting negative interest rate policy. 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, analyzes, 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.

The yen held its recent rally even as Japan's Finance Minister Aso said the jump in the yen is clearly a one-sided speculative move that is extremely concerning and the nation is ready to take action if needed, per Bloomberg. As noted in the Schwab Market Perspective: Great Expectations!, currency movements have played a large part in global stock market activity. We may be getting to the point of some calming in the currency markets, which could help stocks generally, but central bank uncertainty likely means continued volatility. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Australian equities declined amid likely caution ahead of tonight's monetary policy decision from the Reserve Bank of Australia, and as financials saw some pressure. Meanwhile, securities traded in South Korea fell on the heels of a report over the weekend showing the nation's exports dropped more than expected in April, and Indian listings finished lower. Finally, markets in mainland China and Hong Kong were closed for a holiday, though the nation reported over the weekend that its official Manufacturing PMI Index unexpectedly dipped in April but remained slightly in expansion territory, while its Services PMI Index also continued to show growth despite a modest decline.

Tomorrow's international economic calendar will be fairly light, with reports slated for release to include the Markit Manufacturing PMI from China and PPI from the Eurozone.

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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