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Wednesday, May 25, 2016

Positive Momentum Continues

Charles Schwab: On the Market
Posted: 5/25/2016 4:15 PM ET

Positive Momentum Continues

U.S. equities ended a second-straight day with solid gains amid strength in technology and financial stocks. As well, eased Brexit concerns, a debt relief deal in Greece, weakness in the yen, continued strength in crude oil prices, and a favorable business confidence report out of Germany helped to lift sentiment. Treasuries finished nearly flat, while gold and the U.S. dollar were lower.

The Dow Jones Industrial Average (DJIA) rose 145 points (0.8%) to 17,851, the S&P 500 Index increased 14 points (0.7%) to 2,091, and the Nasdaq Composite gained 34 points (0.7%) to 4,895. In moderate volume, 899 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude added $0.94 to $49.56 per barrel, wholesale gasoline was $0.01 lower at $1.65 per gallon, while the Bloomberg gold spot price lost $2.41 to $1,224.80 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 95.38.

Hewlett Packard Enterprise Co. (HPE $17) announced plans for a tax-free spin-off and merger of its enterprise services with Computer Sciences Corp. (CSC $51) in a transaction expected to deliver approximately $8.5 billion to HPE shareholders in a stock-for-stock exchange. Separately, HPE posted in line 2Q earnings-per-share (EPS) and stronger-than-expected revenue for the quarter, while it reaffirmed its full-year profit outlook. HPE rose and CSC surged over 40%.

Tiffany & Co. (TIF $64) reported 1Q EPS ex-items of $0.64, compared to the $0.68 FactSet estimate, as revenues decreased 7.0% year-over-year (y/y) to $891 million, below the projected $917 million. 1Q same-store sales dropped 9.0% y/y, versus the expected 4.6% decline. The upscale retailer said it faced numerous challenges, including continued pressure from foreign tourist spending in Europe, the U.S. and Asia, particularly in Hong Kong. TIF forecasted declines in full-year earnings and revenues. Shares were lower.

Intuit Inc. (INTU $105) posted fiscal 3Q earnings ex-items of $3.43 per share, above the forecasted $3.21, with revenues rising 8.0% y/y to $2.3 billion, roughly in line with estimates. The parent of TurboTax and QuickBooks software said it was a great season for the former and it was a strong quarter for small business. INTU issued stronger-than-expected full-year guidance. Shares were solidly lower as some analysts pointed out the strong run-up in the stock ahead of the release, while decelerating QuickBooks online subscription growth also fostered some concerns.

Sarepta Therapeutics Inc. (SRPT $23) got a boost from the announcement that the U.S. Food and Drug Administration (FDA) delayed a ruling on its drug to treat the underlying cause of Duchenne muscular dystrophy, appearing to boost optimism that the treatment could be approved.

Service sector activity surprisingly slows, while mortgage applications rise

The preliminary Markit U.S. Services PMI Index in May unexpectedly slid but remained at a level depicting expansion (a reading above 50), declining to 51.2 from 52.8 in April, and compared to the Bloomberg forecast calling for a modest rise to 53.0. The release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and Markit weights its index components differently.

As noted in the Schwab Market Perspective: Corporate Caution…Global Recession?, while the manufacturing side of the U.S. economy continues to flirt with a recession, the much larger service side continues to hold up fairly well. If corporate confidence improves, it should lead to increased capital expenditures, which should lead to an increase in productivity, and in turn economic activity. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Tomorrow, we will get a look at demand for manufacturing in the form of the preliminary April durable goods orders report (economic calendar). Orders are projected to rise 0.5% month-over-month (m/m), after gaining 0.8% in March, while excluding transportation, orders are forecasted to increase 0.3%, following the prior month's 0.2% decline. Orders for non-defense capital goods excluding aircraft—a proxy for business spending—are anticipated to grow 0.3%, after March's 0.1% gain. As well, weekly initial jobless claims will be released, forecasted to tick slightly lower to a level of 275,000 from the prior week's 278,000, while pending home sales are expected to show the pipeline of existing home sales to have risen by 0.6% m/m during April following the 1.4% increase registered in March.

The MBA Mortgage Application Index increased 2.3% last week, after declining by a favorably revised 1.0% in the previous week. The rise came as a 0.4% gain for the Refinance Index was met with a 4.8% jump for the Purchase Index. The average 30-year mortgage rate rose 3 basis points (bps) to 3.85%.

Treasuries were little changed, as the yields on the 2-year note and the 10-year note were unchanged at 0.92% and 1.87%, respectively, while the yield on the 30-year bond dipped 1 bp to 2.67%. Bond yields have rallied as of late amid resurfaced Fed rate hike expectations courtesy of hawkish commentary from Central Bank officials, stronger-than-expected economic data—including continued signs of budding inflation—and the April monetary policy meeting minutes which kept the possibility of a June rate hike on the table.

For our latest analysis on a potential rate hike, see our article, What If the Fed Raises Interest Rates?, at www.schwab.com/insights. Be sure to follow Schwab on Twitter: @schwabresearch. Also, Schwab's Chief Investment Strategist, Liz Ann Sonders discusses why the Fed appears itchier than ever to raise rates again in her article, Sympathy for the Devil in the Details of Wage Growth, at www.schwab.com/marketinsight, and follow Liz Ann on Twitter: @lizannsonders.

Europe and Asia higher on data, oil, Greek and U.S. optimism

European equities traded broadly higher for a second-straight session, with yesterday's rally in the U.S. as a jump in home sales helped ease concerns about the potential near-term rate hike helping global sentiment. Oil & gas issues led the way as crude oil prices continued to gain ground. Financials moved higher as eurozone finance ministers agreed with Greece and the International Monetary Fund (IMF) yesterday on a deal on debt relief and reforms. Moreover, the British pound's rally remained on growing optimism the U.K. will vote next month against leaving the European Union (EU), known as a Brexit, while a read on German business confidence rose more than expected in May to the strongest level of the year. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his article, Brexit: 5 Things Investors Need to Know, and how Eight Years Later: Europe's Economy is Back and its Stocks are Leading Global Markets. Read both articles at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop. The euro ticked higher versus the U.S. dollar, while bond yields in the region were mostly lower.

Stocks in Asia finished mostly higher on the heels of the rally in the U.S. yesterday, with a much stronger-than-expected rise in home sales easing concerns about the possibility of a summer Fed rate hike and sluggish global growth. Japanese equities rose solidly, bolstered by the yen giving back Monday's rally. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his latest article, Japan: Another Recession Coming?, although Japanese stocks may see some relief if the yen stabilizes or reverses recent strength, we see the hefty headwinds offsetting the potential positives. Disappointment may be in store for those hoping for a sharp rebound in Japan’s economic growth this year. Read more at www.schwab.com/oninternational. Stocks traded in Hong Kong jumped amid the global market boost from the U.S., which appeared to overshadow the People's Bank of China's move to fix the yuan at the lowest level in five years. However, mainland Chinese equities gave up early gains and finished lower, with noticeable pressure on airline stocks. Australia's markets advanced, led by a rally in oil & gas issues, as well as financials, while Indian securities rallied, as the upbeat global mood was met with a stronger-than-average forecast for rainfall during the June-September monsoon season, and South Korean listings rose.

Tomorrow's international economic calendar will hold Japan's PPI, GDP from Spain, and trade data from Italy.

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