Charles Schwab: On the MarketPosted: 5/23/2016 4:15 PM ET
Stocks Finish Fairly Flat
U.S. equities closed the regular session lower, but near the flatline as some decent strength in materials issues was unable to influence stocks higher with health care and consumer discretionary listings lagging. Treasuries were mixed and little changed following an unexpected slip in Markit's preliminary U.S. manufacturing report. The U.S. dollar was mostly flat and gold and crude oil prices ticked lower.
The Dow Jones Industrial Average (DJIA) declined 8 points to 17,493, the S&P 500 Index decreased 4 points (0.2%) to 2,048, and the Nasdaq Composite lost 4 points (0.1%) to 4,766. In moderately-heavy volume, 804 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.33 lower to $48.08 per barrel, wholesale gasoline was unchanged at $1.64 per gallon, and the Bloomberg gold spot price lost $2.23 to $1,252.52 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.26.
Bayer AG (BAYRY $95) announced that it has made an offer to acquire Monsanto Co. (MON $106) for $122 per share in cash, valued at about $62 billion. Bayer said it is fully committed to pursuing the transaction and is prepared to proceed immediately to due diligence and negotiations and to quickly agree to a transaction. The company also added that it expects the acquisition to be accretive to core earnings-per-share (EPS) by a double-digit percentage after the first full year. MON did not comment on the announcement. MON traded nicely higher.
Markit's preliminary May manufacturing report unexpectedly dips
The preliminary Markit U.S. Manufacturing PMI Index for May dipped to 50.5 from April's 50.8 level, and below the modest increase to 51.0 that economists surveyed by Bloomberg were forecasting, though a reading above 50 denotes expansion in activity.
The report kicks off the week's U.S. economic front, which will bring other key releases of new home sales, preliminary durable goods orders, the second look (of three) at 1Q GDP, and the final University of Michigan Consumer Sentiment Index. However, the attention of the global markets will likely remain on the Fed, with another plethora of officials set to speak, including a speech from Chairwoman Janet Yellen on Friday.
As noted in the Schwab Market Perspective: Corporate Caution…Global Recession?, the Fed appears stuck, as 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. 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 mixed, with the yield on the 2-year note rising 2 basis points (bps) to 0.90%, while the yield on the 10-year note declined 1 bp to 1.83% and the 30-year bond rate was flat at 2.63%. Bond yields have jumped as of late amid resurfaced Fed rate hike expectations in the wake of some hawkish commentary from Central Bank officials and the April monetary policy meeting minutes which showed the possibility of a June rate hike has not been ruled out.
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 Kathy Jones' articles, Mixed Signals From the Bond Market: Something's Got to Give, and Bond Index Investing: Why You Should Track More Than One Benchmark, at www.schwab.com/marketinsight.
Tomorrow, the U.S. economic calendar will include the aforementioned housing data in the form of new home sales for April, expected to show a 2.3% increase to an annual rate of 523,000 units. Also, some regional data will take shape with the release of the Richmond Fed Manufacturing Index for May, forecasted to decline to 8 from the prior month's level of 14, but a reading above 0 denotes expansion in activity.
Europe mostly lower and Asia mixed as Fed continues to command attention
European equities traded mostly lower, as the global markets continued to grapple with the possibility of a near term rate hike by the Fed, while oil & gas issues saw some pressure amid the weakness in crude oil prices. Basic materials stocks also weighed on the markets. In economic news, the preliminary Markit Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—dipped to 52.9 in May from 53.0 in April, compared to the expected rise to 53.2. However, a reading above 50 denotes expansion, while growth in French services sector activity unexpectedly accelerated and German business activity came in stronger than expected. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses Europe in his article, Eight Years Later: Europe's Economy is Back and its Stocks are Leading Global Markets. Moreover, festering concerns about the possibility of a U.K. exit from the EU, known as a Brexit, remain and Jeffrey Kleintop discusses the possible implications in his article, Brexit: 5 Things Investors Need to Know. Read more at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop. The euro and the British pound lost ground versus the U.S. dollar, while bond yields in the region were mixed.
Stocks in Asia finished mixed with the global markets remaining focused on the potential for a summer rate hike out of the U.S., while lower oil prices weighed on the energy sector. Japanese equities declined, with the yen strengthening to pressure sentiment on the heels of this weekend's G-7 meeting between world finance chiefs in Japan, which delivered little major developments but focus was on the apparent disagreement regarding foreign exchange policy. Japan reported an unexpected widening of its April trade surplus as exports fell slightly more than expected, while imports dropped by a larger amount than projected. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers analysis of Japan in his latest article, Japan: Another Recession Coming?, at www.schwab.com/oninternational. Stocks in mainland China finished higher, while those trading in Hong Kong declined. Australian securities decreased amid weakness in oil & gas issues, which was met with declines in financials and basic materials stocks. Finally, Indian stocks traded lower on the festering uncertainty regarding a potential Fed rate hike and South Korean equities moved higher.
The international economic docket for tomorrow will include the release of the Leading Index from China, 1Q GDP and the Zew Economic Sentiment Survey from Germany, manufacturing and business confidence from France and public sector borrowing from the U.K.
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