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Thursday, June 23, 2016

Bear(s)-exit the Markets

Charles Schwab: On the Market
Posted: 6/23/2016 4:15 PM ET

Bear(s)-exit the Markets

U.S. stocks rallied and the European markets finished to the upside, despite the palpable uneasiness as to the outcome of the Brexit vote, with current expectations seemingly leaning toward the U.K. remaining in the EU. Domestic economic news was mixed, as jobless claims fell more than expected and new home sales dropped, while a preliminary read on manufacturing bested expectations. Treasuries were lower, crude oil prices were higher, while gold and the U.S. dollar dipped.

The Dow Jones Industrial Average (DJIA) jumped 230 points (1.3%) to 18,011, the S&P 500 Index rose 28 points (1.3%) to 2,113, and the Nasdaq Composite rallied 77 points (1.6%) to 4,910. In moderate volume, 837 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.98 to $50.11 per barrel and wholesale gasoline was $0.02 higher at $1.61 per gallon, while the Bloomberg gold spot price moved $2.03 lower to $1,266.09 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.2% at 93.52.

Macy's Inc. (M $33) announced that Chief Executive Officer (CEO) Terry Lundgren will transition the position of CEO to Jeff Gennette in 1Q 2017. Lundgren will continue as Executive Chairman of the company and work side-by-side with Gennette as President and CEO. Shares were nicely higher.

Bed Bath & Beyond Inc. (BBBY $44) reported fiscal 1Q earnings-per-share (EPS) of $0.80, six cents below the FactSet estimate, as revenues were roughly flat year-over-year (y/y) at $2.7 billion, compared to the projected $2.8 billion. 1Q same-store sales declined 0.5% y/y, versus the estimated 0.6% gain. BBBY lowered its full-year same-store sales outlook. Shares finished higher.

Red Hat Inc. (RHT $78) posted 1Q EPS ex-items of $0.50, roughly in line with forecasts, as revenues rose 18.0% y/y to $568 million, compared to the projected $563 million. RHT issued 2Q and full-year guidance that missed the Street's expectations. Separately, the company announced a new $1.0 billion stock buyback plan and the acquisition of 3scale with terms not disclosed. RHT was lower. 

Jobless claims fall, new home sales retreat from 8-year high

Weekly initial jobless claims (chart) dropped by 18,000 to 259,000 last week, versus the Bloomberg estimate calling for claims to decrease to 270,000, as the prior week's figure was unrevised at 277,000. The four-week moving average declined by 2,250 to 267,000, while continuing claims decreased by 20,000 to 2,142,000, south of the estimated level of 2,150,000.

New home sales (chart) declined 6.0% month-over-month (m/m) in May to an annual rate of 551,000 after reaching the highest level since February 2008 last month, and compared to forecasts of 560,000. The median home price rose 1.0% y/y to $290,400. The supply of new home inventory increased 14.6% m/m to 4.7 months at the current sales pace as sales fell m/m in the Northeast and West, dipped in the South, and rose solidly in the Midwest. New home sales are based on contract signings instead of closings.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) declined 0.2% m/m in May, versus the projected 0.1% increase, and compared to April's unrevised 0.6% gain. Support came from the component pertaining to the yield curve, while jobless claims weighed on the index.

The preliminary Markit U.S. Manufacturing PMI Index for June improved to 51.4 from May's 50.7 level, and above the forecasted modest rise to 50.9, with a reading above 50 denoting expansion in activity.

The Kansas City Fed Manufacturing Activity Index for June improved to 2 from May's -5 level, where it was expected to remain, with a reading north of zero depicting expansion.

Treasuries were lower, as the yield on the 2-year note increased 2 basis points (bps) to 0.77%, while the yields on the 10-year note and the 30-year bond gained 5 bps to 1.73% and 2.55%, respectively. 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 Is the ECB Driving European Bond Investors Into the US Bond Market?, at www.schwab.com/insights. Follow Randy and Schwab on Twitter: @randyafrederick and @schwabresearch.

Tomorrow's economic calendar will offer the preliminary durable goods orders report, with economists forecasting a 0.6% m/m decline for May, while ex-transportation, orders are expected to inch 0.1% higher. Rounding out the day will be the final University of Michigan Consumer Sentiment Index, anticipated to fall slightly to a level of 94.0.

Europe rallies on optimism, Asia mixed, as Brexit vote arrives

European equities traded nicely higher, with optimism that the U.K. will vote to remain in the EU fueling a fifth-consecutive session of gains. Financials were one of the best performers and the British pound rose versus the U.S. dollar as the U.K. is voting today on whether to remain or leave the EU—known as a Brexit—with results likely being announced early Friday morning. For our latest analysis on the Brexit issue read our article,  Will the UK Stay or Go? Markets Wait for Brexit Vote at www.schwab.com/insights, while Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his article, Brexit: 5 Things Investors Need to Know. Jeff adds that no matter the outcome, the issue of a Brexit may not be put to rest entirely as EU member parliaments must also agree to the changes being proposed. Nevertheless, the British understand the key role trade has always played in their economy. The British may resent bailed-out banks and bureaucrats in Brussels, but we believe economic considerations will favor the U.K. remaining within the EU. Read more at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. In economic news, the preliminary Markit Eurozone Composite PMI Index—a gauge of business activity in the manufacturing and services sectors—declined to 52.8 in June, from 53.1 in May, and compared to expectations of a dip to 53.0. However, a reading above 50 denotes expansion. The euro gained solid ground on the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mixed with volumes on the lighter side as the global markets awaited the results of today's U.K. Brexit vote. Japanese equities rose, with the yen holding steady during the session, while securities traded in Hong Kong posted a fifth-straight session of gains. Meanwhile basic materials stocks weakened to pressure mainland Chinese securities, as the sector was bogged down by reports that the U.S. may raise duties on some steel products. Finally, markets in Australia and India moved higher, but South Korean equities declined.

While all eyes will likely be on the results of the Brexit vote, other items on the international economic calendar for tomorrow include inflation figures from Japan, trade data from China, GDP from France, retail sales from Italy, and the Ifo Business Climate Index from Germany.

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