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Friday, June 17, 2016

Bears Take Upper Hand for the Week

Charles Schwab: On the Market
Posted: 6/17/2016 4:15 PM ET

Bears Take Upper Hand for the Week

U.S. equities closed out a disappointing week amid continued jitters about next week's looming U.K Brexit vote, and despite crude oil prices snapping a six-session losing streak. Healthcare issues were the biggest drag on the major indexes, while technology stocks sunk following Oracle's miss. Treasuries finished lower in the midst of a mixed housing report, while the U.S. dollar fell and gold was higher.

The Dow Jones Industrial Average (DJIA) fell 58 points (0.3%) to 17,675, the S&P 500 Index lost 7 points (0.3%) to 2,071, and the Nasdaq Composite finished 45 points (0.9%) lower at 4,800. In very heavy volume, as a result of quadruple witching—the simultaneous expiration of stock and index futures and options contracts—2.0 billion shares were traded on the NYSE and 2.5 billion shares changed hands on the Nasdaq. WTI crude oil increased $1.77 to $47.98 per barrel and wholesale gasoline added $0.04 to $1.51 per gallon, while the Bloomberg gold spot price increased $19.77 to $1,298.20 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 94.16. Markets were lower for the week, as the DJIA declined 1.1%, the S&P 500 Index decreased 1.2% and the Nasdaq Composite fell 1.9%.

Oracle Corp. (ORCL $40) reported fiscal 4Q earnings-per-share (EPS) ex-items of $0.81, one penny shy of the FactSet estimate, as revenues declined 1.0% year-over-year (y/y) to $10.6 billion, above the projected $10.5 billion. Shares gained ground as the earnings miss was overshadowed by its stronger-than-expected growth and upbeat guidance for its cloud software and platform services segment.

Viacom Inc. (VIAB $44) issued fiscal 3Q profit guidance that was well below expectations. The company said its 3Q results will be impacted by the theatrical underperformance of Teenage Mutant Ninja Turtles: Out of the Shadows as well as a delay in completing a significant subscription video on demand (SVOD) agreement. VIAB said that it expected to complete a significant SVOD agreement in the quarter, but the recent and highly public governance controversy negatively impacted the timing and its ability to achieve an optimal outcome with partners. VIAB added that it has a strong slate of theatrical releases in the months ahead. Shares were modestly lower amid choppy trading.

Finisar Corp. (FNSR $19) posted fiscal 4Q EPS ex-items of $0.29, north of the expected $0.25, as revenues dipped 0.4% y/y to $319 million, compared to the projected $318 million. The fiber optic communications technology company issued stronger-than-expected 1Q guidance. Shares were nicely higher.

Housing construction activity in May mixed

Housing starts (chart) for May declined 0.3% month-over-month (m/m) to an annual pace of 1,164,000 units, but the figure topped the Bloomberg forecast of a 1,150,000 unit rate. April's starts were downwardly revised to an annual pace of 1,167,000. Construction of single-family units ticked higher and was up for multi-family structures, while both were nicely higher compared to the same period a year ago. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, rose 0.7% m/m in May to an annual rate of 1,138,000, after April's upward revision to a 1,130,000 rate, but the rate missed the expected annual pace of 1,145,000 units. Single-family unit permits declined m/m but were up y/y, while permits for multi-family structures rose solidly m/m, though are down y/y.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Summer Lovin', higher wages and a continued improving housing market would go a long way toward improving consumer confidence, and that's what we believe we're seeing. A robust consumer would likely aid the more cyclical sectors, such as technology and consumer discretionary, as well as helping the overall U.S. economy. Read more at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Treasuries were lower, as the yield on the 2-year note was flat at 0.69%, while the yield on the 10-year note rose 3 bps to 1.61%, and the 30-year bond rate increased 2 bps to 2.42%. Bond yields rebounded modestly from their recent tumble exacerbated by this week's unchanged Fed monetary policy decision, where it preserved uncertainty regarding the timing of the next rate hike by suggesting that it is still in a "wait-and-see" mode, remaining data dependent in the wake of May's severely disappointing labor report, but still forecasting the possibility of two rate hikes this year. Bond yields have also seen pressure courtesy of rising growth concerns, and growing uncertainty regarding a U.K. exit from the European Union (EU), known as a Brexit.

For more on the bond markets in the wake of the Fed's decision see the video by Schwab's Chief Fixed Income Strategist, Kathy Jones and Managing Director of Trading and Derivatives, Randy Frederick, titled Fed on Pause: Watching and Waiting to Raise Rates, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

The recent pressure on global bond yields has amplified the uneasy sentiment as of late, with rates in Germany, Japan and the U.K. hitting record lows, while the U.S. 10-year Treasury yield touched a four-year low during yesterday's trading session. Amid this backdrop, Schwab's Kathy Jones offers notes in her latest article, Global Bonds: A World Without Yield, near- or below-zero bond yields in major global markets are likely to persist into the second half of the year. However, we doubt the strong performance year to date can be repeated in the second half of the year, especially in the riskier areas of the fixed income market. With yields low and prices high, bonds are susceptible to setbacks. Investors with exposure to international and low-credit-quality bonds may want to re-examine the allocations within their fixed income portfolios, as risks are rising and the potential rewards are declining. Read more at www.schwab.com/marketinsight.

Europe trims weekly loss, Asia rebounds

European equities finished higher, with the Stoxx Europe 600 Index paring its more than 2.0% weekly drop, aided by a broad-based advance in Asia and following yesterday's upside reversal in the U.S. that snapped a string of five-straight losing sessions. Financials and oil & gas issues led the rebound as the recently battered sectors recovered from recent pressure. The sectors have been hampered by the flared-up global risk aversion amid the plethora of market headwinds, concerns about bad bank loans and capital positions, and the recent tumble in crude oil prices, which are rebounding today. Moreover, concerns about a U.K. Brexit eased as campaigning for the June 23 referendum was suspended for a second day in the wake of yesterday's murder of Labour Party lawmaker Jo Cox, who was in favor of the U.K. remaining in the EU. The British pound and the euro gained ground on the U.S. dollar, while bond yields in the region were mixed. For analysis on the Brexit issue read our article, Brexit: How Might Stocks Respond? at www.schwab.com/insights.

Stocks in Asia finished higher to close out a negative week, aided by yesterday's upside reversal in the U.S., while eased concerns about a U.K. Brexit underpinned sentiment. Japanese equities rose to trim a sharp weekly decline, supported by the yen pausing from its recent surge that has been fueled by risk aversion on heightened global growth and Brexit concerns, and exacerbated by this week's decision by the Bank of Japan to hold off on adding further stimulus measures. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses What investors need to know about helicopter money, while offering Five ways investors can make the most of slower growth, at www.schwab.com/oninternational. Mainland Chinese stocks, as well as those in Hong Kong gained ground, paring their weekly drops, along with Australian listings, led by technology and financials issues. Finally, India's markets advanced for the week, and South Korea securities ticked higher to limit the solid decline seen this week.

Risk aversion festers to pressure global equities

The global stock markets finished solidly lower on a week filled with volatility fueled by elevated risk aversion. Heightened concerns about a Brexit and disappointing monetary policy decisions out of the U.S. and Japan were painted on a backdrop of festering global growth concerns. The yen continued its rally and crude oil prices posted a string of six-straight losing sessions. Treasury yields remained under pressure, contributing to the drop in global bond yields, which illustrated the flight to safety in the markets. The hampered global sentiment overshadowed Dow member Microsoft Corp's (MSFT $50) agreement to acquire LinkedIn Corp. (LNKD $191) for about $26.2 billion, as well as a second-straight solid monthly rise in retail sales.

As noted in the Schwab Market Perspective: Summer of Discontent?, stocks moving nowhere for over a year, and a continued low yield environment is fueling investor frustration. There doesn’t appear to be a lot of impetus for that to change soon, but investors should remain patient as positive signs are emerging. Read more at www.schwab.com/marketinsight, and for our analysis of this week's Fed decision see our article, Fed Holds Steady on Rates at www.schwab.com/insights.

Economic calendar likely to yield to Brexit vote

Next week's economic calendar will start slow but pick up steam on Tuesday as Federal Reserve Chairwoman Janet Yellen will begin her two-day semiannual monetary policy report to Congress. Yellen's testimony will be accompanied by some key reads on housing in the form of existing and new home sales reports, as well as manufacturing, with preliminary releases of durable goods orders and Markit's Manufacturing PMI Index. Other notable domestic reports due out next week include: the Leading Index and the final June University of Michigan Consumer Sentiment Index.

However, the focus of the global markets will likely be the looming June 23 U.K. Brexit vote, which has been a major source of the volatility in the markets as of late with uncertainty regarding the outcome remaining. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his article, Brexit: 5 Things Investors Need to Know, 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. Be sure to follow Jeff on Twitter: @jeffreykleintop.

Key international reports to look out for next week include: Australia—Reserve Bank of Australia meeting minutes. China—property prices. Japan—trade balance. Eurozone—Markit's business activity reports, along with German investor and business confidence data.

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