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Wednesday, June 22, 2016

Fence-Sitting Ahead of Brexit Vote

Charles Schwab: On the Market
Posted: 6/22/2016 4:15 PM ET

Fence-Sitting Ahead of Brexit Vote

U.S. equities finished lower in cautious, choppy trading, with the shadow of tomorrow's U.K. Brexit vote hovering over the markets. Meanwhile, energy stocks suffered following a bearish Department of Energy report, while earnings reports from FedEx and Adobe, along with guidance from HP, were met with disappointment. Fed Chair Yellen concluded her two-day monetary policy report to Congress, while existing home sales rose to their highest level in more than nine years. Treasuries finished modestly higher, while gold and the U.S. dollar lost ground.

The Dow Jones Industrial Average (DJIA) fell 49 points (0.3%) to 17,781, the S&P 500 Index lost 3 points (0.2%) to 2,085, and the Nasdaq Composite finished 10 points (0.2%) lower at 4,833. In moderate volume, 812 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.72 to $49.13 per barrel and wholesale gasoline was unchanged at $1.59 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 0.3% at 93.74.

FedEx Corp. (FDX $157) reported fiscal 4Q earnings-per-share (EPS) ex-items of $3.30, above the $3.28 FactSet estimate, as revenues grew 7.4% year-over-year (y/y) to $13.0 billion, north of the projected $12.8 billion. FDX issued current year EPS guidance with a midpoint below analysts' expectations. Shares finished lower.

Adobe Systems Inc. (ADBE $94) posted fiscal 2Q profits of $0.71 per share, above the estimated $0.68, with revenues rising 20.0% y/y to $1.4 billion, roughly in line with forecasts. ADBE issued 3Q EPS guidance that came in mostly below the Street's expectations. Shares were solidly lower.

Shares of HP Inc. (HPQ $13) fell after the company reaffirmed its full-year profit outlook, lowered its cash flow target and announced a plan to change the company's printing supplies inventory management strategy. These overshadowed its raised 3Q EPS guidance.

KB Home (KBH $15) announced fiscal 2Q EPS of $0.17, three cents north of forecasts, as revenues grew 30.2% y/y to $811 million, compared to the expected $753 million. KBH traded nicely higher.

Tesla Motors Inc. (TSLA $197) came under solid pressure after the company yesterday offered about $2.8 billion in all stock to acquire SolarCity Corp. (SCTY $22), which closed higher. TSLA's Chief Executive Officer and Founder Elon Musk noted on a conference call that the board opinion is unanimous at both companies, which he is the largest shareholder and chairman of both.

Existing home sales rise roughly in line with forecasts

Existing-home sales in May rose 1.8% month-over-month (m/m) to a 5.53 million annual rate—the highest annual pace since February 2007—compared to the Bloomberg forecast of a 5.55 million pace. April's figure was revised downward to a 5.43 million annual rate. Compared to last year, sales were 4.5% higher and the median existing-home price was up 4.7% at $239,700—an all-time high. Housing supply came in at a 4.7-month pace at the current sales rate. Sales were higher in the Northeast, South and West, while the Midwest fell. Single-family and condominium and co-op sales both rose.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said the primary driver of the increase in sales was homeowners realizing the equity they have accumulated in recent years and finally deciding to trade-up or downsize, though first-time buyers are still struggling. "Barring further deceleration in job growth that could ultimately temper demand from these repeat buyers, sales have the potential to mostly maintain their current pace through the summer," Yun added.

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.

The MBA Mortgage Application Index rose 2.9% last week, after declining 2.4% in the previous week. The increase came as a 6.5% jump for the Refinance Index more than offset a 2.4% decline for the Purchase Index. The average 30-year mortgage rate fell 3 basis points (bps) to 3.76%.

Federal Reserve Chairwoman Janet Yellen concluded her two-day semiannual monetary policy report to Congress, speaking to the House Financial Services Committee shortly after the opening bell. Her prepared remarks did not differ from yesterday's testimony to the Senate, where she noted that the economy has made further progress. "However, the pace of improvement in the labor market appears to have slowed more recently, suggesting that our cautious approach to adjusting monetary policy remains appropriate," she added. Yellen also stressed that the Central Bank believes the recent slowing in employment growth is "transitory" but it is watching the job market carefully. Moreover, she said a U.K. vote to exit the European Union (EU)—known as a Brexit—"could have significant economic repercussions." Yellen concluded by saying the path of the fed funds rate will depend on economic and financial developments. The global markets are paying close attention to the Q&A session that is underway.

Treasuries finished slightly higher, as the yields on the 2-year and 10-year notes, along with the 30-year bond, lost 2 basis points (bps) to 0.75%, 1.68% and 2.49%, respectively. Schwab's Chief Fixed Income Strategist Kathy Jones provides analysis of the global bond markets in her latest article, Global Bonds: A World Without Yield, at www.schwab.com/marketinsight, and she teams up with Schwab's Managing Director of Trading and Derivatives, Randy Frederick, in the video titled Fed on Pause: Watching and Waiting to Raise Rates, for further analysis on the Fed and the bond markets at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Tomorrow's economic calendar will be the busiest of the week, beginning with weekly initial jobless claims, forecasted to decline to 270,000 from the prior week's 277,000, as well as Markit's preliminary Manufacturing PMI, with economists anticipating activity to move higher into expansionary territory (a reading above 50) for June to a level of 50.9 from May's 50.7. After the opening bell, investors will get a look at new home sales, with forecasts calling for a 9.5% m/m decline for May to an annual rate of 560,000 units, as well as the Leading Index, expected to have gained 0.1% m/m during May, following the 0.6% increase posted in April. Finally, the Kansas City Fed Manufacturing Activity Index will round out the day.

Europe higher, Asia mixed as Brexit vote draws closer

European equities traded mostly higher, as optimism appeared to be holding that the U.K. will vote to remain in the EU, despite recent polls suggesting it remains too close to call. Financials led the markets higher and oil & gas issues contributed modestly to the advance, with crude oil prices flirting with the $50 per barrel mark before some bearish U.S. inventory data. Tomorrow the U.K. will vote on whether to remain or leave the U.K., 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 at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. The euro and British pound gained ground on the U.S. dollar, while bond yields in the region finished mixed, with earnings and economic data on the light side.

Stocks in Asia finished mixed as the global markets grapple with uncertainty ahead of tomorrow's Brexit vote in the U.K., while digesting testimony from U.S. Fed Chair Yellen to Congress, where she offered little new clues about the timing of future rate hikes. Japanese equities declined, after rallying the past three sessions, with the uncertainty toward the U.K. likely fostering some afternoon strength in the yen. Meanwhile, stocks in Australia and India declined, however those traded in South Korea, mainland China and Hong Kong all gained ground.

A host of manufacturing and services PMI readings from across the globe will be released tomorrow, while Japan will also release its Leading Index, and industrial sales will come from Italy.

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