Markets Bounce After Two-Day Rout

Charles Schwab: On the Market

Posted: 6/28/2016 4:15 PM ET

Markets Bounce After Two-Day Rout

U.S. equities were able to climb out of their two-day hole to finish with solid gains, as investors snapped up beaten-down issues in the aftermath of Friday's Brexit vote. Equity news was sparse, while on the domestic economic front 1Q GDP mostly matched expectations, consumer confidence jumped and a regional manufacturing report surprised to the downside. Treasuries were modestly lower, gold and the U.S. dollar also lost ground, while crude oil prices finished higher.

The Dow Jones Industrial Average (DJIA) jumped 269 points (1.6%) to 17,409, the S&P 500 Index gained 36 points (1.8%) to 2,036, and the Nasdaq Composite rallied 97 points (2.1%) to 4,692. In heavy volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.52 to $47.85 per barrel and wholesale gasoline was $0.03 higher at $1.52 per gallon, while the Bloomberg gold spot price fell $11.64 to $1,312.96 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 96.10.

Carnival Corp. (CCL $44) announced 2Q earnings per share ex-items of $0.49, topping the $0.39 FactSet estimate, while revenues rose 3.5% year-over-year (y/y) to $3.7 billion, roughly matching expectations. The company issued an improved outlook for its full year 2016 net revenue yields and increased the low and high ends of its full year earnings per share guidance. Shares of CCL gave up early gains and finished lower.

Marriott International Inc. (MAR $63) and Starwood Hotels & Resorts Worldwide Inc. (HOT $71) announced they have received clearance from the European Commission for MAR to acquire HOT in a previously announced merger transaction. The Commission found that the takeover would not adversely affect competition in Europe. Shares of both companies were higher.

Final read on 1Q GDP mostly in line with expectations

The final look (of three) at 1Q Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 1.1%, revised upward from the 0.8% and the 0.5% expansion reported in the second and first revisions, respectively. This compared to the Bloomberg forecast of a revised 1.0% pace of growth. 4Q GDP expanded by an unrevised 1.4% rate. Personal consumption came in at a 1.5% gain for 1Q, down from the preliminary estimate of 1.9%, while forecasts called for an upwardly revised 2.0% pace of growth. Personal consumption grew by an unrevised 2.4% in 4Q.

On inflation, the GDP Price Index was revised to a 0.4% gain, versus forecasts of an unrevised 0.6% increase, while the core PCE Index, which excludes food and energy, was adjusted down a tick to a 2.0% rise, versus expectations for it to remain at 2.1%.

The Consumer Confidence Index (chart) jumped to 98.0 in June from the downwardly revised 92.4 level in May and compared to the estimated rise to 93.5. The sentiment towards the present situation rebounded nicely after last month it registered the lowest level since November, while expectations of business conditions also saw solid improvement. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—inched higher to 0.1 from the 0.0 posted in May.

The Richmond Fed Manufacturing Activity Index unexpectedly fell deeper into contraction territory (a reading below zero), dropping to -7 in June from the -1 posted in May, while economists had anticipated the index to move back into an expansionary state to a reading of 3.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.4% y/y in April, roughly matching expectations. Month-over-month (m/m), home prices were up by 0.5% on a seasonally adjusted basis for April, slightly below forecasts of a 0.6% increase.

Treasuries finished slightly lower, as the yields on the 2-year and 10-year notes, as well as the 30-year bond, all rose 1 basis point to 0.61%, 1.46% and 2.27%, respectively. For the latest analysis on the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' recent article titled, Brexit: What Does It Mean for the Bond Market?, at www.schwab.com/marketinsight. And follow Kathy on Twitter: @kathyjones.

Tomorrow's economic calendar will begin with a report on personal income and spending, forecasted to show income rose 0.3% m/m during May and that spending increased 0.4%, followed by pending home sales, with economists expecting a 1.1% m/m decline, as well as MBA Mortgage Applications.

Europe bounces after two-day rout, Asia higher too

European equities finished solidly to the upside, snapping their worst two-day losing streak since 2008, following the U.K.'s vote to exit the European Union (EU), known as 'Brexit', with the pound advancing as investors may have regained a bit of their appetite for risk assets. EU leaders met in Brussels for the start of a two-day summit to discuss Britain's decision to leave the group, while the bloc's lawmakers have said the U.K. should trigger the process for seceding from the EU as soon as possible, a process that may be difficult to achieve due to the complexity of the British political system. For deeper analysis of the current global landscape, see the Schwab Center for Financial Research's recent article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight and be sure to follow Schwab on Twitter: @schwabresearch. In economic news in the region, import prices for Germany increased more than expected m/m, rising 0.9% versus the forecasted 0.6% gain, while France and Italy reported a m/m decline in consumer confidence as the latter also reported an improvement in manufacturing confidence but a decline in economic sentiment for June.

Stocks in Asia finished mostly to the upside as global investors continued to look for signs that central banks and governments may help to ease the recent market turmoil in the wake of the U.K.'s vote in favor of leaving the European Union. Japanese equities ticked slightly higher, with construction companies, warehouse stocks and food producers leading gains, while exporters mostly fell. Prime Minister Abe noted they would continue to monitor the markets closely and the island nation's Finance Minister said he's watching currency moves with a sense of urgency and will take action as needed. Mainland Chinese stocks advanced amid speculation of whether or not the People's Bank of China (PBoC) may step in to slow the yuan depreciation that has occurred since the Brexit announcement, posing challenges to the PBoC in terms of its policy direction, while listings in Hong Kong pared a sharp morning decline to finish slightly lower, with speculation about a long-awaited Shenzhen-Hong Kong link increasing trading volumes in the region. Indian's markets gained ground, as investors looked to invest in companies that would benefit from Prime Minister Modi's growth-boosting policies and have no business links with Europe. Finally, stocks in South Korea increased, while those traded in Australia declined.

The international economic calendar for tomorrow will hold retail sales and trade data from Japan, consumer confidence from Germany and the Eurozone, and CPI from Spain.