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Wednesday, June 29, 2016

Stocks Rally for a Second Day

Charles Schwab: On the Market
Posted: 6/29/2016 4:15 PM ET

Stocks Rally for a Second Day

U.S. stocks notched a second day of solid gains, recouping some of the losses incurred post-Brexit, with financials leading the way. Treasuries were slightly lower, having oscillated between the plus-and-minus sides throughout the day, while crude oil prices tacked on to their upward march, gold was also higher, and the U.S. dollar was lower. In economic news, personal income and spending mostly matched expectations, while pending home sales and weekly mortgage applications slumped.

The Dow Jones Industrial Average (DJIA) jumped 284 points (1.6%) to 17,694, the S&P 500 Index gained 35 points (1.7%) to 2,071, and the Nasdaq Composite rallied 87 points (1.9%) to 4,779. 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 $2.03 to $49.88 per barrel and wholesale gasoline was $0.02 higher at $1.54 per gallon, while the Bloomberg gold spot price gained $6.36 to $1,318.15 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 95.83.

After yesterday's closing bell, NIKE Inc. (NKE $55) announced 4Q earnings-per-share (EPS) of $0.49, slightly better than the FactSet $0.48 forecast, while revenues rose 6.0% year-over-year (y/y) to $8.2 billion, matching estimates. Shares of NKE traded higher.

Monsanto Co. (MON $104) announced 3Q EPS ex-items of $2.17, well below the $2.40 FactSet estimate, while revenues decreased 8.5% y/y to $4.2 billion, versus the FactSet expectation of $4.5 billion. MON also highlighted progress against several milestones related to the company's long-term growth drivers despite the macro challenges facing global agriculture. MON gained ground.

General Mills Inc. (GIS $68) reported 4Q EPS ex-items of $0.66, topping the FactSet estimate of $0.60, while revenues declined 8.6% y/y to $3.9 billion, roughly in line with expectations. GIS announced a 4% increase to its quarterly dividend, and that it now expects to achieve an adjusted operating profit margin of 20% by fiscal 2018, an increase of 400 basis points over fiscal 2015 levels. Shares of GIS were higher.

Personal income and spending rise, pending home sales and mortgage apps decline

Personal income (chart) was 0.2% higher month-over-month (m/m) in May, slightly lower than the Bloomberg forecast of 0.3% and below April's upwardly revised 0.5% increase. Personal spending came in 0.4% higher m/m last month, matching expectations and versus April's upwardly revised reading of 1.1%. The May savings rate as a percentage of disposable income declined to 5.3% from April's 5.4% rate. The PCE Deflator rose 0.2% m/m, matching forecasts. Compared to last year, the deflator was 0.9% higher, just shy of estimates calling for a 1.0% increase. Excluding food and energy, the PCE Core Index was 0.2% higher m/m, matching expectations, and the index was up 1.6% y/y, in line with estimates.

Pending home sales fell 3.7% m/m in May, versus projections of a 1.1% decline and following the downwardly revised 3.9% gain registered in April. Compared to last year, sales were 2.4% higher, versus forecasts of a 4.6% increase. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose in line with expectations for May.

The MBA Mortgage Application Index declined 2.6% last week, after increasing 2.9% in the previous week. The decrease came as a 2.4% decline for the Refinance Index coupled with a 3.0% decrease for the Purchase Index. The average 30-year mortgage rate lost 1 basis point (bp) to 3.75%.

Treasuries finished slightly lower, as the yield on the 2-year note rose by 2 bps to 0.63%, while the yields on the 10- year note and the 30-year bond gained 4 bps to 1.51% and 2.32%, 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, the economic calendar will offer weekly initial jobless claims, forecasted to move higher to a level of 267,000 from the surprising drop to 259,000 in the prior week, as well as the Chicago Purchasing Managers Index, with economists expecting a reading of 51.0 for June, up from the 49.3 posted in May, with 50 the demarcation point between expansion and contraction in activity.

Europe rallies for second-straight day, Asia notches gains as well

European equities traded higher, with the U.K. FTSE 100 Index erasing losses that developed after the Brexit vote, as stocks in the region managed a second-straight day of solid gains after tumbling following Britain's vote to leave the European Union (EU). EU leaders continued a two-day summit in Brussels today, without the U.K., to discuss the Brexit process, which they have noted would be preferable to do orderly and quickly so as to avoid entering into a prolonged period of uncertainty. The concern that a timely, organized exit may not occur has been magnified by the fact that U.K. Prime Minister David Cameron announced his resignation following the successful 'leave' vote, and he stated that the exit process should be triggered by his successor, who may not be selected until September. 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, Germany reported an unexpected improvement in consumer confidence, as well as national and regional consumer price inflation reads that were mostly in line with estimates. Also, the U.K. matched economists' estimates when it reported a larger expansion of consumer credit than occurred the previous month.

Stocks in Asia finished higher as the global equity rally continued on some optimism that policy makers may introduce measures aimed at limiting any economic fallout following the U.K. Brexit vote. Japanese securities surged, with financial companies and steel producers leading gains, even as the yen rose versus the U.S. dollar. After meeting with the Governor of the Bank of Japan, Prime Minister Abe told journalists he will mobilize all possible measures after the Brexit vote, while Governor Kuroda also informed the media that the central bank can add funds to the market as needed. Chinese equities, and those traded in Hong Kong moved higher, as the world's second largest economy will begin to release June economic data on Friday starting with manufacturing and non-manufacturing PMI releases. Australia's markets increased, with energy issues leading gains, while South Korean listings advanced, while the won gained for a second day after the Korean government said yesterday that it plans to spend more than 20 trillion won, or approximately $17 billion, on a stimulus package to support jobs and growth. Finally, Indian stocks also increased nicely.

On tomorrow's international economic calendar, investors will be treated to industrial production from South Korea and Japan, while the island nation will also report construction orders and housing starts, credit statistics will come from Australia, retail sales and employment data from Germany, consumer spending, CPI and PPI from France, and the U.K. will release final 1Q GDP figures.

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