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Thursday, June 09, 2016

Stocks See a Soft Shade of Red

Charles Schwab: On the Market
Posted: 6/9/2016 4:15 PM ET

Stocks See a Soft Shade of Red

U.S. stocks pared losses to close fairly near the flatline after initially following the global equity trend lower as growth concerns continued to flare amid some recent disappointing economic data and a diverging international monetary policy landscape. Treasuries were higher despite a surprising decline in weekly initial jobless claims and an increase in wholesale inventories. The U.S. dollar and gold were higher, while crude oil prices declined.

The Dow Jones Industrial Average (DJIA) shed 20 points (0.1%) to 17,985, the S&P 500 Index ticked 4 points (0.2%) lower to 2,115, and the Nasdaq Composite finished 16 points (0.3%) to the downside at 4,959. In moderate volume, 798 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.67 to $50.56 per barrel, wholesale gasoline was unchanged at $1.62 per gallon, and the Bloomberg gold spot price increased $6.39 to $1,269.19 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 94.01.

J. M. Smucker Co. (SJM $143) reported fiscal 4Q earnings-per-share (EPS) ex-items of $1.44, well above the $1.19 FactSet estimate. Revenues rose 25.0% year-over-year (y/y) to $1.8 billion—reflecting the contribution from its acquisition of Big Hearts Pet Brands in 4Q of the prior year—roughly in line with forecasts. The company said it concluded the year with a strong 4Q, including the continued successful introduction of Dunkin' Donuts K-Cup pods and other on-trend products, while it was able to provide lower pricing on Folgers coffee. SJM issued much stronger-than-expected current year EPS guidance. Shares finished nicely higher.

Restoration Hardware Holdings Inc. (RH $28) posted 1Q EPS ex-items of $0.05, matching forecasts, with revenues rising 8.0% y/y to $456 million, compared to the expected $452 million. 1Q same-store sales increased 4.0% y/y, versus the estimated 6.1% gain. RH issued much softer-than-expected 2Q and full-year guidance, noting that its results will be impacted by "certain short term operational items," including costs associated with production delays, timing issues, and a more aggressive approach to optimizing inventory. Shares of RH closed over 20% lower.

Jobless claims unexpectedly decline, inventories jump

Weekly initial jobless claims (chart) decreased by 4,000 to 264,000 last week, versus the Bloomberg estimate calling for claims to increase to 270,000, as the prior week's figure was revised higher by 1,000 to 268,000. The four-week moving average fell by 7,500 to 269,500, while continuing claims dropped 77,000 to 2,095,000, south of the estimated level of 2,171,000.

For more on the labor market, see Schwab's Chief Investment Strategist, Liz Ann Sonders' latest article, Are the Glory Days of Job Growth Over?, at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Wholesale inventories (chart) rose 0.6% month-over-month (m/m) in April, well above forecasts calling for a 0.1% increase, and compared to March's upwardly revised 0.2% increase. Sales were up 1.0% m/m, helping to trim the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—to a 1.35 months level from the 1.36 posted in March.

Treasuries were higher, with the yield on the 2-year note declining 1 basis point (bp) to 0.76%, while the yields on the 10-year note and the 30-year bond dipped 2 bps to 1.68% and 2.47%, respectively. Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis of fixed income investing in her article, Bond Index Investing: Why You Should Track More Than One Benchmark, at www.schwab.com/onbonds, and follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will be light, offering the preliminary University of Michigan Consumer Sentiment Index for June, expected to tick lower to 94.0 from May's 94.7 level.

Europe and Asia lower as global sentiment stymied

European equities finished lower with global economic growth concerns appearing to flare-up following some disappointing data out of Japan and as the markets grappled with the diverging global monetary policy landscape. Basic materials were under some pressure amid the soured global mood and lower crude oil prices menaced the energy sector. The euro and British pound lost ground versus the U.S. dollar, while bond yields in the region were lower.

European Central Bank (ECB) President Mario Draghi spoke today, reiterating the economic need for structural reform, while the markets focused on the second day of the ECB's corporate bond-buying program as part of the central bank's expanded stimulus measures announced in March. For analysis of the ECB's corporate bond buying, check out Schwab's Fixed Income Director Collin Martin's, CFA, article, The ECB's Latest Plan: What Does It Mean for U.S. Corporate Bonds? at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch. In economic news, German exports came in flat m/m in April, versus the 0.8% decline that was expected, and following the 1.9% gain seen in March. The U.K. trade deficit came in smaller than anticipated for April.

Stocks in Asia finished mostly lower amid the cautious global economic growth sentiment, while the markets await next week's monetary policy decisions out of the U.S., Japan and the U.K. Emerging markets came under pressure courtesy of the soured global sentiment, with Indian securities pulling back from seven-month highs. However, volume was lighter than usual with markets in mainland China and Hong Kong closed for a holiday. Despite the closures, China reported a smaller-than-expected rise in its consumer price inflation and a smaller-than-forecasted decline in producer price inflation for May.

Japanese equities fell, courtesy of some late-session strength in the yen and following a much larger-than-expected drop in the nation's April machine orders—a gauge of capital investment. Australian stocks declined, with a solid gain in basic materials listings being overshadowed by noticeable weakness in industrials and a modest decline in financials.

Finally, South Korean stocks dipped, even as the Bank of Korea surprisingly cut its benchmark interest rate by 25 bps to 1.25%, possibly causing some concern about the outlook for the nation's economic growth. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers Five ways investors can make the most of slower growth, at www.schwab.com/oninternational. Follow Jeff on Twitter: @jeffreykleintop.

The international economic docket for tomorrow will yield the Tertiary Industry Index and PPI from Japan and industrial production from India. Releases from across the pond will include the Wholesale Price Index and CPI from Germany, industrial and manufacturing production from France and construction output from the U.K.

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