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Thursday, June 16, 2016

Stocks Stage Midday Turnaround

Charles Schwab: On the Market
Posted: 6/16/2016 4:15 PM ET

Stocks Stage Midday Turnaround

Seeing pressure early amid some uneasiness in the wake of monetary policy decisions from the Fed, Bank of England and Bank of Japan, continued global growth concerns, and Brexit worries, stocks were able to dig out of their hole to finish higher on the day. Treasuries were mixed following mixed reads on U.S. inflation, jobless claims and homebuilder sentiment, the U.S. dollar was flat while gold and crude oil prices tumbled.

The Dow Jones Industrial Average (DJIA) rose 93 points (0.5%) to 17,733, the S&P 500 Index increased 7 points (0.3%) to 2,078, and the Nasdaq Composite finished 10 points (0.2%) higher at 4,845. In moderate volume, 876 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $1.80 to $46.21 per barrel and wholesale gasoline declined $0.03 to $1.47 per gallon, while the Bloomberg gold spot price decreased $11.30 to $1,280.45 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was unchanged at 94.61.

Rite Aid Corp. (RAD $8) reported 1Q earnings-per-share (EPS) ex-items of $0.01, below the $0.05 FactSet estimate, on revenues of $8.2 billion, which roughly matched forecasts. 1Q same-store sales grew 0.4% y/y. The company said its challenge was pharmacy reimbursement rate pressure, which it was unable to offset largely due to drug purchasing efficiencies that did not meet its expectations. Shares finished nearly unchanged.

Kroger Co. (KR $35) reported 1Q EPS of $0.70, one penny north of estimates, with revenues growing 4.7% year-over-year (y/y) to $34.6 billion, below the projected $34.9 billion. Same-store sales, excluding fuel, rose 2.4% y/y, just shy of the anticipated 2.5% increase. KR reaffirmed its full-year profit forecast. Shares were slightly lower.

Envision Healthcare Holdings Inc. (EVHC $26) and AMSURG Corp. (AMSG $78) announced a merger agreement in an all-stock transaction at a fixed exchange ratio of 0.334 AMSG shares per EVHC share, with an enterprise value of about $15.0 billion. Envision shareholders will own about 53.0% of the combined company and AMSURG shareholders will own approximately 47.0%. EVHC traded lower, while AMSG gained ground.

Headline consumer price inflation slightly misses forecasts, jobless claims jump

The Consumer Price Index (CPI) (chart) was up 0.2% month-over-month (m/m) in May, below forecasts of a 0.3% increase, while April's 0.4% rise was unrevised. The core rate, which strips out food and energy, gained 0.2% m/m, matching expectations and April's unrevised increase. Y/Y, prices were 1.0% higher for the headline rate, below forecasts of a 1.1% rise, while the core rate was up 2.2%, in line with projections. April y/y figures showed an unrevised 1.1% rise and an unadjusted 2.1% increase for the headline and core rates respectively.

Weekly initial jobless claims (chart) rose by 13,000 to 277,000 last week, versus estimates calling for claims to increase to 270,000, as the prior week's figure was unrevised at 264,000. The four-week moving average dipped by 250 to 269,250, while continuing claims rose by 45,000 to 2,157,000, north of the estimated level of 2,140,000.

The May National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month rose to 60—the highest since January 2016—from 58 in May, versus estimates calling for an improvement to 59. However, builder confidence remained above 50, which separates good and poor conditions, for the twenty-fourth straight month. The NAHB said builders in many markets across the nation are reporting higher traffic and more committed buyers at their job sites. The NAHB added, "However, our members are also relating ongoing concerns regarding the shortage of buildable lots and labor and noting pockets of softness in scattered markets."

Tomorrow, the lone report on the U.S. economic calendar will be a read on housing construction activity, in the form of May housing starts and building permits. Starts are expected to decline 1.9% m/m to an annual rate of 1,150,000 units, while permits are projected to rise 1.3% to a rate of 1,145,000 units. As noted in the Schwab Market Perspective: Summer of Discontent?, a more confident consumer should be supported by an improving housing market, which should also support business confidence and the economy more broadly. Read more at www.schwab.com/marketinsight.

The Philly Fed Manufacturing Index (chart) in June rose to a level depicting expansion (a reading above zero) increasing to 4.7 from -1.8 in May, and compared to estimates calling for an improvement to 1.0.

Treasuries were mixed, as the yield on the 2-year note rose 1 basis point (bp) to 0.67%, while the yield on the 10-year note was flat at 1.57% and the 30-year bond rate ticked 1 bp lower to 2.40%. Bond yields fell yesterday following the 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 been seeing pressure courtesy of rising growth concerns, and growing uncertainty regarding a U.K. exit from the European Union (EU), known as a Brexit. For analysis on the Fed's decision from Schwab experts see our article, Fed Holds Steady on Rates, at www.schwab.com/insights, as well as Schwab's Fixed Income Director Collin Martin's, CFA, article, Waiting for a Fed Rate Hike: Bond Investments That May Make Sense Now at www.schwab.com/marketinsight. Follow Schwab on Twitter: @schwabresearch.

Europe resumes slide, Asia lower following Fed and BoJ decisions, Brexit worries

Although off the worst levels of the day, European equities fell back in the red, after the Stoxx Europe 600 Index rebounded yesterday from its worst five-day plunge since February, per Bloomberg. Industrials led to the downside, with the global markets stymied by festering global growth concerns and disappointment on the heels of unchanged monetary policy decisions from the U.S. and Japan. Financials saw pressure as worries toward bad debt resurfaced, exacerbated by a flare-up in uneasiness toward the sector's capital positions. Also, worries about a U.K. Brexit remained a drag on sentiment, with the Bank of England holding its monetary policy unchanged, reiterating growth and inflation would be materially impacted by a Brexit. The U.K. will hold a referendum on June 23 to determine if it will leave the European Union (EU) and for analysis on the issue read our article, Brexit: How Might Stocks Respond? at www.schwab.com/insights. The euro and British pound dropped versus the U.S. dollar, while bond yields in the region finished mixed. In other monetary policy news, the Swiss National Bank held its benchmark interest rate unchanged, as expected. In economic news, EU new car registrations jumped in May, while eurozone consumer price inflation came in slightly hotter than expected and U.K. retail sales rose more than anticipated for May.

Stocks in Asia finished mostly lower after the U.S. Fed did little to clear up uncertainty regarding the timing of the next rate hike, while the yen jumped after the Bank of Japan (BoJ) held off on adding further stimulus measures. Also, the global markets remained hamstrung by festering growth concerns and worries about a Brexit. Japanese equities tumbled, with the yen surging on the heels of the decision by the BoJ to keep its monetary policy stance unchanged. The BoJ noted that risks to the economic outlook include uncertainties in emerging and commodity-exporting economies, the impact of monetary policy response from the U.S. on global financial markets, the prospects regarding Europe's debt problem and economic activity, as well as geopolitical risks. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses What investors need to know about helicopter money. Mainland Chinese securities and those traded in Hong Kong fell on the U.S. and Japan monetary policy decisions and as economic growth concerns lingered. Schwab's Jeffrey Kleintop offers Five ways investors can make the most of slower growth. Read both articles at www.schwab.com/oninternational. Finally, Australian stocks finished flat with strength in basic materials being offset by weakness in oil & gas issues, while South Korean listings and those that changed hands in India moved lower.

The international economic calendar will be fairly light for tomorrow, with trade data expected from Italy and the Eurozone, wage figures from France and building permits from Germany.

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