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Monday, July 25, 2016

Drop in Crude Pressures Markets

Charles Schwab: On the Market
Posted: 7/25/2016 4:15 PM ET

Drop in Crude Pressures Markets

Despite more upbeat news on the manufacturing front, U.S. equities finished lower as a drop in crude oil prices weighed on energy issues, and caution appeared to prevail ahead of a heavy dose of economic reports this week, headlined by the FOMC's monetary policy meeting mid-week. Treasuries, the U.S. dollar and gold were also all lower.

The Dow Jones Industrial Average (DJIA) declined 78 points (0.4%) to 18,493, the S&P 500 Index lost 7 points (0.3%) to 2,168 and the Nasdaq Composite ticked 3 points (0.1%) lower to 5,098. In moderate volume, 763 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil was $1.16 lower at $43.13 per barrel, wholesale gasoline lost $0.03 to $1.33 per gallon and the Bloomberg gold spot price decreased $6.23 to $1,316.50 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 97.28.

In M&A action, Verizon Communications Inc. (VZ $56) announced it has entered into a definitive agreement to acquire the operating business of Yahoo! Inc. (YHOO $38) for approximately $4.8 billion. The deal is subject to customary closing conditions, approval by Yahoo's shareholders, and regulatory approvals, and is expected to close in 1Q of 2017. Yahoo added that, until the closing it will continue to operate independently, offering and improving its own products and services for users, advertisers, developers and partners. Shares of both companies were lower.

Kimberly-Clark Corp. (KMB $133) announced adjusted 2Q earnings-per-share (EPS) of $1.53, north of the $1.47 FactSet estimate, while revenues declined 1.2% year-over-year (y/y) to $4.6 billion, roughly in line with expectations. The company reaffirmed its full-year 2016 EPS guidance and stated that the restructuring program it began in October of 2014 is expected to be completed by the end of this year. KMB finished lower.

Sprint Corp. (S $6) announced a 1Q loss of $0.08 per share, matching the FactSet estimate, while revenues were flat y/y at $8.0 billion, also in line with forecasts. Sprint's CEO noted that the company experienced the highest first quarter postpaid phone net additions in nine years. S rallied over 25%.

Rockwell Collins Inc. (COL $84) reported fiscal 3Q EPS of $1.63, beating the FactSet consensus estimate of $1.59, while revenues rose 3.2% y/y to $1.3 billion, roughly matching forecasts. The company also announced that it has narrowed the range of its 2016 fiscal year EPS outlook to between $5.50 and $5.55, from the previously reported $5.45 to $5.65 range. Shares traded to the downside.

2Q earnings season is entering one of its busiest weeks and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides some bottom-line analysis in his recent article Earnings estimates are rebounding: what it means for stocks. Jeff discusses how in the past month, headlines have been full of geopolitical risks including Brexit, a terror attack in France, and an attempted coup in Turkey. Yet global stocks are rallying—a different reaction than might have taken place earlier this year or last year. One reason for the change in stock market reaction: earnings expectations are back on the rise. Read the article at www.schwab.com/marketinsight and follow Jeff on Twitter: @jeffreykleintop.

Regional manufacturing activity tops estimates

The Dallas Fed Manufacturing Index ascended to -1.3 for July from June's unrevised -18.3 level with economists forecasting an improvement to -10.0. A reading below zero denotes contraction in manufacturing activity. The Dallas Fed noted that the production index component, a key measure of state manufacturing conditions, came in near zero after two months of negative readings, suggesting output stopped falling this month.

A ramp-up of earnings reports will be accompanied by a plethora of releases from the U.S. economic calendar this week, beginning in earnest tomorrow with the release of new home sales, which are forecasted to have risen 1.6% month-over-month (m/m) during June to an annual rate of 560,000, as well as the S&P/CaseShiller Home Price Index, with economists expecting a year-over-year (y/y) advance of 5.54% for May and a 0.2% increase m/m on a seasonally-adjusted basis. As well, investors will get the latest reads on consumer confidence, the Richmond Fed Manufacturing Index, and Markit's preliminary Manufacturing PMI Index.

Reports likely to be the headline events for the week, however, include Friday's first look (of three) at 2Q GDP, which will follow Wednesday's monetary policy decision from the Federal Open Market Committee (FOMC), with no changes expected to its current policy stance, while earnings season will continue to ramp-up. Schwab's experts tackle these topics in the latest Schwab Market Perspective: New Records…Same Skepticism, noting that while there’s a near unanimous opinion that the Federal Open Market Committee (FOMC) will stay put at its meeting this week, market expectations for a rate hike later this year have risen over the past couple of weeks, coming closer to what we have believed was the more realistic possibility. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Treasuries finished lower, as the yield on the 2-year note rose 3 basis points (bps) to 0.74%, the yield on the 10-year note was unchanged at 1.57%, and the 30-year bond ticked 1 bp higher to 2.29%. Bond yields have rebounded as of late from record lows on favorable U.S. economic data, as well as eased U.K. Brexit concerns and expectations of a Fed rate hike this year. For analysis see the video from Schwab's Chief Investment Strategist, Liz Ann Sonders and Managing Director of Trading and Derivatives, Randy Frederick, titled Strong Jobs Report: Recession off the Table but Is Rate Hike Back On?, at www.schwab.com/insights. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick. Also, Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis in her recent article titled, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

Europe and Asia mixed after giving up early gains

European equities pared early gains and finished trading mostly lower as some initial support from better-than-expected business climate data released from Germany seemingly faded as the decline in crude oil prices weighed on energy issues. Business sentiment in Germany declined, but less than was forecasted according to the Ifo's recent survey results, suggesting a robust business climate in the wake of the Brexit vote and the recent string of terror attacks in Germany in the past few weeks. It's been just over a month since the U.K. voted in favor of Brexit and Schwab's experts inform us in the recent Schwab Market Perspective: New Records…Same Skepticism, that at the time of the vote we noted that the stock market typically recovered after initial shocks like Brexit, but that recovery usually took about three months. For the Brexit shock it took just three weeks. We believe there are three primary reasons that the global stock market has remained so resilient. To find out what they are, read the whole article at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch. In other economic news in the region, U.K. manufacturing confidence slipped to its lowest level since early 2009, adding to the haze of uncertainty that has been growing since the Brexit vote as the world awaits a clear plan and timeline from the British government in how it will negotiate its new relationship with the European Union. The euro and British pound advanced versus the U.S. dollar and bond yields in the region finished mixed higher.

Stocks in Asia finished mostly higher on Monday as investors may have been exercising some caution ahead of a couple of high-profile central bank monetary policy meetings taking place later this week in the U.S. and Japan. Japanese equities finished slightly to the downside, but mostly flat as the island nation reported a larger-than-expected trade surplus for June, though exports were shown to have declined for the ninth-consecutive month. With the Bank of Japan's upcoming meeting fast approaching, Schwab's Chief Global investment Strategist, Jeffrey Kleintop, CFA, discusses in his article, What investors need to know about helicopter money, how the return of deflation in Japan has led to heightened expectations for more unconventional monetary policy and some have even called for the use of so-called “helicopter money." Read the whole article at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. Stocks traded in both Mainland China and Hong Kong finished slightly higher with some volatile trading occurring on lower-than-average volume as traders in the world's second largest economy may be searching for some economic clues as data from the country is expected to be light for the week. Meanwhile markets in Australia, South Korea's and India finished higher.

Reports on tomorrow's international economic calendar will be very sparse, with those scheduled for release to include inflation data from Japan and industrial production from Sweden.

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