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Tuesday, July 19, 2016

Markets Mixed Amid Sundry of News

Charles Schwab: On the Market
Posted: 7/19/2016 4:15 PM ET

Markets Mixed Amid Sundry of News

U.S. equities finished out today's session mixed in choppy action amid an assortment of earnings reports, headlined by Netflix's lower-than-expected subscriber figures, and tempered sentiment following a reduction in the IMF's global growth forecast. Treasuries were mostly higher, despite an upbeat housing construction report, while gold and the U.S. dollar also gained ground, and crude oil prices were lower.

The Dow Jones Industrial Average (DJIA) rose 26 points (0.1%) to 18,559, while the S&P 500 Index declined 3 points (0.1%) to 2,164 and the Nasdaq Composite lost 19 points (0.4%) to 5,037. In moderate volume, 741 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.49 to $45.45 per barrel, wholesale gasoline shed $0.01 to $1.38 per gallon, while the Bloomberg gold spot price increased $3.77 to $1,332.62 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 97.05.

Dow member Goldman Sachs Group Inc. (GS $161) reported 2Q earnings-per-share (EPS) of $3.72, well above the $3.04 FactSet estimate, as revenues declined 12.5% year-over-year (y/y) to $7.9 billion, compared to the projected $7.5 billion. Shares finished lower after running the past few sessions as earnings reports from the sector have mostly topped forecasts.

For our analysis of our outperform rating on the financial sector see the latest Schwab Sector Views: Sector Impact of Brexit from Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA at www.schwab.com/marketinsight.

Dow component International Business Machines Corp. (IBM $160) posted 2Q EPS ex-items of $2.95, above the expected $2.89, with revenues decreasing 3.0% y/y to $20.2 billion, exceeding the forecasted $20.1 billion. IBM reaffirmed its full-year earnings outlook, and shares were lower.

Dow member Johnson & Johnson (JNJ $125) announced 2Q earnings ex-items of $1.74 per share, north of the projected $1.68, as revenues increased 3.9% y/y to $18.5 billion, versus the estimated $18.0 billion. JNJ raised its full-year profit and revenue guidance. Shares of JNJ finished higher.

Dow member UnitedHealth Group Inc. (UNH $143) reported 2Q profits ex-items of $1.96 per share, above the projected $1.89, as revenues grew 28.1% y/y to $46.5 billion, compared to the anticipated $45.0 billion. UNH raised the lower end of its full-year earnings outlook. Shares were higher.

Netflix Inc. (NFLX $86) posted 2Q EPS of $0.09, topping the expected $0.03, as revenues rose 32.7% y/y to $2.0 billion, below the estimated $2.1 billion. The company's net subscriber additions missed the Street's expectations and its 3Q subscriber and profit guidance also came in short of projections. NFLX was sharply lower.

Yahoo Inc. (YHOO $38) announced 2Q earnings ex-items of $0.09 per share, one penny below forecasts, as revenues excluding traffic acquisition costs (TAC) fell 19.3% y/y to $842 million, compared to the expected $840 million. YHOO traded higher.

Monsanto Co. (MON $107) rejected Bayer AG's (BAYRY $101) recently upwardly revised near $55 billion takeover offer, saying that it views the proposal as financially inadequate and insufficient to ensure deal certainty. MON said it remains open to continued and constructive conversations with Bayer. MON was modestly higher.

Housing construction activity top forecasts

Housing starts (chart) for June rose 4.8% month-over-month (m/m) to an annual pace of 1,189,000 units, above the Bloomberg forecast of a 1,165,000 unit rate. May's starts were downwardly revised to an annual pace of 1,135,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, gained 1.5% m/m in June to an annual rate of 1,153,000, after May's downward revision to a 1,136,000 rate, slightly above the expected annual pace of 1,150,000 units. Construction activity for single-family and multi-family structures both improved m/m, but remain below year ago levels.

Today's report adds to the recent string of favorable economic data that has helped foster all-time highs for the Dow and S&P 500, as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her latest article, 19th Nervous Breakout: Stocks Finally Reach New Highs. Liz Ann notes that coupled with investor sentiment, economic upside surprises have been numerous and broad-based, explaining the market finally breaking out of what had been a remarkably narrow two-year trading range and fostering implications for Fed policy. Read more at www.schwab.com/marketinsight.

Treasuries were mostly higher, as the yield on the 2-year note was little changed at 0.69%, while the yield on the 10-year note and the 30-year bond declined 3 basis points (bps) to 1.55% and 2.27%, respectively. Bond yields have pulled back slightly from their recent rally that has come from favorable U.S. economic data as of late and eased U.K. Brexit fallout. For analysis see the video from Schwab's 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.

The only report of note on tomorrow's economic calendar is MBA Mortgage Applications.

Europe lower following earnings and data, Asia mixed

European equities traded lower, with some earnings reports missing expectations, along with a read on sentiment in Germany, while the International Monetary Fund (IMF) lowered its global growth forecast. Basic materials stocks led the downside move, with mining issues seeing pressure. In economic news, German investor confidence fell sharply into negative territory for the first time since October 2014 and hitting the lowest level since November 2012, on concern that Britain's decisions to leave the European Union—known as a Brexit—could weaken the region's economy, per Bloomberg. A plethora of reads on U.K. inflation came in mostly hotter than expected in June. The euro and British pound fell versus the U.S. dollar and bond yields in the region traded mostly to the downside. Amid the backdrop of heightened volatility in the region as the markets grapple with the impact of a Brexit, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers analysis for investors in his article, After the Brexit Vote: What Lies Ahead for Markets?, and gives us Three Reasons Why Now is Not the Time to Retreat from Global Diversification at www.schwab.com/marketinsight. Be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed with Japan's markets adding onto last week's rally after being closed for a holiday yesterday. The yen remained under pressure as expectations of more aggressive stimulus measures continued. For more on Japan's potential increased stimulus measures see Schwab's Jeffrey Kleintop's, article, What investors need to know about helicopter money, at www.schwab.com/oninternational. Australian equities dipped amid weakness in basic materials stocks, as miners came under pressure, while the minutes from the Reserve Bank of Australia's (RBA) unchanged monetary policy decision earlier this month suggested the central bank is keeping its policy options open after offering lower forecasts for the economy and inflation. Mainland Chinese stocks and those traded in Hong Kong declined, with the latter retreating from the recent rally. Meanwhile Indian securities rose and South Korean stocks traded lower.

Tomorrow's international economic calendar will include PPI from Germany, employment data from the U.K., and consumer confidence from the Eurozone.

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