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Tuesday, July 05, 2016

Markets Pare Post-Brexit Rally

Charles Schwab: On the Market
Posted: 7/5/2016 4:15 PM ET

Markets Pare Post-Brexit Rally

U.S. equities finished the first session of a shortened week lower, as Brexit concerns resurfaced and anxiety over the Italian banking sector started to creep into investors' psyche. Treasuries moved higher amid a decline in factory orders, and crude oil prices were sharply lower, while the U.S. dollar and gold gained ground.

The Dow Jones Industrial Average (DJIA) fell 109 points (0.6%) to 17,841, the S&P 500 Index declined 15 points (0.7%) to 2,089, and the Nasdaq Composite lost 40 points (0.8%) to 4,823. In moderately-heavy volume, 969 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil dropped $2.39 to $46.60 per barrel and wholesale gasoline was $0.08 lower at $1.43 per gallon, while the Bloomberg gold spot price increased $5.31 to $1,356.10 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% higher at 96.23.

Tesla Motors Inc. (TSLA $214) came under pressure after the electric car maker announced softer-than-expected 2Q deliveries. The company noted 2Q deliveries were lower than anticipated due to the extreme production ramp in the quarter and the high mix of customer-ordered vehicles still on trucks.

Insys Therapeutics Inc. (INSY $15) moved higher after announcing that the U.S. Food and Drug Administration (FDA) approved its treatment for anorexia, known as Syndros. INSY said Syndros is awaiting scheduling by the U.S. Drug Enforcement Administration.

Factory orders drop to begin shortened week

Factory orders (chart) fell 1.0% month-over-month (m/m) in May, versus the Bloomberg expectation of a 0.8% decline, while April was adjusted lower to a 1.8% gain. May durable goods orders—preliminarily reported two weeks ago—were revised lower to a 2.3% drop from the initial estimate of a 2.2% fall.

Treasuries were solidly higher, as the yield on the 2-year note dropped 4 basis points (bps) to 0.55%, while the yield on the 10-year note declined 8 bps to 1.37%, and the 30-year bond rate fell 9 bps to 2.14%. Bond yields have fallen back to record lows as the global markets continue to grapple with the impact of the U.K. Brexit vote and Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis in her recent article titled, Brexit: What Does It Mean for the Bond Market?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

Today's report kicked off the holiday-shortened week and although the global markets will likely continue to grapple with the Brexit fallout, we will get a plethora of key reports. The docket will be headlined by tomorrow's minutes from the Federal Reserve's June meeting, culminating with Friday's June nonfarm payroll report. However, the data has the potential to be discounted somewhat as the impact of the Brexit vote is not likely to show in the data, and it has dampened expectations of a near-term Fed rate hike. As noted in the Schwab Market Perspective: British Shock—What's Next, the Fed is unlikely to raise rates in the foreseeable future, and could look to add some sort of support to the economy or financial institutions if needed. The next several weeks could be a tumultuous time in global markets, and investors need to keep a longer-term view in mind. Global stock markets have tended to ultimately rebound from other sharp declines—often fairly quickly. It can be tough to get back on track once things reverse, so we recommend investors use volatility to tactically keep allocations in line with their long-term strategic targets. Read more www.schwab.com/marketinsight.

Other notable releases slated for tomorrow include the ISM non-Manufacturing Index, forecasted to rise to a level of 53.9 for June from the 52.9 posted in May, as well as Market's final Services PMI, anticipated to tick lower to a level of 51.3 from the preliminary reading of 51.4, but up from May's 50.7 level. In addition, investors will get a look at the trade balance, with economists expecting the deficit widened to $40.0 billion in May from the $37.4 billion registered in April, as well MBA Mortgage Applications.

Europe and Asia lower as Brexit concerns flare up

European equities finished mostly lower, with financials seeing heavy pressure amid festering Italian banking concerns, and as worries about the impact of the U.K.'s recent vote to leave the European Union flared up. The British pound fell versus the U.S. dollar, though the U.K. markets reversed modestly to the upside as the Bank of England reduced capital requirements for banks after Governor Carney warned that "there is the prospect of a material slowing of the economy." For deeper analysis of the impact of the Brexit vote, see the Schwab Center for Financial Research's recent article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight and be sure to check out the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, titled Brexit Aftershock: When Will the Markets Calm Down?, at www.schwab.com/insights. Follow Schwab, Randy and Jeff on Twitter: @schwabresearch, @randyafrederick and @jeffreykleintop.

In economic news, the final Markit Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—was revised higher to 53.1 in June, from the preliminary level of 52.8, where economists had expected it to remain. A reading above 50 denotes expansion and the index matched May's figure. Eurozone retail sales rose in line with expectations for May. The euro declined versus the U.S. dollar and bond yields in the region were mixed.

Stocks in Asia finished mostly to the downside with political uncertainty in Australia and flared-up Brexit concerns dampening global sentiment, though mainland Chinese stocks gained ground following an upbeat read on the nation's key services sector activity and hopes of further stimulus measures. Australian equities fell, led by financials, after the Reserve Bank of Australia held its monetary policy unchanged and as political uncertainty was fueled by federal elections over the weekend failing to deliver a clear winner. Schwab's Director of International Research, Michelle Gibley, CFA, offers a look at the global political landscape in her article, Performing Reformers: How Political Change Can Affect Stocks, at www.schwab.com/oninternational, and be sure to follow Schwab on Twitter: @schwabresearch. Finally, Japan's markets dropped, exacerbated by the yen rallying late in the session, while stocks traded in Hong Kong, South Korea and India all finished lower.

Tomorrow's international economic calendar will be fairly light, with manufacturing orders and construction PMI coming from Germany, while the Swiss National Bank will meet, with no change to its monetary policy stance expected.

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