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Thursday, July 21, 2016

Markets Pause Recent Run

Charles Schwab: On the Market
Posted: 7/21/2016 4:15 PM ET

Markets Pause Recent Run

U.S. equities were lower, bringing the recent run that has brought the Dow and S&P 500 to record highs to a rest, despite a host of upbeat earnings and economic reports. Treasuries finished higher as the fall in stocks was met with domestic economic reports that showed existing home sales unexpectedly rose, jobless claims surprisingly slipped and the Leading Index topped forecasts. Crude oil prices and the U.S. dollar were lower, while gold moved higher.

The Dow Jones Industrial Average (DJIA) fell 78 points (0.4%) to 18,517, the S&P 500 Index declined 8 points (0.4%) to 2,165 and the Nasdaq Composite lost 16 points (0.3%) to 5,074. In moderate volume, 800 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil was $1.00 lower at $44.75 per barrel, wholesale gasoline was unchanged at $1.36 per gallon and the Bloomberg gold spot price increased $15.42 to $1,331.48 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 96.93.

Dow member Intel Corp. (INTC $34) reported 2Q earnings-per-share (EPS) ex-items of $0.59, above the $0.54 FactSet estimate, as revenues rose 3.0% year-over-year (y/y) to $13.5 billion, versus the expected $13.6 billion. However, shares were solidly lower as the company's 2Q revenue growth out of its key data center unit missed analysts' forecasts. INTC issued 3Q and full-year revenue guidance with midpoints that exceeded forecasts.

General Motors Co. (GM $32) posted 2Q EPS ex-items of $1.86, well above the projected $1.52, with revenues growing 11.0% y/y to $42.4 billion, easily exceeding the expected $38.2 billion. GM raised its full-year profit outlook and shares were nicely higher.

Dow component Travelers Companies Inc. (TRV $117) announced 2Q profits ex-items of $2.20 per share, topping the forecasted $2.04, as net written premiums rose 3.0% y/y to $6.4 billion, mostly in line with estimates. TRV traded lower.

Dow member American Express Co. (AXP $63) reported 2Q EPS of $2.10, but that figure included a few one-time items that may make it not comparable to the Street's forecast of $1.96. Revenues declined 1.0% y/y to $8.2 billion, versus the forecasted $8.3 billion. AXP reaffirmed its full-year earnings guidance and shares came under pressure.

Qualcomm Inc. (QCOM $60) posted fiscal 3Q earnings ex-items of $1.16 per share, as revenues increased 4.0% y/y to $6.0 billion, topping the projected $5.6 billion. QCOM issued stronger-than-expected 4Q earnings and revenue guidance. QCOM gained solid ground.

Southwest Airlines Co. (LUV $37) announced 2Q EPS ex-items of $1.19, two cents below expectations, as revenues rose 5.3% y/y to $5.4 billion, roughly in line with projections. LUV said the fare environment remains challenging and shares were sharply lower.

eBay Inc. (EBAY $30) posted 2Q EPS ex-items of $0.43, one penny north of estimates, as revenues rose 6.0% y/y to $2.2 billion, mostly in line with projections. EBAY issued mostly stronger-than-expected full-year guidance and announced a $2.5 billion addition to its share repurchase program. Shares rallied.

Existing home sales unexpectedly rise, while jobless claims surprisingly dip

Existing-home sales in June rose 1.1% month-over-month (m/m) to a 5.57 million annual rate—the highest annual pace since February 2007—compared to the Bloomberg forecast of a 5.48 million pace. May's figure was revised lower to a 5.51 million annual rate. Compared to last year, sales were 3.0% higher and the median existing-home price was up 4.8% at $247,700. Housing supply came in at a 4.6-month pace at the current sales rate. Sales were lower in the Northeast and flat in the South, while rising in the West and Midwest. Single-family and condominium and co-op sales both grew.

June sales were bolstered by a greater share of sales to first-time buyers not seen in nearly four years and National Association of Realtors (NAR) Chief Economist Lawrence Yun said sustained job growth as well as this year's descent in mortgage rates is undoubtedly driving the appetite for home purchases. "Looking ahead, it's unclear if this current sales pace can further accelerate as record high stock prices, near-record low mortgage rates and solid job gains face off against a dearth of homes available for sale and lofty home prices that keep advancing," Yun added.

Weekly initial jobless claims (chart) dipped 1,000 to 253,000 last week, versus the Bloomberg estimate of an increase to 265,000, with the prior week's figure unrevised at 254,000. The four-week moving average declined by 1,250 to 257,750, while continuing claims dropped 25,000 to 2,128,000, south of the estimated level of 2,137,000.

The Philly Fed Manufacturing Index (chart) in July unexpectedly fell back to a level depicting contraction (a reading below zero) after falling to -2.9 from 4.7 in June, and compared to estimates calling for a dip to 4.5.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) increased 0.3% m/m in June, versus the projected 0.2% gain, and compared to May's unrevised 0.2% decline. Support came from the components pertaining to jobless claims and the yield curve.

Economic upside surprises have been numerous and broad-based helping propel the Dow and S&P 500 to all-time highs, as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, 19th Nervous Breakout: Stocks Finally Reach New Highs, at www.schwab.com/marketinsight.

Treasuries finished higher, as the yield on the 2-year note lost 3 basis points (bps) to 0.68%, the yield on the 10-year note fell 2 bps to 1.56% and the 30-year bond rate dipped 1 bp to 2.30%. Bond yields had 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 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.

The only item on tomorrow's economic calendar is the preliminary Markit Manufacturing PMI Index, forecasted to tick higher to a level of 51.5 for July from the prior month's 51.3.

Europe and Asia mixed after ECB leaves policy stance unchanged

European equities finished mixed, as traders digested a plethora of divergent earnings and economic reports as well as the expected decision from the European Central Bank (ECB) to leave its monetary policy unchanged, with its benchmark rate at zero and the deposit rate in negative territory. The euro was lower versus the U.S. dollar, and bond yields in the region were modestly higher, as the markets paid close attention to ECB President Mario Draghi's customary press conference. Draghi noted that the euro area financial markets have weathered the spike in uncertainty and volatility on the heels of the June vote by the U.K. to leave the European Union (EU), known as a Brexit, "with encouraging resilience." He also noted that financing conditions remain highly supportive and continue to support its baseline scenario of an ongoing economic recovery and an increase in inflation rates. Draghi added that over the coming months when it has more information it will be in a better position to reassess the most likely paths of inflation and growth and the risks around those paths. He reiterated that the ECB will act if needed by using all available instruments within its mandate.

Amid the backdrop of heightened volatility in the region, 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. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. The British pound dipped versus the U.S. dollar. In other economic news, Switzerland's trade surplus narrowed in June, French business confidence unexpectedly improved in July, and U.K. retail sales missed forecasts in June.

Stocks in Asia finished mixed, though Japanese equities rose, continuing their recent rally as the yen remained under pressure amid reports that the Bank of Japan (BoJ) was considering a larger-than-expected stimulus plan. However, after the markets closed, the yen rallied as a radio interview with BoJ Governor Kuroda—that was pre-recorded in June—aired with him rejecting the idea of so-called helicopter money. It is important to point out that Kuroda had rejected the idea of adopting a negative interest rate policy (NIRP) just days before the BoJ did it early this year so the comments may be getting discounted. For more on Japan's potential increased stimulus measures see Jeffrey Kleintop's, article, What investors need to know about helicopter money, at www.schwab.com/oninternational. Mainland Chinese stocks advanced, rising for the first time in four days, while those traded in Hong Kong rose to enter a bull market, as it has rallied 20% off its February low, per Bloomberg. Australian securities increased, despite some continued weakness in basic materials stocks, but South Korea's markets dipped and India's bourse declined amid some concerns about earnings growth and banking sector loan quality.

For tomorrow, the international economic calendar will hold the preliminary Markit M

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