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Monday, July 11, 2016

Stocks Continue to Recover From Brexit Fallout

Charles Schwab: On the Market
Posted: 7/11/2016 4:15 PM ET

Stocks Continue to Recover From Brexit Fallout

U.S. equities finished higher, with the S&P 500 hitting an all-time high and European equities extending its rally to three days, as global growth concerns continued to ease on the heels of Friday's favorable domestic labor report as well as political events in Japan and the U.K. Treasuries were lower amid an empty economic calendar, while crude oil and gold also declined, and the U.S. dollar was higher. 2Q earnings season unofficially got started after the closing bell, after Alcoa posted a better-than-expected profit.

The Dow Jones Industrial Average (DJIA) rose 80 points (0.4%) to 18,227, the S&P 500 Index gained 7 points (0.3%) to 2,137, and the Nasdaq Composite added 32 points (0.6%) to 4,988. In moderate volume, 799 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil was $0.65 lower at $44.76 per barrel, wholesale gasoline added $0.02 to $1.39 per gallon and the Bloomberg gold spot price decreased $11.71 to $1,354.62 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 96.53.

Alliance Data Systems Corp. (ADS $210) got a boost from the disclosure of a 6.8% stake in the company from ValueAct Capital, which said it intends to have conversations with ADS management and board to discuss ways to enhance shareholder value. ValueAct said the topics of these conversations will cover a range of issues.

Dow members General Electric Co. (GE $32) and Microsoft Corp. (MSFT $53) announced a partnership that will make GE's Predix platform available on the Microsoft Azure cloud for industrial businesses. Shares of MSFT were higher, while GE was flat.

Alcoa Inc. (AA $10) posted a 2Q profit of $0.15 per share after the close, unofficially kicking off 2Q earnings season, above forecasts of $0.09, on revenues of $5.9 billion, also above analysts' expectations.

Per data compiled by FactSet, S&P 500 earnings are expected to decline 5.6% year-over-year (y/y), which would be the first time the index has recorded five consecutive quarters of declines since 3Q 2008 through 3Q 2009. As noted in the recent Schwab Market Perspective: Looking Beyond Britain, healthy job growth and the possible support to inflation from higher wages lead us to wonder if market expectations around Fed policy may have gone too far. The futures market indicates roughly no chance of a hike for the balance of the year; while rate cut expectations have come back in play. Some questions have come to light recently regarding what consequences the uncertainty in Europe and a potential strengthening of the U.S. dollar may have. We'll start to get an initial view on those questions in the next few weeks as 2Q earnings season ramps up. Read the whole article at www.schwab.com/marketinsight.

Bond yields rise as global growth concerns ease following Friday's jobs data

Treasuries finished lower , while the U.S. economic docket was void of any major reports today. The yield on the 2-year note rose 4 basis points (bps) to 0.65%, the yield on the 10-year note was up 7 bps to 1.42%, and the 30-year bond rate advanced 5 bps to 2.14%. On the heels of Friday's market calming, stronger-than-expected June labor report, bond yields are recovering somewhat from their recent drop that has come courtesy of the U.K. Brexit fallout, which exacerbated global growth concerns, as well as dampened expectations for a Fed rate hike this year. Against this backdrop, Schwab's Director of Income Planning, Rob Williams, provides investment analysis in his latest article, Market Stress: How Emotions Can Hurt and Help Your Portfolio at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

This week's economic calendar will heat back up, beginning with tomorrow's National Federation of Independent Business (NFIB) Small Business Optimism Index, expected to tick highert to a level of 94.0 for June from the 93.8 posted in May, as well as wholesale inventories, with economists anticipating a slightly 0.2% month-over-month increase for May, a decline from the 0.6% registered the month prior. Rounding out the day will be the Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, forecasted to show 5.5 million jobs were available in May, down from the 5.8 million in April.

Other key releases this week will include retail sales, the Consumer Price Index (CPI), the Producer Price Index (PPI), the Fed's Beige Book, industrial production and capacity utilization, along with the preliminary University of Michigan Consumer Sentiment Index for July.

Europe and Asia higher on eased growth concerns and stimulus optimism

European equities traded nicely higher for a third-straight session, with Friday's stronger-than-expected U.S. labor report helping ease global growth concerns and keep Fed rate hike expectations in check. Also, some apparent positive political developments around the world buoyed sentiment, headlined by a landslide victory for Japan's Prime Minister Abe's ruling coalition that is boosting stimulus hopes. Clarity on the next U.K. prime minister may have helped sentiment, as Home Secretary Theresa May was named the next British leader after Prime Minister Cameron announced that he will resign by Wednesday and May's lone competitor for the position dropped out. The markets calmed down from the flare-up in risk aversion on the heels of the U.K. vote in late June to leave the European Union, known as a Brexit, which exacerbated global growth concerns and fueled uncertainty in the world financial markets. For analysis on the impact of the Brexit vote, 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/marktetinsight. The euro was flat and the British pound ticked higher versus the U.S. dollar, while bond yields in the region were mostly higher. In economic news, Italy's industrial production unexpectedly declined for May.

Stocks in Asia finished nicely higher, as election results out of Japan over the weekend added to eased global growth concerns in the wake of Friday's upbeat U.S. June employment report, which also appeared to simultaneously fail to reignite Fed rate hike concerns. Japanese equities surged amid a drop in the yen, with Prime Minister Abe's ruling coalition winning a decisive upper house election over the weekend to foster optimism of further stimulus measures. Also, Australian securities rallied after the nation's Prime Minister Turnbull declared a victory in elections that were done more than a week ago and were considered to be too close to declare that his coalition won enough seats to form a majority government. 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. Mainland Chinese stocks and those traded in Hong Kong rose, though the nation reported mixed reads on consumer and wholesale price inflation for June. Amid the upbeat global market mood, markets in both India and South Korea advanced.

Internationally, the economic calendar will hold inflation data out of Japan, as well as the island nation's Tertiary All-Industry Index, business confidence from Australia, India's trade balance, retail sales from the U.K., and CPI from Germany.

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