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Wednesday, July 06, 2016

Stocks Finish Strong After Slow Start

Charles Schwab: On the Market
Posted: 7/6/2016 4:15 PM ET

Stocks Finish Strong After Slow Start

U.S. stocks overcame some early weakness and finished higher in the wake of some upbeat services sector reports and as the Fed released the minutes from its June monetary policy meeting. Domestic equities climbed into positive territory on the heels of an upside reversal for crude oil prices, while the U.S. dollar dipped slightly and Treasury yields were mixed. Overseas, stocks were mostly lower amid uneasy global sentiment and exacerbated global growth concerns. Gold continued to move higher.

The Dow Jones Industrial Average (DJIA) gained 78 points (0.4%) to 17,919, the S&P 500 Index increased 11 points (0.5%) to 2,100, and the Nasdaq Composite added 36 points (0.8%) to 4,859. In moderately heavy volume, 1.0 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil was $0.83 higher at $47.43 per barrel, wholesale gasoline was unchanged at $1.43 per gallon and the Bloomberg gold spot price increased $7.70 to $1,364.15 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% lower at 96.08.

Walgreens Boots Alliance Inc. (WBA $82) reported fiscal 3Q earnings-per-share (EPS) ex-items of $1.18, above the FactSet estimate of $1.14, as revenues rose 2.4% year-over-year (y/y) to $29.5 billion, compared to the forecasted $29.7 billion. WBA raised the low end of its full-year profit outlook. Shares closed to the downside.

Nortek Inc. (NTK $87) surged after the industrial company announced an agreement to be acquired by Melrose Industries PLC for $86.00 per share in cash, in a transaction with an estimated enterprise value of about $2.8 billion.

Fed releases June meeting minutes, while services sector activity accelerates

At 2:00 p.m. ET the Federal Open Market Committee (FOMC) released the minutes from its June monetary policy meeting. The report showed that a number of participants in the Committee judged after assessing the outlook and associated uncertainties for economic activity, the labor market, and inflation that the target range for the federal funds rate should remain at 0.25-0.50%. Members also generally agreed that the British referendum, commonly known as Brexit, could affect economic performance by creating turbulence in financial markets, while some also noted that "continued uncertainty regarding the outlook for China's foreign exchange policy and the relatively high levels of debt in China and some other emerging market economies represented appreciable risks to global financial stability and economic performance." The minutes reiterated that in determining the timing and size of future adjustments to the target range, the Committee would assess realized and expected economic conditions relative to its dual mandate. The Committee members voted unanimously in favor of leaving policy unchanged.

Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her latest article, Dazed and Confused: Brexit Contributes to Volatile Times, market expectations are that the Federal Reserve is unlikely to raise rates this year in light of weak growth and the deteriorating financial conditions associated with Britain’s vote to leave the European Union. We expect the U.S. economy and stock market to continue producing mixed results. One silver lining is that sluggish growth has kept interest rates low and inflation at bay. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The Institute for Supply Management (ISM) non-Manufacturing Index (chart) showed growth (a reading above 50) accelerated more than expected, rising to 56.5 in June—the highest since November 2015—from 52.9 in May, and compared to the Bloomberg forecast of a gain to 53.3. New orders and business activity both showed solid growth, while employment moved back into expansion territory. The ISM said the report reflects a strong rebound from the cooling-off of the previous month for the non-manufacturing sector. Non-manufacturing activity dwarfs manufacturing in terms of U.S. economic output, driven by the consumer, lending support to our view in the Schwab Market Perspective: British Shock—What's Next, that the U.S. economy is hanging in there, with the all-important U.S. consumer being bolstered by higher wages due to the apparent tightening of the labor market. However, should the impact from the British vote become harsher than currently expected, we may be forced to downgrade our longer-term view of both the U.S. economy and equities. Read more at www.schwab.com/marketinsight.

The final Markit U.S. Services PMI Index was revised to 51.4 in June from the preliminary level of 51.3, which matched May's figure and was expected to remain. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

The trade balance (chart) showed that the deficit came in at $41.1 billion in May, compared to the $40.0 billion Bloomberg estimate. April's deficit was unrevised at $37.4 billion. Exports dipped 0.2% month-over-month (m/m) to $182.4 billion, and imports rose 1.6% m/m to $223.5 billion.

The MBA Mortgage Application Index jumped 14.2% last week, after decreasing 2.6% in the previous week. The solid gain came as a 20.8% surge for the Refinance Index coupled with a 4.3% rise for the Purchase Index. The average 30-year mortgage rate fell 9 basis points (bps) to 3.66%.

Treasuries were mixed, with the yield on the 2-year note rising 3 bps to 0.58%, the yield on the 10-year note was flat at 1.37% and the 30-year bond rate dipped 2 bps to 2.14%. Bond yields have been trying to rebound from their recent drop to record lows amid the fallout 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. Also, for more on the Brexit fallout, see our article, Buckle Up: Markets Poised for More Volatility, at www.schwab.com/insights, and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the domestic economic calendar will offer weekly initial jobless claims, forecasted to show a slight uptick to a level of 269,000, as well as the ADP Employment Change Report, with economists anticipating a 160,000 increase in private sector jobs during June following the 173,000 rise in May.

Europe extends selloff, Asia mostly lower

European equities were decisively lower for a third-straight session, with the U.K. Brexit fallout persisting and fueling continued risk aversion and global growth concerns. Also, uneasiness toward the Italian banking sector festered to exacerbate the selloff in the region. Moreover, the British pound remained under pressure, touching a 31-year low versus the U.S. dollar. 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 Randy and Jeff on Twitter: @randyafrederick and @jeffreykleintop. Also amid the backdrop of the falling pound, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, Currency Wars: Is a Weaker Currency Good or Bad?, at www.schwab.com/oninternational. The economic front likely did not help sentiment in the region, as German factory orders for May came in flat m/m, versus projections of a 1.0% gain, and following the favorably revised 1.9% drop in April. The euro was little changed versus the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mostly to the downside, with the global markets remaining hamstrung by the festering U.K. Brexit vote fallout, which exacerbated global growth sentiment. The ensuing flight-to-safety is amplifying the pressure on global bond yields and is boosting the yen, which continued to gain ground to foster a drop for Japanese equities. Also, securities trading in Australia, Hong Kong, and South Korea fell. However, mainland Chinese listings rose, buoyed by growing expectations of further stimulus measures from the nation's central bank. Finally, markets in India were closed for a holiday.

The international economic docket for tomorrow will include the Leading Index from Japan, industrial production from Germany, trade data from France and industrial and manufacturing production from the U.K.

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