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Saturday, July 02, 2016

Stocks Hold Gains

Charles Schwab: On the Market
Posted: 7/1/2016 4:15 PM ET

Stocks Hold Gains

Domestic stocks pared gains Friday afternoon, but still managed to finish the trading session in the green ahead of the extended holiday weekend, which will keep all U.S. markets shuttered on Monday in observance of Independence Day. Some upbeat manufacturing reports aided in the early equity gains, while Treasuries were mixed, the U.S. dollar was lower and gold and crude oil prices were higher.

The Dow Jones Industrial Average (DJIA) rose 19 points (0.1%) to 17,949, the S&P 500 Index gained 4 points (0.2%) to 2,103, and the Nasdaq Composite added 20 points (0.4%) to 4,863. In moderate volume, 844 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.66 to $48.99 per barrel and wholesale gasoline was $0.01 higher at $1.51 per gallon, while the Bloomberg gold spot price increased $19.95 to $1,341.85 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 95.66. Markets were nicely higher for the week, as the DJIA and the S&P 500 Index surged 3.2% and the Nasdaq Composite rallied 3.3%.

Micron Technology Inc. (MU $13) reported a fiscal 3Q loss of $0.08 per share, compared to the $0.10 per share shortfall estimated by FactSet, with revenues falling 25.0% year-over-year (y/y) to $2.9 billion, versus the projected $3.0 billion. The memory chip maker issued 4Q revenue guidance that was mostly below expectations and forecasted an unexpected loss, while announcing plans to cut 2,400 jobs as part of its cost savings program. Shares finished solidly lower.

The major automakers reported U.S. June sales today, with Fiat Chrysler Automobiles NV's (FCAU $6) Chrysler brand's sales growing 10.8% y/y, compared to the FactSet estimate of a 4.9% gain. The figures were adjusted to reflect one more selling day this year compared to the same period a year ago. Ford Motor Co's (F $13) adjusted sales rose 2.3%, above the forecasted 0.7% gain, while General Motors Co's (GM $29) sales fell 5.4%, compared to the projected 5.2% decrease. Shares of all three were higher.

Manufacturing activity picks up steam

The Institute for Supply Management (ISM) Manufacturing Index (chart) in June remained in expansion territory (above 50) for the fourth-straight month after increasing to 53.2 from May's 51.3 level, where Bloomberg forecasted it to remain. New orders, production and employment led a broad-based advance, with the exception of prices, which dropped but remained above the 60 mark.

The final Markit U.S. Manufacturing PMI Index was revised slightly lower to 51.3 for June from the 51.4 preliminary level, and compared to the projected downward revision to 51.2. However, the index was up from the 50.7 level posted in May. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

The upbeat manufacturing reports add credence to our view in the Schwab Market Perspective: British Shock—What's Next, the U.S. economy is fairly healthy and should manage to stay out of recession territory in the near term, although risks have risen. However, the continued extreme interest rate environment seems to us to be influencing corporate decision making—although likely not in the way policy makers were hoping. Stock buybacks and increased dividend payments seems to be the choice of many companies, while they remain reluctant to invest substantially in equipment and material that has longer-term potential benefits. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Construction spending (chart) unexpectedly dropped 0.8% month-over-month (m/m) in May, versus projections of a 0.6% advance, and following April's downwardly revised 2.0% drop. Residential spending was flat m/m, while non-residential spending fell 1.3%.

Treasuries finished mixed, with the yield on the 2-year note ticking 1 basis point (bp) higher to 0.59%, while the yield on the 10-year note dipped 3 bps to 1.44% and the 30-year bond rate declined 6 bps to 2.23%. Bond yields continue to see pressure in the aftermath 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.

Please note: All U.S. markets will be closed on Monday in observance of the Independence Day holiday.

Europe rally extends to four days, Asia mostly higher amid mixed data

European equities finished higher, with the markets extending their post-Brexit shock recovery rally to four sessions, with the U.K. FTSE leading the way with a more than 7.0% surge on the week. The rally was bolstered by yesterday's statement from Bank of England (BoE) Governor Carney that suggested the central bank will likely need to deploy stimulus measures in the wake of the Brexit vote. Also, banking stocks overcame early weakness amid reports that the BoE is planning to cut banks' capital requirements as early as next week, per Bloomberg. The euro was higher and the British pound declined versus the U.S. dollar, while bond yields in the region finished mostly lower.

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. For analysis on global monetary policy, see Schwab's Jeffrey Kleintop's latest article, What investors need to know about helicopter money, at www.schwab.com/marketinsight. Follow Randy and Jeff on Twitter: @randyafrederick and @jeffreykleintop.

In economic news, the final Markit Eurozone Manufacturing PMI Index was revised upward for June to 52.8—the highest level of the year—from the preliminary figure of 52.6, where it was expected to remain. A reading above 50 denotes expansion and growth accelerated from May's level of 51.5.

Stocks in Asia finished mostly to the upside, aided by the three-day Brexit recovery rallies posted in the U.S. and Europe yesterday, which were bolstered by a signal from the BoE of further stimulus measures in the wake of the surprising U.K. vote. Stocks moved higher as the markets sifted through a plethora of mixed economic data in the region. Japan's 2Q Tankan survey of sentiment in the large manufacturing sector came in unchanged, versus the decline that was expected—though a majority of the responses were taken before the Brexit vote was determined. Separate reports showed Japan's household spending fell and core consumer price inflation declined in line with forecasts for May. In China, the nation's official Manufacturing PMI Index dipped as expected to the demarcation point between expansion and contraction, while a separate read on the activity in the sector by Caixin/Markit showed the contraction accelerated for June. However, China's official non-Manufacturing PMI Index showed growth in the key services sector accelerated in June. Schwab's Jeffrey Kleintop, offers Five ways investors can make the most of slower growth, at www.schwab.com/oninternational.

Brexit shock recovery rally puts positive spin on week

Although Friday's U.K. Brexit downside shock carried over to the beginning of the week, U.S. stocks snapped back and rallied to close sharply higher, pushing the S&P 500 into positive territory for 2Q and the year. Crude oil prices recovered and the European markets rebounded sharply, led by the U.K., to aid the global rally, which was underpinned by pledges from central banks—notably the Bank of England—to support the financial markets from the likely impact of the Brexit vote. However, global bond yields continued to drop, with U.S. Treasury yields hitting record lows. Schwab's Jeffrey Kleintop offers analysis for investors in his article, After the Brexit Vote: What Lies Ahead for Markets?, at www.schwab.com/oninternational. Jeff notes that it may take some time for the shock to work through the economic, financial and political systems in the U.K. and Europe. As a result, global stocks may fall further. No two market shocks are the same, but in some of the other shocks since the financial crisis, markets have recovered in three to four months. Investors with longer time horizons may want to maintain their diversified asset allocations, which can help portfolios weather volatility over time.

Short week but long economic docket

Although the global markets will likely continue to grapple with the Brexit fallout, next week's U.S. economic calendar will bring a plethora of key reports. The docket will be headlined by the minutes from the Federal Reserve's June meeting, the ISM non-Manufacturing Index and 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, 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 at www.schwab.com/marketinsight.

Other notable U.S. releases slated for next week include: factory orders, the trade balance, and the ADP employment change report.

International reports due out next week include: Australia—Reserve Bank of Australia monetary policy decision, trade balance and retail sales. China—Caixin/Markit Services PMI Index. India—Services PMI Index. Japan—trade balance. Eurozone—Markit's business activity reports, retail sales and the European Central Bank's June meeting minutes. U.K.—manufacturing and industrial production releases, trade balance and Markit's business activity reports.

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