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Wednesday, July 13, 2016

Stocks Manage Mild Moves and Mixed Finish

Charles Schwab: On the Market
Posted: 7/13/2016 4:15 PM ET

Stocks Manage Mild Moves and Mixed Finish

U.S. stocks paused a bit from their recent rally with the major indexes closing mixed and near the flatline as a drop in crude oil prices weighed on energy issues. Investors may have been exercising some additional caution ahead of some key earnings reports out of the financial sector later this week. In economic news, the Fed released its Beige Book, mortgage applications jumped for a second-straight week and import prices rose. Treasuries and gold were higher, while the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) rose 24 points (0.1%) to 18,372, the S&P 500 Index was flat at 2,152, and the Nasdaq Composite shed 17 points (0.3%) to 5,006. In moderate volume, 823 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil was $2.05 lower at $44.75 per barrel, wholesale gasoline declined $0.05 to $1.38 per gallon and the Bloomberg gold spot price increased $8.70 to $1,343.62 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.2% lower at 96.29.

CSX Corp. (CSX $28) released 2Q earnings about an hour before the closing bell, correcting information that was released via Twitter earlier in the day. CSX announced earnings-per-share (EPS) of $0.47 versus the FactSet estimate of $0.44, while revenues declined 11.9% year-over-year to $2.68 billion, just shy of forecasts. The company noted that looking forward it continues to expect 2016 full-year earnings per share to decline, reflecting the ongoing transition in the energy markets, along with the impact of the strong U.S. dollar and low commodity prices. Shares of CSX traded higher.

Juno Therapeutics Inc. (JUNO $30) rallied after the company announced that the U.S. Food and Drug Administration (FDA) has removed the clinical hold on the Phase 2 clinical trial of its blood cancer treatment. As a result, JUNO said the trial, known as ROCKET, will resume.
Teva Pharmaceutical Industries Ltd. (TEVA $54) gained ground after the company raised its 2Q EPS and revenue guidance. Both figures were above FactSet estimates.

Fed releases Beige Book, mortgage applications jump back-to-back

The Federal Reserve's Beige Book, a tool summarizing economic activity across the nation used by the Federal Open Market Committee (FOMC) to prepare for its next two-day meeting set to conclude on July 27, was released in afternoon action. The report showed that U.S. economic activity continued to expand at a modest pace across most regions and while employment continued to increase during the period, the rate of growth ranged from little change to moderate. Consumer spending, though positive, was reported as showing some signs of softening and manufacturing was mixed and reporting districts noted that the outlook remained positive but deteriorated. As noted in the recent Schwab Market Perspective: Looking Beyond Britain, while we agree that the July FOMC meeting is likely off the table for a move on rates, we aren’t dismissing the possibility of a hike later in the year. A lot can happen in a few months and if financial markets stabilize, the job market remains healthy, and inflation pressures rise the Fed could look to move toward a more “normal” rate, while also giving it some room to act if/when the U.S. economy begins showing recession risks. Read the whole article at www.schwab.com/marketinsight.

The MBA Mortgage Application Index rose 7.2% last week, after jumping 14.2% in the previous week. The second-straight solid weekly gain was led by a 11.2% rise for the Refinance Index, while the Purchase Index came in flat. The average 30-year mortgage rate fell 6 basis points (bps) to 3.60%.

The Import Price Index (chart) rose 0.2% month-over-month (m/m) for June, compared to the Bloomberg projection of a 0.5% increase, and May's unrevised 1.4% gain. Compared to last year, prices were lower by 4.8%, versus the 4.6% forecasted drop, and following May's unrevised 5.0% fall.

Treasuries were higher, with the yield on the 2-year note declining 2 bps to 0.67%, the yield on the 10-year note decreasing 4 bps to 1.47% and the 30-year bond rate falling 5 bps to 2.17%. Bond yields gave back some of their two-day recovery from recent pressure that has come from 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, read our article, Uncharted Waters: What Record-Low Yields Mean for Investors, at www.schwab.com/insights and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar will yield the release of the Producer Price Index, expected to have increased 0.3% for May after rising 0.2% the month prior, and weekly initial jobless claims, forecasted to show an increase to a level of 265,000.

Europe modestly retreats from steep rally, Asia extends winning streak

European equities finished slightly lower on the heels of a four-session rally that came as the global markets recovered from the fallout from the late-June vote in the U.K. to leave the European Union, known as a Brexit. Financials lagged as Italian banking worries festered, while energy issues were bogged down by a drop in crude oil prices in the wake of a mixed U.S. oil inventory report. However, the appointment of Home Secretary Theresa May as the new U.K. Prime Minister cleared up some political uncertainty, while hopes of further stimulus measures in Japan and expectations of a rate cut from the Bank of England tomorrow added some support. With volatility remaining elevated, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides Three Reasons Why Now is Not the Time to Retreat from Global Diversification at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. In economic news, eurozone industrial production in May dropped more than expected. The euro traded higher and the British pound fell versus the U.S. dollar, while bond yields in the region lost ground.

Stocks in Asia extended their recent winning streak to three days as the global markets continued to recover from the post Brexit fallout pressure, remaining buoyed by expectations of further Japanese stimulus measures, and some political clarity in the U.K. Japanese equities rose, adding to the rally as of late as expectations continued to be elevated that Prime Minister Abe, coming off his ruling party's convincing weekend upper house election victory, is close to announcing more aggressive stimulus measures. Gains in Japan came even as the yen rebounded somewhat from its recent drop and as a Japanese government spokesperson denied an earlier media report that suggested government officials are considering "helicopter money" as a policy option. For more on Japan's potential increased stimulus measures see Schwab's Jeffrey Kleintop's, article, What investors need to know about helicopter money, at www.schwab.com/oninternational.

Stocks trading in mainland China and Hong Kong extended their recent gains on speculation that the government is taking steps to support investor sentiment, per Bloomberg. After the closing bell, China reported a slightly smaller-than-expected drop in June exports, which came ahead of Thursday night's release of the nation's 2Q GDP report, expected to show year-over-year growth slowed to 6.6% from 6.7% in 1Q. Finally, equities in Australia and South Korea advanced, while Indian securities were mostly flat, despite late-yesterday's mostly upbeat data on the nation's industrial production and consumer price inflation.

The international economic docket for tomorrow will be limited, with expected economic reports consisting of inflation expectations, employment data and new vehicle sales from Australia. Meanwhile, in central bank action, tomorrow the Bank of England is expected to announce a 25 basis point reduction to its official bank rate, which would lower the rate to 0.25%, while the Bank of Korea will also meet and is expected to leave its benchmark interest rate unchanged at 1.25%.

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