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Monday, July 18, 2016

Stocks Manage Modest Up-Move on Monday

Charles Schwab: On the Market
Posted: 7/18/2016 4:15 PM ET

Stocks Manage Modest Up-Move on Monday

U.S. stocks gained ground to start the week with Bank of America topping the Street's quarterly estimates as earnings season begins to ramp up. Technology stocks were among the session's top performers and may have found some support from the announcement that Japan's SoftBank agreed to acquire chip designer ARM Holdings for $32 billion. International equity markets were mostly mixed with a plethora of geopolitical events being weighed by global investors. Treasuries, gold and crude oil prices were lower, while the U.S. dollar was little changed.

The Dow Jones Industrial Average (DJIA) rose 17 points (0.1%) to 18,533, the S&P 500 Index increased 5 points (0.2%) to 2,167, and the Nasdaq Composite gained 26 points (0.5%) to 5,056. In moderate volume, 727 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil was $0.71 lower at $45.24 per barrel, wholesale gasoline shed $0.03 to $1.39 per gallon and the Bloomberg gold spot price decreased $7.85 to $1,329.60 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.55.

Bank of America Corp. (BAC $14) reported 2Q earnings-per-share (EPS) of $0.36, above the $0.33 FactSet estimate, as revenues declined 7.2% year-over-year (y/y) to $20.6 billion, versus the expected $20.4 billion. The company said it saw improved customer and client activity, and each of its four business segments reported y/y earnings growth. BAC finished higher.

Hasbro Inc. (HAS $80) posted 2Q EPS of $0.41, north of the expected $0.39, with revenues rising 10.0% y/y to $879 million, topping the forecasted $859 million. Shares lost solid ground as analysts expressed concerns toward the toy maker's slowdown in sales of its key boy-oriented toys division.

Technology issues gained ground as chip designer ARM Holdings PLC. (ARMH $66) surged after Japan's SoftBank Group Corp. (SFTBY $26) announced that it has reached an agreement to acquire the U.K.-based company for roughly $32 billion in cash. ADR shares of ARMH surged over 40% in U.S. trading, while ADR shares of SFTBY were sharply lower.

Homebuilder sentiment dips as housing data heats up this week

The July National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month dipped to 59 from 60 in June, where the Bloomberg estimate had called for it to remain. However, builder confidence remained above 50, which separates good and poor conditions. The NAHB said the index is consistent with the ongoing gradual housing recovery, but there are still reports of scattered softness in some markets, due largely to regulatory constraints and shortages of lots and labor.

The ramp-up of 2Q earnings season is likely to garner attention this week, particularly guidance and commentary surrounding the impact of the Brexit vote in the U.K., while the U.S. economic calendar will be tilted toward the housing sector. Today's homebuilder sentiment report got the ball rolling and will be followed by tomorrow's look at housing construction activity in the form of housing starts and building permits and Thursday's existing home sales report. Other releases worth noting on this week's economic docket include: the Leading Index and Markit's preliminary Manufacturing PMI Index.

For some timely insight into the stock market as earnings season is set to heat up, see the latest Schwab Sector Views: Sector Impact of Brexit from Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA. Brad adds that healthy mortgage demand could be bolstered by the continued low interest rate environment and high rental rates in some areas that provide incentive for home buying. These are some of the factors that lead us to our outperform rating for the financial sector. Read more at www.schwab.com/marktetinsight.

Treasuries were lower with the yield on the 2-year note rising 2 basis points (bps) to 0.69%, the yield on the 10-year note increasing 3 bps to 1.59% and the 30-year bond rate gaining 4 bps to 2.30%. Bond yields have been volatile in the wake of the U.K. Brexit fallout, which exacerbated global growth concerns, as well as amid dampened expectations for a Fed rate hike this year. However, the June U.S. labor report has helped ease growth concerns and given a boost to bond yields as of late.

For analysis see the video from Schwab's Chief Investment Strategist, 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.

Europe and Asia mixed to begin week

European equities finished mixed, with oil & gas stocks seeing some pressure as crude oil prices fell, while traders were likely cautious ahead of this week's European Central Bank monetary policy decision. Also, the global markets digested a plethora of geopolitical events that added to the backdrop of heightened volatility and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversificationat www.schwab.com/marketinsight. Be sure to follow Jeff on Twitter: @jeffreykleintop. The euro and British pound were higher versus the U.S. dollar and bond yields in the region mostly gained ground.

Stocks in Asia also finished mixed to begin the week, while markets in Japan were closed for a holiday and the global markets eyed the failed coup attempt in Turkey. For more on Turkey, see Schwab's Jeffrey Kleintop's, article, Turmoil in Turkey: What Does Coup Attempt Mean for Markets?, at www.schwab.com/marktetinsight. Chinese stocks trading in Shanghai declined, while those in Hong Kong advanced on the heels of a report that showed the nation's June property price gains slowed. Australian securities rose with strength in oil & gas issues more than offsetting a decline in basic materials stocks. South Korean equities moved to the upside, while Indian listings declined following some disappointing earnings results and weakness in telecom issues as companies lowered data prices.

Tomorrow, the international economic docket will deliver the CPI and PPI from the U.K., construction output from the eurozone and the Zew Economic Sentiment Survey from Germany.

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