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Monday, August 22, 2016

Fence-Sitting Persists

Charles Schwab: On the Market
Posted: 8/22/2016 4:15 PM ET

Fence-Sitting Persists

Last week's uncertainty has carried over to this week, as U.S. equities finished mixed and near the unchanged mark, amid evident caution ahead of the start to the Federal Reserve's annual symposium in Jackson Hole, Wyoming this week, which culminates with Friday's speech by Fed Chairwoman Janet Yellen. A pullback in crude oil prices from last week's rally also fostered some negative sentiment, while some M&A news gave the healthcare sector a boost. Treasuries finished higher and the U.S. dollar was flat, while gold was lower.

The Dow Jones Industrial Average (DJIA) decreased 23 points (0.1%) to 18,529, the S&P 500 Index shed 1 point (0.1%) to close at 2,183, while the Nasdaq Composite gained 6 points (0.1%) to 5,245. In lighter volume, 693 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.70 to $47.41 per barrel, wholesale gasoline lost $0.03 to $1.48 per gallon and the Bloomberg gold spot price declined $3.03 to $1,338.44 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.55.

Dow member Pfizer Inc. (PFE $35) announced an agreement to acquire oncology bio-pharmaceutical company Medivation Inc. (MDVN $80) for $81.50 per share in cash for a total enterprise value of about $14.0 billion. PFE said the deal is expected to be immnew ediately accretive to its earnings upon closing and it does not expect it to impact its current 2016 guidance. PFE was modestly lower, while shares of MDVN rallied nearly 20%.

Domestic economic docket dormant but Fed gathering set to command attention

Treasuries were higher amid a dormant economic calendar, as the yield on the 2-year note dipped 1 basis point (bp) to 0.74%, the yield on the 10-year note declined 4 basis points (bps) to 1.54%, and the 30-year bond rate fell 5 bps to 2.24%.For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Fixed Income Director Collin Martin, CFA, titled Tempered Expectations for Bond Returns: Why Hold Bonds? Also, for commentary on the record high stock market, see the video from Schwab's Chief Investment Strategist, Liz Ann Sonders and Randy Frederick, titled Long-Running Bull Finally Attracting Believers? See both at www.schwab.com/insights and follow us on Twitter: @randyafrederick, @lizannsonders and @schwabresearch.

Fed policy focus and accompanying volatility is likely to begin to ramp back up this week, with the U.S. economic calendar yielding key data on the housing sector in the form of tomorrow's new homes sales, with economists expecting a 2.0% month-over-month decline during July to an annual rate of 580,000 units, as well as Wednesday's release of existing home sales. As well, some manufacturing data may also likely garner some attention, with Thursday's durable goods orders report in focus, as well as two reports tomorrow—Markit's Manufacturing PMI Index, forecasted to tick lower to 52.7 during July from the 52.9 posted in June, with a reading above 50 denoting expansion in activity, as well as the Richmond Fed Manufacturing Index. For a look at the housing market, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: There's a New Sector Coming. However, the highlight of the week will likely be the Fed's highly-anticipated annual monetary policy symposium in Jackson Hole, Wyoming, which will culminate with Friday's speech by Federal Reserve Chairwoman Janet Yellen.

As noted in the Schwab Market Perspective: The Calm Before the…., a period of peace has reigned in the market over the past month, but the lull in volatility likely won’t last. However, we do believe the secular bull market has further to run. The third quarter is shaping up to improve on lackluster first half U.S. economic results but weak corporate confidence remains an impediment to stronger growth. Fed uncertainty is likely to heat up heading toward the September Federal Open Market Committee (FOMC) meeting. Read the whole perspective and our sector views at www.schwab.com/marketinsight.

Europe and Asia mixed on commodity weakness and Fed focus

European equities finished mixed, with basic materials and oil & gas issues seeing pressure as commodity prices fell, led by crude oil prices amid lingering supply speculation. The U.S. dollar gained modest ground as Fed rate hike expectations continued to resurface following comments over the weekend from Fed Vice Chair Stanley Fischer that the Central Bank was close to reaching its targets for full employment and 2.0% inflation. The euro dipped compared to the greenback, while bond yields in the region moved to the downside. However, the British pound was higher versus the dollar, continuing its recent rebound from a sell-off that followed the Bank of England's (BoE) decision earlier this month to cut its benchmark interest rate further and boost its asset purchases. The BoE's decision was aimed at bolstering the economy on the heels the late-June vote by the U.K. to leave the European Union, known as a Brexit. The pound has also found support from last week's July economic data that showed retail sales easily topped forecasts, jobless claims unexpectedly declined and consumer price inflation surprisingly rose. For more on the potential impact of the Brexit vote, see the Schwab Center for Financial Research's article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight.

Stocks in Asia finished mixed, with the global markets continuing to focus on the divergent monetary policy landscape following comments over the weekend by U.S. Fed Vice Chair Fischer and ahead of this week's annual Fed policy gathering. Also, Bank of Japan (BoJ) Governor Kuroda hinted at further stimulus measures, while uncertainty regarding more policy action in China persisted. The yen weakened versus the U.S. dollar, though crude oil prices gave back some of a recent run. For more on Japan's potential increased stimulus measures see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, What investors need to know about helicopter money, and amid the heightened uncertainty, Jeff offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. Japanese equities, as well as those traded in Hong Kong, advanced, while mainland Chinese fell. Meanwhile, securities traded in Australia, South Korea and India all saw declines for the session.

Tomorrow's international economic calendar will be dominated by the Markit Manufacturing PMI from around the globe, as well as trade data from the U.K.

Schwab Center for Financial Research - Market Analysis Group

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