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Wednesday, August 31, 2016

Low Energy Leads Decline

Charles Schwab: On the Market
Posted: 8/31/2016 4:15 PM ET

Low Energy Leads Decline

U.S. stocks traded lower, with the energy sector leading the decline as crude oil prices fell following a bearish government inventory report. Global caution remained heightened amid Fed rate hike concerns as traders await Friday's key August labor report. Treasuries ticked lower following reads on employment, regional manufacturing and housing. The U.S. dollar was flat and gold was lower.

The Dow Jones Industrial Average (DJIA) declined 53 points (0.3%) to 18,401, the S&P 500 Index shed 5 points (0.2%) to 2,171, and the Nasdaq Composite decreased 10 points (0.2%) to 5,213. In moderately-heavy volume, 1.1 billion shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.65 to $44.70 per barrel, wholesale gasoline declined $0.04 to $1.33 per gallon and the Bloomberg gold spot price decreased $2.47 to $1,308.64 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.04.

Palo Alto Networks Inc. (PANW $133) posted fiscal 4Q earnings-per-share (EPS) ex-items of $0.50, roughly in line with the FactSet estimate, as revenues grew 41.0% year-over-year (y/y) to $401 million, above the expected $390 million. The cybersecurity company issued stronger-than-expected full-year EPS guidance and announced a $500 million share repurchase program. However, the company offered 1Q earnings and revenue guidance that missed estimates and shares closed solidly lower.

H&R Block Inc. (HRB $22) reported a fiscal 1Q loss of $0.55 per share, wider than the estimated $0.53 per share shortfall, as revenues declined 9.4% y/y to $125 million, below the forecasted $133 million. The tax preparation services company said 1Q results typically represent less than 5.0% of annual revenues and less than 15.0% of annual expenses, due to the highly seasonal nature of its business. Shares of HRB fell.

ADP's private sector employment report roughly matches forecasts

The ADP Employment Change Report showed private sector payrolls rose by 177,000 jobs in August, modestly above forecasts of 175,000, while July's gain of 179,000 jobs was revised higher to a 194,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader August nonfarm payroll report, expected to show an increase of 180,000 jobs, while private sector payrolls are projected to rise by the same amount (economic calendar). The unemployment rate is forecasted to dip to 4.8% from 4.9% and average hourly earnings are projected to rise 0.2% month-over-month (m/m). Schwab's Chief Fixed Income Strategist, Kathy Jones discusses in her article, What Does Strong Job Growth Mean for Bond Investors?, at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

The Chicago Purchasing Managers Index (chart) fell more than expected but remained in expansion territory (above 50), after dropping to 51.5 in August from 55.8 in July and versus expectations of a decline to 54.0. New orders fell amid some widespread weakness, though the lone component that saw a rise was employment.

Pending home sales grew 1.3% m/m in July, versus projections of a 0.7% gain and following the downwardly revised 0.8% drop registered in June. Compared to last year, sales were 2.2% lower, versus forecasts of a 2.2% increase. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which fell for the first time since February in July.

The MBA Mortgage Application Index rose 2.8% last week, after declining 2.1% in the previous week. The increase came as a 3.7% gain for the Refinance Index was accompanied by a 1.3% rise for the Purchase Index. The average 30-year mortgage rate remained at 3.67%.

Treasuries inched lower, with the yields on the 2-year and 10-year notes gaining 1 basis point to 0.81% and 1.58%, respectively, while the 30-year bond rate was flat at 2.23%.

For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Kathy Jones, titled Rate Hike on the Horizon—but When? at www.schwab.com/insights and follow Randy on Twitter: @randyafrederick. Also, for the latest on the subdued market action in the "dog days" of summer, Schwab's Chief Investment Strategist, Liz Ann Sonders offers her latest article, All Summer Long: Will the Extreme Lull in Volatility Persist? at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

Tomorrow, the U.S. economic calendar will bring the tail end of a global look at August manufacturing activity, in the form of the ISM Manufacturing Index and the final Markit Manufacturing PMI Index. ISM's index is projected to dip to 52.0 from 52.6 in July, while Markit's report is expected to be unrevised at 52.1, down slightly from July's 52.9 reading. Readings above 50 for both indexes depict expansion in manufacturing output. As noted in the Schwab Market Perspective: The Calm Before the…., the latest batch of U.S. economic data doesn’t appear to presage an imminent recession, which would typically lead to a bear market. However, it will be difficult to get the U.S. economy rolling without an improvement in productivity, which is undoubtedly being constrained by ongoing tepid capital spending. Read the whole perspective at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Europe mostly lower, Asia mixed

European equities gave up early gains and finished mostly lower, led by oil & gas issues as crude oil prices extended a recent pullback on a bearish oil inventory report. Also, basic materials stocks continued to see pressure amid the recent weakness in metals prices. Global caution remained a drag on conviction amid heightened U.S. Fed rate hike expectations as Friday's key August nonfarm payroll report looms on the horizon. However, financials were the lone bright spot, continuing their recent rally on the Fed rate hike expectations and eased global growth uneasiness, bolstered by some M&A chatter toward the German banking sector. A much stronger-than-expected German retail sales report failed to boost stocks, with separate reports showing eurozone consumer price inflation came in cooler than expected in August and the region's unemployment rate remained at 10.1%, versus projections of a dip to 10.0%. The data comes ahead of tomorrow's manufacturing PMI reports for August.

The euro overcame early weakness and ticked higher and the British pound gained ground versus the U.S. dollar, while bond yields in the region finished higher. With the markets choppy and poised for increased volatility amid the diverging global monetary policy landscape and Brexit uncertainty, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed, with the global markets awaiting Friday's key August employment report in the U.S. as Fed rate hike expectations remain elevated, along with tonight's Chinese business activity reports. Japanese equities gained ground, with the yen extending its weakness to boost export-heavy issues on the U.S. rate hike expectations and as recent commentary from Bank of Japan officials continues to bolster optimism of further stimulus measures on the heels of a preliminary report showing the nation's industrial production came in flat m/m for July, compared to estimates of a 0.8% gain. For more on Japan's potential increased stimulus measures see Jeffrey Kleintop's, CFA, article, What investors need to know about helicopter money.

Mainland Chinese stocks rose, while those traded in Hong Kong declined amid some caution ahead of tonight's releases of the nation's Manufacturing and non-Manufacturing PMI Indexes and as some banking sector earnings were mostly favorable. Australian equities were bogged down by basic materials and oil & gas issues amid the pressure on metals and crude oil prices as of late, while South Korean listings also closed to the downside. Finally, Indian securities moved higher, buoyed by recent data showing foreign investment into the nation continued. After the closing bell, India reported 2Q GDP growth of 7.1% y/y, down from the 7.9% expansion seen in 1Q and below the expected growth of 7.6%. Schwab's Jeffrey Kleintop discusses Five ways investors can make the most of slower growth. Read both of Jeff's articles at www.schwab.com/oninternational.

In addition to the aforementioned Chinese reports, the international economic docket for tomorrow will include a plethora of manufacturing PMI reads from Japan, India, Germany, France, Italy, the Eurozone and the U.K. Japan will also release reports on capital spending, company profits and vehicle sales.

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