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Monday, August 01, 2016

Markets Echo Past Performances

Charles Schwab: On the Market
Posted: 8/1/2016 4:15 PM ET

Markets Echo Past Performances

U.S. equities finished mixed in an all-too-familiar theme as of late, with crude oil continuing its recent decent to weigh on the energy sector, and conflicting global economic data fostering uncertainty. Meanwhile, M&A activity headlined the equity front, while Biogen and Ionis Pharmaceuticals rallied on favorable results of their treatment for a deadly muscle disorder. Treasuries were lower, while gold and the U.S. dollar gained ground.

The Dow Jones Industrial Average (DJIA) fell 27 points (0.2%) to 18,405, the S&P 500 Index declined 3 points (0.1%) to 2,171, while the Nasdaq Composite increased 22 points (0.4%) to 5,184. In moderate volume, 841 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $1.54 to $40.06 per barrel, wholesale gasoline lost $0.02 to $1.30 per gallon, while the Bloomberg gold spot price rose $2.32 to $1,353.60 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 95.73.

Tesla Motors Inc. (TSLA $230) announced an agreement to acquire SolarCity Corp. (SCTY $25) for $25.37 per share in an all-stock transaction with an equity value of about $2.6 billion. Under the terms of the deal, SolarCity stockholders will receive 0.110 Tesla shares for each share they own. Shares of both companies were lower.

Dow member Verizon Communications Inc. (VZ $55) announced an agreement to acquire fleet and mobile workforce management solutions company, Fleetmatics Group PLC. (FLTX $60), for $60.00 per share in cash, representing a value of about $2.4 billion. VZ was lower down, while FLTX rallied over 38%.

Shares of Biogen Inc. (BIIB $302) jumped and Ionis Pharmaceuticals Inc. (IONS $38) surged over 30% after the companies announced favorable results of a late-stage trial of their treatment for a deadly muscle disorder in infants, saying it met its main goal.

Manufacturing activity remains in expansion territory

The Institute for Supply Management (ISM) Manufacturing Index (chart) in July remained in expansion territory (above 50) for the fifth-straight month after declining to 52.6 from June's 53.2 level, and compared to the Bloomberg forecast of a dip to 53.0. New orders were roughly flat month-over-month (m/m), but continued to show growth, and employment declined, while production accelerated. Prices dropped but remained well above the 50 mark.

The final Markit U.S. Manufacturing PMI Index was unrevised for July at the 52.9 preliminary level, in line with expectations. However, the index was up from the 51.3 level posted in June. 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.

Construction spending (chart) unexpectedly declined, falling 0.6% month-over-month (m/m) in June, versus projections of a 0.5% advance, and following May's positively revised 0.1% dip. Residential spending was 0.1% lower m/m, while non-residential spending fell 1.0%.

As noted in the latest Schwab Market Perspective: New Records…Same Skepticism, the U.S. economy continues to show signs of improvement, though business confidence and spending remain hamstrung. Additionally, some inflation measures heating up may force the Fed's hand and we believe the risk of an actual inflation problem remains low; but we could have an inflation scare. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Treasuries were lower, as the yield on the 2-year note gained 2 basis points (bps) to 0.68%, the yield on the 10-year note rose 4 bps to 1.50%, and the 30-year bond rate added 6 bps to 2.24%. Bond yields are rebounding modestly from last week's drop that came courtesy of the Fed leaving its monetary policy unchanged and 2Q GDP growth decisively missing expectations.

Schwab's Chief Investment Strategist, Liz Ann Sonders discusses last week's Fed's decision in her commentary, A Hopeful Transmission: Fed Holds Rates Steady, But… and Schwab's Chief Fixed Income Strategist, Kathy Jones discusses in her article, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?. Read both articles at www.schwab.com/marketinsight and follow Liz Ann and Kathy on Twitter: @lizannsonders and @kathyjones.

Tomorrow's economic calendar will begin with a report on personal income and spending, forecasted to show both income and spending rose 0.3% m/m during June, while monthly auto sales will be reported throughout the day.

Europe lower in face of bank stress tests and data, Asia mixed following China reports

European equities traded mostly lower, with financials seeing pressure in the wake of late-Friday's release of the European banking sector stress test results, while some disappointing manufacturing reports out of China and the U.K. hamstrung sentiment. Oil & gas issues led to the downside as crude oil prices continued to fall. Markit's UK PMI Manufacturing Index was revised lower to 48.2 for July from the preliminary estimate of 49.1, and down from the 52.4 level registered in June. A reading below 50 denotes contraction and the report shows the impact of the late-June Brexit vote may have dampened activity. The data comes ahead of this week's monetary policy decision from the Bank of England, with Bloomberg forecasting a rate cut. Although most of Europe's banks showed improved and adequate levels of capital in certain scenarios following the stress tests, key Italian lender BMPS SpA (BMDPY $0.25) tested poorly in an adverse scenario, and the results were met with some skepticism regarding their efficacy in testing the current environment, which has seen a prolonged period of negative interest rates and uncertainty regarding a Brexit.

Markit's final Eurozone Manufacturing PMI Index for July was revised higher to 52.0 from the preliminary level of 51.9, where it was expected to remain, but down from June's 52.8 figure. The euro was little changed and the British pound declined versus the U.S. dollar, while bond yields in the region were mostly higher. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification. Read more at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop

Stocks in Asia finished mixed with the Japanese markets still grappling with Friday's disappointing monetary policy announcement from the Bank of Japan (BoJ), while traders digested a plethora of July Chinese business activity reports. Japanese equities gained ground, with the yen giving back some of Friday's jump on the BoJ's decision to boost its stimulus measures by a smaller-than-expected amount, and as banking stocks gained some ground. Oil & gas and basic materials issues helped Australia's markets advance, despite some likely caution ahead of tomorrow's monetary policy decision from the Reserve Bank of Australia. Meanwhile, stocks in India declined amid some disappointing earnings reports in the region, while those listed in South Korea rose. Mainland Chinese equities declined, with concerns festering about a regulatory crackdown on wealth-management products, while securities in Hong Kong rose, as a disappointing manufacturing activity release was met with a favorable services sector report and an independent read on the nation's manufacturing output. China's official Manufacturing PMI Index unexpectedly dipped to 49.9 last month from 50.0—the demarcation point between expansion and contraction—in June, where it was expected to remain. However, the nation's non-Manufacturing PMI Index showed growth in the key services sector accelerated, and the Caixin/Markit PMI Manufacturing Index rose to a level depicting expansion.

Reports slated for release on tomorrow's international docket include: CPI from South Korea, consumer confidence from Japan, trade and housing figures from Australia, as well as the aforementioned Reserve Bank of Australia monetary policy decision, while from across the pond will come PPI from the Eurozone, labor data from Spain, and retail sales from Switzerland.

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