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Tuesday, August 02, 2016

Markets Lose on Trifecta of Events

Charles Schwab: On the Market
Posted: 8/2/2016 4:15 PM ET

Markets Lose on Trifecta of Events

U.S. equities finished solidly lower amid a triple dose of negativity, with global sentiment dampened on festering European banking concerns, disappointment surrounding Japan's stimulus measures, as well as a drop into bear market territory for crude oil prices. Meanwhile, dismal July domestic auto sales figures didn't help matters. Treasuries were mixed on the heels of a divergent domestic personal income and spending report, the U.S. dollar was lower and gold moved higher.

The Dow Jones Industrial Average (DJIA) fell 91 points (0.5%) to 18,314, the S&P 500 Index declined 14 points (0.6%) to 2,157 and the Nasdaq Composite tumbled 46 points (0.9%) to 5,138. In moderately-heavy volume, 931 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.55 to $39.51 per barrel, wholesale gasoline inched $0.01 higher to $1.31 per gallon, while the Bloomberg gold spot price rose $12.30 to $1,365.45 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% lower at 95.09.

Dow member Procter & Gamble Co. (PG $87) reported fiscal 4Q earnings-per-share (EPS) ex-items of $0.79, above the $0.74 FactSet estimate, as revenues decreased 3.0% year-over-year (y/y) to $16.1 billion, versus the projected $15.8 billion. PG warned that core 1Q EPS will be disproportionately affected by foreign exchange headwinds and the impact of lost finished product sales to its Venezuelan subsidiaries. Shares finished higher.

Dow component Pfizer Inc. (PFE $36) posted 2Q EPS ex-items of $0.64, two cents above expectations, with revenues growing 11.0% y/y to $13.2 billion, versus the projected $13.0 billion. PFE reaffirmed its full-year guidance and shares were lower.

CVS Health Corp. (CVS $98) announced 2Q EPS ex-items of $1.32, above the expected $1.30, as revenues rose 17.6% y/y to $43.7 billion, below the forecast $44.3 billion. CVS issued 3Q earnings guidance that was mostly above expectations, and raised its full-year profit outlook. Shares were nicely higher. 

The major automakers reported U.S. July sales today, with Ford Motor Co's (F $12) sales falling 2.8%, below the FactSet estimate of a 0.3% decrease, while General Motors Co's (GM $30) sales dropped 1.9%, compared to the projected 0.1% dip. Fiat Chrysler Automobiles NV's (FCAU $6) Chrysler brand's sales ticked 0.3% higher y/y, compared to the expected 2.3% gain. Toyota Motor Corp. (TM $110) posted a 1,5% y/y decline in sales, besting the 3.8% shortfall expected, and Volkswagen AG (VLKAY $29) saw an 8.1% y/y decline in sales for the month, well above the 20% plunge forecast. Shares of all five of the automakers were lower.

Personal income and spending report mixed

Personal income (chart) was 0.2% higher month-over-month (m/m) in June, below the Bloomberg forecast of a 0.3% rise and matching May's unrevised increase. Personal spending came in 0.4% higher m/m last month, north of expectations of a 0.3% gain and matching May's unrevised rise. The June savings rate as a percentage of disposable income was 5.3%. The PCE Deflator rose 0.1% m/m, below forecasts of a 0.2% increase. Compared to last year, the deflator was 0.9% higher, matching estimates. Excluding food and energy, the PCE Core Index was 0.1% higher m/m, in line with expectations, and the index was up 1.6% y/y, in line with estimates.

Treasuries were mixed, as the yield on the 2-year note dipped 1 basis point (bp) to 0.68%, while the yield on the 10-year note ticked 1 bp higher to 1.54%, and the 30-year bond rate gained 3 bps to 2.30%. Bond yields have rebounded somewhat 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 provides analysis of 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 the domestic economic calendar will bring some reads on the key services sector for July courtesy of the Institute for Supply Management's (ISM) non-Manufacturing Index and Markit's final Services PMI Index. ISM's index is projected to decline to 55.9 from 56.5 in June, and Markit's index is anticipated to be revised slightly higher to 51.0 from the preliminary level of 50.9, just shy of June's 51.4 figure. However, both reports are projecting continued expansion in the services sector as denoted by readings above 50.

Although last week's 2Q GDP report disappointed, the consumer spending component was a bright spot and today's personal spending data came in stronger than expected, suggesting the consumer may be poised to bolster the U.S. economy. As noted in the latest Schwab Market Perspective: New Records…Same Skepticism, the U.S. economy continues to show signs of improvement, with jobless claims reinforcing a healthier employment picture, wage growth starting to perk up, and housing continuing to be a bright spot and indicating better confidence among consumers. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

As well, the ADP Employment Change report is slated for release, forecast to show private sector payrolls added 170,000 jobs during July, as well as MBA Mortgage Applications.

Europe and Asia lower amid banking concerns and Japan stimulus details

European equities finished lower, with oil & gas issues remaining weak as the recent tumble in crude oil prices to bear market territory weighed on the energy sector. Financials led to the downside, amid festering uneasiness toward the Italian banking sector in the wake of late-Friday's European banking sector stress test results. Mixed earnings reports in the region, coupled with lackluster global economic data as of late and disappointment toward Japan's new stimulus measures weighed on the markets, overshadowing a rate cut in Australia today. Amid this backdrop, 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. The euro and the British pound were higher versus the U.S. dollar, while bond yields in the region gained ground. Switzerland's markets saw some pressure in a return to action following yesterday's holiday, on the heels of some disappointing retail sales and manufacturing data.

Stocks in Asia finished mostly lower with energy issues seeing pressure as crude oil prices continued to fall yesterday, entering bear market territory. Japanese equities dropped sharply, with the yen gaining ground late in the session, while the markets appeared to be disappointed by details of the government's fiscal stimulus package announced last week and approved after the markets closed. Markets in Australia declined, bogged down by oil & gas and basic materials issues, while failing to get a boost from the expected monetary policy decision from the Reserve Bank of Australia (RBA) to cut its benchmark interest rate by 25 bps to 1.50%. The RBA noted that the global economy is continuing to grow at a lower-than-average pace, with conditions becoming more difficult for a number of emerging markets, while inflation remains quite low. Jeffrey Kleintop, CFA, offers Five ways investors can make the most of slower growth, at www.schwab.com/oninternational. Meanwhile, Indian securities and those traded in South Korea's declined, but mainland Chinese listings bucked the trend to finish higher, rising for the first time in three sessions, led by property-related issues, and those traded in Hong Kong were closed due to the impact of tropical storm Nida on the region.

For tomorrow, the Markit Service PMI Indexes from around the globe will likely dominate the international economic calendar, with other reports scheduled for release to include wage data from Australia and retail sales from the Eurozone.

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