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Thursday, August 04, 2016

Mixed Results Amid Choppy Action

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

Mixed Results Amid Choppy Action

U.S. equities finished mixed and near the unchanged mark, in what appeared to be some noticeable caution ahead of tomorrow's July labor report. Stocks traded in a fairly narrow range during the bumpy session, despite a recovery in crude oil prices and the Bank of England's move to cut rates and up its asset purchases. Treasuries were higher following a surprising rise in jobless claims and a drop in factory orders, while gold and the U.S. dollar also gained ground.

The Dow Jones Industrial Average (DJIA) ticked 3 points lower to 18,352, the S&P 500 Index was nearly unchanged at 2,164 and the Nasdaq Composite increased 7 points (0.1%) to 5,166. In moderate volume, 801 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.10 to $41.93 per barrel and wholesale gasoline added $0.02 to $1.37 per gallon, while the Bloomberg gold spot price increased $3.35 to $1,361.53 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 95.75.

Tesla Motors Inc. (TSLA $231) reported a 2Q loss of $1.06 per share, compared to the FactSet estimate of a $0.59 per share shortfall, as revenues rose 31.0% year-over-year (y/y) to $1.6 billion, roughly in line with forecasts. The electric car maker said production and demand are on track to support deliveries of about 50,000 new Model S and Model X vehicles during the second half of 2016. Shares were modestly higher.

Kellogg Co. (K $82) posted 2Q EPS of $0.91, mostly in line with projections, as revenues declined 6.5% y/y to $3.3 billion, below the forecasted $3.4 billion. The company raised its full-year earnings outlook and shares were nicely higher.

Allstate Corp. (ALL $69) announced 2Q operating earnings of $0.62 per share, above the expected $0.58, with revenues rising 2.0% y/y to $9.2 billion, versus the estimated $8.2 billion. Shares finished higher.

Shares of MetLife Inc. (MET $40) were sharply lower after it reported 2Q profits of $0.83 per share, including items that may be impacting comparability to the estimated $1.35, while revenues of $15.2 billion came in well below the forecasted $17.3 billion.

Jobless claims unexpectedly rise

Weekly initial jobless claims (chart) rose 3,000 to 269,000 last week, versus the Bloomberg estimate of a dip to 265,000, with the prior week's figure unrevised at 266,000. The four-week moving average increased by 3,750 to 260,250, while continuing claims declined 6,000 to 2,138,000, north of the estimated level of 2,130,000.

Factory orders (chart) fell 1.5% month-over-month (m/m) in June, versus expectations of a 1.9% drop, while May's figure was adjusted lower to a 1.2% decrease. June durable goods orders—preliminarily reported a week ago—were revised positively to a 3.9% drop from the initial estimate of a 4.0% fall, and orders of nondefense capital goods excluding aircraft—a proxy for business spending—was revised higher to a 0.4% gain from the initially reported 0.2% increase.

Treasuries finished higher, with the yield on the 2-year note declining 3 basis points (bps) to 0.64%, while the yields on the 10-year note and the 30-year bond dropped 4 bps to 1.50% and 2.26%, respectively. Bond yields are seeing some pressure in the wake of the decision in the U.K. to cut rates and add to its asset purchases, as well as ahead of tomorrow's key July nonfarm payroll report that will follow last week's unchanged monetary policy stance from the Fed and severe miss in 2Q GDP growth (economic calendar). Headline job growth is projected at 180,000 jobs, while private sector payrolls are expected to rise 171,000. The unemployment rate is forecasted to dip to 4.8% from 4.9% and average hourly earnings are projected to rise 0.2% m/m.

Schwab's Chief Investment Strategist, Liz Ann Sonders points out in her analysis of the Fed's decision titled, A Hopeful Transmission: Fed Holds Rates Steady, But… the Fed noted diminished risks in the U.S. economy and a tighter labor market in contrast to its earlier reaction to the extremely weak May jobs report. Liz Ann concludes that although there was nothing manifest in the statement pointing to September as the meeting at which they'll likely move, we believe it's on the table as long as economic data behaves and financial conditions remain relatively loose. For analysis on the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' 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.

In addition to the July labor report, investors will get a look at the trade balance, with economists forecasting the deficit to have widened in June to $43.0 billion from May's $41.1 billion, while in the final hour of trading the consumer credit report is expected to show consumer borrowing was $15.5 billion for the month of June, down from the $18.6 billion posted in May.

Europe higher on Bank of England moves, Asia ticks higher on yen and oil rebound

European equities finished higher, led by financials as Italian banking concerns eased for a second-straight session, while the markets got a boost from the monetary policy decision by the Bank of England (BoE), as well as some upbeat earnings results. Oil & gas issues also rebounded to help the markets as crude oil prices continued to recover from a recent tumble to bear market territory. The BoE cut its benchmark interest rate by 25 bps to 0.25%, as expected, but the British pound fell versus the U.S. dollar after it also unexpectedly boosted its asset purchase program to 435 billion pounds from 375 billion pounds. The euro dipped versus the greenback, while bond yields in the region moved lower. Amid the continued elevated global volatility that has been amplified by economic growth uncertainty and divergent monetary policy actions, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, provides an updated look at sectors, post-Brexit in the latest Schwab Sector Views: Brexit's Impact on Sectors, Part Two. Read both articles at www.schwab.com/marketinsight and be sure to follow Schwab and Jeff on Twitter: @schwabresearch and  @jeffreykleintop.

Stocks in Asia finished mostly higher, aided by the rebound in crude oil prices yesterday that helped U.S. markets gain ground, while traders were likely cautious ahead of today's monetary policy decision in the U.K. and tomorrow's key July U.S. labor report. Earnings and a modest pullback in the yen from its recent rally that has come courtesy of disappointment toward Japan's recently announced stimulus measures, helping Japanese stocks to stage a rebound. Indian equities ticked higher amid muted reaction to the passing in the upper house of parliament of the nation's biggest tax reform in decades, per Bloomberg, in the form of the goods-and-services tax bill. Schwab's Director of International Research, Michelle Gibley, CFA, offers a look at the global political landscape in her article, Performing Reformers: How Political Change Can Affect Stocks, at www.schwab.com/oninternational. Meanwhile, Australian listings advanced, led by oil & gas issues, South Korean securities gained modest ground, while those traded in mainland China and Hong Kong nudged higher.

Tomorrow, the international economic calendar will be fairly light, with reports scheduled for release to include the trade balance and the Leading Index from Japan, manufacturing orders from Germany, and industrial production from Italy.

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