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Tuesday, August 30, 2016

Stocks Trim Early Losses but Finish Lower

Charles Schwab: On the Market
Posted: 8/30/2016 4:15 PM ET

Stocks Trim Early Losses but Finish Lower

Domestic stocks finished lower amid heightened monetary policy uncertainty ahead of Friday's highly anticipated labor report, with expectations of a possible one or two rate hike before year end giving a boost to the U.S. dollar to pressure crude oil prices. Gold was lower and Treasuries were mixed, though a better-than-expected read on consumer confidence may have bolstered rate hike expectations. In equity news, the EU said Dow member Apple was granted undue tax benefits in Ireland, while Modelez International halted its pursuit of Hershey.

The Dow Jones Industrial Average (DJIA) declined 49 points (0.3%) to 18,454, the S&P 500 Index shed 4 points (0.2%) to 2,176, and the Nasdaq Composite decreased 9 points (0.2%) to 5,223. In moderate volume, 743 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.63 to $46.35 per barrel, wholesale gasoline declined $0.03 to $1.37 per gallon and the Bloomberg gold spot price decreased $12.03 to $1,311.35 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 96.07.

Hershey Co. (HSY $100) is falling after Mondelez International Inc. (MDLZ $45) announced it has ended discussions with the company regarding a possible combination of the two companies. MDLZ said it determined that there is no actionable path forward toward an agreement following discussions and taking into account recent shareholder developments at HSY. MDLZ traded nicely higher.

Dow member Apple Inc. (AAPL $106) was in focus after the European Union (EU) Commission ruled that Apple was granted undue tax benefits in Ireland of up to 13 billion euros ($14.5 billion). The EU Commission said Ireland must recover from Apple the unpaid tax for the period since 2003 and through 2014, but noted that the amount that Irish authorities should recover could be reduced if other countries were to require Apple to pay more taxes on profits for this period. AAPL and the Irish government both said they will fight the decision. Shares finished lower.

Abercrombie & Fitch Co. (ANF $18) reported a 2Q loss ex-items of $0.25 per share, compared to the expected $0.20 per share shortfall, as revenues declined 4.0% year-over-year (y/y) to $783 million, roughly in line with forecasts. 2Q same-store sales declined 4.0% y/y, versus the expected 4.2% decrease. Shares traded sharply lower after the company said same-store sales are expected to remain challenging through the second half of the year, with a disproportionate effect from flagship and tourist locations.

Potash Corp. of Saskatchewan Inc. (POT $18) and Agrium Inc. (AGU $96) rallied sharply after the two agriculture companies confirmed reports that they are in preliminary merger discussions. The companies said no decision has been made and no agreement has been reached, while there can be no assurance that any transaction will result from these discussions.

United Continental Holdings Inc. (UAL $51) jumped after the airline announced that Scott Kirby has been named president of United Airlines. Kirby held the position of president of American Airlines Group Inc. (AAL $37) since the merger of American and U.S. Airways.

Consumer confidence tops forecasts

The Consumer Confidence Index (chart) rose to 101.1 in August—the highest since September 2015—from the downwardly revised 96.7 level in July and compared to the Bloomberg estimate of 97.0. Sentiment towards the present situation and expectations of business conditions both improved. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—grew to 2.6 from the 0.9 posted in July.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a rise in home prices of 5.1% y/y in June, in line with expectations. Month/month (m/m), home prices were lower by 0.1% on a seasonally adjusted basis for June, matching forecasts.

Treasuries finished mixed, with the yield on the 2-year note losing 1 basis point (bp) to 0.80%, while the yield on the 10-year note ticked 1 bp higher to 1.57% and the 30-year bond rate rose 2 bps to 2.23%. For analysis on the bond markets see our latest article, The Return of the "Bond Vigilantes," at www.schwab.com/insights and follow Schwab on Twitter: @schwabresearch.

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 and follow Liz Ann on Twitter: @lizannsonders.

Ahead of the opening bell tomorrow, the U.S. economic calendar will offer the ADP Employment Change report, forecasted to show private sector payrolls added 175,000 jobs during August, as well as MBA Mortgage Applications. Shortly after trading commences, we will receive the Chicago Purchasing Managers Index, with economists expecting a reading of 54.0 for August, down from the 55.8 registered in July, which will be followed by pending home sales, expected to have increased 0.7% m/m in July.

Europe and Asia higher higher

European equities traded higher, with financials and technology issues leading the way in the wake of the recently boosted U.S. Fed rate hike expectations and eased concerns about the health of the global economy, bolstered by today's upbeat read on U.S. consumer confidence. Also, the euro continued its recent weakness versus the U.S. dollar to aid sentiment, though the global markets remained cautious ahead of Friday's key August nonfarm payroll report in the U.S. However, mining issues saw some pressure, hamstringing the U.K. markets in a return to action following yesterday's holiday, as metal prices were lower and Citigroup offered a bearish outlook for the sector. The British pound dipped versus the greenback, while bond yields in the region finished mixed. In economic news, German consumer price inflation came in cooler than expected for August, while eurozone business and economic confidence slipped for this month. In the U.K. consumer credit decelerated more than expected and mortgage approvals missed forecasts for last month. With global uncertainty remaining elevated to open the door for some possible increased volatility, 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 mostly to the upside though conviction remained subdued as the global markets tread lightly amid the recently heightened rate hike expectations in the U.S. ahead of Friday's employment report. Japanese equities dipped following yesterday's rally that was fueled by Bank of Japan's Governor Kuroda's reiterated pledge to deploy further stimulus measures if needed. For more on Japan's potential increased stimulus measures see Jeffrey Kleintop's, CFA, article, What investors need to know about helicopter money at www.schwab.com/oninternational. The downside pressure was pared as Japan reported some relatively better-than-expected July economic data and the yen saw late-day weakness. Japan's overall household spending fell for the fifth-straight month, but by a smaller amount than anticipated, along with retail sales, while the nation's jobless rate unexpectedly dipped. Chinese stocks rose with banking stocks finding support ahead of the sector's earnings releases. Australian securities traded higher, with basic materials and oil & gas issues rebounding from yesterday's declines. Equities in India rallied on optimism that the nation's planned issuance of a new benchmark 10-year bond will boost demand for the nation's debt, per Bloomberg. Finally, South Korean stocks finished higher.

The international docket for tomorrow will remain robust, with releases expected to include industrial production, housing starts, construction orders and vehicle production from Japan, a consumer sentiment read from China, 2Q GDP from India and private sector credit from Australia. Reports from across the pond will include consumer confidence from the U.K., retail sales from Germany and PPI and CPI from France.

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