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Thursday, August 18, 2016

Uncertainty Continues

Charles Schwab: On the Market
Posted: 8/18/2016 4:15 PM ET

Uncertainty Continues

U.S. equities traded in a narrow range and finished modestly higher with investors nervously weighing yesterday's seemingly dovish July Fed meeting minutes, mixed earnings results from Dow member's Wal-Mart and Cisco Systems, and upbeat economic data. Energy issues got a boost from a rally in crude oil prices, while Treasuries and gold also gained ground, but the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) increased 24 points (0.1%) to 18,598, the S&P 500 Index gained 5 points (0.2%) to 2,187 and the Nasdaq Composite added 11 points (0.2%) to close at 5,240. In moderate volume, 744 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.47 to $48.22 per barrel, wholesale gasoline added $0.04 to $1.49 per gallon and the Bloomberg gold spot price gained $3.96 to $1,352.69 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% lower at 94.11.

Dow member Wal-Mart Stores Inc. (WMT $74) reported 2Q earnings-per-share (EPS) ex-items of $1.07, above the $1.02 FactSet estimate, as revenues increased 0.5% year-over-year (y/y) to $120.9 billion, topping the expected $120.2 billion. 2Q U.S. same-store sales at Walmart rose 1.6% y/y, exceeding the forecasted 1.0% gain. WMT raised its full-year adjusted EPS guidance. Shares were nicely higher.

Dow component Cisco Systems Inc. (CSCO $30) posted fiscal 4Q EPS of $0.63, north of the estimated $0.60, with revenues rising 2.0% y/y to $12.6 billion, roughly in line with forecasts. The company issued slightly softer-than-expected 1Q guidance. CSCO announced a restructuring, which will eliminate up to 5,500 positions from its global workforce. CSCO finished lower.

L Brands Inc. (LB $78) announced 2Q profits of $0.70 per share, above the $0.62 expectation, on previously reported revenues of $2.9 billion. Despite reporting 3Q EPS guidance that came in below forecasts, the retailer raised its full-year earnings outlook. L Brands traded solidly higher.

NetApp Inc. (NTAP $34) reported fiscal 1Q EPS ex-items of $0.46, above the forecasted $0.36, as revenues declined 3.1% y/y to $1.3 billion, roughly in line with expectations. NTAP issued 2Q guidance that was mostly in line with estimates. NTAP rallied over 17%.

With 2Q earnings season wrapping up, Schwab's Chief Investment Strategist, Liz Ann Sonders discusses in her latest commentary, With a Little Help From My Friends: On Africa, Economy and Earnings whether earnings growth can squeak its way back into the green in the third quarter, at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

Jobless claims decline, leading indicators top forecasts 

Weekly initial jobless claims (chart) decreased 4,000 to 262,000 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 rose 2,500 to 265,250, while continuing claims gained 15,000 to 2,175,000, north of the estimated level of 2,145,000.

The Philly Fed Manufacturing Index (chart) in August moved back to at a level depicting expansion (a reading above zero) after rising to 2.0 from -2.9 in July, in line with estimates.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) increased 0.4% month-over-month (m/m) in July, above projections calling for it to match June's unrevised 0.3% gain. Support came from the components pertaining to jobless claims, average workweek, stock prices and the yield curve.

Treasuries finished higher in choppy action, as the yields on the 2-year and 10-year notes declined 2 basis points (bps) to 0.71% and 1.53%, respectively, while the 30-year bond rate ticked 1 bp lower to 2.25%. Bond yields declined yesterday after the release of the Fed's July policy meeting minutes that showed members remained divided and continued to be data dependent regarding the timing of the next rate increase. For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Collin Martin, CFA, titled Tempered Expectations for Bond Returns: Why Hold Bonds?, at www.schwab.com/insights. Follow Randy and Schwab on Twitter: @randyafrederick and @schwabresearch.

Tomorrow’s economic calendar will take a break, as no notable reports are scheduled for release.

Europe higher, Asia mixed following data and Fed minutes

European equities finished to the upside, with the Stoxx Europe 600 Index gaining ground for the first time in five sessions, amid a plethora of mixed earnings reports, while mining issues continued a string of gains to lift the basic materials sector. Oil & gas issues led the way, with crude oil prices adding to a recent rally. The global markets digested yesterday's look at the U.S. Fed's July meeting that appeared to dampen imminent rate hike expectations as the Central Bank noted that it remains data dependent. The euro moved higher on the U.S. dollar, which saw pressure following the Fed's report, while bond yields in the region were mostly lower. The British pound rallied versus the greenback on the heels of a much larger-than-expected rise in U.K. July retail sales. The report joins separate releases this week that have shown jobless claims unexpectedly fell and inflation surprisingly rose in July. The data is offering the first glimpses at the impact of the late-June vote in the U.K. to leave the European Union, known as a Brexit, and likely easing concerns. For more on the potential impact of the Brexit vote, see the Schwab Center for Financial Research's article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight.

Stocks in Asia finished mixed with the global markets digesting yesterday's U.S. Fed July meeting minutes that showed policymakers remain in wait-and-see mode regarding the timing of the next rate hike. The U.S. dollar saw some pressure, boosting the Japanese yen, which weighed on Japanese stocks along with the nation's July trade report that showed exports and imports fell more than expected. Mainland Chinese equities declined on the heels of the country's home price report for July, which showed prices gained in fewer cities m/m. However, some stronger-than-expected earnings reports helped lift stocks in Hong Kong. Australia's markets decreased following a rally in the Australian dollar on the nation's employment report that showed job growth was much stronger than anticipated for last month. Indian securities advanced, as emerging markets found support from the weaker U.S. dollar as rate hike expectations were dampened. Finally, South Korean equities moved slightly higher. Amid the elevated uncertainty in the markets, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Unlike the U.S., the international economic docket will be somewhat busy, with reports slated for release to include PPI from South Korea, Japan’s All Industry Index, PPI from Germany, Spain’s trade balance, and public sector net borrowing from the U.K.

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