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Monday, September 19, 2016

Early Gains Fall Flat

Charles Schwab: On the Market
Posted: 9/19/2016 4:15 PM ET

Early Gains Fall Flat

U.S. equities finished mixed and near the unchanged mark, as early strength amid a rebound in crude oil prices lost steam along with the commodity, while global conviction continued, and will likely remain hamstrung, ahead of the mid-week monetary policy decisions from the Fed and Bank of Japan. News on the equity front again surrounded M&A activity, while shares of Sarepta Therapeutic surged after an FDA approval of its muscular dystrophy drug. Treasuries were nearly flat, despite a jump in home builder sentiment, and gold gained ground, while the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) fell 4 points to 18,120, the S&P 500 Index was unchanged at 2,139, and the Nasdaq Composite declined 10 points (0.2%) to 5,235. In moderate volume, 764 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.24 higher to $43.62 per barrel, wholesale gasoline lost $0.04 to $1.42 per gallon and the Bloomberg gold spot rose $2.92 to $1,313.27 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 95.84.

Tech Data Corp. (TECD $85) announced an agreement to acquire the technology solutions unit of Avnet Inc. (AVT $42) for stock and cash valued at about $2.6 billion. Under the terms of the deal, AVT will receive $2.4 billion in cash and 2.8 million shares of TECD. TECD rallied over 20% and shares of AVT gained solid ground.

Isle of Capri Casinos Inc. (ISLE $22) announced an agreement to be acquired by Eldorado Resorts Inc. (ERI $14) for $23.00 per share in cash, in a deal with a total consideration of about $1.7 billion, including debt. The deal will create a combined company that owns and operates 20 regional gaming facilities in 10 states. ERI closed slightly lower, while ISLE was up nearly 30%.

Sarepta Therapeutics Inc. (SRPT $49) surged nearly 75% after the U.S. Food & Drug Administration (FDA) granted accelerated approval of its drug to treat Duchenne muscular dystrophy.

Homebuilder sentiment jumps

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month jumped to 65 from August's downwardly revised 59 figure, and versus the Bloomberg estimate of 60. Builder confidence moved further above the key 50 mark, which separates good and poor conditions, reaching the highest level since October 2015. The NAHB said as household incomes rise, builders in many markets across the nation are reporting they are seeing more serious buyers, a positive sign that the housing market continues to move forward.

Today's report kicks off an economic week that will bring a plethora of key reports to digest tilted toward the housing sector, headlined by the releases of August housing starts and building permits and existing home sales. Tomorrow, housing starts are projected to decline 1.7% month-over-month (m/m) to an annual rate of 1,190,000 units, while building permits are expected to rise 1.8% to an annual rate of 1,165,000 units. For a look at investing in the housing market, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, article, Real Estate Sector: Marketperform at www.schwab.com/marketinsight.

However, the attention of the global markets will likely be undivided as the Bank of Japan (BoJ) will deliver its monetary policy decision early Wednesday, hours before the Federal Open Market Committee (FOMC) will announce their policy stance. Uncertainty regarding if the BoJ will deploy further stimulus measures and/or move further into negative interest rate territory remains, while odds of a FOMC rate hike have diminished in the wake of the aforementioned economic data. However, odds of a December FOMC rate hike remain near 50%, per Bloomberg, and the markets will be dissecting its statement, which will be followed by the customary press conference from Chairwoman Janet Yellen and accompanying updated economic projections looking for clues to whether a rate hike this year is in the cards.

As noted in the Schwab Market Perspective: Round and Round We Go…, after August’s all-time highs followed by a stall, stocks were once again jolted into action by mixed messages from the Federal Reserve (Fed). We continue to believe the bull market is intact but near term risks are elevated. Economic data continues to have a groundhog day quality to it—perking up some before then pulling back again. The Fed isn’t the only game in town and other global central banks have added to the uncertainty, with many catalysts this fall potentially adding to the monetary mashup. Read the whole perspective at www.schwab.com/marketinsight.

Treasuries finished nearly unchanged, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.78%, while the yields on the 10-year note and the 30-year bond were flat at 1.70% and 2.45%, respectively. For a timely discussion of the recent ramp up in market volatility see the video from Schwab's Vice President of Trading and Derivatives, Randy Frederick and Chief Global Investment Strategist, Jeffrey Kleintop, CFA, titled Is the Bear Back: What's Behind the Renewed Volatility? at www.schwab.com/insights and follow Randy and Jeff on Twitter: @randyafrederick and @jeffreykleintop.

Europe rebounds as energy and miners rally, Asia mostly higher 

European equities traded higher, with the Stoxx Europe 600 Index recovering from recent weakness as oil & gas issues gained solid ground amid a rebound in crude oil prices, while a rally in mining stocks boosted the basic materials sector. However, the political landscape garnered attention following weekend elections in Germany and Russia, while global caution remained ahead of this week's key monetary policy decisions in the U.S. and Japan. Amid the backdrop of heightened global volatility as of late, Schwab's Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think at www.schwab.com/oninternational. The euro and the British pound gained ground on the U.S. dollar, while bond yields in the region finished mixed. In economic news, eurozone construction output rebounded in July.

Stocks in Asia finished mostly to the upside, with markets in China and South Korea returning to action following last week's holiday, while volume was muted as Japanese markets took the day off for a holiday and Australian markets were halted for the day due to a technical glitch that disrupted the trading session. The yen has shown some strength as the global markets await this week's monetary policy decision, which will precede the policy announcement from the Fed. Uncertainty remains regarding what the BoJ will announce, while the central bank is expected to release its comprehensive review of the efficacy of its policy measures thus far. For more on Japan's monetary policy, see Schwab's Jeffrey Kleintop's, CFA, article, What investors need to know about helicopter moneyat www.schwab.com/oninternational. Mainland Chinese stocks and those listed in Hong Kong advanced amid ramped up mainland buying of Hong Kong shares via the trading link between the two exchanges, while a read on August property prices rose the most in more than six years, per Bloomberg. Meanwhile equities traded in South Korea and India finished to the upside.

Economic news abroad will be sparse tomorrow, with the only reports of note being housing prices from Australia and PPI from Germany.

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