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Tuesday, September 20, 2016

Modest Gains Ahead of Tomorrow's Main Events

Charles Schwab: On the Market
Posted: 9/20/2016 4:15 PM ET

Modest Gains Ahead of Tomorrow's Main Events

U.S. equities finished modestly higher in a somewhat subdued session, as crude oil prices staged a humble rebound, and with the global markets on the edge of their seats ahead of tomorrow's monetary policy decisions from the Fed and Bank of Japan. Treasuries finished higher following a disappointing housing construction report, as did gold and the U.S. dollar. News on the equity front centered around some second-tier earnings results.

The Dow Jones Industrial Average (DJIA) rose 10 points (0.1%) to 18,130, the S&P 500 Index ticked nearly a point higher to 2,140, and the Nasdaq Composite increased 6 points (0.1%) to 5,241. In light-to-moderate volume, 748 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.19 higher to $44.05 per barrel, wholesale gasoline gained $0.01 to $1.43 per gallon and the Bloomberg gold spot rose $1.65 to $1,314.84 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 96.01.

Lennar Corp. (LEN $43) reported fiscal 3Q earnings-per-share (EPS) of $1.01, above the $0.90 FactSet estimate, as revenues rose 13.7% year-over-year (y/y) to $2.8 billion, north of the projected $2.7 billion. However, new orders and gross margins missed expectations. The homebuilder said the housing market's recovery has continued to progress on a slow, steady and sometimes choppy path. LEN was solidly lower.

FedEx Corp. (FDX $164) announced that effective January 2, 2017, it will increase shipping rates for its express, ground and freight services. FDX traded higher.

Steel Dynamics Inc. (STLD $24) issued 3Q EPS guidance that came in below the Street's expectations, as the steel company noted that demand for heavy equipment, agricultural and energy sectors remains challenged, and higher raw material steel costs. STLD also said lower steel shipments are expected to offset some positive margin impact. STLD was lower.

Shares of Ascena Retail Group Inc. (ASNA $6) tumbled after the parent of Ann Taylor and Lane Bryant issued full-year guidance that severely missed analysts' forecasts. The disappointing outlook was given as the company posted 4Q EPS ex-items of $0.08, below the expected $0.16, and a larger-than-expected drop in same-store sales, while revenues of $1.8 billion were roughly in line with forecasts.

Housing construction activity misses

Housing starts (chart) for August declined 5.8% month-over-month (m/m) to an annual pace of 1,142,000 units, below the Bloomberg forecast of a 1,190,000 unit rate. July starts were upwardly revised slightly to an annual pace of 1,212,000. Weakness in single- unit starts out of the Northeast and South weighed on the report, more than offsetting growth in the West and Midwest. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, dipped 0.4% m/m in August to an annual rate of 1,139,000, after July's downwardly revised 1,144,000 rate, and south of the expected annual pace of 1,165,000 units. Midwest and West permits rose, offset by flat single-unit permits in the Northeast and a drop in multi-unit structures in the South.

The softer-than-expected construction activity may have caught some off guard given the recent upbeat housing data, including yesterday's jump in the NAHB's homebuilder sentiment report. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, recommends in his article, Real Estate Sector: Marketperform a marketweight positon for the real estate group, pointing out tailwinds of low interest rates and an improving economy being offset by the potential for rising rates and a changing consumer, along with a possible inflection point facing apartment demand. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Treasuries finished higher, as the yield on the 2-year note was flat at 0.77%, while the yields on the 10-year note and the 30-year bond declined 3 basis points (bps) to 1.69% and 2.43%, respectively.

The attention of the global markets remains on central bank action, ahead of tomorrow's monetary policy decisions from the Bank of Japan (BoJ), hours before the 2:00 p.m. ET decision from the Federal Open Market Committee (FOMC) (economic calendar). Uncertainty regarding if the BoJ will deploy further stimulus measures and/or move further into negative interest rate territory remains, while its comprehensive review of the efficacy of its policy measures thus far will likely garner attention. Moreover, odds of a FOMC rate hike have diminished in the wake of some choppy economic data, though odds of a December FOMC rate hike continue to hover around the 50% mark, per Bloomberg. The markets will also 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.

For what to look for, see our latest commentary, Fed and Bank of Japan Meetings: What to Watch, at www.schwab.com/insights, where you can also find Schwab's Vice President of Trading and Derivatives, Randy Frederick and Chief Global Investment Strategist, Jeffrey Kleintop, CFA, video 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.

The only other item on tomorrow's economic calendar is MBA Mortgage Applications.

Europe and Asia mixed as central bank caution continues

European equities pared early gains and finished mixed, with global caution prevailing ahead of tomorrow's monetary policy decision from the Bank of Japan and the Fed. The energy sector was hamstrung by sluggishness in crude oil prices, while financials were bogged down by continued pressure on Italian banks. The Stoxx Europe 600 Index failed to follow up on yesterday's rebound from last week's drop to a six-week low as global monetary policy uncertainty, the late-June vote in the U.K. to leave the European Union—known as a Brexit—and a plethora of mixed global economic data hamstrung conviction. Schwab's Jeffrey Kleintop, CFA, offers his latest analysis for global investors in his article, World Tour: An Around The World Look At the Economic Landscape. Also, with volatility ramping up on the aforementioned headwinds, Jeff 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. Read all these articles at www.schwab.com/oninternational. The euro dipped and the British pound declined versus the U.S. dollar, while bond yields in the region lost ground. In economic news, Switzerland's trade surplus widened slightly in August.

Stocks in Asia finished mixed on the heels of the failed advance in the U.S. yesterday, while global conviction remained stymied ahead of tomorrow's monetary policy decisions from the Fed and BoJ. Japanese equities returned to action following yesterday's holiday break, declining even as the yen moved lower with the markets grappling with the uncertainty regarding the range of actions by the BoJ, along with its much-awaited comprehensive review. For more on Japan's monetary policy, see Schwab's Jeffrey Kleintop's, CFA, article, What investors need to know about helicopter money at www.schwab.com/oninternational. Mainland Chinese stocks, as well as those traded in Hong Kong Seng dipped, while Australian securities rose modestly following yesterday's technical glitch that halted most of the trading session, while the minutes from the Reserve Bank of Australia's unchanged monetary policy decision earlier this month suggested it was consistent with sustainable growth and achieving its inflation target. Elsewhere, Indian stocks declined, and South Korea's markets saw a nice boost.

Even though all eyes will likely be on the monetary policy decisions from Japan and the U.S., there are some economic reports overseas that may garner some attention, including Japan's trade balance, PPI from South Korea, public sector net borrowing from out of the U.K., and industrial orders from Spain.

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