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Wednesday, September 28, 2016

Oil Rally Helps Fuel Equity Gains

Charles Schwab: On the Market
Posted: 9/28/2016 4:15 PM ET

Oil Rally Helps Fuel Equity Gains

U.S. stocks finished with solid gains powered by the energy sector as crude oil prices rallied on the heels of a Reuters report that OPEC has reached a production cut deal, though a finalized plan may not come until November. Treasuries and gold ticked lower, while the U.S. dollar was nearly unchanged. Meanwhile, some rate hike uncertainty may have been revived as a plethora of Fed officials either have or will deliver remarks today, including Chairwoman Janet Yellen who gave financial regulation testimony to a House panel. In other developments, Dow member Nike offered a mixed earnings report and a preliminary read for durable goods orders in August was relatively upbeat.

The Dow Jones Industrial Average (DJIA) rose 111 points (0.6%) to 18,339, the S&P 500 Index gained 11 points (0.5%) to 2,171, and the Nasdaq Composite added 13 points (0.2%) to 5,319. In moderate volume, 910 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil surged $2.38 to $47.05 per barrel, wholesale gasoline was $0.08 higher at $1.44 per gallon and the Bloomberg gold spot price declined $4.50 to $1,322.82 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.47.

Dow member Nike Inc. (NKE $53) reported fiscal 1Q earnings-per-share (EPS) of $0.73, above the $0.56 FactSet estimate, as revenues increased 8.0% year-over-year (y/y) to $9.1 billion, north of the projected $8.9 billion. The company said its global futures orders of athletic footwear and apparel were up 7.0% y/y, below the expected 8.3% increase as North American and Greater China orders were below forecasts, while Western European demand was slightly ahead of estimates. Shares traded lower. 

BlackBerry Ltd. (BBRY $8) posted flat 2Q EPS, compared to the $0.05 per share loss that was anticipated, as revenues declined 28.2% y/y to $352 million, below the projected $392 million. The company raised its full-year earnings outlook, reflecting improving margins and reduced interest expense, as well as planned investments in growth areas. BBRY also said it is focusing on software development, including security and applications, and plans to end all internal hardware development by outsourcing that function to partners. Shares finished nicely higher.

Durable goods orders relatively upbeat, mortgage applications dip

August preliminary durable goods orders (chart) came in flat month-over-month (m/m), compared to Bloomberg's estimate of a 1.5% decline and July's negatively revised 3.6% gain. Ex-transportation, orders declined 0.4% m/m, versus the 0.5% forecasted decrease, and July's downwardly revised 1.1% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, rose 0.6%, above projections of a 0.1% dip, and following the unfavorably revised 0.8% rise in the month prior.

Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her article, Every Picture Tells a Story: Recession Risk Up, but Not High, that leading indicators weakened in August, but are not yet flashing a recession warning. Recession models show rising, but still low risk of a coming contraction in economic activity. Economic recoveries don’t tend to die of old age; they die of excess…of which there's little in this recovery. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The MBA Mortgage Application Index dipped 0.7% last week, after falling 7.3% in the previous week. The decrease came as a 1.6% drop for the Refinance Index more than offset a 0.8% increase for the Purchase Index. The average 30-year mortgage rate fell 4 basis points (bps) to 3.66%.

Treasuries ticked lower, with the yields on the 2-year and 10-year notes, as well as the 30-year bond all gaining 1 basis point to 0.75%, 1.57% and 2.29%, respectively. Schwab's Chief Fixed Income Strategist, Kathy Jones points out in her article, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?, the end of the bull market doesn't mean a bear market is starting, as slow global growth, deflationary pressures abroad, a firm dollar and demographic trends are likely to keep yields low. Investors should focus less on short-term changes in the market and more on structuring a fixed income portfolio that can work for them over the long run. Read the whole article and other timely bond market commentary at www.schwab.com/onbonds. Follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will yield the final look (of three) of 2Q GDP, projected to be adjusted slightly higher to a 1.3% quarter-over-quarter annualized rate of growth, after 1Q's 0.8% expansion. Additionally, we will receive weekly initial jobless claims, forecasted to increase by 8,000 to a level of 260,000, which will be followed by pending home sales, expected to come in flat m/m for August after increasing 1.3% in July.

Europe moves higher, Asia mixed 

European equities traded higher, with financials rebounding amid a recovery in shares of Deutsche Bank AG (DB $12). DB received a boost from the announcement that it agreed to sell its U.K. insurance business and its CEO eased concerns that the company will need to raise capital. Also, the German government denied a media report that it was preparing a contingency plan if the bank faces a capital shortfall. DB has sold off sharply as of late as capital concerns have ramped up, with the U.S. Department of Justice seeking a record $14.0 billion fine in relation to its alleged practices leading up to the 2008 mortgage crisis. Oil & gas and basic materials issues also gained ground to aid the markets, with crude oil prices rebounding in continued choppy action as headlines are sparking speculation regarding what this week's informal OPEC meeting may bring in terms of a production agreement. The euro and the British pound dipped versus the U.S. dollar, while bond yields in the region finished mostly lower.

With the volatility likely to remain as global market uncertainty heightens, Schwab's Chief Global Investment Strategist 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. Read these articles, as well as Jeff's World Tour: An Around The World Look At the Economic Landscape, at www.schwab.com/oninternational. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed on the heels of the advance in the U.S. yesterday on some upbeat consumer confidence and services sector data, while monetary policy uncertainty in Japan festered. Japanese equities fell as the yen pared yesterday's advance, while a large portion of stocks were adjusted lower to account for their dividend payments, per Bloomberg. Also, uncertainty surrounding the Bank of Japan's (BoJ) recently announced new monetary policy direction likely hamstrung equities with comments earlier in the week from BoJ Governor Kuroda that suggested a move further into negative interest rate territory weighed on the banking sector. For more on this topic, Schwab's Kathy Jones offers her article, Negative Interest Rate Policy: What Is It and Could It Happen Here at www.schwab.com/onbonds. Mainland Chinese stocks declined and Hong Kong shares rose in light volume posturing ahead of next week's golden week holiday break. Australian securities ticked higher, with strength in technology issues being met with weakness in oil & gas and basic materials stocks. Indian stocks advanced, while South Korean equities declined.

The international economic docket for tomorrow will include retail sales from Japan, CPI from Germany, business climate data from the Eurozone and consumer credit from the U.K.

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