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Friday, September 09, 2016

Stocks Finish Week on a Low Note

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

Stocks Finish Week on a Low Note

U.S. stocks fell during the regular trading session, joining a global equity pullback as a growing number of Federal Reserve officials have recently delivered hawkish policy commentary leading to heightened rate hike concerns. Treasuries and crude oil prices lost solid ground and gold was also lower, while the U.S. dollar gained ground. In equity news, Enterprise Products Partners withdrew its indication of interest to combine with Williams Companies.

The Dow Jones Industrial Average (DJIA) lost 394 points (2.1%) to 18,085, the S&P 500 Index was 53 points (2.4%) lower at 2,128, and the Nasdaq Composite declined 134 points (2.5%) to 5,126. In moderately-heavy volume, 1.1 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil declined by $1.74 to $45.88 per barrel, wholesale gasoline shed $0.06 to $1.36 per gallon and the Bloomberg gold spot price fell $9.10 to $1,329.20 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 95.34. Markets were lower for the week, as the DJIA declined 2.2%, and the S&P 500 Index and the Nasdaq fell 2.4%.

Enterprise Products Partners LP (EPD $27) announced that it has withdrawn its indication of interest in the Williams Companies Inc. (WMB $30) regarding the possible combination of the companies, as it determined that there is no actionable path forward toward an agreement. WMB responded by saying it is surprised by the announcement and it remains open to considering any potential strategic alternative that would maximize value for stockholders. EPD dipped, while WMB lost solid ground.

Kroger Co. (KR $32) reported 2Q earnings-per-share (EPS) ex-items of $0.47, north of the $0.45 FactSet estimate, as revenues increased 4.0% year-over-year (y/y) to $26.6 billion, below the projected $26.8 billion. 2Q same-store sales excluding fuel rose 1.7% y/y, south of the expected 2.3% gain. KR lowered its full-year EPS and same-store sales guidance. Shares overcame losses and ticked higher.

Restoration Hardware Holdings Inc. (RH $36) posted 2Q EPS ex-items of $0.44, well above the $0.29 estimate, with revenues rising 7.0% y/y to $543 million, compared to the expected $512 million. The luxury home goods retailer said its much stronger-than-expected 2Q results were due to its ability to ship products earlier than anticipated, resulting in a pull forward of revenue and earnings into 2Q from 3Q. The company issued mixed 3Q and full-year guidance as it noted that results for 2016 will be impacted by certain short term operational items including costs associated with RH Modern production delays and a more aggressive approach to rationalizing its SKU count and optimizing inventory. Shares were higher.

Wholesale inventories flat

Wholesale inventories (chart) came in flat month-over-month (m/m) in July, matching June's unrevised figure and compared to the Bloomberg forecast calling for a 0.1% gain. Sales were down 0.4% m/m, versus the expected 0.2% increase and the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—ticked higher to a 1.34 months level from the 1.33 months pace posted in June.

Treasuries were lower and the U.S. dollar gained ground as Boston Fed President and Federal Open Market Committee (FOMC) voting member Eric Rosengren added to a recent string of Fed officials that see a "reasonable case" that could be made for a rate increase. The yield on the 2-year note rose 1 basis point (bp) to 0.78%, the yield on the 10-year note gained 7 bps to 1.67%, and the 30-year bond rate increased 9 bps to 2.39%. Amid this backdrop, see the video from Schwab's Vice President of Trading and Derivatives, Randy Frederick and Chief Fixed Income Strategist, Kathy Jones, titled Rate Hikes on the Horizon—but When? at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones. Kathy also offers her latest analysis of the interest rate environment in her article, Negative Interest Rate Policy: What Is It and Could It Happen Here?, at www.schwab.com/onbonds.

Europe and Asia mostly lower amid plethora of headwinds 

European equities moved lower, with crude oil prices retreating from yesterday's rally, and as Italian banking sector concerns continued. Disappointment lingered on the heels of yesterday's monetary policy announcement from the European Central Bank, where it held off on making changes to its asset purchase program as some had expected. Moreover, Fed rate hike uncertainty festered following another round of hawkish commentary from a Central Bank official, while reports of another nuclear test by North Korea bolstered geopolitical concerns. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Geopolitical risks in 2016: Is your portfolio prepared?. The euro and the British pound finished lower versus the U.S. dollar, while bond yields in the region gained ground. German exports and imports in July both unexpectedly fell, while French industrial and manufacturing production both surprisingly declined in July. In the U.K., the trade deficit shrunk by a smaller amount than anticipated in July, while construction output topped forecasts for the month. For more analysis of the U.K. and the Brexit fallout, Schwab's Director of International Research, Michelle Gibley, CFA, offers her latest article, Keep Calm and Carry On: The Brexit Shock That Wasn't. Read both articles at www.schwab.com/oninternational and follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch.

Stocks in Asia finished mostly to the downside on the heels of yesterday's unchanged monetary policy decision from the European Central Bank, where it disappointed some that were expecting a change to the composition and/or duration of the central bank's asset purchase program. South Korean equities led the decline with sentiment in the region getting unnerved by reports that North Korea conducted another nuclear test. Also, the Bank of Korea kept its monetary policy stance unchanged as expected. Japanese securities finished mostly flat, with the aforementioned headwinds being met with weakness in the yen amid continued speculation that the Bank of Japan will deploy further stimulus measures later this month. Mainland Chinese stocks fell as the nation reported mixed wholesale and consumer price inflation figures. However, equities in Hong Kong rose, with financials rallying after China regulators said insurers will be allowed to participate in the Shanghai-Hong Kong exchange trading link.

Australian stocks finished lower, with strength in basic materials and oil & gas issues being overshadowed by losses in the financial and healthcare sectors. Finally, Indian equities dropped, giving back some of a recent rally to an 18-month high. Amid the mixed and choppy market action on the diverging global monetary policy landscape and geopolitical concerns, Schwab's 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 at www.schwab.com/oninternational.

Stocks lower for week as Fed uncertainty festers

The U.S. equity markets finished lower for the holiday-shortened week with Fed rate hike uncertainty stymieing sentiment and keeping the divergent global monetary policy in focus. The ISM non-Manufacturing Index showed growth in the key services sector decelerated more than expected to the slowest pace since February 2010. The report complemented the prior week's fall into contraction territory for the ISM Manufacturing Index. However, this week's record high Job Openings and Labor Turnover Survey (JOLTS) and unexpected decline in jobless claims followed last Friday's softer-than-expected but still solid August nonfarm payroll report and were accompanied by another dose of hawkish Fed commentary to resuscitate the possibility of a rate hike sooner rather than later. Moreover, the European Central Bank's unchanged monetary policy decision weighed on the global markets. The U.S. dollar dipped after paring early losses throughout the week, while Treasury yields on the mid-to-long end of the curve moved higher. Weakness among the sectors was broad-based, though energy stocks rallied as crude oil prices received a boost from a couple bullish oil inventory reports.

This week's action was in contrast to the recent period of low volatility and volume and Schwab's Chief Investment Strategist, Liz Ann Sonders notes in All Summer Long: Will the Extreme Lull in Volatility Persist? history shows similarly subdued periods tend to be followed by a lift in volatility, and some weakness in returns. Liz Ann adds that Fed policy will likely drive much of any additional pickup in volatility. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Next week's economic calendar set to add fuel to Fed rate discussion

Next week's economic docket is poised to bring some key reads on August retail sales, inflation, and industrial production, along with the preliminary September University of Michigan Consumer Sentiment Index, with the September 21 FOMC monetary policy decision looming. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses the industrials and consumer discretionary sectors in his latest Schwab Sector Views: The Politics and Economics of Industrials at www.schwab.com/marketinsight.

International reports on next week's calendar to look out for include: Australia—employment change and consumer confidence. China—lending statistics, industrial production and retail sales. India—Consumer Price Index (CPI), industrial production and trade balance. Japan—machine orders, PPI and industrial production. Eurozone—2Q employment, industrial production, new car registrations, trade balance and CPI. U.K.—The Bank of England's monetary policy decision, CPI and PPI, employment change, and retail sales.

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