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Thursday, September 29, 2016

Stocks Give Back Previous Session's Gains

Charles Schwab: On the Market
Posted: 9/29/2016 4:15 PM ET

Stocks Give Back Previous Session's Gains

Domestic stocks traded lower, with financials among the largest decliners as Deutsche Bank continued to make headlines after recently being fined by U.S. authorities. The energy sector managed to limit losses as crude oil prices extended yesterday's jump that developed on the announced preliminary production cut agreement from OPEC, despite some elevated scrutiny toward the details of the deal. Treasuries and the U.S. dollar were slightly higher, while gold was flat. In economic news, reports on 2Q GDP, weekly jobless claims and the trade deficit were mostly favorable.

The Dow Jones Industrial Average (DJIA) fell 196 points (1.1%) to 18,143, the S&P 500 Index lost 20 points (0.9%) to 2,151, and the Nasdaq Composite dropped 49 points (0.9%) to 5,269. In moderately-heavy volume, 977 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.78 to $47.83 per barrel, wholesale gasoline was flat at $1.44 per gallon and the Bloomberg gold spot price declined $0.03 to $1,321.51 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 95.53.

PepsiCo Inc. (PEP $108) reported fiscal 3Q earnings-per-share (EPS) ex-items of $1.40, above the $1.32 FactSet estimate, as revenues declined 1.9% year-over-year (y/y) to $16.0 billion, compared to the expected $15.9 billion. PEP raised its full-year profit guidance. Shares finished higher.

Dow member McDonald's Corp. (MCD $115) announced a 6.0% increase in its quarterly cash dividend to $0.94 per share. The company noted meaningful progress it has made against its turnaround plan. MCD gained modest ground.

Intra-Cellular Therapies Inc. (ITCI $15) plunged over 60% after the company reported failed results from a trial of its treatment for schizophrenia.

ConAgra Foods Inc. (CAG $46) posted fiscal 1Q EPS ex-items of $0.61, above the estimated $0.48, as revenues declined 5.0% y/y to $2.7 billion, roughly in line with forecasts. This is the last earnings release for ConAgra Foods as it remains on track to split into two independent, publicly-traded companies. CAG rallied.

Final revision to 2Q GDP tops forecasts, jobless claims tick higher

The final look (of three) at 2Q Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 1.4%, adjusted up from the 1.1% and the 1.2% expansion reported in the second and first revisions, respectively. This compared to the Bloomberg forecast of a revised 1.3% pace of growth. 1Q GDP expanded by an unrevised 0.8% rate. Personal consumption came in at a 4.3% gain for 2Q, down from the preliminary estimate of 4.4%, where it was expected to remain. Personal consumption grew by an unrevised 1.6% in 1Q.

Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her article, Every Picture Tells a Story: Recession Risk Up, but Not High, that 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.

Weekly initial jobless claims (chart) rose by 3,000 to 254,000 last week, versus estimates of an increase to 260,000, with the prior week's figure being downwardly revised to 251,000. The four-week moving average declined by 2,250 to 256,000, while continuing claims fell 46,000 to 2,062,000, south of the estimated level of 2,129,000.

The advance goods trade deficit narrowed to $58.4 billion in August, from the downwardly revised $58.8 billion in July, versus projections calling for the deficit to widen to $62.2 billion.

Pending home sales fell 2.4% month-over-month (m/m) in August, versus projections of a flat reading and following the downwardly revised 1.2% gain registered in July. Compared to last year, sales were 4.0% higher, versus forecasts of a 2.6% increase. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which unexpectedly declined last month.

Treasuries finished higher, with the yields on the 2-year and 10-year notes, as well as the 30-year bond rate all dipping 2 basis points to 0.74%, 1.56% and 2.28%, 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's economic calendar will begin with a report on personal income and spending, forecasted to show income rose 0.2% m/m during August and that spending increased 0.1%, followed by the Chicago Purchasing Managers Index, with economists expecting a reading of 52.0 for September, up from the 51.5 registered in August. Rounding out the day, we'll receive the final University of Michigan Consumer Sentiment Index for September, estimated to have inched higher to 90.0 after the preliminary read matched August's 89.8 level.

Europe mixed, Asia mostly higher

European equities finished mixed, with oil & gas issues rallying on the heels of the surprise agreement to cut oil production for the first time in eight years at an informal meeting by the Organization of the Petroleum Exporting Countries (OPEC). Also, financials modestly added to yesterday's rebound after selling off recently on capital concerns toward Deutsche Bank AG (DB $11). However, the German financial sector finished lower as DB gave back some of a two-day rebound and saw heavy pressure in U.S. trading after the European markets closed as Bloomberg reported that about 10 hedge funds that clear derivatives trades with the company have withdrawn some excess cash and positions held at the lender. A spokesperson for the German lender said the company is confident that the vast majority of its trading clients have a full understanding of its stable financial position, per the report. In economic news, preliminary German consumer price inflation came in slightly hotter than expected, eurozone economic confidence unexpectedly improved, and U.K. consumer credit topped forecasts, though a separate read on the nation's mortgage approvals came in slightly below estimates. The euro was higher and British pound declined versus the U.S. dollar, while bond yields in the region were mostly higher.

With global market uncertainty/volatility elevated, 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, at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly higher, with the energy sector gaining ground following yesterday's surge in crude oil prices as OPEC announced the first oil output cut deal in eight years. An advance for Japanese equities was aided by some late-session weakening of the yen, even as the nation reported a larger-than-expected drop in August retail sales. Australian stocks gained ground, with oil & gas and basic materials stocks leading the way. Securities trading in mainland China and Hong Kong increased ahead of next week's golden week holiday break. South Korean listings traded to the upside and Indian stocks fell after the country announced that it has carried out surgical strikes on terrorist camps in Pakistan. For our latest analysis of the global economic front, see Schwab's Jeffrey Kleintop's, CFA, article, World Tour: An Around The World Look At the Economic Landscape, at www.schwab.com/oninternational.

Tomorrow, the international economic docket will yield household spending, CPI, vehicle production, housing starts and construction orders for Japan, private sector credit from Australia and a manufacturing PMI read from China. Releases from across the pond will include consumer confidence and 2Q GDP from the U.K., retail sales from Germany and CPI from France, Italy and the Eurozone.

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