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Tuesday, September 06, 2016

Stocks Higher Amid Tempered Fed Hike Worries

Charles Schwab: On the Market
Posted: 9/6/2016 4:15 PM ET

Stocks Higher Amid Tempered Fed Hike Worries

Markets in the U.S. finished off the first trading session of a shortened week with modest gains, as a softer-than-expected read on the ISM non-Manufacturing Index joined last week's lackluster ISM Manufacturing Index and nonfarm payroll reports to temper recent expectations of any imminent Fed rate hike. Meanwhile, M&A news dominated the equity front, headlined by Bayer AG's increased takeover offer for Monsanto. Treasuries, gold and crude oil prices all gained ground, while the U.S. dollar tumbled.

The Dow Jones Industrial Average (DJIA) rose 46 points (0.3%) to 18,538, the S&P 500 Index gained 7 points (0.3%) to 2,187, and the Nasdaq Composite increased 26 points (0.5%) to 5,276. In moderate volume, 844 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.39 higher to settle at $44.83 per barrel, wholesale gasoline ticked $0.02 higher to $1.32 per gallon and the Bloomberg gold spot price jumped $21.85 to $1,348.93 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—tumbled 1.0% to 94.86.

Marvell Technology Group Ltd. (MRVL $13) reported 2Q earnings-per-share (EPS) ex-items of $0.18, above the $0.11 FactSet estimate, as revenues declined 12.0% year-over-year (y/y) to $626 million, below the projected $630 million. The chip company issued 3Q EPS and revenue guidance that came in below estimates. Shares were lower.

Bayer AG (BAYRY $108) increased its takeover offer again for Monsanto Co. (MON $106) to $127.50 per share in cash, or about $65.0 billion, including debt. Monsanto has rejected Bayer's previous offers of $122 and $125 per share. MON said it is evaluating the proposal as well as proposals from other parties and other strategic alternatives to enable its Board of Directors to determine if a transaction in the best interests of its shareowners can be realized. Shares of BAYR were higher, while MON was modestly lower.

Danaher Corp. (DHR $79) announced an agreement to acquire global molecular diagnostics company Cepheid (CPHD $53) for $53.00 per share in cash, with a total enterprise value of about $4.0 billion. Shares of DHR fell, while CPHD surged over 50%.

Spectra Energy Corp. (SE $41) announced an agreement to combine with Canada's Enbridge Inc. (ENB $43) in a stock-for-stock transaction, valuing Spectra at about $28.0 billion. Shares of both rallied. 

Navistar International Corp. (NAV $20) jumped over 40.0% after Volkswagen AG (VLKAY $30) reported plans to acquire a 16.6% stake in the truck maker for $256 million as part of the companies' announced strategic alliance.

Services sector activity decelerates more than expected

The Institute for Supply Management (ISM) non-Manufacturing Index (chart) fell to 51.4 in August—the lowest since February 2010—from 55.5 in July and compared to the Bloomberg forecast of a dip to 55.0. However, the index continued to depict expansion with a reading above 50. New orders, business activity and inventories all fell solidly, while employment decreased. The ISM said the majority of comments from respondents indicated that there has been a slowing in the level of business for their respective companies.

The data was disappointing as the non-manufacturing sector makes up a larger portion of economic output compared to manufacturing activity. However, as noted in the Schwab Market Perspective: Get Ready for the End of the Summer Slumber, a healthy U.S. consumer is vital to growth, and along with housing we continue to see signs of an improving picture in the labor market. A tighter job market should continue to help pressure wages higher, which we've started to see, helping to increase the amount of disposable income available to consumers. Read the whole perspective at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Treasuries finished higher following the data, with the yield on the 2-year note declining 7 basis points (bps) to 0.73%, the yield on the 10-year note falling 6 bps to 1.54%, and the 30-year bond rate dropping 4 bps to 2.24%.

For analysis on the fixed income markets 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.

Today's report kicked off a holiday-shortened week and will be followed by tomorrow's release of the Federal Reserve's Beige Book—an anecdotal report on national economic activity used by the Central Bank to prepare for the next two-day monetary policy meeting ending on September 21. Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her latest article, Summer Long: Will the Extreme Lull in Volatility Persist?, on the heels of August's period of low volatility and volume, history shows similarly subdued periods tend to be followed by a lift in volatility, and some weakness in returns. Fed policy will likely drive much of any additional pickup in volatility and we expect to see the September odds move as economic data comes in over the next few weeks. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

As well, tomorrow's economic calendar will offer investors a look at the Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, expected to show 5.6 million jobs were available to be filled in July, matching June's figure, as well as MBA Mortgage Applications.

Europe turns lower following U.S. data, Asia mostly higher as central banks in focus

European equities finished lower after turning to the downside following the disappointing U.S. services sector report and as conviction continued to be held in check by pressure on Brent crude oil prices and Thursday's looming monetary policy decision from the European Central Bank (ECB). The ECB is not expected to make any major changes to its recently boosted stimulus measures but the duration of its asset purchase program will likely be eyed to see if it gets extended. The euro and British pound gained ground on the U.S. dollar, with the latter continuing to rebound following the recent economic data misses in the U.S. and as yesterday's upbeat read on U.K. manufacturing and services activity topped forecasts by showing stronger-than-expected growth in August. The data adds to a recent string of upbeat economic reports that suggest the late-June vote in the U.K. to leave the European Union, known as a Brexit, is having a limited economic impact thus far. For more analysis of 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 at www.schwab.com/marketinsight. Follow Schwab on Twitter: @schwabresearch. Bond yields in the region lost ground following reports that showed German factory orders grew by a smaller amount than expected in July, while eurozone 2Q GDP growth was unrevised at a 1.6% y/y pace, matching forecasts and compared to the 1.7% expansion seen in 1Q.

Stocks in Asia finished mostly higher ahead of the U.S. markets' return to action following yesterday's holiday. The global markets continue to focus on the divergent global monetary policy landscape ahead of this week's announcement from the European Central Bank and decisions from the Fed and Bank of Japan later this month. Japanese securities rose modestly, with the yen rebounding slightly against the U.S. dollar. Stocks in China and Hong Kong both gained ground, with sentiment getting a lift from speculation that state-run funds intervened in both the equity and currency markets, per Bloomberg. Indian's markets rallied, with automakers showing some strength and emerging markets getting a boost from Friday's softer-than-expected U.S. employment report that dimmed some expectations of an imminent Fed rate hike, while South Korean equities traded higher. Finally, Australian listings declined after the Reserve Bank of Australia (RBA) expectedly kept its benchmark interest rate at 1.50%. With the markets choppy and poised for increased volatility amid the diverging global monetary policy landscape and Brexit uncertainty, Schwab's Chief Global Investment Strategist, 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. Read these articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Tomorrow's international economic calendar will offer GDP from Australia, the Leading Index from Japan, industrial production from Germany, and France's trade balance.

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