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Wednesday, September 14, 2016

Stocks Unable to Hold Higher, Close Mixed

Charles Schwab: On the Market
Posted: 9/14/2016 4:15 PM ET

Stocks Unable to Hold Higher, Close Mixed

U.S. stocks attempted to rebound some from yesterday's drop before ultimately closing the trading session mixed as crude oil prices continued to drop in the wake of a mixed government energy inventory report. Treasuries and gold rose and the U.S. dollar was lower, while economic releases showed a rise in mortgage applications and a larger-than-expected decline for the Import Price Index. In M&A news, Bayer AG agreed to acquire Monsanto in a cash deal valued near $66 billion.

The Dow Jones Industrial Average (DJIA) lost 32 points (0.2%) to 18,035, the S&P 500 Index declined 1 point (0.1%) to 2,126, and the Nasdaq Composite advanced 19 points (0.4%) to 5,174. In moderately-heavy volume, 890 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.32 to $43.58 per barrel, wholesale gasoline lost $0.02 to $1.36 per gallon and the Bloomberg gold spot was $4.00 higher at $1,323.05 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.3% at 95.35.

Bayer AG (BAYRY $105) announced an agreement to acquire Monsanto Co. (MON $107) for $128 per share in cash, in a transaction with an aggregate value of $66 billion. The deal will create the world's largest supplier of seeds and pesticides, per Bloomberg. Bayer said the transaction is expected to be accretive to core earnings-per-share in the first full year after closing. Shares of both companies moved higher.

Ford Motor Co. (F $12) outlined its 2016-2018 growth outlook, noting that total company results are expected to decline in 2017 compared to 2016 and improve in 2018. The automaker said the forecasted decline in 2017—which missed analysts' forecasts—is the result of increasing investments and costs for emerging opportunities in electrification, autonomy and mobility. F traded lower.

Mortgage applications rise

The MBA Mortgage Application Index rose 4.2% last week, after gaining 0.9% in the previous week. The increase came as a 1.7% gain for the Refinance Index was met with an 8.6% jump for the Purchase Index. The average 30-year mortgage rate dipped 1 basis point (bp) to 3.67%.

The Import Price Index (chart) declined 0.2% month-over-month (m/m) for August, compared to the Bloomberg projection of a 0.1% decrease and July's unrevised 0.1% gain. Compared to last year, prices were lower by 2.2%, in line with forecasts, and following July's unadjusted 3.7% fall.

Treasuries were higher, with the yield on the 2-year note dropping 4 bps to 0.76%, the yield on the 10-year note declining 3 bps to 1.70% and the 30-year bond rate decreasing 1 bp to 2.45%.

Schwab's Chief Fixed Income Strategist, Kathy Jones 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 and follow Kathy on Twitter: @kathyjones.

Also, with global market volatility picking up as of late, Schwab's Chief Investment Strategist, Liz Ann Sonders offers her latest article, Is That All? at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders. Liz Ann discusses the recent jump in the volatility index (VIX), noting that previous large increases in the VIX led to inconsistent performance in stocks near-term. Also, she points out that the so called "Fed policy loop," a concept constructed by Bank Credit Analyst (BCA), is likely to remain a source of more frequent bouts of volatility. For more on this topic, see our latest article, Fed Uncertainty Brings Volatility to Markets at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar will come alive, headlined by key August reports on retail sales, the Producer Price Index and industrial production. Headline retail sales are projected to dip, but core sales—excluding autos and gas—are expected to show modest growth. Wholesale price inflation is expected to remain subdued and industrial production is estimated to decline after a couple of solid monthly gains.

Other reports due out tomorrow include: the Empire Manufacturing Index and Philly Fed Manufacturing Index, jobless claims and business inventories.

As noted in the Schwab Market Perspective: Get Ready for the End of the Summer Slumber, U.S. economic data has perked up, with some signs that manufacturing may be breaking out of its malaise, but we need to see consistently better data to confirm a sustainable lift in growth beyond the third quarter. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses why it might be time to start paying closer attention to the industrials sector in his latest Schwab Sector Views: The Politics and Economics of Industrials. Read both articles at www.schwab.com/marketinsight.

Europe extends string of losses, Asia mixed

European equities gave up early gains in late-day action, with the Stoxx Europe 600 Index dipping to extend a losing streak to five sessions, as the global markets remain jittery amid festering world monetary policy uncertainty. Oil & gas issues added to yesterday's drop, courtesy of elevated pressure on crude oil prices on the heels of a bearish supply forecast from the International Energy Agency (IEA), which was followed by today's mixed U.S. government energy inventory report. However, basic materials stocks rebounded as mining issues found support from a rise in metals prices. The British pound was little changed and the euro moved higher versus the U.S. dollar, while bond yields in the region finished mostly lower, ahead of tomorrow's monetary policy decision from the Bank of England (BoE). Recent U.K. data has suggested the late-June vote to leave the European Union, known as a Brexit, is having a limited economic impact thus far and Schwab's Director of International Research, Michelle Gibley, CFA, offers her article, Keep Calm and Carry On: The Brexit Shock That Wasn't. Ahead of the BoE's decision, the U.K. employment change over a three month period ending in July rose slightly more than expected. In other economic news, French consumer price inflation rose in line with forecasts for August, while eurozone industrial production fell more than anticipated in July.

Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers a reminder for investors amid the increased volatility, which has been fostered by the global monetary policy and Brexit uncertainty, 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 and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed on the heels of yesterday's drop in the U.S., with uncertainty regarding what next week's monetary policy decisions from the Fed and Bank of Japan (BoJ) will bring continuing to stymie conviction and fostering a ramp up in volatility. Yesterday's drop in crude oil prices from a downbeat supply forecast from the IEA weighed on energy issues in the region. Japanese equities declined, with financials showing some weakness to overshadow a retreat in the yen from its recent rally that has come from the BoJ's policy uncertainty. For more on Japan's monetary policy, see Schwab's Jeffrey Kleintop's, CFA, article, What investors need to know about helicopter money.

Stocks trading in mainland China and Hong Kong declined, with recent data that has suggested stabilization in the world's second-largest economy dampening speculation of further stimulus measures. After the closing bell, China reported August new yuan loans, aggregate financing—a gauge of total credit issued, and money supply all topped expectations. For more on China, see Schwab's Michelle Gibley's, CFA, article, 5 Reasons China Won't Crash the Global Economy in 2016. Read both articles at www.schwab.com/oninternational. Australian equities advanced, with strength in telecom and financials, more than offsetting weakness in oil & gas and basic materials issues. Indian securities ticked higher, following yesterday's holiday, with some recent cooler-than-expected inflation reports buoying optimism that the Reserve Bank of India may have room to further cut rates, countering the uncertainty regarding the Fed and BoJ. South Korean markets were closed for a holiday.

The international economic docket for tomorrow will yield consumer inflation and employment data from Australia, retail sales from the U.K. and the trade balance and CPI for the Eurozone. In central bank action, the Bank of England will deliver its monetary policy decision, with no changes to its current stance expected.

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