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Tuesday, October 11, 2016

Markets Falter Amid Dearth of Positive News

Charles Schwab: On the Market
Posted: 10/11/2016 4:15 PM ET

Markets Falter Amid Dearth of Positive News

U.S. equities finished lower on the day, as investors weighed rising Fed rate hike expectations, disappointing results from Alcoa to unofficially kick off 3Q earnings season, and a fall in crude oil prices. Meanwhile, Treasuries lost ground amid a surprising decline in small business optimism, as did gold, while the U.S. dollar rallied.

The Dow Jones Industrial Average (DJIA) tumbled 200 points (1.1%) to 18,128, the S&P 500 Index fell 27 points (1.2%) to 2,137, and the Nasdaq Composite plummeted 82 points (1.5%) to 5,247. In moderate volume, 817 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.56 to $50.79 per barrel, wholesale gasoline ticked $0.02 lower to $1.48 per gallon and the Bloomberg gold spot price lost $6.01 to $1,253.64 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—jumped 0.8% to 97.66.

Alcoa Inc. (AA $28) unofficially kicked off 3Q earnings season, posting earnings-per-share (EPS) ex-items of $0.32, below the $0.33 FactSet estimate, as revenues declined 6.0% year-over-year (y/y) to $5.2 billion, versus the projected $5.3 billion. This is the last earnings report before it splits into two companies next month, one consisting of its legacy metal-producing businesses, known as Alcoa Corp, and the other comprised of its components operations named Arconic Inc. AA lowered its full-year guidance for its Arconic business due to near-term challenges and foreign exchange impacts. Shares were sharply lower.

Illumina Inc. (ILMN $139) tumbled nearly 25% after the DNA sequencing company warned that its 3Q revenue will be lower than previously forecasted, due to a larger-than-expected y/y decline in its gene sequencing instruments.

Samsung Electronics Co. Ltd. (SSNLF $1,350) dropped in South Korea as the company halted production and all sales of its Galaxy Note 7 smartphone in the wake of continued issues with batteries catching fire. Shares of Dow member Apple Inc. (AAPL $116) were modestly higher following the news.

Small business optimism dips

The National Federation of Independent Business (NFIB) Small Business Optimism Index for September dipped to 94.1 from August's 94.4 level, and compared to the Bloomberg forecast of a modest rise to 95.0.

Treasuries finished lower, after the bond markets were closed yesterday for Columbus Day, as the yield on the 2-year note rose 3 basis points (bps) to 0.86%, while the yields on the 10-year note and the 30-year bond increased 4 bps to 1.75% and 2.49%, respectively. Bond yields have gained ground as of late, courtesy of some upbeat economic data, hawkish Fedspeak, and the rise in crude oil prices. Schwab's Chief Fixed Income Strategist, Kathy Jones discuss the interest rate environment in her latest article, Are Bond Yields About to Rise?, at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

The markets continue to discuss the U.S. political landscape in the wake of Sunday's second Presidential debate, and Schwab's Vice President, Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Where Do the Candidates Stand? Key Issues for Investors, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016. Also, Schwab's Chief Investment Strategist, Liz Ann Sonders discusses the dynamic of household deleveraging and still high federal government debt in her article, Your Time is Gonna Come: Households' Leverage Down, Government Leverage Up, at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

With Fed rate hike expectations gaining steam as of late, tomorrow's highlight of the U.S. economic calendar will likely be the afternoon release of the minutes from the Federal Open Market Committee's (FOMC) September meeting. The Fed held its monetary policy steady, noting that "the case for an increase in the federal funds rate has strengthened," but decided, for the time being, to wait for further evidence of continued progress toward its objectives. As noted in the recent Schwab Market Perspective: Crunch Time, the September FOMC meeting boosted expectations that a rate hike is likely before the end of the year; contingent on economic data remaining decent in the coming months. More of the FOMC’s voting body is leaning toward raising rates, as there were three dissenting votes on the decision to hold rates steady—a relatively high number indicating growing discordance among members. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

In addition, the Labor Department will release its Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, forecasted to show 5.80 million jobs were available to be filled in August, down from the 5.87 posted in July, as well as MBA Mortgage Applications.

Europe lower as Fed rate hike expectations rise, Asia mixed

European equities finished lower, with oil & gas issues giving back a recent rally amid a retreat in crude oil prices from yesterday's jump. Elevated Fed rate hike expectations and Alcoa's disappointing results to unofficially kick off earnings season likely weighed on global sentiment. The British pound remained under pressure on the Fed rate hike expectations and amid festering "hard Brexit" concerns. However, the downside pressure may have been limited by German investor confidence which jumped more than expected for October. The euro declined versus the greenback, while the Swedish krona is falling sharply following a cooler-than-expected read on consumer price inflation which is fostering speculation that the nation's central bank may need to deliver further stimulus measures later this month. Bond yields in the region finished mostly lower. Amid the backdrop of potentially heightened volatility on global growth, political and monetary policy uncertainty, 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 mixed with yesterday's continuation of the rally in crude oil prices boosting the energy sector, while rising expectations of a rate hike in the U.S. this year weighed on the yen. Japanese equities rose after being closed yesterday for a holiday, bolstered by the weakness in the yen, while energy stocks helped Australia's markets to notch a modest gain. Mainland Chinese securities advanced, though those traded in Hong Kong fell sharply after yesterday's holiday break, seeing pressure as real estate issues dropped on the heels of increased property curbs. The moves come ahead of tonight's key read on Japanese machine orders—a gauge of capital investment—and a plethora of Chinese economic data slated for this week and Schwab's Jeffrey Kleintop, CFA, offers timely analysis of the global economic picture in his article, World Tour: An Around The World Look At the Economic Landscape, at www.schwab.com/oninternational. South Korean equities tumbled, with a drop in Samsung Electronics' shares adding pressure amid the troubles surrounding its Galaxy Note 7 smartphone.

Looking ahead to tomorrow, in addition to the reports out of Japan and China, the international economic calendar will have the following on tap for release: the unemployment rate from South Korea, CPI from France and India, as well as industrial production from the Eurozone.

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