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Monday, October 03, 2016

Stocks Lose Ground in First Action of 4Q

Charles Schwab: On the Market
Posted: 10/03/2016 4:15 PM ET

Stocks Lose Ground in First Action of 4Q

U.S. stocks pared losses, finishing lower following some domestic economic reports that showed mostly better-than-expected reads for manufacturing activity and a surprising decline in construction spending. Treasuries and gold were lower, while the U.S. dollar and crude oil prices were higher. M&A action was in play on the equity front as Cabela's agreed to be acquired by Bass Pro Shops in a cash deal and Janus Capital and Henderson Group inked a deal for a merger of equals in an all-stock transaction.

The Dow Jones Industrial Average (DJIA) lost 54 points (0.3%) to 18,254, the S&P 500 Index decreased 7 points (0.3%) to 2,161, and the Nasdaq Composite declined 11 points (0.2%) to 5,301. In moderate volume, 809 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.57 to $48.81 per barrel, wholesale gasoline increased $0.01 to $1.47 per gallon and the Bloomberg gold spot price declined $2.98 to $1,312.89 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 95.70.

Cabela's Inc. (CAB $63) and Bass Pro Shops revealed that they have entered into a definitive agreement under which Bass Pro Shops will acquire CAB for $65.50 per share in cash for an aggregate transaction value of approximately $5.5 billion. Shares of CAB rallied.

Janus Capital Group Inc. (JNS $16) and Henderson Group Plc. (HNDGF $4) announced that their Boards of Directors have unanimously agreed to an all-stock merger of equals with the combined company to be named Janus Henderson Global Investors Plc. HNDGF and JNS are expected to own approximately 57% and 43%, respectively of the combined company with the deal anticipated to close in the 2Q of 2017. Shares of both companies traded sharply higher.

Tesla Motors Inc. (TSLA $214) announced that it had delivered approximately 24,500 vehicles in 3Q, of which 15,800 were Model S and 8,700 were Model X. Quarter-over-quarter (q/q) this represents about a 70% increase for deliveries, while TSLA also announced production increased by 37% q/q. TSLA shares made solid gains.

The major automakers reported U.S. September sales today. Ford Motor Co's(F $12) sales of its combined Ford and Lincoln brands fell 7.7% y/y versus the FactSet estimate of an 8.5% drop, while General Motors Co's (GM $32) sales declined 0.6%, compared to the projected 1.6% decrease. Fiat Chrysler Automobiles NV's(FCAU $6) Chrysler brand's sales shed 0.9% y/y, compared to the expected 5.1% decline, and Toyota Motor Corp's (TM $115) sales gained 1.5% y/y, versus the projected 2.0% advance. F, GM and FCAU closed higher, while TM was lower.

Schwab's experts detail in the recent Schwab Market Perspective: Crunch Time, that we’re seeing some signs of potential weakening of the auto market, which had been on a solid run. According to Cornerstone Macro Research, the percentage of banks tightening auto loan standards is now over 8%, not a lot but up from negative territory in the first quarter (indicating more banks were loosening standards). Read the whole perspective at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Manufacturing mostly better than expected, construction spending miss's estimate

The Institute for Supply Management (ISM) Manufacturing Index (chart) for September moved back to expansion territory (above 50) after increasing to 51.5 from August's 49.4 level, and compared to the Bloomberg forecast of a modest rise to 50.4. The new orders gauge of the report jumped to its highest level in six months, while the production measure also improved markedly.

The final Markit U.S. Manufacturing PMI Index was revised slightly higher to 51.5 for September from the 51.4 preliminary level, where it was expected to remain. The index is down from the 52.0 level posted in August. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

Construction spending (chart) unexpectedly declined 0.7% m/m in August, versus projections of a 0.3% advance, and following July's downwardly revised 0.3% decrease. Residential spending was 0.2% lower, while non-residential spending declined 1.1%.

Treasuries finished lower, with the yield on the 2-year note rising 3 basis points (bps) to 0.79% and the yields on the 10-year note and the 30-year bond increasing 2 bps to 1.62% and 2.33%, 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 bond market commentary at www.schwab.com/onbonds. Follow Kathy on Twitter: @kathyjones

Tomorrow, the U.S. economic calendar will be void of any major releases, but will heat back up on Wednesday with some reads on the all-important services sector in the form of the ISM non-Manufacturing Index and Markit's Services PMI Index. Mid-week we will also see reports on factory orders and the ADP Employment Change report, ahead of Friday's widely followed nonfarm payrolls release, with expectations of an increase of 174,000 jobs for September after gaining 151,000 the month prior.

Schwab's experts note in the recent Schwab Market Perspective, some recent U.S. economic data has been weaker than expectations and we’ll be watching for coming releases to see if it’s only a soft spot or something more concerning. We lean toward the former but the answer will go a long way to determining if we see a rate hike in 2016. Read the whole perspective at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Europe pares early advance to finish mixed, Asia gains despite lower volume

European equities finished mixed, with Deutsche Bank(DB $13) again commanding investors' attention despite a national holiday in Germany, which kept markets there shuttered. Stocks in the U.K. were nicely higher, with exporters in the country benefitting from some weakness in the British pound as it approached lows reached shortly after the Brexit referendum. U.K. Prime Minister Theresa May announced that she will begin the withdrawal process from the European Union in the 1Q of 2017, to which the European Commission said that the announcement to trigger the exit clause by March changes nothing and it still won't start to negotiate until she does. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his recent article World Tour: An Around The World Look At the Economic Landscape, there has been little evidence of any impact from the Brexit vote on Europe’s economy, so far. August data for the United Kingdom on job growth, service sector sentiment, and retail sales have been resilient. Read the rest of the article at www.schwab.com/oninternational and follow Jeff on Titter: @jeffreykleintop. In economic news, manufacturing reads in the euro area accelerated in September.

Stocks in Asia finished higher in lighter volume with equity markets in China and South Korea closed for holidays and amid some investor optimism that the U.S. Department of Justice and Deutsche Bank may soon reach an agreement. Japanese equities gained ground despite a somewhat downbeat read for the island nation's 3Q Tankan business sentiment survey, though the results did reveal that large companies from all industries plan to slightly increase capital spending through March of next year. Though mainland Chinese shares were sidelined in observance of the golden week holiday break, securities trading in Hong Kong rallied with strength stemming from casino operators following some better-than-expected Macau gambling numbers. An advance for Australian stocks was aided by an upbeat manufacturing read, while the Reserve Bank of Australia met today and is expected to announce no change to its current cash target rate later tonight. Finally, Indian stocks jumped on some strength in automakers and as recent regional border tensions have eased, while the Reserve Bank of India will conclude a monetary policy meeting tomorrow, with no changes expected to its current stance.

The international economic docket for tomorrow will be light, offering the Consumer Confidence Index from Japan, the Commodity Index from Australia and PPI for the Eurozone.

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