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Monday, October 24, 2016

Stocks Manage Gains Amid Major M&A Moves

On the Market
Posted: 10/24/2016 4:15 PM ET

Stocks Manage Gains Amid Major M&A Moves

U.S. stocks began the week with solid gains in the wake of a heavy dose of M&A news, headlined by AT&T's $85.4 billion agreement to acquire Time Warner, while a preliminary read on domestic manufacturing activity for October topped expectations. Global sentiment received an early boost on the heels of some favorable Japanese economic data and as growth in Eurozone business activity bested forecasts. Meanwhile, Treasuries, gold and crude oil prices were lower and the U.S. dollar managed an advance.

The Dow Jones Industrial Average (DJIA) increased 77 points (0.4%) to 18,223, the S&P 500 Index was 10 points (0.5%) higher at 2,151 and the Nasdaq Composite gained 52 points (1.0%) to 5,310. In moderate volume, 782 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.33 to $50.52 per barrel, wholesale gasoline ticked $0.02 lower to $1.49 per gallon and the Bloomberg gold spot price lost $1.95 to $1,264.52 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 98.79.

AT&T Inc. (T $37) announced an agreement to acquire Time Warner Inc. (TWX $87) for $107.50 per share in stock and cash, for a total equity value of about $85.4 billion. Under the terms of the deal, TWX shareholders will receive $53.75 in cash and the same amount in T stock for each share they own. T also reported 3Q results yesterday, where it matched earnings forecasts and missed on revenues, while raising its quarterly dividend by a penny to $0.49 per share. Both companies traded lower.  

Aerospace and defense company Rockwell Collins Inc. (COL $79) reported an agreement to acquire aircraft cabin interior products maker B/E Aerospace Inc. (BEAV $59) for $62.00 in cash and stock, valued at about $6.4 billion. Under the terms of the deal, BEAV shareholders will receive $34.10 in cash and $27.90 in COL stock for each share they own. COL fell, while BEAV surged. 

TD Ameritrade Holding Corp. (AMTD $35) announced an agreement to acquire Scottrade Financial Services Inc for about $4.0 billion in cash and stock. AMTD saw some pressure as the company also reported fiscal 4Q results, missing expectations and raising its quarterly dividend by 5.9% to $0.18 per share.

T-Mobile US Inc. (TMUS $51) reported 3Q earnings-per-share (EPS) of $0.42, above the $0.22 FactSet estimate, as revenues rose 17.8% year-over-year (y/y) to $9.2 billion, compared to the projected $9.5 billion. TMUS raised its adjusted operating earnings guidance. Shares rallied.

Preliminary manufacturing report tops forecasts to kick off economic week

The preliminary Markit U.S. Manufacturing PMI Index for October unexpectedly improved to 53.2 from September's 51.5 level, where the Bloomberg forecast expected it to remain, with a reading above 50 denoting expansion in activity. Markit said output and new order growth hit one-year highs, and manufacturers reported the fastest expansion of input buying since June 2015, while input cost inflation accelerated to the strongest for almost two years.

Treasuries declined, with the yield on the 2-year note ticking 2 basis points (bps) higher to 0.84%, while the yields on the 10-year note and the 30-year bond gained 3 bps to 1.76% and 2.51%, respectively. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses 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.

Tomorrow, releases from the U.S. economic calendar  will include manufacturing and housing data, in the form of the S&P CoreLogic Case-Shiller Home Price Index, expected to show housing prices in the 20-city composite were 5.0% higher y/y and 0.1% higher on a seasonally-adjusted month-over-month (m/m) basis, and the Richmond Fed Manufacturing Index, forecasted to improve to -4 during October from the -8 the month prior, with a reading below zero denoting contraction in manufacturing activity. Consumer Confidence will round out the day, expected to decline to 101.5 in October from the prior month’s 104.1.

The political landscape also remains in focus as the November election approaches, 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, where you can also find timely analysis of The Stock Market and Election Cycles, along with Michael's latest article, Final Clinton-Trump Debate Sets Up a Sprint to the Finish Line. Moreover, for analysis of the potential impact of the election on the muni bond markets, see Schwab's Senior Fixed Income and Planning Research Analyst, Cooper Howard's, CFA, and Director of Income Planning, Rob Williams' latest article, Opposing Views: How the Candidates' Tax Plans Could Affect Muni Bondsat www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Europe gains ground, Asia mostly higher

European equities traded mostly higher, with financials leading the way, while some political uncertainty in Spain was cleared up over the weekend after the Socialist party voted not to block incumbent Prime Minister Rajoy from leading a minority government. Economic data was on the positive side, with Markit's Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—rising to 53.7 in October, from 52.6 in September, and compared to the modest increase to 52.8 that was expected. A reading above 50 denotes expansion, and the upbeat read came as growth in German services and manufacturing output accelerated, while French manufacturing activity moved out of contraction territory. The euro was little changed versus the U.S. dollar, while bond yields in the region finished mixed. The British pound declined and earnings season continued to roll on in the region. For analysis of earnings and the stock markets, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article,  Three Reasons Stocks May Avoid Another Lost Decade, at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly to the upside, with some relatively upbeat Japanese economic data lending support, while optimism that the Chinese government will increase infrastructure spending and expedite reform of state-owned enterprises lifted the markets in China, per Bloomberg. Japanese equities managed to tick higher, though gains were held in check by some late-day strength in the yen and caution as earnings season is set to ramp up in the nation. Japan's September exports fell by a smaller amount than anticipated and the nation's PMI Manufacturing Index showed expansion in the sector accelerated for October. 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 Landscapeat www.schwab.com/oninternational. Mainland Chinese stocks rose and those traded in Hong Kong advanced, while equities in South Korea and India also increased. However, Australian securities declined, with consumer goods, oil & gas, technology and financials seeing some pressure.

The international economic docket for tomorrow will be light, yielding a weekly consumer confidence read from Australia, the Ifo business climate survey from Germany and industrial orders from Italy.

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