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Thursday, October 13, 2016

Stocks Up From Lows but Still Close Down

Charles Schwab: On the Market
Posted: 10/13/2016 4:15 PM ET

Stocks Up From Lows but Still Close Down

U.S. stocks pared an early drop that developed on resurfaced global growth concerns following a disappointing Chinese trade report. Crude oil prices were higher following a momentary plunge in the wake of a bearish government oil inventory report and as the U.S. dollar gave back some of a recent rally. Treasuries and gold were higher, while equity news consisted of corporate earnings releases and Wells Fargo announced that its CEO has retired effectively immediately.

The Dow Jones Industrial Average (DJIA) shed 45 points (0.2%) to 18,099, the S&P 500 Index lost 7 points (0.3%) to 2,133 and the Nasdaq Composite fell 26 points (0.5%) to 5,213. In moderate volume, 858 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.26 to $50.44 per barrel, wholesale gasoline ticked $0.02 higher to $1.48 per gallon and the Bloomberg gold spot price gained $2.76 to $1,258.01 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 97.57.

CSX Corp. (CSX $31), the first major rail company to deliver results, posted 3Q earnings-per-share (EPS) of $0.48, above the $0.45 FactSet estimate, as revenues declined 8.0% year-over-year (y/y) to $2.7 billion, roughly in line with expectations. The company noted sharp coal volume declines though expenses improved. CSX said while the U.S. dollar strength and low global commodity prices persisted in the quarter, it is positioning itself to capture growth opportunities. CSX gained ground.

Ahead of tomorrow's earnings report, Wells Fargo & Co. (WFC $45) announced that its Chairman and Chief Executive Officer (CEO) John Stumpf will retire from the company and board, effective immediately. WFC's board elected President and Chief Operating Officer, Tim Sloan, as CEO. The announcement comes in the wake of the company's fake account opening scandal. WFC traded lower.

Delta Air Lines Inc. (DAL $40) reported 3Q EPS of $1.70, above the estimated $1.65, with revenues decreasing 5.6% y/y to $10.5 billion, roughly in line with forecasts as 3Q passenger unit revenue fell 6.8%, including the impact from a technology outage in August. DAL forecasted 4Q passenger unit revenues to decline 3-5% y/y, due to further slowing of capacity growth, fully offsetting savings from lower fuel prices and productivity initiatives, and margins to decline slightly. The airline said it is encouraged by unit revenue trends through 3Q but it has more work ahead of it and should make progress toward its goal of positive unit revenues. DAL overcame solid early weakness and finished higher.

Ulta Salon, Cosmetics & Fragrance Inc. (ULTA $266) rallied after the company raised its 3Q and full-year EPS and revenue guidance, due to its stronger-than-expected performance in 3Q to date.

Jobless claims unchanged

Weekly initial jobless claims (chart) were unchanged last week at the prior week's downwardly revised 246,000, versus the Bloomberg estimate of an increase to 253,000. The four-week moving average declined by 3,500 to 249,250, while continuing claims dropped 16,000 to 2,046,000, south of the estimated level of 2,050,000.

The Import Price Index (chart) ticked 0.1% higher month-over-month (m/m) for September, compared to projections of a 0.2% increase and August's unrevised 0.2% decline. Compared to last year, prices were lower by 1.1%, versus forecasts of a 1.0% drop, and following August's unadjusted 2.2% fall.

Treasuries finished higher, with the yields on the 2-year note and the 30-year bond declining 2 basis points (bps) to 0.84% and 2.48%, respectively and the yield on the 10-year note dropping 3 bps to 1.75%. Bond yields surrendered a slice of the gains from a recent rally that was bolstered by some upbeat economic data, hawkish Fedspeak, and the rise in crude oil prices. 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.

With the global markets grappling with the uncertain U.S. political landscape as the November election looms, 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.

Although the banking sector is poised to garner attention as earnings season heats up, tomorrow's U.S. economic calendar will bring some key reads on consumer spending, inflation and consumer sentiment, as the markets grapple with if the economy is healthy enough to foster an expected Fed rate hike. September retail sales are projected to rebound solidly from August's declines, the Producer Price Index is expected to increase modestly and the preliminary University of Michigan Consumer Sentiment Index is expected to improve slightly m/m in October. Business inventories are also due out tomorrow, forecasted to tick higher in August.

As noted in the recent Schwab Market Perspective: Crunch Time, we believe the mixed economic data over the past month is temporary softness brought on by a very quiet August when more folks than usual seemed to be on the sidelines; and are looking for a comeback in the fourth quarter. Continuing historically-low initial jobless claims (a key leading economic indicator), the low unemployment rate, rising wages and consumer confidence, and ongoing accommodative monetary policy lead us to believe that the economy will continue to muddle through into 2017. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Europe and Asia mostly lower as China data disappoints 

European equities finished lower, with basic materials falling as some softer-than-expected China trade data resuscitated global growth concerns. Financials led to the downside as Italian banking uneasiness remained and some key earnings reports from the sector are due out in the U.S. tomorrow. The markets continued to grapple with yesterday's details of the Fed's September policy meeting that preserved elevated expectations of a December rate hike. The euro and the British pound gained ground versus the U.S. dollar, while bond yields in the region mostly lost ground. With global growth concerns flaring up, 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 mostly to the downside as some softer-than-expected Chinese trade data caused global growth concerns to flare-up, adding to yesterday's September policy meeting minutes out of the U.S. that preserved elevated December Fed rate hike projections. China's September exports fell 10.0% y/y in U.S. dollar terms, after declining 2.8% in August, and compared to the 3.3% drop that was expected. Also, China's imports unexpectedly declined. Stocks trading in Hong Kong fell on the heels of the report, while conviction remained pressured by the recent crackdown on real estate activity and the continued weakness in the yuan. However, mainland Chinese equities ticked slightly higher. More data out of China is slated to be released 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.

The yen rallied on the China data, overcoming early weakness to weigh on Japanese equities. Weakness in oil & gas issues on crude oil's recent declines, along with the disappointing China data, pressured Australian securities lower. South Korea stocks traded lower in the wake of the Bank of Korea's decision to keep its benchmark interest rate unchanged at 1.25%. Finally, Indian equities dropped in a return to action following holiday breaks for the last two sessions, pressured by the flared-up global growth concerns and elevated Fed rate hike concerns. However, after the closing bell, India's consumer price inflation slowed more than expected in September, possibly giving scope for the Reserve Bank of India to further cut rates.

Tomorrow, the international economic docket will include reports on PPI from Japan, PPI and CPI from China, construction output from the U.K. and the trade balance for the Eurozone.

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