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Wednesday, November 02, 2016

Investors Jittery Ahead of Fed and Election

Charles Schwab: On the Market
Posted: 11/1/2016 4:15 PM ET

Investors Jittery Ahead of Fed and Election

U.S. equities finished solidly lower, as anxiety surrounding next week's election and tomorrow's conclusion to the Fed's monetary policy meeting keeping investors on edge, with upbeat reads on manufacturing activity adding to the uncertainty. Treasuries finished nearly unchanged and the U.S. dollar was lower, while gold was higher. Crude oil reversed to the downside, but gasoline prices spiked in the wake of an explosion and fire in Alabama that shuttered the largest fuel pipeline in the U.S.

The Dow Jones Industrial Average (DJIA) fell 105 points (0.6%) to 18,037, the S&P 500 Index tumbled 15 points (0.7%) to 2,112 and the Nasdaq Composite declined 36 points (0.7%) to 5,154. In heavy volume, 1.1 billion shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.19 lower to $46.67 per barrel, wholesale gasoline jumped $0.06 to $1.48 per gallon and the Bloomberg gold spot price rose $11.07 to $1,288.28 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.7% lower at 97.78.

Dow member Pfizer Inc. (PFE $31) reported 3Q earnings-per-share (EPS) ex-items of $0.61, one penny south of the FactSet estimate, as revenues rose 8.0% year-over-year (y/y) to $13.1 billion, roughly in line with estimates. PFE lowered the high end of its full-year EPS guidance range, due to the negative impact of the discontinuation of global development of it cholesterol-lowering treatment, bococizumab, while raising the low end of its revenue outlook. Shares were lower.

Kellogg Co. (K $75) posted 3Q EPS of $0.96, above the expected $0.87, as revenues declined 2.2% y/y to $3.3 billion, versus the projected $3.3 billion. The company raised its full-year EPS outlook. K traded modestly higher. 

Coach Inc. (COH $37) announced fiscal 1Q profits ex-items of $0.45 per share, in line with forecasts, with revenues increasing 1.0% y/y to $1.0 billion, compared to the expected $1.1 billion. 1Q same-store sales grew 2.0% y/y, compared to the forecasted 2.2% gain. COH reaffirmed its full-year guidance, and shares gained solid ground.

The major automakers reported U.S. October sales today, with figures being adjusted to account for two fewer selling days this month compared to last year. General Motors Co's (GM $31) adjusted sales rose 5.9% y/y, compared to the projected 1.0% increase. Fiat Chrysler Automobiles NV's (FCAU $7) Chrysler brand's sales declined 3.4% y/y, compared to the expected 2.5% decline. Ford Motor Co (F $12) postponed its monthly sales report due to a fire at its world headquarters yesterday, and it will release its sales figures later this week. GM and FCAU both finished lower.

Manufacturing reports top forecasts

The Institute for Supply Management (ISM) Manufacturing Index (chart) for October moved slightly further into expansion territory (above 50) after rising to 51.9 from September's 51.5 level, and compared to the Bloomberg forecast of a modest rise to 51.7. The new orders gauge of the report declined but continued to grow, while production increased and employment moved back into expansion territory. The ISM said comments from the survey were largely positive citing a favorable economy and steady sales, with some exceptions.

The final Markit U.S. Manufacturing PMI Index was revised modestly higher to 53.4 for October from the 53.2 preliminary level, where it was expected to remain. The index is up from the 51.5 level posted in September. 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) decreased 0.4% m/m in September, versus projections of a 0.5% advance, and following August's favorably revised 0.5% decrease. Residential spending was 0.4% higher, while non-residential spending fell 0.9%.

As noted in the recent Schwab Market Perspective: Looking Past the Election, economic data continues to support a sluggish growth narrative, although there are glimmers of hope that we could see at least a modest acceleration in 2017. Oil rig counts continue to bounce back, indicating a rebound in the energy sector and could help to support an uptick in capital spending, the U.S. consumer appears to gaining some confidence, and single family housing starts rose solidly. However, auto sales appear to be slowing, retail sales gains are relatively modest and businesses remain cautious. Read more at www.schwab.com/marketinsight and be sure to follow Schwab on Twitter: @schwabresearch.

Treasuries finished nearly unchanged, as the yield on the 2-year note ticked 1 basis point (bp) lower to 0.83%, while the yields on the 10-year note and the 30-year bond were flat at 1.83% and 2.58%, 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.

Finally, with U.S. political risk hamstringing the global markets, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Final Clinton-Trump Debate Sets Up a Sprint to the Finish Line, 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.

Tomorrow, investors will get a look at the ADP Employment Change report, with economists forecasting a rise in private sector jobs of 165,000 during October following the 154,000 posted in September, as well as MBA Mortgage Applications (economic calendar). However, what is likely the headlining event for the day, let alone the week, all eyes will be on the conclusion of the Federal Open Market Committee's (FOMC) two-day monetary policy meeting and its pending rate decision, and while a rate hike is not expected to be announced tomorrow, see our latest article, Inflation and the Fed: What to Expect at This Week's Meeting, at www.schwab.com/insights.

Europe lower following earnings, Asia mixed on central bank decisions and data

European stocks finished mostly lower, with lingering political and monetary policy uncertainty continuing to hamper conviction, as the U.S. election looms and central banks in Japan and Australia kept their monetary policy stances unchanged, as the Fed began its two-day meeting. Disappointing results from the earnings front hampered sentiment, despite some favorable October Chinese business activity reports. Schwab's Chief Global Investment Strategist 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, and follow Jeff on Twitter: @jeffreykleintop. The euro rallied and the British pound dipped versus the U.S. dollar, while bond yields in the region gained ground.

Stocks in Asia finished mixed on the heels of the continued drop in crude oil prices yesterday, and as traders digested some central bank decisions in Japan and Australia, along with some favorable Chinese business activity reports. Japanese equities ticked higher after the Bank of Japan (BoJ) left its monetary policy stance unchanged, as expected, but pushed out its goal of reaching its 2.0% inflation target, and despite an uptick in the yen and some disappointing earnings results. Mainland Chinese stocks and those in Hong Kong advanced on the heels of reports showing both its official and unofficial manufacturing releases showed growth in the sector accelerated in October, with the former reaching the fastest pace of expansion since July 2014. Also, China's key services sector report showed growth in output accelerated. Australian markets declined after the Reserve Bank of Australia kept its monetary policy stance unchanged, while oil & gas issues continued to see pressure on the selloff in crude oil prices. Meanwhile, stocks in India declined in their return to action from a holiday break, while South Korean listings finished flat. Schwab's Jeffrey Kleintop, CFA, discusses central bank decisions and the recent movement in the global yield curve in his latest article, Recession Odds Pass Key Threshold at www.schwab.com/oninternational. Jeff notes that the yield spread rose for many countries in October, a key indicator that the risk of global recession and accompanying bear market in the coming year diminished during the month.

Looking ahead to tomorrow, manufacturing PMIs from around Europe will dominate the international economic docket, while Germany will also report its unemployment rate, and the U.K. will post CPI figures.

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