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Wednesday, December 07, 2016

Bulls Grab Third Win for Week

Charles Schwab: On the Market
Posted: 12/7/2016 4:15 PM ET

Bulls Grab Third Win for Week

U.S. stocks finished with solid gains, joining an advance for most global equity markets ahead of tomorrow's highly anticipated monetary policy decision from the European Central Bank. Some limited domestic economic reports showed mostly in line job openings data, a smaller-than-expected increase in consumer credit and a modest decline in weekly mortgage applications. Treasuries and gold were higher, while the U.S. dollar and crude oil prices moved lower. In equity news, Western Digital and Dave & Buster's rallied on upbeat reports and MasterCard boosted its dividend and share buyback plan.

The Dow Jones Industrial Average (DJIA) advanced 298 points (1.5%) to 19,550, the S&P 500 Index gained 29 points (1.3%) to 2,241 and the Nasdaq Composite added 61 points (1.1%) to 5,394. In moderately-heavy volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.16 to $49.77 per barrel and wholesale gasoline was $0.03 lower at $1.51 per gallon. Elsewhere, the Bloomberg gold spot price traded $3.37 higher to $1,173.22 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.3% to 100.17.

Western Digital Corp. (WDC $69) raised its fiscal 2Q earnings-per-share (EPS) and revenue guidance, with the storage technology company noting continued strong acceptance from customers and a favorable mix of its broad product portfolio, which enabled solid execution in a favorable market. Separately, WDC announced a renewed cross license agreement with Samsung Electronics Co. Ltd. (SSNLF $1,250). Shares of WDC finished solidly higher.

Mastercard Inc. (MA $105) announced that its board increased its quarterly dividend by 16.0% to $0.22 per share, as well as approved a new share repurchasing program of up to $4.0 billion of its Class A common stock. MA gained ground.

Dave & Buster's Entertainment Inc. (PLAY $57) jumped nearly 20% after the company posted 3Q EPS of $0.25, above the FactSet estimate of $0.14, with revenues rising 19.0% year-over-year (y/y) to $229 million, north of the projected $217 million. The gaming and dining chain said its strength was broad-based as it experienced momentum across the country and throughout the quarter. 3Q same-store sales grew 5.9% y/y, versus the forecasted 2.3% increase. PLAY raised its full-year earnings and revenue guidance.

Job openings roughly in line

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, dipped to a level of 5.53 million jobs available to be filled in October, from September's upwardly revised 5.63 million level, roughly in line with the Bloomberg forecast of 5.50 million. The hiring and separation rates remained at 3.5% and 3.4%, respectively.

For our latest look at employment, see Schwab's Chief Investment Strategist Liz Ann Sonders' article, Welcome to the Working Week: An Update on Jobs. Liz Ann also offers her latest article, You've Got to Earn It: Valuations Aided by Improving "E," where she points out that economic and earnings momentum has picked up—and not just post-election, with the latter expected to grow by more than 12% in 2017. She concludes that valuations are reasonable considering inflation; but that also represents a risk factor next year. Read both these articles at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $16.0 billion during October, below the $18.7 billion forecast of economists polled by Bloomberg, while September's figure was adjusted upward to an increase of $21.8 billion from the originally reported $19.3 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $13.7 billion, while revolving debt, which includes credit cards, rose by $2.3 billion.

The MBA Mortgage Application Index declined 0.7% last week, following the previous week's 9.4% fall. The dip came as the Refinance Index decreased 0.7%, while the Purchase Index ticked 0.4% higher. The average 30-year mortgage rate rose 4 basis points (bps) to 4.27%.

Treasuries gained ground, with the yield on the 2-year note dipping 2 bps to 1.10%, while the yields on the 10-year note and the 30-year bond declined 5 bps to 2.34% and 3.03%, respectively.

With bond yields having spiked since the surprise presidential election and amid elevated December rate hike expectations, which have been bolstered by some mostly stronger-than-expected economic data, see Schwab's Chief Fixed Income Strategist, Kathy Jones' latest article, Bond Market Outlook: Higher Rates and Known Unknowns at www.schwab.com/onbonds. Kathy notes the prospect of fiscal stimulus and tax reform under the new administration is driving bond yields higher, and we believe the upward trend is likely to continue into 2017. However, there are many “known unknowns” about policy that could affect the outlook for investors. Trade tariffs and/or a stronger dollar could slow growth and cool inflation, tempering the rise in bond yields. We suggest investors take a cautious approach to the bond market, focusing on high quality domestic bonds and keeping the average portfolio duration in the short to intermediate term until there is more clarity.

Be sure to check out Kathy's video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled How Will Expected December Interest Rate Hike Affect Markets in 2017?, at www.schwab.com/insights. Follow Kathy, Randy and Schwab on Twitter: @kathyjones, @randyafrederick and @schwabresearch.

Tomorrow, the U.S. economic calendar will be light as weekly initial jobless claims will be the lone major release, which are expected to have declined to a level of 255,000 from the previous week's read of 268,000.

Europe extends rally ahead of ECB decision, Asia mostly higher despite data

European equities finished higher as basic materials stocks helped the markets extend a three-day rally, with optimism growing ahead of tomorrow's monetary policy decision from the European Central Bank that the central bank will extend its asset purchase program. Financials were also standout winners as flared-up Italian banking concerns cooled on talk of support for the sector. Festering banking sector concerns were exacerbated as of late after the failed Italian referendum over the weekend that was the first step of several that could pave the way for an Italian exit from the European Union (EU), as discussed by Schwab's Director of International Research, Michelle Gibley, CFA, in her latest article, Europe Votes: Could More Countries Reject the EU?, at www.schwab.com/oninternational. In economic news, German industrial production rose by a smaller amount than expected in October, while U.K. industrial and manufacturing output both unexpectedly declined for October.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Happy Unrecession: The Alice in Wonderland economy, noting that while volatility may lie ahead for stocks, a prolonged bear market and recession seem unlikely for 2017. Read more at www.schwab.com/oninternational. Follow Jeff on Twitter: @jeffreykleintop. The euro was higher and the British pound lost ground versus the U.S. dollar, while bond yields in the region were lower.

Stocks in Asia finished mostly higher, with the global markets continuing a post U.S.-election rally, despite a surprise monetary policy decision in India, some disappointing Australian economic data, and caution likely prevailing ahead of tomorrow's monetary policy decision from the ECB. Japanese equities rose, with the yen holding onto recent weakness. Stocks trading in mainland China and Hong Kong advanced, with the markets continued to embrace the honeymoon period of the exchange trading link between Hong Kong and Shenzhen, while shrugging off flared up uncertainty regarding trade relations with the U.S. For analysis of the impact on the global markets of the U.S. election, see Schwab's Jeffrey Kleintop's, CFA, latest article, President Trump and Global Trade: How Will Campaign Promises Play Out?, at www.schwab.com/oninternational.

Australian securities gained ground despite a report showing the nation's 3Q GDP contracted by 0.5% quarter-over-quarter, after expanding 0.6% in 2Q, and compared to the 0.1% dip that was forecasted. Y/Y, the nation's 3Q GDP grew at 1.8%, versus the 2.2% forecasted expansion, and following the 3.1% growth posted in 2Q. The disappointing GDP data may have sparked some optimism that the Reserve Bank of Australia may need to bolster stimulus measures after yesterday's decision to keep its stance in place. South Korean equities ticked higher despite some continued political turmoil. However, Indian stocks fell after the Reserve Bank of India unexpectedly left its benchmark interest rates unchanged, compared to forecasts of a 25 bps cut.

In addition to the aforementioned ECB decision, the international economic docket for tomorrow will deliver trade data, 3Q GDP and bank lending from Japan, local car sales from India, the trade balance for Australia, house price data from the U.K. and non-farm payrolls from France.

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