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Monday, December 05, 2016

Markets Begin Week Higher

Charles Schwab: On the Market
Posted: 12/5/2016 4:15 PM ET

Markets Begin Week Higher

U.S. equities began the week on solid footing, courtesy of a more than one-year high for the ISM non-Manufacturing Index, as well as a string of relatively upbeat global business activity reports, while shrugging off a failed Italian referendum. Treasuries finished lower and crude oil ticked slightly higher, while the U.S. dollar and gold lost ground.

The Dow Jones Industrial Average (DJIA) rose 46 points (0.2%) to 19,216, the S&P 500 Index gained 13 points (0.6%) to 2,205 and the Nasdaq Composite jumped 53 points (1.0%) to 5,309. In moderately-heavy volume, 924 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.11 higher to $51.79 per barrel and wholesale gasoline was unchanged at $1.56 per gallon. Elsewhere, the Bloomberg gold spot price traded $8.37 lower to $1,169.06 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.6% to 100.14.

Consolidated Communications Holdings Inc. (CNSL $27) announced an agreement to acquire business and broadband communications provider FairPoint Communications Inc. (FRP $19) in an all-stock transaction valued at about $1.5 billion, including debt. Under the terms of the deal, FRP shareholders will receive a fixed exchange ratio of 0.73 shares of CNSL for each share they own. CNSL traded lower, while FRP rallied over 10%.

Services sector activity continues to grow

The Institute for Supply Management (ISM) non-Manufacturing Index (chart) rose to 57.2—the highest since October 2015—in November from 54.8 in October and compared to the Bloomberg forecast of an increase to 55.5. A reading above 50 denotes expansion. New orders dipped but remained solidly in expansion territory, while business activity and employment both saw accelerated growth. The ISM said comments from respondents were positive about business conditions and the direction of the overall economy.

The final Markit U.S. Services PMI Index was revised to 54.6 in November from the preliminary 54.7 level, and versus forecasts of 54.9. The index was below the 54.8 figure posted in October. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently. A reading above 50 denotes expansion.

The data suggests growth in the services sector, which accounts for the lion's share of U.S. economic output, helping boost stocks back to record highs as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her latest article, Emotional Rescue: What to make of the post-election surge? Liz Ann notes that her view has not changed that we remain in a secular bull market, but we may be pulling some of next year's performance into the final weeks of this year. She continues to expect some bouts of volatility as we move from speculating about Trump’s policies to actually facing their reality next year; especially if protectionism moves up the priority ranking of policies. Liz Ann adds that the strongest support for both the economy and stock market looking ahead is animal spirits have been suppressed for some time, and appear to be lighting up. But there are risks, including spikes in optimistic sentiment (a contrarian indicator) and the U.S. dollar (which is causing a tightening of financial conditions). Stay long, but stay strong in terms of your discipline around diversification and rebalancing. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Treasuries finished lower, as the yield on the 2-year note rose 2 basis points (bps) to 1.11%, while the yields on the 10-year note and the 30-year bond rate ticked 1 bp higher to 2.39% and 3.07%, respectively.

Bond yields have wavered from a rally that has come as a plethora of stronger-than-expected economic data has bolstered the boost from the surprise election and elevated December Fed rate hike expectations. For our latest analysis of the jump in bond yields, see Schwab's Chief Fixed Income Strategist, Kathy Jones' latest Bond Market Outlook: Higher Rates and Known Unknowns at www.schwab.com/onbonds, and 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's economic calendar will be fairly busy, beginning with the trade balance, forecasted to show the deficit widened during October to $42.0 billion from the $36.4 billion shortfall in September, followed by final 3Q nonfarm productivity and unit labor costs, with economists expecting productivity to be revised higher to a 3.3% quarter-over-quarter (q/q) gain from the preliminary 3.1% q/q reading, and labor costs to remain at the previously-posted 0.3% q/q increase. After the opening bell, factory orders will be released, forecasted to have jumped 2.6% m/m during October following the 0.3% increase the month prior.

Europe shows some resiliency in the face of failed Italian referendum, Asia lower

European equities overcame early choppiness and finished higher, with a stronger-than-expected read on U.S. services sector activity headlining a plethora of relatively upbeat global business activity reports. Italian stocks lagged behind after the weekend's failed referendum on constitutional reform but the market pared solid early losses. Following the vote, Italian Prime Minister Renzi announced his intention to resign. Italian banks were lower and the failed referendum is 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?. Michelle notes that the near-term risks to European stocks are heightened by the uncertainty posed by these votes. However, the resulting political uncertainty isn't sufficient reason to abandon global diversification. We believe having a diversified portfolio can set you up to participate if and when the trends switch. Read more www.schwab.com/oninternational.

In economic news, Markit's final Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—was revised to 53.9 for November, from the preliminary level of 54.1, where it was projected to remain. A reading above 50 denotes expansion and the index was up from the 53.3 level posted in October. Also, eurozone retail sales grew more than anticipated in October and Markit reported that growth in U.K. business activity unexpectedly accelerated for November. 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 gained ground and the British pound dipped versus the U.S. dollar, while bond yields in the region were higher.

Stocks in Asia finished mostly lower on the heels of the failed Italian referendum over the weekend, while comments and actions from U.S. President-elect Donald Trump caused uncertainty to flare up regarding world trade relations. 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. Japanese equities declined, despite some late-session weakness in the yen and a relatively upbeat read on the nation's November services sector growth. Meanwhile, stocks in China and Hong Kong fell, with the start of the exchange trading link between Hong Kong and Shenzhen getting off to a lackluster start and the aforementioned trade relation concerns with the U.S. overshadowing a report from Caixin that showed growth in the nation's key services sector accelerated last month. Markets in Australia and South Korea declined as well, but securities in India bucked the trend, posting solid gains, despite a report showing the country's services sector activity contracted in November.

Tomorrow, the international economic calendar will hold trade data from South Korea, retail sales from the U.K., manufacturing orders from Germany, as well as GDP data from the Eurozone. In central bank action, the monetary policy meetings from both the Reserve Bank of Australia (RBA) and the Reserve Bank of India (RBI) are scheduled, with analysts forecasting no change the RBA's policy, while the RBI is anticipated to cut its benchmark interest rate by 25 bps.

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