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Tuesday, December 27, 2016

Stocks Return to Action in Positive Fashion

Charles Schwab: On the Market
Posted: 12/27/2016 4:15 PM ET

Stocks Return to Action in Positive Fashion

U.S. stocks managed to gain ground on light trading volume following the extended Christmas holiday weekend. The advance for stocks was supported by a 15-year high read for consumer confidence and stronger-than-expected reports on regional manufacturing activity and home prices. Treasury yields, gold and crude oil prices were higher and the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average (DJIA) increased 11 points (0.1%) to 19,945, the S&P 500 Index added 5 points (0.2%) to 2,269 and the Nasdaq Composite gained 31 points (0.6%) to 5,487. In light volume, 487 million shares were traded on the NYSE and 1.2 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.88 higher to $53.90 per barrel and wholesale gasoline was $0.02 higher at $1.66 per gallon. Elsewhere, the Bloomberg gold spot price added $5.86 to $1,139.17 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% higher at 103.04.

Biogen Inc. (BIIB $291) and Ionis Pharmaceuticals Inc. (IONS $55) gained solid ground after their treatment for spinal muscular atrophy, known as Spinraza, received approval late Friday from the U.S. Food and Drug Administration (FDA).

Consumer Confidence jumps to 15-year high

The Consumer Confidence Index (chart) hit the highest level since August 2001after jumping to 113.7 in December from the upwardly revised 109.4 level in November, and compared to the Bloomberg estimate of 109.0. Sentiment toward the present situation declined but expectations of business conditions for the next six months rose solidly to the highest level since December 2003. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—decreased to 4.4 from the 6.6 posted in November.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.1% gain in home prices year-over-year (y/y) in October, versus expectations of a 5.0% increase. Month/month (m/m), home prices were up 0.6% on a seasonally adjusted basis for October, north of forecasts calling for a 0.5% gain.

The Richmond Fed Manufacturing Activity Index moved further into expansion territory (a reading above zero), rising to 8 for December from the 4 posted in November, and versus expectations of a 5 reading.

Tomorrow, the lone release from the U.S. economic calendar will give us a look at pending home sales from November, expected to have increased 0.5% m/m after rising 0.1% in October.

Treasuries were lower, with the yield on the 2-year note gaining 3 basis points (bps) to 1.23%, while the yields on the 10-year note and the 30-year bond rose 2 bps to 2.56% and 3.13%, respectively.

Bond yields have surged as of late as some upbeat economic data has accompanied high expectations for fiscal stimulus, tax reform and regulatory rollbacks following the surprise November Presidential election. Also, the rally in rates was bolstered in early December as the Fed's highly expected 25 bp increase to its target for the fed funds rate was delivered along with a forecast for three rate hikes in 2017, up from two in its September projection. Schwab’s Chief Investment Strategist Liz Ann Sonders details the Fed's monetary policy decision in her latest article, Fed Shocks No One and Raises Rates. Read more at www.schwab.com/marketinsight, and be sure to check out Liz Ann's video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled Fed Raises Rates: What Should the Markets Expect? at www.schwab.com/insights. Follow Liz Ann, Randy and Schwab on Twitter: @lizannsonders, @randyafrederick and @schwabresearch.

Moreover, Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets in a video with Schwab's Randy Frederick titled, How Should Bond Investors Prepare in Light of Fed Outlook for 2017? at www.schwab.com/insights, where you can also find her latest, Changing Conditions: A Bond Market FAQ. Follow Kathy on Twitter: @kathyjones.

Signs of rising inflation have also pressured bond prices and Schwab's Fixed Income Director, Collin Martin, CFA, discusses in his article, Inflation Is Rising: Time to Consider Treasury-Inflation Protected Securities? at www.schwab.com/onbonds.

European stocks tick higher, Asia mixed in light holiday trading 

European equities nudged higher, with volume remaining light amid the holiday period and U.K. markets continuing to be on a break. Financials remained hamstrung as the troubled Italian banking sector continued to be in focus after the European Central Bank said struggling lender Banca Monte dei Paschi di Siena SpA (BMDPD $7) needs about twice the amount the company had sought in its recently failed capital increase, per Bloomberg. The ECB's estimate comes as the government approved a bank bailout decree that will allow it to increase its public borrowing by 20 billion euros to help fund bank bailouts. Heatlhcare and technology issues helped push stocks slightly higher, along with another dose of U.S. economic data. The euro was little changed and the British pound was lower versus the U.S. dollar, while bond yields in the region finished mixed. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, 5 Reasons International Stocks May Underperform In 2017, at www.schwab.com/oninternational, as well as his video with Senior Derivatives Analyst Nathan Peterson titled, Brexit, Germany, China: How the Global Economy Could Fare in the New Year at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed with continued light volume amid the holiday season, while markets in Hong Kong and Australia remained closed. Japanese equities finished flat, with the yen losing ground in the wake of economic data showing the nation's core consumer price inflation declined more than expected and household spending unexpectedly fell in November. Mainland Chinese stocks declined despite a solid acceleration in the country's industrial profits y/y for last month. The data adds to a recent string of upbeat reports suggesting stabilization in the world's second-largest economy, but these have been met with festering currency/liquidity concerns in the wake of the U.S. dollar's recent jump, uncertainty following government crackdowns—notably on the real estate and insurance sectors—and lingering uneasiness 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?.

South Korean securities advanced despite a disappointing read on the nation's consumer confidence in December, while Indian listings rallied. India's index rebounded from a recent selloff that has taken the index to a five-week low, courtesy of festering earnings and economic concerns, along with government reform uncertainty and monetary policy divergence. Schwab's Director of International Research, Michelle Gibley, CFA, offers timely analysis of emerging markets in her latest article, Emerging Markets: Why They Deserve a Place in Your Portfolio. Read both articles at www.schwab.com/oninternational.

The international economic docket for tomorrow will include industrial production, retail sales and vehicle production from Japan, retail sales from Germany and consumer confidence from Italy.

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