Global Trade Concerns Pressure Markets

Charles Schwab: On the Market

Posted: 1/23/2017 4:15 PM ET

Global Trade Concerns Pressure Markets

U.S. equities finished modestly lower, with global sentiment being hampered by actions by President Donald Trump to make changes to trade agreements, particularly the Trans-Pacific Partnership (TPP). The energy sector saw some pressure as crude oil prices pared a recent run. Meanwhile Treasuries were higher amid a dormant economic calendar, as was gold, while the U.S. dollar fell. On the equity front, Dow member McDonald's declined despite topping earnings forecasts and Qualcomm saw pressure amid news of a patent dispute with Dow member Apple, while a federal judge blocked Aetna's takeover of Humana.

The Dow Jones Industrial Average (DJIA) declined 27 points (0.1%) to 19,827, the S&P 500 Index was 6 points (0.3%) lower at 2,265 and the Nasdaq Composite decreased 2 points to 5,553. In moderate volume, 755 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.47 to $52.75 per barrel and wholesale gasoline was unchanged at $1.57 per gallon. Elsewhere, the Bloomberg gold spot price moved $4.92 higher to $1,215.24 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.6% to 100.17.

Dow member McDonald's Corp. (MCD $121) reported 4Q earnings-per-share (EPS) of $1.44, above the $1.41 FactSet estimate, as revenues decreased 5.0% year-over-over (y/y) to $6.0 billion, roughly in line with projections. Worldwide same-store sales rose 2.7% y/y, north of the expected 1.3% gain, though U.S. sales declined 1.3%, reflecting the challenging comparison against the prior year launch of its all-day breakfast, versus the estimated 1.4% decrease. Shares finished lower amid concerns about potential slowing growth from its all-day breakfast campaign.

Halliburton Co. (HAL $55) posted 4Q EPS ex-items of $0.04, two cents above estimates, as revenues fell 20.9% y/y to $4.0 billion, compared to the forecasted $4.1 billion. Shares were noticeably lower.

Qualcomm Inc. (QCOM $55) came under solid pressure amid a host of analyst downgrades and as the mobile phone chipmaker was hit with late-Friday's patent lawsuit from Dow component Apple Inc. (AAPL $120), which QCOM called "baseless."

Aetna Inc. (AET $119) fell after a federal judge blocked its deal to acquire Humana Inc. (HUM $205), ruling that the transaction would violate antitrust laws by reducing competition. An Aetna spokesperson said, "We're reviewing the opinion now and giving serious consideration to an appeal," while HUM has not commented, per Bloomberg. Shares of HUM were higher.

Treasury yields slide as economic calendar remains quiet

Treasuries were higher, with the economic calendar void of any major reports today, as the yields on the 2-year note and the 30-year bond declined 6 basis points (bps) to 1.14% and 2.99%, respectively, while the yield on the 10-year note dropped 7 bps to 2.39%.

The U.S. dollar and Treasury yields moved higher last week, with political uncertainty rising leading up to Friday's inauguration of President Donald Trump, while economic data continued to be relatively positive. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend and Vice President of Trading and Derivatives, Randy Frederick offer their latest video, How Could the Items on the Republican Agenda Impact Investors?, at www.schwab.com/insights. Follow Schwab on Twitter: @schwabresearch.

Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets and the recent rally in the greenback in her articles, Anatomy of a Bond Bear Market: What to Look For When Yields Rise and Will the U.S. Dollar Bull Market Continue in 2017?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

With the stock markets dipping recently from record levels, Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Not Fade Away: Will High Consumer/Business Confidence Fade or Persist?, at www.schwab.com/marketinsight and be sure to check out our article, The Trump Effect: Can the Post-Election Rally Continue at www.schwab.com/insights. Follow Liz Ann on Twitter: @lizannsonders.

This week, earnings season will accelerate to give us further insight to whether earnings growth can meet lofty expectations, while guidance will likely garner heavy attention as consumer, business and investor confidence has jumped on optimism that President Trump's administration and Republican-controlled Congress can deliver on proposed policies. Also, the U.S. economic calendar will bring key releases of new home sales, the first look (of three) at 4Q GDP, durable goods orders, the Leading Index, and the final University of Michigan Consumer Sentiment Index for January.

Tomorrow, the docket will begin to ramp back up with the release of existing home sales, projected to decline 1.8% to an annual rate of 5.51 million units for December from November's level that was the strongest since February 2007. The report will be accompanied by the releases of Markit's preliminary Manufacturing Index and the Richmond Fed Manufacturing Index, with both expected to show continued growth in the sector for this month.

As noted in the Schwab Market Perspective: A Perfect Mix?, the conditions for a continuation of the long-running equity bull market appear to be intact. The recent digestion of gains since the election is a healthy process as it forestalls a potentially dangerous "melt-up" scenario, at least for now. Economic data and corporate earnings growth are conspiring with a boost in consumer and business confidence to ignite "animal spirits." Add in a Federal Reserve that is slowly normalizing monetary policy, but still remains accommodative, and we see a good mix for further equity gains. Manufacturing has rebounded around the globe, and could continue on a positive trajectory in the first half of 2017. Read more at www.schwab.com/marketinsight.

European stocks see pressure, Asia mixed as U.S. politics continue to garner attention

European equities moved lower, with concerns about global trade relations with the U.S. ramping up as President Donald Trump already took actions to make good on his campaign promise for changes to trade deals known as North American Free Trade Agreement (NAFTA) and Trans-Pacific Partnership (TPP). The euro and British pound gained ground on the U.S. dollar, while bond yields in the region were lower. Financials and technology stocks saw some pressure, along with oil & gas issues as crude oil prices gave back some of a recent run. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, The CURE for a calm Market: Four risks for 2017, that after a calm post-election climb, developments in China, United Kingdom, Russia, and Europe may bring a return of stock market volatility. However, Jeff points out that better and broader global economic growth should help offset these risks and result in stock market gains for 2017. Read more at www.schwab.com/oninternational, where you can also find Jeff's commentary, 5 Reasons International Stocks May Underperform In 2017. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed as the global markets appeared jittery in the wake of Friday's inauguration of U.S. President Donald Trump, with concerns about global trade relations flaring up. The yen moved higher to weigh on Japanese equities, while those traded in Australia also dropped. For more on Trump's trade policies, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, President Trump and Global Trade: How Will Campaign Promises Play Out? at www.schwab.com/oninternational, where you can also find Schwab's Director of International Research, Michelle Gibley's, CFA, latest article, Currency Hedging: 5 Things You Need to Know. Mainland Chinese stocks rose and listings in Hong Kong ticked higher, with markets calm ahead of the Lunar New Year holiday break at the end of the month. South Korea's markets finished flat, while stocks in India advanced. Schwab's Michelle Gibley, CFA, offers timely analysis of emerging markets in her latest article, Emerging Markets: Why They Deserve a Place in Your Portfolio at www.schwab.com/oninternational, and be sure to check out our release, Why Your Portfolio Needs International Stocks—Despite 2017 Risks at www.schwab.com/insights.

A slew of manufacturing PMIs from across the globe will dominate tomorrow's international economic calendar, while other reports of note include consumer sentiment from South Korea, and public sector net borrowing from the U.K.