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Tuesday, January 10, 2017

Markets Lose Steam Late in the Day

Charles Schwab: On the Market
Posted: 1/10/2017 4:15 PM ET

Markets Lose Steam Late in the Day

U.S. equities trimmed early gains to finish mixed, as investors looked to be cautious ahead of tomorrow's press conference by President-elect Donald Trump to expound on his policy preferences. Treasuries were little changed, despite a 12-year high in small business optimism, while gold and the U.S. dollar were higher and crude oil lost ground. Meanwhile, shares of Chipotle Mexican Grill were able to shrug disappointing 4Q guidance, and Valeant Pharmaceuticals announced it will sell some of its assets.

The Dow Jones Industrial Average (DJIA) declined 32 points (0.2%) to 19,856, the S&P 500 Index was nearly unchanged at 2,269 and the Nasdaq Composite advanced 20 points (0.4%) to 5,552. In moderate-to-heavy volume, 918 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.14 to $50.82 per barrel and wholesale gasoline lost $0.02 to $1.55 per gallon. Elsewhere, the Bloomberg gold spot price rose $6.38 to $1,187.48 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 102.00.

Chipotle Mexican Grill Inc. (CMG $414) issued 4Q earnings and same-store sales guidance that came in below the Street's expectations. The burrito chain also announced an additional $100 million to its share repurchase program. Shares reversed sharply to the upside to finish solidly higher, as the report also showed December same-store sales jumped 14.7% year-over-year (y/y), fostering some optimism that sales at the company, which have been hampered by a string of e.coli and norovirus outbreaks, may be starting to recover. However, the company did note that "sales comparisons are lapping an easier compare due to lower sales levels in November and December 2015."

Valeant Pharmaceuticals International Inc. (VRX $16) announced that it has agreed to sell three skin-care brands to L'Oreal SA (LRLCY $37) for $1.3 billion in cash. Also, the company said it agreed to sell its Dendreon Pharmaceuticals Inc. to Chinese conglomerate Sanpower Group Co. for $820 million. Shares were higher.

Small business optimism jumps

The National Federation of Independent Business (NFIB) Small Business Optimism Index for December jumped to 105.8 from November's 98.4 level, well above the Bloomberg forecast calling for an improvement to 99.5. This was the highest reading since December 2004, adding credence to Schwab’s Chief Investment Strategist Liz Ann Sonders' view in her latest article, Luminous Times: Looking Ahead With Optimism About 2017, that the presidential election fostered rising business, consumer and investor confidence, but you could have looked in the rearview mirror on Election Day and seen an improvement in the economy along with a return to positive earnings growth. She concludes that we remain optimistic that this is an ongoing secular bull market in U.S. stocks; and the risk of it ending swiftly is low. Read more at www.schwab.com/marketinsight and follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, increased to a level of 5.52 million jobs available to be filled in November, from October's downwardly revised 5.45 million level, and slightly above the Bloomberg forecast of 5.50 million. The hiring rate remained at 3.6% and the separation rate ticked higher to 3.5% from 3.4%.

Wholesale inventories (chart) rose 1.0% month-over-month (m/m) in November, versus the favorably revised 0.1% dip in October and forecasts of a 0.9% gain. Sales increased 0.4% m/m, versus the expected 0.5% gain and the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—rose to 1.32 months from October's 1.31 months level.

Treasuries finished flat, as the yields on the 2-year and 10-year notes, as well as the 30-year bond, were unchanged at 1.19%, 2.38% and 2.97%, respectively.

Bond yields and the U.S. dollar have been choppy and moderated somewhat from elevated levels that came courtesy of post-election optimism, the string of upbeat economic data, and the Fed's December rate hike and a faster-than-previously-forecasted pace of rate increases for 2017. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets in a video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled, How Should Bond Investors Prepare in Light of Fed Outlook for 2017? at www.schwab.com/insights. Kathy also addresses the potential changes facing the fixed income market and the jump in the greenback in her articles, Changing Conditions: A Bond Market FAQ 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 posting a sharp rally in the first week of 2017 and the potential for sideways movement and/or potential pullbacks in the New Year, see Senior Vice President of the Schwab Center for Financial Research, Mark Riepe's, CFA, latest podcast, 7 Principles for Investing Success, at www.schwab.com/insights.

The only item on tomorrow's economic calendar is MBA Mortgage Applications.

Europe ticks higher as miners rally, Asia mixed as Japan returns to action 

European equities finished mostly higher, with basic materials being bolstered by mining issues as French manufacturing and industrial production both rose much more than expected in November, and mixed Chinese inflation data showed the nation's producer price inflation easily bested forecasts. Financials declined amid festering banking sector concerns and the British pound paused from yesterday's drop that came amid a flare-up in "hard" Brexit uncertainty on the heels of comments from U.K. Prime Minister May over the weekend. For commentary on the Brexit vote fallout, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, Keep Calm and Carry On: The Brexit Shock That Wasn't. The euro is dipping versus the U.S. dollar, while bond yields in the region are mostly moving to the upside.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, 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 these articles 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 following the lackluster session in the U.S. yesterday, while Japanese equities fell in their return to action following yesterday's holiday, with a stronger yen weighing on export-related issues. Mainland Chinese stocks declined, though listings in Hong Kong gained ground. The mixed action came on increased buying activity of Hong Kong stocks amid the exchange link with Shanghai, per Bloomberg, and as traders digested mixed reads on the nation's consumer and producer price inflation statistics for December, which saw the former miss forecasts and the latter easily top expectations. Markets in Australia dropped on the heels of a smaller-than-expected rise in the country's retail sales for November and weakness in financials, which overshadowed a gain in basic materials stocks. Meanwhile, stocks India advanced, snapping a recent losing streak on gains in mining and auto issues, while South Korean equities traded lower. 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. Read more 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.

Economic reports scheduled on tomorrow's international calendar include: South Korea's unemployment rate, Japan's Leading Index, and industrial production from Spain and the U.K.

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