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Thursday, January 19, 2017

Stocks Trade Down Despite Upbeat Domestic Data

Charles Schwab: On the Market
Posted: 1/19/2017 4:15 PM ET

Stocks Trade Down Despite Upbeat Domestic Data

U.S. stocks traded lower despite some strong domestic economic reports and ahead of tomorrow's inauguration of President-elect Trump. Treasuries and gold were lower, while the U.S. dollar and crude oil prices were higher. In equity news, earnings were in focus, headlined by solid results from Netflix.

The Dow Jones Industrial Average (DJIA) decreased 72 points (0.4%) to 19,732, the S&P 500 Index was 8 points (0.4%) lower at 2,264 and the Nasdaq Composite declined 16 points (0.3%) to 5,540. In moderate volume, 753 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.23 to $52.12 per barrel and wholesale gasoline shed $0.02 to $1.53 per gallon. Elsewhere, the Bloomberg gold spot price ticked $0.44 higher to $1,204.74 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.2% to 101.12.

Netflix Inc. (NFLX $138) reported 4Q EPS of $0.15, above the $0.13 FactSet estimate, on a 35% year-over-year (y/y) jump in revenues to $2.4 billion, slightly above the $2.3 billion forecast. The media streaming service provider said an addition of 5.12 million net international subscribers drove quarterly growth, well above estimates of 3.75 million, and that it added 1.93 million net domestic subscribers, also above projections. Shares rallied.

Shares of CSX Corp. (CSX $46) finished solidly higher after the Wall Street Journal reported that Harrison Hunter, outgoing Chief Executive Officer of Canadian Pacific Railways Ltd. (CP $150), will team up with activist investor Paul Hilal to take on CSX in pursuit of a leadership position at the U.S. railway, according to a person familiar with the matter. Billionaire hedge fund manager Bill Ackman, who Hilal worked with for years before starting his own fund, recruited Hunter five years ago to instigate a successful proxy fight against CP to replace it’s then-CEO, Fred Green by mid-2012. CP announced that Keith Creel will replace Hunter and become President and CEO effective Jan 31, 2017. Shares of CP were higher, as the news overshadowed its earnings miss, and lower-than-expected revenues for the 4Q.

BB&T Corp. (BBT $45) posted a 4Q profit, excluding charges, of $0.73 per share, in line with the FactSet estimate, on revenues of $2.7 billion, a shade lower than the $2.8 billion expected. The North-Carolina lender’s Chairman and CEO Kelly S. King said, "While higher interest rates created $34M in pre-tax charges, revenue growth was strong, expense control was solid and we are well-positioned for future interest rate increases." Shares traded lower.

Economic news upbeat

Housing starts (chart) for December rose 11.3% month-over-month (m/m) to an annual pace of 1,226,000 units, above the Bloomberg forecast of a 1,200,000 unit rate. November starts were upwardly revised to an annual pace of 1,102,000. Single-family units rose a modest 4.0% m/m, and multi-unit construction jumped a whopping 53.9% m/m, while both indicators were also higher compared to last year. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, inched 0.1% lower m/m in December to an annual rate of 1,210,000, after November’s favorably revised 1,212,000 rate, and below the expected annual pace of 1,230,000 units. Permits for single-family and multi-family units were higher m/m. Compared to the same period last year, single family permits were up, while multi-family permits were lower.

Weekly initial jobless claims (chart) declined 15,000 to 234,000 last week, below forecasts of 254,000, with the prior week’s figure revised to 249,000 from 247,000. The four-week moving average decreased by 10,250 to 246,750, the lowest level in the average since November 1973, while continuing claims fell by 47,000 to 2,046,000, south of estimates of 2,083,000.

The Philly Fed Manufacturing Index (chart) in January jumped further into a level depicting expansion (a reading above zero) after surging to 23.6 from 19.7 in December, and compared to estimates of a decline to 16.0.

Treasuries were mostly lower with the yield on the 2-year note nearly unchanged at 1.22%, the yield on the 10-year note advancing 4 bps to 2.47%, and the 30-year bond rate increasing 3 bps to 3.04%.

Treasury yields and the U.S. dollar have seen erratic moves as of late, courtesy of ramped up political uncertainty ahead of President-elect Donald Trump's inauguration this week and volatility in the currency markets following comments from Trump, as well as Brexit remarks from U.K. Prime Minister May. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the bond markets and the recent rally 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.

Tomorrow, the U.S. economic calendar will be void of any major releases.

Europe and Asia mixed

European equities finished mixed, paring an early lift from strong economic data in the U.S., after dovish comments from European Central Bank (ECB) President Mario Draghi following the Central Bank’s decision to leave its benchmark interest rate unchanged, as widely expected. The ECB also kept its asset purchase program in place, where it will continue its purchases of 80 billion euros until March, at which time it will then lower that amount to 60 billion euros through the rest of the year. At his customary press conference following the decision, Draghi elicited a dovish tone, indicating that the recent uptick in inflation was due to oil and base effects. Draghi also reiterated the ECB’s recent stance that it would increase the size and scope of its quantitative strategy in the event that financial conditions tightened or its outlook worsened. Other economic news in the region was light, with Spain’s trade deficit narrowing in November, while prices at the wholesale level in Switzerland were a bit cooler than forecasts. The euro cooled and was modestly lower following Draghi’s comments, and the British pound gained ground vs. the U.S. dollar, while bond yields in the region were higher.

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 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 in lackluster trading ahead of the inauguration of U.S. President-elect Donald Trump, as concerns over potential trade policy changes lingered, while a host of key Chinese economic data is slated for release tonight. Japanese equities rose, buoyed by a continued decline in the yen versus the U.S. dollar, while Australian listings gained ground following a better-than-expected employment report in the nation. Chinese stocks lost ground, with yesterday’s decline in crude oil a drag on energy issues. Liquidity/currency concerns remained a focus as the government injected funds into the system ahead of the Lunar New Year holiday, which begins at the end of this month. Some caution may have also kept markets in the Asian nation in check ahead of the release of its 4Q GDP report tonight, as well as Friday’s upcoming inauguration of President-elect Trump. For more on China, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, 5 Big Risks Posed by China (And Why They Shouldn't Crash Global Markets in 2017).

Indian securities advanced and South Korean equities inched higher as the recent volatility in the U.S. dollar continues to be a factor on emerging markets. 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.

The international economic docket for tomorrow will include department store sales from Japan, PPI from Germany and retail sales from the U.K. In addition to the aforementioned Chinese GDP report, the country is expected to deliver reads on industrial production and retail sales.

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