Trump, Brexit Uncertainty Sap Stocks, Dollar

Charles Schwab: On the Market

Posted: 1/17/2017 4:15 PM ET

Trump, Brexit Uncertainty Sap Stocks, Dollar

U.S. equities finished the first trading session of a shortened week lower, as comments from President-elect Donald Trump ahead of his inauguration this week sparked some political uncertainty, pressuring the U.S. dollar. Moreover, the British pound rallied as U.K. Prime Minister May offered details of her country's Brexit plans. A continued pullback in Treasury yields pressured financials, despite stronger-than-expected quarterly results from Morgan Stanley. Meanwhile, gold jumped and crude oil prices ticked higher.

The Dow Jones Industrial Average (DJIA) decreased 59 points (0.3%) to 19,827, the S&P 500 Index was 7 points (0.3%) lower at 2,268 and the Nasdaq Composite declined 35 points (0.6%) to 5,539. In moderate volume, 882 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.11 higher to $52.48 per barrel and wholesale gasoline lost $0.01 to $1.60 per gallon. Elsewhere, the Bloomberg gold spot price rose $13.03 to $1,215.76 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—tumbled 0.8% to 100.36.

Morgan Stanley (MS $42) reported 4Q earnings-per-share (EPS) of $0.81, above the $0.65 FactSet estimate, as revenues rose 16.9% year-over-year (y/y) to $9.0 billion, topping the projected $8.5 billion. The company said it had solid results in its sales & trading and advisory unit, and record revenues in wealth management, while managing expenses prudently. MS added that it is optimistic about opportunities in 2017 and beyond. Shares finished solidly lower.

Dow member UnitedHealth Group Inc. (UNH $161) posted 4Q EPS ex-items of $2.11, versus the expected $2.07, as revenues rose 8.9% y/y to $47.5 billion, north of the projected $47.4 billion. UNH reaffirmed its 2017 guidance, though the outlook was mostly below expectations. Shares came under pressure. .

Tiffany & Co. (TIF $80) announced that its same-store sales for the holiday period declined 2.0% y/y, while noting that it expects 2016 EPS to decline by no more than a mid-single digit percentage. Shares were lower.

J.C. Penney Co. Inc. (JCP $7) announced an agreement with Dow member Nike Inc. (NKE $54) to put Nike shops in over 600 JCP stores. Shares of both companies were higher.

Reynolds American Inc. (RAI $58) gained solid ground after British American Tobacco PLC. (BTI $113) announced a deal where it will acquire the remaining 57.8% of RAI that it does not already own for $59.64 per share in cash and stock, in a deal valued at about $49.4 billion.

Growth in regional manufacturing activity slows more than expected

The Empire Manufacturing Index showed output from the New York region slipped but remained in expansion territory (a reading above zero) for January. The index declined to 6.5 from December's downwardly revised 7.6 level, with the Bloomberg forecast calling for an 8.5 reading.

Today's data kicks off another shortened week for the U.S. markets, with a heating up 4Q earnings season continuing to vector some attention away from the economic calendar, which will begin to heat up tomorrow with the release of the Consumer Price Index (CPI), forecasted to have increased 0.3% month-over-month (m/m) during December, following the 0.2% m/m rise in November, while the core rate, which excludes food and energy, is expected to have risen 0.2% m/m, matching the prior month's reading, as well as the Federal Reserve's industrial production and capacity utilization report, with economists expecting a 0.6% m/m increase in production, rebounding from the 0.4% m/m decline, and for capacity utilization to have ticked higher to 75.4% from November's 75.0% level. Rounding out the day will be the January NAHB Housing Market Index, forecasted to show a reading of 69, a shade lower than the 70 registered in December, but well above the 50 level that marks the demarcation point of homebuilders characterizing the housing market as good versus poor.

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.

Treasuries were higher, with the yield on the 2-year note declining 5 basis points (bps) to 1.14%, the yield on the 10-year note dropping 7 bps to 2.33%, and the 30-year bond falling 6 bps to 2.93%.

Treasury yields and the U.S. dollar are pulling back amid posturing on comments from President-elect Donald Trump ahead of his inauguration this week and as the British pound is rallying following Brexit comments 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.

Against the backdrop of the late-2016 rally in the stock markets, Schwab’s Chief Investment Strategist Liz Ann Sonders and Vice President of Trading and Derivatives, Randy Frederick offer their latest video, Record Territory: Could the Bull Market Continue in 2017? Watch the video at www.schwab.com/insights, where you can also find Senior Vice President of the Schwab Center for Financial Research, Mark Riepe's, CFA, latest podcast, 7 Principles for Investing Success, as well as our 2017 Schwab Market Outlook.

Europe mostly lower, Asia mixed as traders digest comments out of U.S. and U.K.

European equities finished mostly lower, with the currency markets in focus following comments from U.S. President-elect Donald Trump and U.K. Prime Minister (PM) May. Trump noted that the U.S. dollar was already "too strong," while U.K. PM May eased "hard" Brexit concerns, despite saying that the country will seek to exit the European Union's (EU) single market. May noted that the U.K. parliament will get a vote on the final Brexit deal and adding that she was confident a deal can be reached with the EU and will seek a "smooth and orderly Brexit." The British pound rallied sharply and the U.S. dollar fell noticeably. 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. German investor confidence improved in January but by a smaller amount than expected. The euro gained ground on the greenback and bond yields in the region finished mostly to the downside.

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, ahead of a speech by U.K. Prime Minister May on Brexit plans, while the U.S. dollar is falling in the wake of comments from U.S. President-elect Donald Trump, which warned that the greenback is too strong while suggesting he is open to changes in global trade policy, notably with China. 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. Japanese equities fell sharply, with the yen gaining ground amid the U.S. dollar's drop, while broad-based weakness led Australia's markets lower. However, mainland Chinese stocks and those in Hong Kong advanced, with the markets in China snapping a string of weakness, bolstered by the government's efforts to boost liquidity ahead of the Lunar New Year holiday, which will begin at the end of this month. Also, a host of China data is slated for this week, headlined by the release of its 4Q GDP report. 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) at www.schwab.com/oninternational.

South Korean stocks gained ground, though stocks in India declined, despite some strength in emerging market currencies in the wake of the pressure on the greenback. 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.

Tomorrow's international economic calendar will offer CPI from Germany and the Eurozone, as well as employment data from the U.K.