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Tuesday, February 14, 2017

Markets Finish Higher Despite March Rate Hike Hint

Charles Schwab: On the Market
Posted: 2/14/2017 4:15 PM ET

Markets Finish Higher Despite March Rate Hike Hint

U.S. equities continued their march higher, with financials getting a solid boost from a rise in Treasury yields following Fed Chairwoman Janet Yellen's Congressional testimony, where the prospect of a March rate hike emerged as a possibility. Meanwhile, the U.S. dollar, crude oil and gold all gained ground. On the equity front, massive merger terminations in the healthcare space dominated the headlines, while GM and PSA Group disclosed strategic initiative discussions.

The Dow Jones Industrial Average (DJIA) advanced 92 points (0.5%) to 20,504, the S&P 500 Index gained 9 points (0.4%) to 2,338, and the Nasdaq Composite added 19 points (0.3%) to 5,783. In moderate volume, 813 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.27 to $53.20 per barrel and wholesale gasoline gained $0.01 to $1.55 per gallon. Elsewhere, the Bloomberg gold spot price rose $4.62 to $1,229.88 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 101.25.

Aetna Inc. (AET $126) and Humana Inc. (HUM $206) announced that they have mutually ended their merger agreement following a ruling from the United States District Court for the District of Columbia granting a United States Department of Justice request to enjoin the merger. AET will pay HUM $1.0 billion as a result of the termination and AET has terminated its previously announced agreement to sell certain Medicare Advantage assets to Molina Healthcare Inc. (MOH $59). AET was higher, while shares of HUM dipped.

In afternoon action, Cigna Corp. (CI $147) announced that it has filed to terminate its merger agreement with Anthem Inc. (ANTM $163), saying that it believes that the transaction would not be able to gain regulatory approval following the Feb.7 order from the U.S. District Court for the District of Columbia too enjoin the transaction. CI also has filed suit against ANTH, seeking a reverse termination fee of $1.85 billion observed in the agreement, as well as $13 billion in damages. ANTH responded by saying that CI does not have the right to terminate the agreement and it is still committed to closing the deal. Separately, CI announced its plans to expand its share repurchase program to $3.7 billion. Shares of CI finished higher, while ANTH fell modestly.

Dr Pepper Snapple Group Inc. (DPS $93) reported 4Q earnings-per-share (EPS) ex-items of $1.04, below the $1.06 FactSet estimate, as revenues rose 2.1% y/y to $1.6 billion, roughly in line with forecasts. DPS issued 2017 EPS guidance that came in below expectations. Shares were lower. For more on earnings season see Schwab’s Chief Investment Strategist Liz Ann Sonders' latest article, Better Days: Earnings Growth Picks Up Sharply in 2017, at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

General Motors Co. (GM $37) got a boost from the confirmation from privately-held parent of Peugeot, PSA Group, that it is exploring numerous strategic initiatives with GM including a potential sale of GM's European business Opel to PSA. But PSA stressed that there can be no assurance that an agreement will be reached.

Fed Chief keeps March rate hike on the table

Federal Reserve Chairwoman Janet Yellen delivered the first of her two-day semi-annual Congressional economic and monetary policy testimony in front of the Senate Banking Committee. Yellen noted that changes in U.S. fiscal and other policies are sources of uncertainty, while reiterating that waiting too long to remove accommodation would be unwise, potentially requiring the Federal Open Market Committee (FOMC) to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. She pointed out that incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the FOMC's expectations. "At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," Yellen added.

As noted in the latest Schwab Market Perspective: Not So Fast!, if economic data continues to surprise on the upside, a March rate hike is likely to be on the table; while there is an additional risk that the Fed may be forced to speed up the tightening process should inflation accelerate from here. Read more at www.schwab.com/marketinsight and check out Schwab's Liz Ann Sonders' video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled, What Can Investors Make of Latest Fed Meeting and January Labor Report?, at www.schwab.com/insights.

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in January were up 0.6% month-over-month (m/m), above the Bloomberg expectation calling for a 0.3% gain and December's downwardly revised 0.2% rise. The core rate, which excludes food and energy, increased 0.4%, versus forecasts of a 0.2% advance and December's downwardly revised 0.1% increase. Y/Y, the headline rate was 1.6% higher, north of projections of a 1.5% increase, and the core PPI rose 1.2% last month, versus estimates of a 1.1% gain. In December, producer prices were up 1.6% for both the headline and core rates.

The National Federation of Independent Business (NFIB) Small Business Optimism Index for January ticked higher to 105.9 from December's 105.8 level, compared to forecasts calling for a decline to 105.0. This was the highest reading since December 2004.

Treasuries were lower, as the yields on the 2-year and the 10-year notes, as well as the 30-year bond, rose 3 basis points (bps) to 1.23%, 2.47% and 3.06%, respectively. For a look at the bond markets, see Schwab's Director of Income Planning, Rob Williams', CFP, and Senior Research Analyst, Cooper Howard's, CFA, latest article, Short-Term Bonds: Why They Could Outperform As Interest Rates Rise, at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Stocks remain at record highs, while Treasury yields and the U.S. dollar continue to regain some upward momentum in the wake of Yellen's comments. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Simple Indicators In A Complex World, noting that while markets may exhibit increasing volatility, we believe the bull market is being supported by tangible and effective indicators of global growth. For more useful indicators see Jeff's article, Five Reasons to Stay Invested Despite Heightened Uncertainty. Read these articles at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

Tomorrow, the U.S. economic calendar will ramp up sharply, with the Q&A session of Fed Chair Yellen's two-day Congressional testimony being accompanied by MBA mortgage applications, the Empire Manufacturing Index, the Consumer Price Index, industrial production and capacity utilization, the NAHB Housing Market Index, and business inventories. However, the headlining report could be the release of January retail sales, given the importance of the consumer on domestic economic output. The headline figure is projected to show sales ticked 0.1% higher m/m, after December's 0.6% increase. Excluding autos, sales are forecasted to rise 0.4% after December's 0.2% gain, while stripping out autos and gas, sales are anticipated to show a 0.3% increase, after being flat in the prior month. The retail sales control group, a figure used in the calculation of GDP, is expected to rise 0.4%, doubling December's gain.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers analysis of the consumer and the retail sector in his latest Schwab Sector Views: Trump Plus OPEC Equals ...What for Energy?, noting that the outlook for American consumer spending appears to be improving, with consumer confidence rising and wages ticking higher. However, spending on traditional retail items has been cautious and competition among retailers may limit profitability, resulting in our marketperform rating for the consumer discretionary sector. Read more at www.schwab.com/marketinsight.

Europe mixed amid data and Yellen's testimony, Asia finished lower

European equity markets finished mixed and the Stoxx Europe 600 Index was little changed after a five-session winning streak. Traders digested some equity and economic data, along with today's Congressional testimony from U.S. Fed Chief Janet Yellen, where she kept the possibility of a March rate hike on the table. The global markets have rallied as of late as sentiment has shifted to optimism regarding U.S. President Donald Trump's reflationary polices from concerns about trade and immigration. Also, the markets have shrugged off festering political uncertainty in the region ahead of some key elections. For analysis of the U.S. and European political fronts, see Schwab's Jeffrey Kleintop's, CFA, article, President Trump and Global Trade: How Will Campaign Promises Play Out? and Director of International Research, Michelle Gibley's, CFA, article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. Eurozone 4Q GDP growth slightly missed expectations, while U.K. consumer price inflation fell to weigh on the British pound. The euro was lower as the U.S. dollar reversed to the upside on Yellen's comments, while bond yields in the region gained ground. For global market investing analysis, see Schwab's Jeffrey Kleintop's, CFA, articles, The CURE for a calm Market: Four risks for 2017, and 5 Reasons International Stocks May Underperform In 2017. Read these articles at www.schwab.com/oninternational.

Stocks in Asia finished lower following the recent global market rally on resurfaced optimism of U.S. President Trump's reflationary policies that has taken some of the focus off of exacerbated trade and immigration concerns. The markets were cautious ahead of today's beginning of U.S. Fed Chair Yellen's Congressional testimony. Japanese equities fell, with the yen regaining some of yesterday's drop, while stocks in China and Hong Kong both finished flat amid lingering liquidity uncertainty and as traders digested hotter-than-expected reads on January consumer and wholesale price inflation figures. After the closing bell, China reported mixed lending statistics for last month. Elsewhere, securities traded in Australia and South Korea declined, while India's market finished little changed in the wake of yesterday's hotter-than-anticipated wholesale price inflation report, which added credence to last week's decision by the Reserve Bank of India's to move to a neutral monetary policy stance from its previous accommodative position. For our analysis of the global markets, see Schwab's Director of International Research, Michelle Gibley's, CFA, articles, Currency Hedging: 5 Things You Need to Know and 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.

Unlike the U.S., tomorrow's international economic calendar will be fairly light and include consumer sentiment from Australia, CPI from Spain, employment data from the U.K. and the Eurozone's trade balance.

Schwab Center for Financial Research - Market Analysis Group

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