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Wednesday, March 22, 2017

Markets Mixed, Dow Extends Losing Streak

Charles Schwab; On the Market
Posted: 3/22/2017 4:15 PM ET

Markets Mixed, Dow Extends Losing Streak

U.S. stocks finished mixed, with the Dow adding to its worst day of the calendar year yesterday, amid a mixed bag of news, and after a developing story involving an attack near the U.K. Parliament. Treasuries were higher following economic news that offered some disappointing housing data, while crude oil prices added to yesterday's pullback and the U.S. dollar was also lower, while gold saw a modest gain.

The Dow Jones Industrial Average (DJIA) declined 7 points to 20,661, the S&P 500 Index rose 4 points (0.2%) to 2,344, and the Nasdaq Composite gained 28 points (0.5%) to 5,822. In moderate volume, 899 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.20 lower to $48.04 per barrel and wholesale gasoline lost a penny to $1.60 per gallon. Elsewhere, the Bloomberg gold spot price gained $3.05 to $1,247.86 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 99.69.

After the closing bell yesterday, Nike Inc. (NKE $54) reported 3Q diluted earnings-per-share (EPS) of $0.68, well above the $0.53 FactSet estimate, while revenues increased 5.0% year-over-year (y/y) to $8.4 billion just shy of expectations. The company also reported that its gross margin had contracted 140 basis points to 44.5%, as higher average selling prices were more than offset by higher product costs, unfavorable changes in foreign exchange rates and the impact of higher off-price sales. Shares of NKE lost solid ground.

FedEx Corp. (FDX $196) also reported after yesterday's close, announcing 3Q EPS of $2.07 per diluted share or $2.35 on an adjusted basis, falling short of the $2.62 consensus forecast, while revenues rose 18.1% y/y to $15.0 billion, matching estimates. FDX noted that its operating results were impacted by the significantly negative net impact of fuel and one fewer operating day, but these factors were partially offset by the benefits from yield growth at all of the company’s transportation segments. FDX traded higher.

Shares of Sears Holdings Corp. (SHLD $8) revealed in its recent 10-K statement, filed today, that its historical operating results indicate substantial doubt exists related to the Company's ability to continue as a going concern. Shares of SHLD were sharply lower.

Existing-home sales and weekly mortgage applications fall shy of estimates

Existing-home sales in February declined 3.7% month-over-month (m/m) to a 5.48 million annual rate, compared to the Bloomberg forecast of a 5.55 million pace. February's figure was unrevised at a 5.69 million annual rate, which is the highest since February 2007. Sales of single-family homes fell 3.0% m/m and purchases of condominium and co-op units dropped 9.2%. The median existing-home price was up 7.7% y/y at $228,400. Housing supply came in at a 3.8-month pace at the current sales rate, and the inventory of homes for sale is down 6.4% y/y. Sales in the South were higher m/m, and were lower in the Northeast, Midwest and West.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said, "The speed of transactions is very fast and we know that there's an inventory shortage. Buying interest remains very solid and strong but we have a bottleneck. We don't have enough inventory to satisfy that buying interest."

The MBA Mortgage Application Index fell 2.7% last week, following the previous week's 3.1% gain. The decrease came as a 3.3% decline for the Refinance Index was met with a 2.1% decrease for the Purchase Index. The average 30-year mortgage rate was unchanged from the previous week's 4.46%.

Treasuries finished higher, as the yields on the 2-year and 10-year notes, as well as the 30-year bond decreased 2 bps to 1.24%, 2.40% and 3.02%, respectively.

As noted in the recent Schwab Market Perspective: Teflon Market, helping to bolster our belief in a strengthening economy—and our bullish stance—is the increased hawkishness of the Federal Reserve and their decision to hike rates at the March Federal Open Market Committee (FOMC) meeting. Additionally, the Fed signaled willingness to continue to hike rates in the coming months, which would mark the first time we would see more than one hike in a year since the financial crisis. Read the whole perspective at www.schwab.com/marketinsight. Also, for analysis on the Fed and its implications for bond investors, see the video from Schwab's Chief Fixed Income Strategist, Kathy Jones and Vice President of Trading and Derivatives, Randy Frederick titled Three Fed Hikes Seen in 2017: How Should Bond Investors Respond?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Tomorrow's economic calendar will give investors some additional housing data in the form of new home sales, with economists anticipating a 1.8% m/m increase during February to a rate of 565,000 units, while weekly initial jobless claims are also slated for release, forecasted to have ticked lower to a level of 240,000 from the prior week's 241,000.

Europe and Asia lower following sharp U.S. declines

European equities finished mostly lower following the sharp declines in the U.S. yesterday with traders cautiously weighing whether the Trump Administration can deliver on its pro-growth policies. Financials and commodity issues led the laggards, a rally in government bonds continued and base metals tumbled, with iron ore approaching bear market territory. Meanwhile, the European Commission drafted some rules to aid in strengthening national antitrust agencies, saying that competition authorities in the European Union should gain more resources, powers and independence. In the U.K., rising prices may be posing a risk to domestic demand as the Bank of England has predicted a slowdown in retail sales and Britain reported its fastest pace of consumer inflation in over three years yesterday. Schwab's Chief Global investment Strategist Jeffrey Kleintop, CFA, informs us in his recent article, The future of Europe: EU 2.0 and its impact on the markets, that this month marks the 60th anniversary of the Treaty of Rome, from which the 28-nation European Union (EU) and the euro currency traces its origin. Also this month, the United Kingdom is preparing to formally begin its exit from the EU—the only full member to ever do so in those 60 years—among a rising tide of nationalist political movements threatening the survival of Europe’s union in the years ahead. Read the rest of the article at www.schwab.com/oninternational and follow Jeff on Twitter: @jeffreykleintop. The euro and British pound are losing ground versus the U.S. dollar and bond yields in the region are mostly declining.

Stocks in Asia finished sharply lower on the heels of yesterday's declines in the U.S. and as some international investors are beginning to speculate whether President Trump's growth promises will transpire from proposals to policy. Japanese equities dropped markedly, as the yen moved higher for a seventh day, hitting a four-month high versus the U.S. dollar and despite some trade data that showed exports grew more than expected on a y/y basis. Schwab's Director of International Research Michelle Gibley, CFA, discusses in her recent article Fed Rate Hikes May Benefit Japanese Stocks, that from Nov. 7 to Dec. 31, the yen fell nearly 12% against the U.S. dollar. Japanese stocks rose in turn. This has a lot to do with Japanese companies’ heavy reliance on exports. Read the whole article at www.schwab.com/oninternational and follow Schwab on twitter: @schwabresearch.

Mainland Chinese shares and those traded in Hong Kong fell to join the regional selloff, while interbank borrowing rates have climbed across the board in the world's second largest economy which has amounted to non-bank institutions paying a record premium for short-term funds relative to larger Chinese banks according to Bloomberg. For more on the impact of the Fed’s rate-hiking cycle on China, see Schwab’s Jeffrey Kleintop’s latest article, The Fed has China in a Tough Spot, at www.schwab.com/marketinsight. Meanwhile, stocks in Australia fell, led by declines in mining issues, while markets in South Korea and India also lost ground.

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