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Wednesday, March 29, 2017

Stocks Diverge as Financials Lag

Charles Schwab: On the Market
Posted: 3/29/2017 4:15 PM ET

Stocks Diverge as Financials Lag

U.S. stocks finished the regular trading session mixed as crude oil extended a rebound and as the U.K. formally began the process to exit the European Union. Financial shares lagged with Treasury yields remaining under pressure despite some hawkish Fed commentary. In equity news, Vertex Pharmaceuticals announced positive results from two studies of its experimental treatment for cystic fibrosis. Gold and the U.S. dollar ticked higher.

The Dow Jones Industrial Average (DJIA) declined 42 points (0.2%) to 20,659, the S&P 500 Index increased 3 points (0.1%) to 2,361, and the Nasdaq Composite was 22 points (0.4%) higher at 5,898. In moderate volume, 728 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.14 higher to $49.51 per barrel and wholesale gasoline gained $0.03 to $1.67 per gallon. Elsewhere, the Bloomberg gold spot price ticked $0.63 higher to $1,252.45 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—advanced 0.2% to 99.93.

RH (RH $44), also known as Restoration Hardware, was solidly higher after issuing 1Q and full-year 2017 revenue guidance that topped the Street's expectations, while its full-year earnings-per-share (EPS) outlook also had a midpoint that exceeded estimates. The company noted that while it expects revenue growth to accelerate, operating margins to expand, and to generate significant free cash flow in fiscal 2017, "we are taking a cautiously optimistic approach to our outlook given the uncertain macro environment in addition to the many initiatives and investments we are undertaking." The upbeat guidance accompanied its 4Q earnings report that it pre-announced last month.

Vertex Pharmaceuticals Inc. (VRTX $108) is charging higher after the company announced positive results from two final-stage studies of its experimental treatment for cystic fibrosis. The company said it will apply for U.S. regulatory approval in the third quarter.

Dave & Buster's Entertainment Inc. (PLAY $60) saw solid pressure after the company reported a 3.2% year-over-year (y/y) gain in 4Q same-store sales, missing the FactSet estimate of a 3.7% increase. The Company did top the Street's EPS expectations and matched revenue forecasts.

Mortgage applications dip

The MBA Mortgage Application Index declined 0.8% last week, following the previous week's 2.7% drop. The decrease came as a 2.9% fall in the Refinance Index more than offset a 1.2% gain for the Purchase Index. The average 30-year mortgage rate fell 13 basis points (bps) to 4.33%.

Pending home sales jumped 5.5% month-over-month (m/m) in February, versus the Bloomberg projection of a 2.5% gain, and following the unrevised 2.8% drop registered in January. Compared to last year, sales were 2.4% lower. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which fell more than expected in February from the fastest pace since 2007.

Treasuries were higher, with the yield on the 2-year note declining 3 bps to 1.27% and the yields on the 10-year note and the 30-year bond decreasing 4 bps to 2.38% and 2.99%, respectively.

Treasury yields continued to pullback, though the U.S. dollar recovered slightly from its recent slide. The markets are grappling with calmed concerns about a faster-than-expected pace of Fed rate hikes this year and flared-up political uncertainty in the wake of last week's failed U.S. healthcare reform bill, which has contributed to the pullback in the stock markets.

For analysis of the Fed's actions on the bond markets, see the video by Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, titled, Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low?, and Randy's and Schwab's Chief Fixed Income Strategist, Kathy Jones' video, Three Fed Hikes Seen in 2017: How Should Bond Investors Respond, at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

However, economic data has been solid, and Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data, after a "typical" weak first quarter, economic growth should accelerate and based on history, soft data is likely to retreat, while hard data is likely to accelerate. Read more at www.schwab.com/marketinsight, and follow Liz Ann on Twitter: @lizannsonders.

Amid this backdrop, see our commentary titled, Stay Disciplined: Resilient Bull Market Is No Cause for Complacency, at www.schwab.com/insights, and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar  will deliver the third and final read for 4Q GDP, with economists expecting the headline figure to be revised higher to a 2.0% quarter-over-quarter annualized rate of expansion from the 1.9% posted in the second report, but down from the 3Q final read of 3.5%. Also, weekly initial jobless claims will be reported and are expected to have decreased by 14,000 to a level of 247,000.

Europe shows some resiliency, Asia mixed

European equities finished mostly higher, with oil & gas issues leading the way as crude oil prices added to yesterday's recovery, bolstered by some bullish U.S. oil inventory data. Most markets shrugged off the expected triggering of article 50 by the U.K. to begin formal negotiations to leave the European Union (EU), known as Brexit. The British pound saw some pressure to help U.K. stocks, but was well off the worst levels of the day. The beginning of the Brexit clock, which could take multiple years to complete the exit process, comes as a key French Presidential election looms and the Scottish First Minister Sturgeon is proposing a new independence referendum that has been rejected by the British government. For analysis of the European political front, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights, and Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. Follow Jeff on Twitter: @jeffreykleintop. The euro lost ground on the U.S. dollar and bond yields in the region finished lower.

Stocks in Asia finished mixed, with global political uncertainty continuing to hamstring conviction, though sentiment found some support after yesterday's rebound in U.S. stocks that snapped a string of losses. The advance in the U.S. came courtesy of an unexpected jump in Consumer Confidence and comments out of Washington that suggested last week's failed healthcare reform efforts will likely not derail President Donald Trump's plans for tax reform and infrastructure spending. Japanese equities ticked higher, with the yen retreating after a recent rally but gains were likely limited by a softer-than-expected read on the nation's retail sales for last month. Crude oil's rebound that led a recovery in the commodity sector helped lift Australian securities. Stocks trading in South Korea, India and Hong Kong rose, while mainland Chinese shares declined with the property sector seeing some pressure as some local governments rolled out more measures to cool the real estate sector, per Bloomberg. Markets in Asia also continued to grapple with the March Fed rate hike and outlook for future increases this year, as discussed by Schwab's Michelle Gibley, CFA, in her recent article, Fed Rate Hikes May Benefit Japanese Stocks, and Jeffrey Kleintop, CFA, in his commentary, The Fed has China in a Tough Spot at www.schwab.com/oninternational.

Tomorrow's international economic docket will be relatively light, offering new home sales from Australia, CPI from Germany and consumer confidence from the Eurozone.

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