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Tuesday, April 04, 2017

Caution Still Hampering Markets

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

Caution Still Hampering Markets

The U.S. equity markets finished with only slight gains in choppy trading, with industrials doing the heavy-lifting for the Dow following comments from President Trump on infrastructure overhaul. Meanwhile, a rebound in crude oil prices gave energy issues a boost, but caution and renewed trade anxiety ahead of the US/China talks later this week kept sentiment in check, while late-day news of Fed member Jeffrey Lacker's immediate departure after disclosing improper disclosure of confidential information had little effect. Treasury yields and gold gained modest ground, while the U.S. dollar was little changed.

The Dow Jones Industrial Average (DJIA) rose 39 points (0.2%) to 20,689, the S&P 500 Index inched 1 point (0.1%) higher to 2,360, and the Nasdaq Composite added 4 points (0.1%) to 5,899. In moderate volume, 801 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.79 to $51.03 per barrel and wholesale gasoline gained $0.03 to $1.72 per gallon. Elsewhere, the Bloomberg gold spot price increased $2.65 to $1,256.15 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 100.55.

Urban Outfitters Inc. (URBN $22) reported that thus far during the first quarter, same-store retail segment net sales are mid-single-digit negative, wider than the FactSet estimate of a 1.2% decline. Shares were solidly lower. 

Shares of Staples Inc. (SPLS $10) jumped following a report from the Wall Street Journal that the company is exploring a possible sale and is in early talks with buyout firms. SPLS did not commented on the report.

Acuity Brands Inc. (AYI $174) reported fiscal 2Q earnings-per-share (EPS) of $1.53, or $1.77 ex-items, compared to the FactSet estimate of $1.83, as revenues rose 3.5% year-over-year (y/y) to $805 million, below the projected $828 million. The company noted that the growth rate of lighting solutions in the North American market in the first half of its fiscal year was lower than anticipated. Shares finished solidly lower.

Factory orders match forecasts, trade deficit narrows more than expected

Factory orders (chart) rose 1.0% month-over-month (m/m) in February, matching the Bloomberg expectation, while January's figure was upwardly revised to a 1.5% gain. February durable goods orders—preliminarily reported two weeks ago—were adjusted slightly higher to a 1.8% increase, from the preliminary reading of a 1.7% gain, and versus expectations of no revision. Orders of nondefense capital goods excluding aircraft—a proxy for business spending—were unrevised at a 0.1% dip.

The trade balance (chart) showed that the deficit came in at $43.6 billion in February, compared to the Bloomberg estimate of $44.6 billion. January's deficit was revised lower to $48.2 billion. Exports ticked 0.2% higher m/m to $192.8 billion, while imports fell 1.8% to $236.4 billion.

Treasuries were lower, as the yield on the 2-year note rose 2 basis points (bps) to 1.25%, the yield on the 10-year note gained 3 bps to 2.35%, and the 30-year bond rate advanced 4 bps to 2.99%.

Bond yields and the U.S. dollar have been diverging, with the former dropping to pressure financials, which have led the last two sessions of losses for the stock markets, while the latter has rebounded from a multi-month low set in late-March. The markets continue to grapple with upbeat economic data, exacerbated political uncertainty here and abroad, and the Fed's March rate hike and outlook for future increases. Amid this backdrop, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Financials—Opportunity or End of the Run?, at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch. Also, check out our videos 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' discussion, 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.

This sets the stage for tomorrow's economic calendar, which will bring MBA mortgage applications and ADP's employment change report, projected to show job growth of 190,000 for March ahead of Friday's key nonfarm payroll report. However, data that will likely garner the most attention is two key reads on March services sector activity in the form of the ISM non-Manufacturing Index and Markit's Services PMI Index. ISM's report is expected to show a slight deceleration to 57.0 from February's 57.6 level and Markit's index is projected to show a revised figure of 53.1 from 52.9, and down from the prior month's 53.8 level. Readings above 50 for both indexes denote expansion. Moreover, the minutes from the Fed's March monetary policy meeting are poised to foster a reaction given the uncertainty and recent moves in the stock, bond and currency markets.

As noted in the latest Schwab Market Perspective: Working off the Froth, the modest downward pressure on stocks recently appears to be working off some overly optimistic sentiment. We view this as a healthy pause in an ongoing bull market. Investors are facing the realization that "soft" data—such as confidence readings and business surveys—doesn't necessarily translate immediately into "hard" data—like retail sales, capital expenditures, and industrial production. It's this hard data that translates into economic growth and increasing profitability. Looking at some of the parabolic moves in recent confidence surveys, it would be difficult for hard data to keep up. Historically, wide spreads between soft and hard data tend to narrow in both directions—soft data tends to retreat, but hard data tends to play some catchup. We expect that pattern in this cycle, too. Read more about this in Schwab’s Chief Investment Strategist Liz Ann Sonders' latest article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data, as well as the rest of our perspective at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

Europe shows resiliency supported by energy, Asia lower in light action

European equities finished mostly higher, showing some late-session resiliency as financials paused from some recent weakness, while oil & gas led to the upside as crude oil prices rebounded. Stocks appeared to shrug off continued festering political uncertainty on both sides of the pond , with the U.S. and China set to meet later this week and skepticism lingering regarding U.S. President Trump's business-friendly agenda. Also, Brexit negotiations remained in focus and France heads toward a key Presidential election later this month. For analysis of the European political front, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop. Also, Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. A stronger-than-expected read on eurozone retail sales may have had a limited positive impact on the markets, along with weakness in the euro and British pound versus the U.S. dollar. Bond yields in the region finished mostly lower.

Stocks in Asia finished lower amid heightened political uncertainty in the U.S. and Europe being met with a flare-up in concerns toward North Korea and the looming meeting between the U.S. and China later this week. For commentary on global trade and China, check out Schwab's Jeffrey Kleintop's, CFA, articles, Top Five Trade Issues Investors Should Be Watching, and The Fed has China in a Tough Spot . Also, the yen showed some strength, U.S. auto sales figures came in softer than expected yesterday, and the Reserve Bank of Australia (RBA) held its monetary policy stance unchanged but appeared to be slightly more dovish, noting concerns about the labor market. Volume was lighter than usual with markets in China and India closed for holidays. Stocks in Japan fell, pressured by the yen's strength, while financials contributed to a decline for Australia's markets. South Korean equities also traded to the downside. Emerging markets have enjoyed strong returns in 2017, led by Indian stocks, which have rebounded sharply after a brief post U.S. election slide. For more on emerging markets read Schwab's Michelle Gibley's, CFA, article, Emerging Markets: Why They Deserve a Place in Your Portfolio. Read all these commentaries at www.schwab.com/oninternational.

Service sector PMI reads will dominate tomorrow's international economic calendar, while the Reserve Bank of India will meet to discuss monetary policy, with economists expecting no change to its stance.

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