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Monday, April 24, 2017

French Election Results Ignite Relief Rally

Charles Schwab: On the Market
Posted: 4/24/2017 4:15 PM ET

French Election Results Ignite Relief Rally

The U.S. equity markets rallied, with financials leading the way, in the wake of yesterday's French Presidential election that appeared to have eased political concerns abroad. Treasury yields moved higher and the U.S. dollar fell after the euro rallied following the election results, while crude oil and gold prices were lower. Equity news was somewhat light, with M&A in focus, headlined by Becton Dickinson's $24 billion agreement to acquire C.R. Bard.

The Dow Jones Industrial Average (DJIA) rallied 216 points (1.1%) to 20,764, the S&P 500 Index increased 25 points (1.1%) to 2,374, and the Nasdaq Composite jumped 73 points (1.2%) to 5,984. In moderately-heavy volume, 906 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.39 lower to $49.23 per barrel and wholesale gasoline lost $0.02 to $1.63 per gallon. Elsewhere, the Bloomberg gold spot price fell $8.65 to $1,275.79 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.9% lower at 99.08.

Becton, Dickinson and Co. (BDX $177) announced an agreement to acquire medical technology company C.R. Bard Inc. (BCR $303) for $317.00 per share in cash and stock, for a total consideration of $24.0 billion. Shares of BCR rallied, though BDX traded to the downside.

Hasbro Inc. (HAS $102) reported 1Q earnings-per-share (EPS) of $0.54, or $0.43 ex-items, compared to the FactSet estimate of $0.38, with revenues rising 2.0% year-over-year (y/y) to $850 million, versus the projected $818 million. HAS traded solidly higher.

Dow member Caterpillar Inc. (CAT $97) gained ground after the mining and construction equipment maker reported the first increase in 3-month rolling retail sales through March since 2012, with the Asia-Pacific region registering sharp gains.

Halliburton Co. (HAL $47) posted a 1Q loss of 0.04 per share, or EPS ex-items of $0.04, versus the expected $0.03, as revenues increased 1.9% y/y to $4.3 billion, roughly in line with forecasts. Shares were lower.

Regional manufacturing report dips to kick off economic calendar

The Dallas Fed Manufacturing Activity Index unexpectedly dipped but remained solidly at a level depicting expansion (a reading above zero). The index declined to 16.8 in April, from 16.9 in March, and compared to the expected improvement to 17.0.

Treasuries finished lower in the wake of the reaction to the French Presidential election, as the yield on the 2-year note rose 5 basis points (bps) to 1.23%, the yield on the 10-year note gained 2 bps to 2.27%, and the 30-year bond rate increased 1 bp to 2.91%. For a look at the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones article, Three Reasons to Own Bonds When the Fed is Raising Interest Rates on the Markets & Economy page at www.schwab.com. Follow Kathy on Twitter: @kathyjones.

Bond yields rebounded and the U.S. dollar dropped as the first round of the key French Presidential election came in as expected, appearing to alleviate some political concerns. Also, the markets remain optimistic regarding progress made on President Trump's tax-reform plans, details of which are expected to be delivered this week. However, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses his latest article, Congress Facing Possible Government Shutdown—Again, on the Insights & Ideas page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch.

Along with ramped-up earnings season, this week's economic calendar will deliver key reads on the economy, beginning with tomorrow's new home sales report, with economists forecasting a 1.4% m/m decline during March to an annual rate of 584,000 units, as well as the S&P/Case-Shiller CoreLogic Home Price Index, expected to show year-over-year increase of 5.8% during February, and a 0.7% m/m rise on a seasonally-adjusted basis. Other reports slated for this week include  durable goods orders, Consumer Confidence and the University of Michigan Consumer Sentiment Index. However, the headlining report will likely be the first look (of three) at 1Q GDP, projected to show growth slowed from a quarter-over-quarter annualized rate of 2.1% in 4Q to 1.1%. The docket will deliver a good mix of "soft" data (confidence/survey-based) and "hard" data, which have diverged to cause some concern in the markets. We note in the latest Schwab Market Perspective: Reassessing Risk and Reflation, that some convergence between the two is expected, and this topic is drilled into by Schwab’s Chief Investment Strategist Liz Ann Sonders in her article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data.

Per the Schwab Market Perspective, investors appear to be shying away from risk, resulting in the recent pullback in stocks. We view this as temporary, although patience will be required and sharper downturns could occur within the ongoing bull market as political and geopolitical uncertainty abounds, while the Fed has begun to address the slow draining of its balance sheet. Global earnings have aided stock market gains, but the expectations bar is getting higher to hurdle. The next several weeks should show whether gains will persist or if expectations may have gone too far. Read both these articles on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Europe rallies, Asia mostly higher following French election results

European equities jumped, with financials leading a broad-based rally as the markets appeared to breathe a sigh of relief after the first round of the key French Presidential election came in as the polls had predicted. The election did not offer any surprising results and post-election polls are suggesting pro-Europe, mainstream candidate Emmanuel Macron is poised to defeat anti-EU Marine Le Pen in the final vote on May 7th. For analysis of the European political front, which still has the final French vote, a U.K. vote and a German election later this year, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, 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? on the Insights & Ideas page at www.schwab.com. Also, check out our article, Brexit Begins: What's Next for the U.K.?, on the Insights & Ideas page at www.schwab.com, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com. The euro jumped and the British pound declined versus the U.S. dollar, while bond yields were mixed. In economic news, German business sentiment improved to the highest level in almost six years for April.

Stocks in Asia finished mostly to the upside as the markets appear to be relieved by the results from the French Presidential election over the weekend that went according to what the polls had suggested to ease some political uncertainty. Japanese equities gained solid ground following a drop in the yen, while markets in Australia, South Korea and India all gained ground. Stocks in Hong Kong also traded higher, but those traded in mainland China fell sharply on festering concerns about regulatory crackdowns. The markets shrugged off lingering geopolitical uncertainty as discussed by Schwab's Jeffrey Kleintop, CFA, in his article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, while he also offers a look at the global landscape in his article, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

Tomorrow, reports slated for release internationally include consumer price inflation data from Japan, consumer sentiment out of South Korea, business sentiment from France, PPI from Spain, and public sector net borrowing from the U.K.

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