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Wednesday, April 19, 2017

Markets Mixed, IBM Weighs on Dow

Charles Schwab: On the Market
Posted: 4/19/2017 4:15 PM ET

Markets Mixed, IBM Weighs on Dow

U.S. equities finished mixed, with IBM applying most of the pressure to the Dow following another revenue miss by the tech giant. Furthermore, an uptick in Treasury yields and upbeat results from Morgan Stanley weren't able to lend much support to financials, who tried to battle back from a plunge yesterday. Energy issues faltered amid a drop in crude oil prices, despite a decline in oil inventories that matched estimates. Meanwhile, the U.S. dollar bounced back, and gold was lower, while markets had little reaction to today's release of the Fed's Beige Book report.

The Dow Jones Industrial Average (DJIA) declined 119 points (0.6%) to 20,404, the S&P 500 Index lost 4 points (0.2%) to 2,338, while the Nasdaq Composite increased 14 points (0.2%) to 5,863. In moderate volume, 821 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil fell $2.00 to $50.85 per barrel and wholesale gasoline was $0.05 lower at $1.66 per gallon. Elsewhere, the Bloomberg gold spot price decreased $9.76 to $1,280.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.3% to 99.81.

Morgan Stanley (MS $42) reported 1Q earnings-per-share (EPS) of $1.00, above the $0.89 FactSet estimate, as revenues rose 25.1% year-over-year (y/y) to $9.7 billion, topping the projected $9.3 billion. The company said all its businesses performed well in improved market conditions, while it recognized that the environment remains uncertain. Shares gained solid ground.

International Business Machines Corp. (IBM $162) posted 1Q EPS of $1.85, or $2.38 ex-items, versus the expected $2.35, as revenues declined 3.0% y/y to $18.2 billion, below the forecasted $18.4 billion. This was the 20th consecutive quarterly revenue decline. IBM reaffirmed its full-year earnings outlook. Shares fell.

Lam Research Corp. (LRCX $136) announced fiscal 3Q profits of $3.10 per share, or $2.80 ex-items, compared to the estimated $2.55, with revenues rising 63.9% y/y and 14.0% quarter-over-quarter (q/q) to $2.2 billion, north of the expected $2.1 billion. The semiconductor equipment and services company issued 4Q guidance that exceeded the Street's forecasts. Shares rallied.

Beige Book shows continued growth, mortgage applications decline

In afternoon action, the Federal Reserve released its Beige Book report, a look at business activity across the nation used as a preparation tool for the Fed's next two-day monetary policy meeting set to conclude on May 3rd. Within the report, the Fed noted that all 12 Districts reported modest-to-moderate economic growth, with the uptick evident to varying degrees across all economic sectors. In addition, wages increased modestly, but broadened out, as the labor market remains tight, with a large number of businesses indicating higher turnover rates and difficulties in retaining employees. On the inflation and housing fronts, the report showed that prices climbed only slightly, while a lack of inventory was restraining demand for homes, despite accelerated growth in residential construction.

The MBA Mortgage Application Index declined 1.8% last week, following the previous week's 1.5% increase. The decrease came as a 0.2% gain for the Refinance Index was met with a 3.4% drop for the Purchase Index. The average 30-year mortgage rate declined 6 basis points (bps) to 4.22%.

Treasuries finished lower, as the yield on the 2-year note increased 1 bp to 1.17%, the yield on the 10-year note rose 4 bps to 2.21%, and the 30-year bond rate gained 3 bps to 2.87%.

Bond yields and the U.S. dollar have rebounded somewhat from recent drops that have come courtesy of flared-up geopolitical concerns, along with increased political uncertainty as the U.K. approved a snap election in June. Also, President Donald Trump recently commented that he thought the greenback was getting "too strong," while on the economic front "hard" data has continued to lag the "soft" data (confidence/survey-based), notably some cooler-than-expected inflation figures.

For a look at the data, see our latest article, Data Divide: Are People Too Enthusiastic About the Economy? on the Insights & Ideas page at www.schwab.com, and follow Schwab on Twitter: @schwabresearch.

For a look at the moves in the bond markets, see Schwab's Senior Fixed Income Research Analyst, Collin Martin's, CFA, latest article titled, What Investors Should Know About the High-Yield Bond Rally on the Markets & Economy page at www.schwab.com, along with Collin's and Vice President of Trading and Derivatives, Randy Frederick's video Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low?. Randy and Schwab's Chief Fixed Income Strategist, Kathy Jones also discuss, Three Fed Hikes Seen in 2017: How Should Bond Investors Respond?. See these and other videos on the Insights & Ideas page at www.schwab.com. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Finally, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers a look at investing amid heightened geopolitical tensions in his article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop.

Tomorrow's economic calendar will give investors a mix of data to peruse, including weekly initial jobless claims, with forecasts calling for an increase to a level of 240,000 from the prior week's 234,000, as well as the Index of Leading Economic Indicators (LEI), with economists anticipating a 0.2% m/m increase for March following the 0.6% rise posted in February. Finally, the Philly Fed Manufacturing Index will round out the day, expected to have moved lower during the month to a level of 25.5 from the 32.8 registered in March.

Europe mostly higher as financials rebound, Asia mostly lower as concerns linger

European equities finished the day mostly higher, courtesy of a rebound in financials from yesterday's drop, as Morgan Stanley's upbeat earnings report eased concerns from yesterday's surprise miss by Goldman Sachs Group Inc. (GS $214) in the U.S. Also, shares of Banco Popular SA (BPESY $3) extended yesterday's solid rebound as reports suggesting the Spanish lender divested some non-performing assets appeared to soothe concerns about the company's capital position, while a relative reprieve in the recent drop in bond yields likely offered support. Carmakers also rallied on the heels of a report showing March European auto sales rose to the highest level on record, per Bloomberg. However, oil & gas issues saw some pressure and U.K. markets remained hamstrung by heightened political uncertainty as yesterday the nation's Prime Minister Theresa May surprisingly called for a snap election in June, which received parliamentary approval today. The increased U.K. political uncertainty comes as Brexit negotiations have begun, France is expected hold the first round of its key Presidential election this weekend, and a German election later this year looms. For more on the political front in the region, see Schwab's 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? 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.

Eurozone consumer price inflation rose in line with forecasts and the region's trade surplus widened more than expected. The euro and British pound gave back some of yesterday's gains versus the U.S. dollar and bond yields in the region were mixed but mostly higher.

Stocks in Asia finished mostly lower, with geopolitical concerns aimed at North Korea festering, while political uncertainty ramped up after U.K. Prime Minister May surprised the markets by calling for an election in June. Resource-related issues were lower as crude oil prices slipped yesterday and metals prices have come under recent pressure, though financials were a big drag following yesterday's unexpected earnings miss from Dow member Goldman Sachs and the recent drop in bond yields. As such, stocks in Australia fell, as well as those in South Korea. Chinese equities continued to be hampered by the heightened geopolitical and political uneasiness, along with concerns about stricter regulations, which have overshadowed some recent upbeat economic data in the nation, with listings in both the mainland and Hong Kong declining. For more on China, see Schwab's Michelle Gibley's, CFA, article, 5 Big Risks Posed by China (And Why They Shouldn't Crash Global Markets in 2017) and for analysis of the global landscape, see Jeffrey Kleintop's, CFA, article, Top Five Trade Issues Investors Should Be Watching. Get both these articles on the International Investing page at www.schwab.com. However, equities in India and Japan both ticked modestly higher, rebounding slightly from pullbacks as of late from a record run for the former and as the yen's recent rally weighed on the latter. The yen showed some late-day weakness to likely help Japanese markets.

Tomorrow's international economic calendar will hold trade data from Japan and PPI from Germany.

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