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Wednesday, May 31, 2017

Lackluster Reports Pressure Equities for Second Day

Charles Schwab; On the Market
Posted: 5/31/2017 4:15 PM ET

Lackluster Reports Pressure Equities for Second Day

U.S. equities finished lower for a second session with financials taking the brunt of the losses following some trading revenue warnings from within the sector, while the Fed's Beige Book noted some districts saw some slowing in growth. Crude oil's continued descent pressured the energy sector, and domestic economic data was less-than-stellar. Meanwhile, Treasury yields lost ground and gold was higher, while the U.S. dollar was flat.

The Dow Jones Industrial Average (DJIA) declined 21 points (0.1%) to 21,009, the S&P 500 Index decreased 1 point (0.1%) to 2,412, and the Nasdaq Composite moved 5 points (0.1%) lower to 6,199. In heavy volume, 1.5 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.34 to $48.32 per barrel and wholesale gasoline lost $0.02 to $1.60 per gallon. Elsewhere, the Bloomberg gold spot price increased $5.57 to $1,268.66 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 97.09.

Michael Kors Holdings Ltd. (KORS $33) reported a fiscal Q4 loss of $0.17 per share, or earnings-per-share (EPS) of $0.73 ex-items, versus the $0.70 FactSet estimate, as revenues dropped 11.2% year-over-year (y/y) to $1.1 billion, roughly in line with forecasts. Q4 same-store sales fell 14.1% y/y, compared to the projected 12.8% decrease. The company noted a challenging year as it continued to operate in a difficult retail environment with elevated promotional levels. KORS issued Q1 and full-year guidance that was below the Street's expectations, as it characterized the current year as "a transition year." Separately, the company announced a new $1.0 billion stock repurchase program. Shares were sharply lower.

Bank of America Corp. (BAC $22) and Dow member JPMorgan Chase & Co. (JPM $82) lead the financial sector lower after executives from the two companies at separate conferences in New York City warned that trading revenues in Q2 are lower y/y.

Regional manufacturing growth slows, Fed report shows moderating growth

The Chicago Purchasing Managers Index (chart) slowed but remained at a level depicting expansion (above 50), after declining to 55.2 in May, from 58.3 in March, which was the highest level since January 2015, and versus the Bloomberg expectation of a decrease to 57.0.

Pending home sales fell 1.3% month-over-month (m/m) in April, versus projections of a 0.5% increase, and following the downwardly revised 0.9% decline registered in March. Compared to last year, sales were 5.4% 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 April.

The MBA Mortgage Application Index decreased 3.4% last week, following the previous week's 4.4% gain. The drop came as a 5.6% fall in the Refinance Index was met with a 1.4% decline for the Purchase Index. The average 30-year mortgage rate remained at 4.17%.

The Federal Reserve's Beige Book, 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 June 14th, was released in afternoon action. The report showed that the U.S. economy as a whole continued to grow at a "modest to moderate" pace, but the districts of Boston and Chicago noted slowing growth, while New York "indicated that activity had flattened out." Meanwhile, the report indicated that "labor market conditions continued to tighten, with most districts citing shortages", while prices overall "were little changed from the previous report, with most districts reporting modest increases."

Expectations are elevated that the Fed will raise interest rates following its June meeting, though the frequency of further hikes this year is in question as the Central Bank looks to begin the process of shrinking its bloated balance sheet, a move that Schwab’s Chief Investment Strategist Liz Ann Sonders notes is a form of tightening. Liz Ann discusses this in her latest article, Gimme Three Steps … and a Stumble?, noting that the transition from quantitative easing (QE) to quantitative tightening (QT) begs the question whether we are heading into another period of heightened volatility. She concludes that although stocks tend to fare well during rate hike cycles, the unprecedented nature of this tightening cycle suggests bouts of volatility are likely. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Treasuries finished modesly higher, as the yields on the 2-year and 10-year notes, along with the 30-year bond, dipped by 1 basis point to 1.28%, 2.20% and 2.87%, respectively. For analysis of the bond markets amid the expected Fed interest rate action, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com, as well as Schwab's Chief Fixed Income Strategist, Kathy Jones' article, Three Reasons to Own Bonds When the Fed is Raising Interest Rates on the Fixed Income page at www.schwab.com. Follow Kathy on Twitter: @kathyjones.

Tomorrow's economic calendar will heat up with a plethora of key reports for the markets to digest ahead of Friday's labor report, beginning with ADP's private sector payroll release and weekly initial jobless claims. However, the following releases of the ISM Manufacturing Index and May auto sales figures are likely to garner the most scrutiny. ISM is expected to show manufacturing activity is expected to slow slightly to 54.6 in May from 54.8 April but remain solidly in expansion territory a depicted by a reading above 50. According the FactSet, adjusted auto sales are projected to post another y/y decline, likely preserving concerns about the divergence between hard and soft data.

As noted in the latest Schwab Market Perspective: Unprecedented! Or Maybe Not?, leading indicators continue to show a growing economy, bouncing back from the weak first quarter, while the labor market continues to tighten, and globally, we are seeing improving growth. This should help the bull market continue. Read more on the Markets & Economy page at www.schwab.com. Other reports on tomorrow's calendar include the final Markit Manufacturing PMI Index and construction spending.

Europe and Asia mixed in the face of heightened political uncertainty

European equities finished mixed amid elevated political uncertainty in the region. Recent polls suggested U.K. Prime Minister Theresa May's Conservative Party could lose seats in Parliament and may not win an overall majority in next week's election. This came against the backdrop of the nation's ongoing Brexit negotiations to foster some increased political uncertainty, while elections loom in Italy and Germany later this year. The British pound overcame early losses and was higher versus the U.S. dollar. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick offer the video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. In economic news, the eurozone consumer price inflation estimates for May came in cooler than expected, while the region's unemployment rate unexpectedly dipped to 9.3%. Also, Germany's unemployment change declined by a slightly smaller amount than anticipated and the nation's retail sales surprisingly slipped. The euro was higher versus the greenback and bond yields in the region finished mixed. Healthcare stocks gained solid ground, though the oil & gas sector came under pressure as crude oil prices extended losses. Basic materials were lower despite some relatively upbeat Chinese manufacturing and services data, while financials were hampered by a flare-up in Italian banking concerns and warnings about trading revenues out of the U.S. banking sector.

Stocks in Asia finished mixed amid lingering political uncertainty in the U.S. and Europe, while the markets digested some divergent reads on economic activity in the region. Japanese equities dipped slightly, with the yen choppy after paring gains late in the session, while a report showed the nation's industrial production rebounded solidly in April, but at a pace that was just shy of expectations. Stocks in mainland China advanced, but those traded in Hong Kong declined, as traders grappled with a recent credit rating downgrade of the nation, festering regulatory crackdown concerns, and the aforementioned political uncertainty. Also, the markets digested China's official May business activity reports, which showed growth in manufacturing output held steady, slightly above forecasts, while its expansion in its key services sector accelerated slightly. Meanwhile, markets in Australia and South Korea gained modest ground, while securities in India finished flat ahead of the release of its Q1 GDP report. After the markets closed, India reported that its Q1 GDP growth slowed to a 6.1% y/y pace of expansion, from a 7.0% pace in Q4, and compared to the projected acceleration to a rise of 7.1%.

For a look at the global markets and economy, see Schwab's Jeffrey Kleintop's, CFA, article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the Markets & Economy page at www.schwab.com, as well as his video, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com.

Reports on tomorrow's international economic calendar include: the Markit Manufacturing PMIs from across the globe, CPI from South Korea, and GDP from Italy.

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