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Wednesday, May 10, 2017

Stocks Straddle Unchanged Mark

Charles Schwab: On the Market
Posted: 5/10/2017 4:15 PM ET

Stocks Straddle Unchanged Mark

U.S. stocks were mostly unchanged, though the Dow was decisively lower in earlier action amid some disappointing earnings results from Walt Disney Co. A jump in crude oil prices fueled by a larger-than-expected drop in oil inventories powered gains for energy listings, while investors also digested yesterday's firing of FBI Director James Comey. In economic news, import prices topped forecasts, weekly mortgage applications rose, Treasuries and gold were lower and the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average (DJIA) fell 33 points (0.2%) to 20,943, the S&P 500 Index ticked 3 points (0.1%) higher to 2,400, and the Nasdaq Composite rose 9 points (0.1%) to 6,129. In moderately-heavy volume, 821 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil jumped $1.45 to $47.33 per barrel and wholesale gasoline added $0.05 to $1.54 per gallon. Elsewhere, the Bloomberg gold spot price moved $1.64 lower to $1,219.59 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 99.61.

Dow member Walt Disney Co. (DIS $110) reported fiscal Q2 earnings-per-share (EPS) of $1.50, versus the $1.41 FactSet estimate, as revenues rose 3.0% year-over-year (y/y) to $13.3 billion, below the projected $13.4 billion. Earnings at its parks and resorts and studio entertainment segments rose solidly y/y, but its media networks unit's income decreased, as its cable networks profits declined and revenue missed forecasts, bogged down by higher programing costs and subscriber losses at ESPN. Shares were solidly lower.

Electronic Arts Inc. (EA $108) posted fiscal Q4 EPS of $1.81, compared to the projected $1.63, on adjusted revenues of $1.1 billion, roughly in line with estimates. EA issued full-year earnings guidance that topped expectations and announced a new $1.2 billion stock repurchase program. Shares rallied.

NVIDIA Corp. (NVDA $121) announced Q1 profits of $0.79 per share, or $0.85 ex-items, versus the expected $0.81, as revenues rose 48.0% y/y to $1.9 billion, but down 11.0% sequentially, roughly in line with forecasts. The graphic chipmaker issued Q2 revenue guidance that topped estimates. Shares finished nicely higher.

Priceline Group Inc. (PCLN $1,824) saw pressure after issuing Q2 earnings guidance that came in below forecasts, which accompanied a mixed Q1 profit report that showed bottomline results topped estimates but revenues were a tad shy of expectations.

Import prices rise more than expected, mortgage applications increase

The Import Price Index (chart) rose 0.5% month-over-month (m/m) for April, above the Bloomberg projection of a 0.1% gain, and compared to March's upwardly revised 0.1% increase. Compared to last year, prices were up by 4.1%, north of forecasts calling for a 3.6% rise, and following March's upwardly revised 4.3% increase.

The MBA Mortgage Application Index rose 2.4% last week, following the previous week's 0.1% dip. The increase came as a 3.3% gain for the Refinance Index was met with a 1.7% rise for the Purchase Index. The average 30-year mortgage rate remained at 4.23%.

Treasuries ticked lower, with the yields on the 2-year and 10-year notes increasing 1 basis point to 1.35% and 2.41%, respectively, while the 30-year bond rate was unchanged at 3.03%.

For analysis of the interest rate environment, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com, where you can also find our commentary, Cash: What to Consider in the New Rate Environment. Follow Schwab on Twitter: @schwabresearch.

Also, Schwab's Vice President of Trading and Derivatives, Randy Frederick and Chief Fixed Income Strategist, Kathy Jones offer the video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? on the Insights & Ideas page at www.schwab.com. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Schwab's Chief Investment Strategist Liz Ann Sonders offers a look at the recent subdued market action in her article, Strange Brew: Heightened Uncertainties, Yet Plunging Volatility…What Gives? on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders. Liz Ann notes that volatility has been plumbing historical depths, but it may not be reflecting investor complacency, while the Fed's plans for its balance sheet, more than rate hikes, could bring on spikes in volatility.

Finally, with the political front remaining in focus on the heels of yesterday's ousting of FBI Director James Comey, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses What the Coming Tax Cuts Mean for the Stock Market on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. Moreover, see the video from Schwab's Randy Frederick and Vice President of Legislative and Regulatory Affairs, Michael T. Townsend titled, Washington Overview: Budget Deals, Tax Reform, and Trump's 100-Day Mark, on the Insights & Ideas page at www.schwab.com.

Tomorrow, the U.S. economic calendar will include the Producer Price Index (PPI) for April, expected to have increased 0.2% m/m after declining 0.1% in March, while excluding food and energy, the core rate is anticipated to have also increased by 0.2%. The docket will also deliver weekly initial jobless claims, forecasted to have increased to a level of 245,000 after registering 238,000 the week prior.

Europe and Asia mixed

European equities finished mixed, with oil & gas issues rebounding from recent weakness as crude oil prices recover, boosted by a much larger-than-expected drop in crude oil inventories reported in the U.S. Global political uncertainty, exacerbated by the firing of FBI Director Comey yesterday in the U.S., continued to fester, as the U.K. negotiates a Brexit ahead of a June election, while votes loom for Germany and Italy later this year. For analysis of the political uncertainty see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's 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?. French industrial and manufacturing production easily topped expectations for March, while the Bank of England is expected to deliver its monetary policy decision tomorrow. European Central Bank President Mario Draghi sounded a familiar upbeat economic tone in a speech today as he did last week when the central bank left its policy stance unchanged, while also noting that it is not the right time to discuss tapering its stimulus measures. The euro and British pound were little changed versus the U.S. dollar, while bond yields in the region came under pressure.

Stocks in Asia finished mixed as Chinese stocks diverged amid lingering economic concerns on the heels of softer-than-expected data and festering uneasiness regarding regulatory crackdowns, while global political uncertainty continued to constrain conviction. Shares trading in mainland China fell and those in Hong Kong rose in the wake of mixed reads on the nation's consumer and producer price inflation, with the former topping forecasts and the latter missing estimates for April. Japanese equities gained ground with the recent weakness in the yen helping the index add to gains as of late. Australian securities advanced amid the recovery in basic materials issues and as the financial sector rebounded despite recent mixed banking sector earnings results. Indian stocks rallied, bolstered by optimism following a forecast calling for a strong monsoon rainfall season. South Korean equities fell, returning to action following yesterday's break as the nation voted in Democratic Party of Korea Moon as its new President. For analysis of the global front amid the backdrop of trade and geopolitical uncertainty, see Schwab's Jeffrey Kleintop's, CFA, articles, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, as well as, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

In addition to the aforementioned decision from the Bank of England, the international economic docket for tomorrow will yield the current account, trade balance, bank lending and office vacancies from Japan, the unemployment rate from South Korea, the Wholesale Price Index from Germany and industrial production, manufacturing production, construction output and the trade balance from the U.K.

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