Charles Schwab: On the MarketPosted: 6/5/2017 4:15 PM ET
Choppy Action to Start Week
U.S. equities finished the first trading day of the week by posting only modest losses, as a plethora of political and geopolitical uncertainty appeared to keep investors in wait-and-see mode, including the upcoming election in the U.K. and European Central Bank monetary policy decision. Treasury yields and the U.S. dollar were slightly higher, along with gold, while crude oil prices were lower. Reports that U.S. services sector activity slowed but continued to show growth also may have also contributed to keeping investors on the sidelines.
The Dow Jones Industrial Average (DJIA) declined 21 points (0.1%) to 21,184, the S&P 500 Index decreased 3 points (0.1%) to 2,436, and the Nasdaq Composite lost 10 points (0.2%) to 6,296. In moderate volume, 699 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.26 to $47.40 per barrel and wholesale gasoline was $0.04 lower at $1.54 per gallon. Elsewhere, the Bloomberg gold spot price added $0.64 to $1,279.81 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 96.81.
D.R. Horton Inc. (DHI $33) announced that it has submitted a proposal to acquire 75.0% of the currently outstanding shares of Forestar Group Inc. (FOR $16) for $16.25 per share in cash. DHI said the proposal provides superior value to the existing merger agreement between Forestar and affiliates of Starwood Capital Group. DHI was lower, while FOR was up sharply.
Herbalife Ltd. (HLF $69) issued Q2 and full-year earnings-per-share (EPS) guidance that came in below estimates, despite raising its outlook for these periods, while lowering its sales outlook for the current quarter as it transitions to new Federal Trade Commission (FTC) rules. Shares were noticeably lower.
The markets payed close attention to the American Society of Clinical Oncology meeting, and Loxo Oncology Inc. (LOXO $70) surged after the company announced upbeat results from a clinical trial of its cancer treatment. However, Bristol-Myers Squibb Co. (BMY $52) came under pressure amid mixed results from the company's treatment for various types of cancer.
Growth in services sector activity slows slightly, factory orders dip
The May Institute for Supply Management (ISM) non-Manufacturing Index (chart) declined to 56.9 from April's unrevised 57.5 level, and compared to the Bloomberg forecast of a decline to 57.0. A reading above 50 denotes expansion. New orders and business activity slowed month-over-month (m/m) but remained solidly in expansion territory, while employment jumped 6.4 points to 57.8. Prices fell 8.4 points to 49.2. The ISM said comments from respondents continue to indicate optimism about business conditions and the overall economy.
The final Markit U.S. Services PMI Index was revised to 53.6 in May from the preliminary 54.0 level, where it was expected to remain, but was up compared to the 53.1 figure posted in April. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.
Services sector activity, which accounts for a majority of U.S. economic growth, continues to suggest expansion despite the festering political and monetary policy uncertainty. As noted in the latest Schwab Market Perspective: Unprecedented! Or Maybe Not?, both political uncertainty and Fed policy changes could contribute to increased volatility, but solid economic and earnings growth—both in the United States and globally—should help the bull market to continue. We suggest looking past the political rhetoric for the most part and focusing on economic developments and the long-term stability the United States provides. Read more on the Markets & Economy page at www.schwab.com.
Factory orders (chart) declined 0.2% m/m in April, in line with expectations, while March's figure was upwardly revised to a 1.0% increase. April durable goods orders—preliminarily reported two weeks ago—were adjusted to a 0.8% decrease from the preliminarily-reported 0.7% decline.
Final Q1 nonfarm productivity (chart) came in flat on an annualized basis, versus expectations of a 0.2% decline. Also, unit labor costs rose 2.2%, versus the forecast calling for a 2.6% gain.
Treasuries finished lower, as the yield on the 2-year note ticked 1 basis point (bp) higher to 1.30%, the 10-year note was up 2 bps to 2.18%, and the 30-year bond rate increased 3 basis points to 2.83%.
Today's data comes ahead of next week's Fed monetary policy decision, which is highly expected to deliver a Fed rate hike, while the potential beginning of the process of the Fed shrinking its bloated balance sheet later this year is also being eyed. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses in her article, Will the Fed Reduce Its Balance Sheet? What Bond Investors Should Know on the Fixed Income page at www.schwab.com. Follow Kathy on Twitter: @kathyjones. Also, Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Gimme Three Steps … and a Stumble?, that reducing the gargantuan balance sheet is a form of tightening and the transition from quantitative easing (QE) to quantitative tightening (QT) begs the question whether we are heading into another period of heightened volatility. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.
Tomorrow's economic calendar will be light, with the only report of note being the Labor Department's Job Openings and Labor Turnover Survey (JOLTS), with economists forecasting that the measure of unmet demand for labor showed 5.73 million jobs were available to be filled during April, down slightly from the 5.74 million posted the month prior.
Europe, Asia lower on U.S. data and political and geopolitical uncertainty
European equities finished lower, though volume was lighter than usual as several markets were closed for holidays, including in Germany and Switzerland. The global markets continued to grapple with lingering geopolitical uncertainty in the wake of the weekend's deadly attack in London, while the political front also garnered attention ahead of this week's U.K. election as Brexit negotiations continue and votes loom in Italy and Germany later this year. Recent polls have showed the U.K. race tightening, causing some of the uncertainty to flare-up. For commentary on the political front check out Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, 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?., as well as another of Jeff's videos, What's the Current State of the Global Economy? The markets also await this week's monetary policy meeting by the European Central Bank. In economic news, U.K. auto sales and services sector output both disappointed the markets. The euro was lower and the British pound was higher versus the U.S. dollar, while bond yields in the region were mixed.
Stocks in Asia finished mostly lower as the markets digest Friday's softer-than-expected employment report in the U.S., which weighed on the U.S. dollar, while political and geopolitical uncertainty lingered. The U.K. is set for an election this week, on the heels of this weekend's deadly attack in London, while several Middle East countries cut ties with Qatar, citing terrorism-related issues. 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.
Japanese stocks finished flat, as the yen pared Friday's gain on the U.S. labor report, though financials weighed on markets in Australia ahead of today's Reserve Bank of Australia monetary policy decision. Mainland Chinese equities and those in Hong Kong declined, despite a relatively favorable read on the nation's key services sector output. Meanwhile, Indian securities ticked higher, continuing its record high run, while listings in South Korea dipped slightly.
Economic reports slated for release internationally tomorrow include retail sales from the U.K. and the Eurozone, as well as the Markit Services PMIs from across Europe.