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Friday, June 09, 2017

Stocks Mixed After Tech Troubles

Charles Schwab: On the Market
Posted: 6/9/2017 4:15 PM ET

Stocks Mixed After Tech Troubles

U.S. equities finished a volatile session mixed as strength in financial and energy issues was countered by a tumble in technology stocks, which led the Nasdaq sharply lower on heavy volume. The U.S. dollar gained ground, gold was lower and crude oil prices were slightly to the upside. Treasuries continued a recent move lower, while a light domestic docket showed that wholesale inventories declined more than expected.

The Dow Jones Industrial Average (DJIA) increased 89 points (0.4%) to 21,272, the S&P 500 Index lost 2 points (0.1%) to 2,432, and the Nasdaq Composite tumbled 114 points (1.8%) to 6,208. In heavy volume, 984 million shares were traded on the NYSE and 3.1 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.19 to $45.83 per barrel and wholesale gasoline was $0.01 higher at $1.50 per gallon. Elsewhere, the Bloomberg gold spot price decreased $7.10 to $1,272.90 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 97.28. Markets were mixed for the week, as the DJIA advanced 0.3%, the S&P 500 Index declined 0.3%, and the Nasdaq Composite fell 1.6%.

VeriFone Systems Inc. (PAY $18) reported a fiscal Q2 loss of $0.80 per share, or earnings-per-share (EPS) of $0.30 ex-items, versus the FactSet estimate of a $0.29 per share profit, as revenues declined 10.0% year-over-year (y/y) to $474 million, above the projected $472 million. The payments and commerce solutions company issued Q3 guidance that missed expectations, while lowering its full-year outlook. Separately, PAY announced that it is divesting three non-strategic businesses to reallocate resources and capital to its core payments and commerce platform. Shares traded solidly lower.

The technology sector gave back some of a decisive rally that led to a plethora of record highs for the stock markets, and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses in his latest Schwab Sector Views: Technology—Too Far or Room to Run?, on the Markets & Economy page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch.

DuPont Fabros Technology Inc. (DFT $61) and Digital Realty Trust Inc. (DLR $113) announced an all-stock merger agreement with a total enterprise value of $7.6 billion. Under the terms of the deal, DuPont Fabros shareholders will receive a fixed exchange ratio of 0.545 Digital Realty shares for each share they own. DFT rallied, while DLR declined.

Pandora Media Inc. (P $9) finished higher after announcing Sirius XM Holdings Inc. (SIRI $5) made a $480 million investment in the company and an agreement to sell its Ticketfly business to Eventbrite for $200 million.

Rite Aid Corp. (RAD $3) fell sharply amid a report from Capitol Forum saying Federal Trade Commission (FTC) staff are preparing a recommendation to sue to block the takeover of the company by Walgreens Boots Alliance Inc. (WBA $81). Neither entity mentioned commented on the story.

Wholesale inventories revised lower

Wholesale inventories (chart) were revised down to a 0.5% month-over-month (m/m) decline for April, versus the Bloomberg forecast of an unrevised preliminary 0.3% decrease, and following March's unrevised 0.1% rise. Sales were 0.4% lower m/m, after March's negatively revised 0.2% decline. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at March's 1.28 months level.

Treasuries finished lower with the yields on the 2-year and 10-year notes rising 2 basis points (bps) to 1.34% and 2.21%, respectively, while the 30-year bond rate gained 1 bp to 2.86%.  

Treasury yields continued a rebound from recent pressure that came amid heightened domestic and European political uncertainty, mixed economic data, and the Fed's highly expected rate hike next week and the likelihood that the Fed could begin the process of shrinking its large balance sheet later this year. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the Fed's potential changes to its bloated balance sheet and the impact on the bond markets in her article, Will the Fed Reduce Its Balance Sheet? What Bond Investors Should Knowon the Fixed Income page at www.schwab.com. Follow Kathy on Twitter: @kathyjones. Also, Chief Investment Strategist Liz Ann Sonders addresses the recent mixed economic data in her latest article, Turn Down For What: Why is Job Growth Slowing?, in which she discusses last Friday’s weak jobs report that raised alarm bells about slowing job growth, but notes that perhaps it's natural at this stage in the cycle. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

The stock markets revisited record high territory alongside the pressure on bond yields, and we discuss this in our article, Stocks and Bonds Rally: Can Both Be Right?. The two major asset classes appear to be pitted against one another in a tug-of-war over where the economy is headed. Many investors can't reconcile the diverging market action with a common view of the economy, and the situation could raise concerns about the fallout from a potentially messy divorce. Read more on the Insights & Ideas page at www.schwab.com.

Europe gains as markets react to U.K. election, Asia also ticks higher

European equities finished higher, with the markets digesting yesterday's U.K. election results that showed Prime Minister Theresa May's Party lost a majority, resulting in a hung parliament. The British pound dropped sharply versus the U.S. dollar, providing some support to U.K. stocks, as the outcome fostered Brexit uncertainty regarding the timing of negotiations and whether it will result in a hard of softer exit terms. 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?. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. In economic news, German exports rose more than expected, while industrial and manufacturing production out of France and the U.K. came in softer than expected. Also, the U.K. trade deficit narrowed more than expected. The euro modestly extended yesterday's decline versus the greenback that stemmed from the European Central Bank's monetary policy decision that showed the central bank upgraded its economic outlook but lowered its inflation forecast. Bond yields in the region traded mixed.

Stocks in Asia finished mostly to the upside, with the global markets taking yesterday's vote that led to a hung parliament in the U.K., the ECB's changed language and outlook, and fired FBI Director Comey's testimony in the U.S. in stride. Japanese equities gained ground, with the yen giving back some recent gains, while South Korean shares also advanced. Mainland Chinese stocks rose, but those traded in Hong Kong dipped on the heels of a report that showed consumer price inflation rose in line with forecasts, while wholesale price increases slowed more than expected for May. Australian securities finished flat and Indian equities moved higher. For a look at the global economic front, see Jeffrey Kleintop's video, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com

Stocks mixed as technology sees late-week stumble

Stocks finished mixed, with a late-week pullback in technology issues from a decisive rally as of late weighing on the markets. Stocks showed little reaction to some highly-anticipated events such as the relatively surprising U.K. election, the European Central Bank's mixed outlook and apparent dovish tone by President Mario Draghi and former FBI Director Comey's testimony on Capitol Hill. Financials led the charge, with Treasury yields and the U.S. dollar rebounding from a recent drop. Energy stocks also showed some resiliency, gaining ground despite pressure on crude oil prices that has persisted since last month's disappointing extension of OPEC production cuts, exacerbated by this week's unexpected jump in U.S. oil inventories. Economic data was relatively light, though the ISM non-Manufacturing Index showed growth continued for the all-important services sector and the JOLTS Job Openings report hit a record high.

The markets are looking to next week's fully-loaded economic calendar, highlighted by the Consumer and Producer Price Indexes (CPI & PPI), NFIB Small Business Optimism, retail sales, industrial production and capacity utilization, the NAHB Housing Market Index, housing starts and building permits, and the preliminary University of Michigan Consumer Sentiment Index. However, the headlining event will likely be the Federal Open Market Committee's (FOMC) monetary policy decision. A 25 bp hike to the target fed funds rate is highly expected, but the accompanying statement, updated economic projections and subsequent press conference by Chairwoman Janet Yellen are poised to garner heavy attention.

As noted in the latest Schwab Market Perspective: Goldilocks…or the Three Bears?, we believe the market will likely largely look past the expected FOMC rate hike, and focus more on any information with regard to the Fed’s balance sheet. It is now expected that the Fed will begin the process of slowly reducing its bloated balance sheet by the end of this year, but that process (and commentary surrounding it) could be a source of elevated volatility in the months to come. Read more on the Markets & Economy page at www.schwab.com, including our continued belief that the bull market has legs, but why investors should be aware that risks are elevated.

International reports due out next week that deserve a mention include: Australia—consumer confidence and employment change. China—lending statistics, retail sales and industrial production. India—CPI, industrial production and trade balance. Japan—Bank of Japan monetary policy decision, machine orders and industrial production. Eurozone—industrial production, Q1 employment, trade balance and CPI, along with German investor confidence. U.K.—Bank of England monetary policy decision, CPI, retail sales and employment change.

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