Charles Schwab: On the MarketPosted: 6/29/2017 4:15 PM ET
Stocks Off Lows, But Still Down on Close
U.S. stocks came off the lows of the day, but still saw significant declines as yesterday's upbeat stress-test results that fueled gains for some big banks were overshadowed by another steep sell-off for the Nasdaq with tech listings nearly doubling the decline of most other depressed sectors. Treasury yields were higher following some mostly lackluster economic data, while gold and the U.S. dollar were lower and crude oil prices were mixed. In equity M&A news, Rite Aid and Walgreens terminated their previously announced merger agreement and Staples inked a deal to be acquired by private equity firm Sycamore Partners.
The Dow Jones Industrial Average (DJIA) fell 168 points (0.8%) to 21,287, the S&P 500 Index dropped 21 points (0.9%) to 2,420, and the Nasdaq Composite plummeted 90 points (1.4%) to 6,144. In moderately-heavy volume, 946 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.19 to $44.93 per barrel and wholesale gasoline was $0.01 higher at $1.48 per gallon. Elsewhere, the Bloomberg gold spot price decreased $4.82 to $1,244.45 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 95.55.
Financials extended a recent run on the heels of late-yesterday's release of the banking stress test results by the Federal Reserve, which showed that it did not object to the capital plans of all 34 bank holding companies participating in the review. However, the Fed said it is requiring one firm, Capital One Financial Corp. (COF $81), to address weakness in its capital planning process and resubmit its capital plan by the end of 2017. COF traded lower.
The approval of capital plans opened the door to a plethora of share buybacks and increased dividend plans in the sector, headlined by Dow member JPMorgan Chase & Co. (JPM $91), which announced plans to increase its quarterly dividend by 12% to $0.56 per share and repurchase up to $19.4 billion of its stock. Citigroup Inc's (C $67) plan was also a standout as it intends to increase its quarterly dividend by 100% to $0.32 per share and common stock repurchases of up to $15.6 billion. Morgan Stanley (MS $45) said it plans to raise its dividend by 25% to $0.25 per share and buyback up to $5.0 billion in stock, while Bank of America Corp. (BAC $24) announced intentions to raise its dividend by 60% to $0.12 per share and repurchase up to $12.0 billion in its stock. All four of these companies gained ground.
The results and subsequent capital actions add credence to Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, outperform rating on the financial sector that has been in place for some time as discussed in his latest Schwab Sector Views: From the Top Down on the Markets & Economy page at www.schwab.com.
Rite Aid Corp. (RAD $3) and Walgreens Boots Alliance Inc. (WBA $78) announced that they have terminated their merger agreement, replacing it with a new agreement in which WBA will purchase 2,186 RAD stores, including three distribution centers and related inventory for about $5.2 billion in cash. RAD will receive a $325 million merger termination fee and the new agreement also replaces RAD's deal to divest certain stores to Fred's Inc. (FRED $10), which fell sharply on the news. RAD tumbled over 25% as the news also accompanied its quarterly earnings report that missed expectations. WBA was nicely higher as it posted quarterly results that topped forecasts, while it also raised its guidance and announced a $5.0 billion share repurchase program.
Dow member Cisco Systems Inc. (CSCO $31) lowered its long-term revenue growth target following its analyst day as it shifts to software and recurring revenue models. CSCO traded lower. The tech sector remained in focus due to the recent flare-up in volatility amid valuation concerns as discussed in our article, Tech's Rough Ride: Is There More Turmoil Ahead? on the Insights & Ideas page at www.schwab.com and Schwab's Chief Investment Strategist Liz Ann Sonders' latest commentary, The Space Between … Tech Today Doesn't Resemble Tech Circa 2000, on the Markets & Economy page at www.schwab.com. Be sure to follow us and Liz Ann on Twitter: @schwabresearch and @lizannsonders.
Staples Inc. (SPLS $10) announced an agreement to be acquired by private equity firm Sycamore Partners for $10.25 per share in cash, valuing the company at about $6.9 billion. SPLS gained ground.
Constellation Brands Inc. (STZ $194) reported fiscal Q1 earnings-per-share (EPS) of $2.00, or $2.34 ex-items, compared to the FactSet estimate of $1.98, as revenues rose 3.4% year-over-year (y/y) to $1.9 billion, roughly in line with projections. The beer, wine and spirits maker raised its full-year EPS outlook and shares rallied.
Jobless claims unexpectedly tick higher, final read on Q1 GDP surprisingly revised up
Weekly initial jobless claims (chart) rose by 2,000 to 244,000 last week, above the Bloomberg forecast of 240,000, with the prior week’s figure being upwardly revised by 1,000 to 242,000. The four-week moving average declined by 2,750 to 242,250, while continuing claims increased by 6,000 to 1,948,000, north of estimates of 1,935,000.
The final look (of three) at Q1 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 1.4%, adjusted up from the 1.2% expansion posted in the second and first reports, where it was expected to remain. Q4 GDP expanded by an unrevised 2.1% rate. Personal consumption came in at a 1.1% gain for Q1, above the preliminary estimate of a 0.6% increase, where it was expected to remain. Personal consumption grew by an unrevised 3.5% in Q4.
On inflation, the GDP Price Index was adjusted to a 1.9% gain, versus forecasts of an unrevised 2.2% increase, while the core PCE Index, which excludes food and energy, was adjusted to a 2.0% rise, compared to expectations of an unrevised 2.1% gain.
Treasuries traded lower, with the yield on the 2-year note rising 2 basis points (bps) to 1.37%, while the yield on the 10-year note advanced 4 bps to 2.27%, and the 30-year bond rate rose 3 bps to 2.82%. Bond yields continued a rebound from depressed levels and Schwab's Chief Fixed Income Strategist Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. We expect the Federal Reserve to continue to tighten monetary policy and reduce its balance sheet gradually, assuming inflation doesn't slip further. Read more, including how we feel investors should position themselves in this environment on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.
Finally, the political front remained in focus with the Senate delaying a vote on its healthcare replacement bill until after the July 4th holiday which exacerbated uncertainty, while the debt ceiling debate continues and the markets are looking for any developments on tax and regulatory reforms, as well as other reflationary policy implementation. As such, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, on the Insights & Ideas page at www.schwab.com.
Tomorrow, the U.S. economic calendar will finish off the week with reports expected to include personal income and spending, with economists predicting a 0.3% m/m increase in income and a 0.1% rise in spending in May, shy of the 0.4% respective advances seen the month prior, and the Chicago Purchasing Managers Index for June, expected to show activity in the Midwest declined to 58.0 from the 59.4 posted in May, though a reading above 50.0 represents expansion. The last release for the day will be the final University of Michigan Consumer Sentiment Index for June, forecasted to remain at the preliminary level of 94.5, but below May's final reading of 97.1.
Europe lower, Asia gains ground
European equities finished lower as the markets appeared to get weary in the midst of a rising hawkish tone among global central banks, though the financials sector was the lone group in the green. Banking stocks eked out a gain on the heels of the upbeat stress test results and actions in the U.S. and as bond yields in the region moved higher. Stocks found pressure as the euro extended a recent run that has come on the heels of this week comments from European Central Bank (ECB) President Mario Draghi, which fostered a hawkish takeaway despite yesterday's reports that ECB members said the markets misjudged his remarks. Draghi pointed out a strengthening and broadening recovery, while saying that pressures on inflation are temporary and that "the threat of deflation is gone and reflationary forces are at play." The British pound added to a recent jump to weigh on the U.K. markets in the wake of Bank of England Governor Mark Carney saying yesterday that policy makers may need to begin the removal of stimulus if the trade-off between growth and inflation continues to lessen and the central bank will discuss this in the coming months. Amid this backdrop, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com.
In economic news, German consumer price inflation unexpectedly rose and the nation's consumer confidence surprisingly ticked higher. Also, eurozone economic confidence improved more than expected. Political uncertainty remained in focus ahead of key elections in the eurozone and as U.K. Brexit negotiations are set to ramp up. Jeff 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.
Stocks in Asia finished higher on the heels of yesterday's rebound in the U.S., with banking stocks leading the way on optimism ahead of the favorable stress test results and as bond yields rose amid apparent hawkish global central bank commentary most recently out of the Bank of England. Japanese equities advanced with the yen slipping somewhat and despite a softer-than-expected read on the nation's retail sales. Australian securities rose with financials moving higher and commodity-related issues gaining ground, bolstered by the recovery in crude oil prices. Indian stocks ticked higher to snap a string of losses, though action was choppy amid derivative expirations. South Korean markets moved to the upside. Mainland Chinese shares increased and those traded in Hong Kong jumped, boosted by banking stocks. China is expected to report some key data on manufacturing and services sector activity tonight. For a look at the global landscape, see Schwab's Jeffrey Kleintop's, CFA, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com.
The international economic docket for tomorrow will be busy, beginning with employment data, CPI, industrial production, vehicle production, housing starts and construction orders from Japan, private sector credit from Australia and manufacturing and non-manufacturing PMIs from China. Releases from across the pond will include consumer confidence, current account balance, Index of Services and GDP from the U.K., CPI, PPI and consumer spending from France and retail sales and unemployment data from Germany.