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Monday, June 12, 2017

Tech Decline Continues to Weigh on Equities

Charles Schwab: On the Market
Posted: 6/12/2017 4:15 PM ET

Tech Decline Continues to Weigh on Equities

U.S. stocks traded lower, with technology stocks again leading the decline, while market participants appeared cautious ahead of this week's monetary policy decisions from the Federal Reserve, Bank of England, Bank of Japan and Swiss National Bank. Treasury yields ticked higher, crude oil prices recovered a bit of ground and the U.S. dollar and gold were little changed. In equity news, Dow member General Electric announced its CEO Jeff Immelt will retire.

The Dow Jones Industrial Average (DJIA) decreased 36 points (0.2%) to 21,236, the S&P 500 Index lost 2 points (0.1%) to 2,429, and the Nasdaq Composite shed 32 points (0.5%) to 6,175. In heavy volume, 951 million shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.25 to $46.08 per barrel and wholesale gasoline was $0.01 lower at $1.49 per gallon. Elsewhere, the Bloomberg gold spot price decreased $1.42 to $1,265.34 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% lower at 97.20.

Dow member General Electric Co. (GE $29) announced that Chairman and Chief Executive Officer (CEO) Jeff Immelt will retire and John Flannery, current President and CEO of GE Healthcare has been named CEO of the company, effective August 1, 2017. GE noted that Immelt will remain Chairman through his retirement on December 31, 2017 and the leadership change is the result of a succession plan that had been run by the Board since 2011. Flannery will become Chairman and CEO January 1, 2018. Shares traded nicely higher.

The technology sector remained in focus today, extending Friday's selloff that gave back some of a decisive rally that has led to a plethora of record highs for the stock markets. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Technology—Too Far or Room to Run?, the tech run likely won't go on forever—nothing does—but we don't see the unabashed enthusiasm for the group that would make us more concerned, and valuations aren't extended to the point that we believe investors should start to worry. That doesn't mean investors who have developed too large a position in tech relative to their risk tolerances shouldn't rebalance and take some profits. But we continue to see positive developments and believe the run in the tech sector still has further to go. Read more on the Markets & Economy page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch.

Fed monetary policy headlines heavy weekly economic calendar

Treasuries ticked lower as the economic calendar was void of any major release today. The yield on the 2-year note increased 2 basis points (bps) to 1.35%, while the yields on the 10-year note and the 30-year bond added 1 bp to 2.21% 2.87%, respectively.

Treasury yields modestly extended a recent rebound from heightened domestic and European political uncertainty, mixed economic data, the Fed's highly expected rate hike this 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?, on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

The markets are looking to this 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 Wednesday's 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.

Tomorrow, the U.S. economic calendar  will commence with the latest National Federation of Independent Business (NFIB) Small Business Optimism Index, forecasted to remain near historical record highs at a level of 104.5 for May, which will be followed by the Producer Price Index (PPI) for May, expected to have not changed m/m after increasing 0.5% in April, while excluding food and energy, the core rate is anticipated to have increased by 0.1%.

European equities down on politics, Asian stocks also see some pressure

European equities lost ground, with technology issues decisively lower on the heels of Friday's selloff in the sector in the U.S., while traders appeared cautious amid looming monetary policy decisions this week out of the U.S., U.K. Switzerland and Japan. The British pound extended late last week's slide versus the U.S. dollar, to lend some relative support to U.K. stocks. The markets grappled with the recent U.K. election that surprisingly resulted in a hung parliament and fostered uncertainty regarding the timing of Brexit negotiations and whether they will yield hard or softer exit terms. Political uncertainty was also supported by local elections in Italy, which faces a national election later this year, showing the populist Five Star Movement suffered a setback. Fallout from France's recent election remained in focus, with President Macron appearing set to gain a large parliamentary majority following this weekend's first round vote. Germany is also headed for an election later this year. 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, French business sentiment held steady in May, while Italian industrial production missed expectations for April. The euro ticked higher versus the greenback and bond yields in the region were mostly lower. However, the oil & gas sector was the lone group in the green as crude oil prices rebounded somewhat from a recent tumble in the wake of last month's disappointing OPEC production cut extension and last week's noticeably bearish U.S. oil inventory data.

Stocks in Asia finished lower as Friday's selloff in the technology sector in the U.S. carried over to the region, causing a flare-up in uneasiness toward the group that has led the rally in the stock markets. The global markets are awaiting this week's key monetary policy decisions, with the Bank of England, Bank of Japan and Swiss National Bank set to deliver statements after Wednesday's highly-anticipated announcement from the Fed in the U.S., which is expected to deliver a rate hike. Moreover, political uncertainty remained on the heels of last week's U.K. election that led to a hung parliament. Japanese equities declined, with the yen gaining some ground and following a report that showed the nation's machine orders—a gauge of capital spending—unexpectedly fell in April. Stocks trading in mainland China and Hong Kong decreased, Indian securities traded lower and South Korean shares dropped. Australian markets were closed for a holiday. 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.

The international economic docket for tomorrow will deliver the BSI All Industry Index and a manpower survey from Japan, business confidence from Australia, CPI, PPI and housing data from the U.K., the Wholesale Price Index from Germany and non-farm payrolls from France.

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