Stocks Off Lows, but Finish Session Mixed

Cgarkes Schwab: On the Market

Posted: 7/11/2017 4:15 PM ET

Stocks Off Lows, but Finish Session Mixed

Well off the lows of the day, U.S. stocks finished mixed amid flared-up geopolitical uncertainty after Donald Trump Jr. released emails he exchanged during the Presidential campaign with a Russian lawyer. The street also appeared a bit cautious ahead of tomorrow's Congressional testimony from Fed Chair Yellen and as the unofficial beginning of Q2 earnings season looms. Treasury yields and the U.S. dollar were lower, while gold and crude oil prices were higher. In equity news, PepsiCo traded lower despite topping earnings forecasts and Arena Pharmaceuticals surged on the heels of some positive drug trial results.

The Dow Jones Industrial Average (DJIA) gained 1 point to 21,409, the S&P 500 Index shed 2 points (0.1%) to 2,426, and the Nasdaq Composite increased 17 points (0.3%) to 6,193. In moderate volume, 784 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.64 to $45.04 per barrel and wholesale gasoline was $0.02 higher at $1.52 per gallon. Elsewhere, the Bloomberg gold spot price gained $2.09 to $1,216.45 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 95.75.

PepsiCo Inc. (PEP $114) reported Q2 earnings-per-share (EPS) of $1.46, or $1.50 ex-items, versus the $1.40 FactSet estimate, as revenues rose 2.0% year-over-year (y/y) to $15.7 billion, above the projected $15.6 billion. However, PEP's North American beverage unit reported softer-than-expected organic revenue growth. The company said its quarterly results were very much in line with its expectations and noted that it remains on track to meet its 2017 financial goals. PEP added that it expected foreign exchange to negatively impact earnings by a smaller amount than initially expected. Shares traded lower.

Arena Pharmaceuticals Inc. (ARNA $26) rallied over 40% after announcing positive phase 2 trial results for its treatment for pulmonary arterial hypertension.

With the stock markets remaining near record highs, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, Where's the Next Bubble?, that bubbles typically bring risks for all investors, even those that don't own the inflating asset, because they represent a broader market and economy that has become out of balance and dependent upon a flawed outlook. Jeff discusses the four most popular candidates for bubbles based on the questions he gets from investors: cryptocurrencies, (low) volatility, internet retailers, and central bank assets. However, he points out that remarkably, none of these seem to fit the classic profile of a potentially damaging bubble, but that doesn’t mean they don't carry risks for investors. Read more on the Markets & Economy page at www.schwab.com, and be sure to follow Jeff on Twitter: @jeffreykleintop.

Job openings fall from record highs

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, dropped to a level of 5.67 million jobs available to be filled in May, from April's downwardly revised 5.97 million level, which was a record high. The Bloomberg forecast called for a decline to 5.95 million. The hiring rate rose to 3.7% from April's 3.5% pace, while the separation rate increased to 3.6% from 3.4%.

The National Federation of Independent Business (NFIB) Small Business Optimism Index for June declined to 103.6 from May's unrevised 104.5 level, versus expectations of a decrease to 104.4.

Wholesale inventories (chart) were revised higher to a 0.4% month-over-month (m/m) gain for May, versus forecasts of an unrevised preliminary 0.3% increase, and following April's unadjusted 0.4% decline. Sales were 0.5% lower m/m, after April's favorably revised 0.3% decline. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—rose to 1.29 months from April's 1.28 pace.

Treasuries were higher, with the yields on the 2-year note and the 30-year bond dipping 1 basis point (bp) to 1.37% and 2.92%, respectively, while the yield on the 10-year note declined 2 bps to 2.36%. Bond yields have rebounded from depressed levels hit in mid-June and the U.S. dollar has stabilized to close out the first half of 2017 from mid-June lows. 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. On the eve of the two-day Congressional monetary policy testimony by Fed Chairwoman Janet Yellen the markets appear cautious as they grapple with what path the Fed's monetary policy normalization will take. Kathy notes that we believe 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.

The political front continues to garner attention, with the Senate healthcare bill remaining uncertain, and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses in his latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, ambitious plans for sweeping policy changes—health care reform, an overhaul of the tax code, infrastructure spending and deregulation, among other things—were announced and the markets reacted positively. But midway through 2017, Republicans have few major policy accomplishments. Dysfunction, drama and ethical issues in the White House have combined with Republican infighting on Capitol Hill to bog down the policy agenda. There's growing concern among congressional Republicans that the much-anticipated policy changes will need to be significantly scaled back—or that they may not happen at all. Read more on the Insights & Ideas page at www.schwab.com and follow us on Twitter: @schwabresearch.

Tomorrow's economic calendar will be light, offering the Federal Reserve's Beige Book, as well as weekly MBA mortgage applications.

Europe declines, Asia mostly higher

European equities finished lower with strength in basic materials issues being met with market caution ahead of tomorrow's monetary policy testimony out of the U.S., along with this week's start of earnings season. Also, a brief flare-up in geopolitical uncertainty in the U.S. regarding President Trump's campaign actions during the election caused the markets to slip in the final hour of trading. The euro was higher and the British pound declined versus the U.S. dollar, while bond yields in the region mostly gained ground. In economic news, Italian industrial production rose more than expected. For a look at the global markets, see Schwab's Jeffrey Kleintop's, CFA, article, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks as we reach the halfway point of 2017on the International Investing page at www.schwab.com, where you can also find his and Vice President of Trading and Derivatives, Randy Frederick's video, How Do U.S. Equity Market Valuations Compare to Other Developed Markets?, on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick.

Stocks in Asia finished mostly to the upside, with technology issues stabilizing after a recent bout of volatility, while the markets awaited tomorrow's beginning of the two-day Congressional testimony from Fed Chair Janet Yellen, looking for clues to the future path of the Central Bank's monetary policy. Japanese equities rose, with the yen losing ground in late-day action. Mainland Chinese listings declined on continued weakness in small-cap stocks, while banking issues helped boost shares trading in Hong Kong. Australian securities ticked to the upside, with basic materials leading the advance, and South Korean stocks gained ground. Indian equities nudged higher, notching another record. For a look at emerging markets, see Schwab's Jeffrey Kleintop's, CFA, article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the Markets & Economy page at www.schwab.com.

The international economic docket for tomorrow will include PPI and the Tertiary Industry Index from Japan, consumer confidence from Australia, CPI and industrial production from India, industrial production from the eurozone, the Wholesale Price Index from Germany and jobs data from the U.K.