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Thursday, August 10, 2017

Stocks Sink in a Wave of Global Equity Declines

Charles Schwab: On the Market
Posted: 8/10/2017 4:15 PM ET

Stocks Sink in a Wave of Global Equity Declines

U.S. stocks fell, joining a broad-based global equity decline as the global markets dialed back risk appetites on the increased tension between the U.S. and North Korea. Technology and financial issues led the drop, followed closely by consumer discretionary stocks as uneasiness toward the retail sector remains despite better-than-expected earnings results from Kohl's and Macy's. In economic news, wholesale price inflation came in cooler than estimated, gold was higher and Treasury yields, crude oil prices and the U.S. dollar were lower.

The Dow Jones Industrial Average (DJIA) declined 205 points (0.9%) to 21,844, the S&P 500 Index lost 36 points (1.4%) to 2,438, and the Nasdaq Composite tumbled 135 points (2.1%) to 6,217. In moderate to heavy volume, 859 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil decreased by $0.97 to $48.59 per barrel and wholesale gasoline was unchanged at $1.62 per gallon. Elsewhere, the Bloomberg gold spot price was $8.25 higher at $1,285.55 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—traded 0.2% lower at 93.40.

Kohl's Corp. (KSS $40) reported Q2 earnings-per-share (EPS) of $1.24, compared to the $1.19 FactSet estimate, as revenues decreased 0.9% year-over-year (y/y) to $4.1 billion, roughly in line with expectations. Q2 same-store sales declined 0.4% y/y, compared to the projected 1.5% drop. The company said traffic momentum that it saw in the combined March/April period accelerated in Q2, and though transactions for the quarter were lower than last year, July transactions increased. Shares finished sharply lower amid concerns about the continued sluggishness in sales.

Macy's Inc. (M $21) posted Q2 EPS of $0.38, or $0.48 ex-items, versus the projected $0.46, with revenues decreasing 5.4% y/y to $5.6 billion, just above the expected $5.5 billion. Quarterly same-store sales decreased 2.8% y/y, versus the forecasted 3.3% decline. M reaffirmed its full-year sales outlook and shares fell due to concerns about the persistent subdued department store sales.

Dillard's Inc. (DDS $62) announced a Q2 loss of $0.58 per share, compared to the estimated EPS of $0.18, as revenues decreased 1.7% y/y to $1.4 billion, mostly in line with expectations. Q2 same-store sales decreased 1.0% y/y, versus the anticipated 3.3% decline. Shares tumbled.

With the markets having scrutinized a plethora of retail results, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Time to "Energize" Your Portfolio? American consumers' mood has certainly improved and we'll be watching to see if that translates into more spending and more pricing power for retailers. For now, we believe that companies in the extremely competitive sector will still be fighting for every dollar, resulting in our marketperform rating for the consumer discretionary sector. Read more on the Markets & Economy page at Follow us on Twitter: @schwabresearch.

Wholesale price inflation cooler than expected, jobless claims rise

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in July were down 0.1% month-over-month (m/m), versus the Bloomberg expectation to match June's 0.1% increase. The core rate, which excludes food and energy, also dipped 0.1%, compared to forecasts of a 0.2% advance and June's unrevised 0.1% increase. Y/Y, the headline rate was 1.9% higher, below projections of a 2.2% increase, and the core PPI rose 1.8% last month, missing estimates of a 2.1% gain. In June, producer prices were 2.0% higher and up 1.9% for the headline and core rates, respectively.

Tomorrow, the economic calendar will culminate with the highly-anticipated release of the Consumer Price Index, projected to show a 0.2% m/m increase in prices at the headline level for July, after being flat in June, while the core rate is also expected to increase 0.2% after the prior month's 0.1% gain. Compared to last year, prices are forecasted to be 1.8% higher, up from June's 1.6% rise, and core inflation is estimated to remain at the prior month's 1.7% pace. Core prices are anticipated to post the third-straight month below the Fed's 2.0% target, but the markets continue to expect the Central Bank to raise rates one more time this year and begin the process of shrinking its behemoth $4.5 billion balance sheet.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Fed Keeps it on the QT, to date, the Fed has raised rates four times; yet over that same period, financial conditions have actually loosened. This is why the Fed feels it can continue to tighten policy in the face of lower inflation. Easier financial conditions, despite higher rates, have supported economic growth as well as the stock market. Read more on the Markets & Economy page at and follow Liz Ann on Twitter: @lizannsonders.

Weekly initial jobless claims (chart) rose by 3,000 to 244,000 last week, above forecasts of 240,000, with the prior week’s figure being revised higher by 1,000 to 241,000. The four-week moving average declined by 1,000 to 241,000, while continuing claims decreased 16,000 to 1,951,000, south of estimates of 1,960,000.

Treasuries traded higher, with the yield on the 2-year note slipping 1 basis point (bp) to 1.33% and the yields on the 10-year note and the 30-year bond dipping 4 bps to 2.20% and 2.78%, respectively.

Treasury yields extended yesterday's dip but the U.S. Dollar Index paused from a slight rebound as the inflation data met skittish global markets amid the flared-up geopolitical tensions. For analysis of the bond markets and the greenback see Schwab's Chief Fixed Income Strategist Kathy Jones' articles, Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' on the Fixed Income page at and Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.

Europe extends yesterday's drop, Asia declines as N Korean uneasiness lingers

European equities added to yesterday's drop, leading a global market slide with festering concerns about escalated tensions between North Korea and the U.S. continuing to dampen sentiment. All major sectors traded lower, with some economic data in the region also disappointing. French industrial production fell more than expected in June and manufacturing output in the U.K. came in flat for June. Moreover, the U.K. trade deficit widened unexpectedly in June. The euro was flat and the British pound dipped versus the U.S. dollar, while bond yields in the region finished mixed. For our latest analysis of the global markets, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, article, What are fund flows telling us about trends and risks in the global stock market?, as well as his commentary, An important benefit to global investors is back after 20 years on the Markets & Economy page at Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished lower for a second day as the global markets remain uneasy regarding recently flared-up geopolitical tensions. The escalation came amid reports that North Korea said it was examining a plan to strike the U.S. territory of Guam with missiles on the heels of a warning from U.S. President Donald Trump and the recent increased U.N. sanctions against North Korea. Schwab's Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans. Read more on the International Investing page at Japanese equities dipped ahead of tomorrow's holiday, with the yen stabilizing from yesterday's jump to help the markets but a read on the nation's key machine orders—a gauge of capital investment—unexpectedly fell in June. Stocks trading in both South Korea and India declined. Australian securities nudged lower. Mainland China and Hong Kong saw shares fall, with the North Korean tensions joining this week's disappointing trade data and softer-than-expected inflation figures.

The international economic docket for tomorrow will be light, offering local car sales and industrial production from India and CPI from Germany and France.

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