Markets Hardy In Face of Persistent Anxiety

Charles Schwab: On the Market

Posted: 9/6/2017 4:15 PM ET

Markets Hardy In Face of Persistent Anxiety

U.S. equities were higher, remaining durable in the face of continued uncertainty surrounding monetary policy, political and geopolitical issues, as well as the approaching Category 5 Hurricane Irma off the Florida coast following in the aftermath of Hurricane Harvey battering the Texas coast last week. Treasury yields and the U.S. dollar were higher after yesterday's drops, while crude oil prices were mixed and gold was lower.

The Dow Jones Industrial Average (DJIA) rose 54 points (0.3%) to 21,808, the S&P 500 Index gained 8 points (0.3%) to 2,466, and the Nasdaq Composite increased 18 points (0.3%) to 6,393. In moderate volume, 813 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.50 to $49.16 per barrel and wholesale gasoline lost $0.03 to $1.67 per gallon. Elsewhere, the Bloomberg gold spot price was $6.20 lower at $1,333.29 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—inched 0.1% higher to 92.29.

Hewlett Packard Enterprise Co. (HPE $14) reported fiscal Q3 earnings-per-share (EPS) of $0.15, or $0.31 ex-items, versus the $0.26 FactSet estimate, as revenues rose 3.0% year-over-year (y/y) to $8.2 billion, topping the forecasted $7.5 billion. HPE issued Q4 EPS guidance that was slightly below expectations, while its full-year profit outlook was mostly in line with estimates. Shares were lower.

Dave & Buster's Entertainment Inc. (PLAY $51) posted Q2 profits of $0.71 per share, or $0.59 ex-items, versus the $0.55 expectation, as revenues increased 14.9% y/y to $281 million, compared to the forecasted $282 million. Q2 same-store sales grew 1.1% y/y, compared to the 2.6% gain that was anticipated. PLAY raised its full-year net income outlook slightly, but it had a midpoint the missed forecasts, while it lowered its same-store sales forecast. Shares fell.

Sarepta Therapeutics Inc. (SRPT $47) jumped after announcing upbeat results from a trial of its treatment for Duchenne Muscular Dystrophy.

United Continental Holdings Inc. (UAL $60) came under pressure after the airline lowered its Q3 outlook, citing some impact from Hurricane Harvey, geopolitical tensions in the Korean Peninsula, pricing issues and higher fuel costs.

Services sector reports miss but show growth accelerated in August

The August Institute for Supply Management (ISM) non-Manufacturing Index (chart) rose to 55.3 from July's unrevised 53.9 level, and compared to the Bloomberg forecast of a gain to 55.6. A reading above 50 denotes expansion. New orders grew 2.0 points month-over-month (m/m) to 57.1, business activity rose 1.6 points to 57.5, and employment gained 2.6 points to 56.2. Prices increased 2.2 points to 57.9. The ISM said the majority of respondents are optimistic about business conditions going forward.

The final Markit U.S. Services PMI Index was revised to 56.0 in August from the preliminary 56.9 level, where it was expected to remain, and up from July's level of 54.7. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

The outlook for the services sector—the largest contributor to U.S. economic growth—appears positive with consumer starting to see wages move higher as one of the strongest areas of the economy continues to be the labor market as discussed in the latest Schwab Market Perspective: A Preview of Coming Attractions?. The limited risk of an economic recession keeps us in the bull market camp, notwithstanding near-term risks of fiscal and monetary uncertainties. Read more on the Markets & Economy page at www.schwab.com.

The trade balance (chart) showed that the deficit came in at $43.7 billion in July, compared to estimates of $44.7 billion. June's deficit was downwardly revised to $43.5 billion. Exports dipped 0.3% month-over-month (m/m) to $194.4 billion, while imports nudged lower by 0.2% to $238.1 billion.

The MBA Mortgage Application Index rose 3.3% last week, following the previous week's 2.3% drop. The increase came as a 5.1% rise in the Refinance Index was met with a 1.4% gain for the Purchase Index. The average 30-year mortgage rate declined 5 basis points (bps) to 4.06%.

In afternoon action, the Federal Reserve released its Beige Book, a summary of business activity across the nation used as a tool to prepare for this month's two-day monetary policy meeting ending on the 20th. The report indicated that the economy continued on a "modest to moderate" pace, with little in the way of inflation. Meanwhile, job growth slowed somewhat in some districts, and labor conditions continued to be characterized as "tight." Some items of note, however, were that some districts expressed concerns over a prolonged slowdown in the auto industry, particularly in Cleveland and Chicago, and the Atlanta and Dallas Fed banks reported wide-ranging disruptions in economic activity along the Gulf Coast as a result of Hurricane Harvey.

Treasuries finished lower, as the yield on the 2-year note ticked 1 bp higher to 1.31%, while the yields on the 10-year note and the 30-year bond rose 4 bps to 2.10% and 2.72%, respectively. Bond yields and the U.S. dollar fell yesterday, courtesy of some dovish commentary from Fed members and a return of risk aversion as North Korean tensions flared back up. The 10-year bond yield hit the lowest level since last November and the greenback fell back to levels not seen in over two years. Global monetary policy uncertainty remains a source of volatility ahead of tomorrow's decision by the European Central Bank (ECB) and as the Bank of Canada today unexpectedly raised rates.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her article, What's the Bigger Risk: Bond Market Bubble or Complacency?, we think bond yields are likely to rise from current levels as the economy continues to improve and the Federal Reserve tightens policy, but we don’t see a bubble in the market. Read more on the Fixed Income page at www.schwab.com, and for analysis of investing styles, see Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Radioactive II: Could the Tide Finally Be Turning for Active vs. Passive?, on the Markets & Economy page. Follow Kathy and Liz Ann on Twitter: @kathyjones and @lizannsonders.

For our latest analysis of the political front, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's newest article, Congress Returns to Face Debt Ceiling, Government Shutdown Deadlines, on the Insights & Ideas page at www.schwab.com.

Tomorrow's economic calendar will be fairly light and include weekly initial jobless claims, forecasted to rise to a level of 241,000 from the prior week's 236,000, as well as final Q2 productivity and labor costs, with productivity expected to be upwardly revised to a 1.3% increase and labor costs to have been adjusted lower to a 0.6% rise.

Europe mixed as skittish mood lingers, Asia mixed

European equity markets finished mixed, with sentiment continuing to be a bit hamstrung by heightened North Korean tensions and U.S. political uneasiness, while monetary policy uncertainty festered ahead of tomorrow's decision from the ECB. The euro and British pound ticked higher versus the U.S. dollar, while bond yields in the region rebounded. German factory orders for July surprisingly dropped. Automakers led to the upside as the recently improved optimism toward the sector was bolstered by some upbeat analyst recommendations. However, insurance companies remained hamstrung in the aftermath of Hurricane Harvey in the U.S. and as another potential damaging Category 5 Hurricane Irma made landfall in the Caribbean. For a look at global stock investing, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, U.S. vs international: what do earnings tell us about what may be ahead?, on the Markets & Economy page at www.schwab.com, and his video with Vice President of Trading and Derivatives, Randy Frederick, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished mostly lower on the heels of yesterday's drop in the U.S., as sentiment remained skittish in the face of exacerbated tensions toward North Korea, along with global monetary policy and U.S. political uncertainties. 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 www.schwab.com. Japanese equities dipped, with the yen holding onto recent gains despite a report that showed the nation's wages unexpectedly declined in July. Markets in South Korea, India, Hong Kong, and Australia all declined, with the latter posting a Q2 GDP report which showed growth was smaller than expected. Stocks in mainland China finished flat.

In addition to the European Central Bank's monetary policy decision, tomorrow's international economic calendar will offer retail sales from Australia, Japan's Leading Index, industrial production from Germany, and GDP from the Eurozone.