Stocks Extend Recent Gains

Charles Schwab: On the Market

Posted: 12/8/2017 4:15 PM EST

Stocks Extend Recent Gains

 

U.S. stocks advanced during the regular trading session to extend recent gains and finish the week mostly higher. The advance for equities was aided by a relatively upbeat read on the domestic labor market which followed favorable economic reports out of China and Japan. Treasury yields were mixed and the U.S. dollar was higher, while gold was little changed and crude oil prices rallied. 

The Dow Jones Industrial Average (DJIA) increased 119 points (0.5%) to 24,329, the S&P 500 Index was 15 points (0.6%) higher at 2,651, and the Nasdaq Composite advanced 27 points (0.4%) to 6,840. In moderate volume, 740 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.67 to $57.36 per barrel and wholesale gasoline gained $0.02 to $1.72 per gallon. Elsewhere, the Bloomberg gold spot price moved $0.71 higher to $1,247.93 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 93.90. Markets were mixed for the week, as the DJIA and the S&P 500 Index increased 0.4% and the Nasdaq Composite declined 0.1%.

United Continental Holdings Inc. (UAL $64) increased its Q4 passenger revenue outlook after reporting a 5.1% increase in November traffic, and it announced a new $3 billion share repurchase program. Shares traded higher.

Western Digital Corp. (WDC $81) is gained solid ground amid media reports that the company and Toshiba Corp. (TOSYY $16) have reached a deal in principle to settle their chip dispute and could announce a formal agreement next week. Neither company commented on the report.

Cooper Companies Inc. (COO $227) reported fiscal Q4 earnings-per-share (EPS) of $1.78, or $2.65 ex-items, versus the $2.64 FactSet estimate, with revenues rising 8.0% year-over-year (y/y) to $562 million, above the projected $559 million. The medical device company issued 2018 EPS guidance that had a midpoint below expectations. Shares finished solidly lower.

November labor report shows job growth tops forecasts, consumer sentiment slips

Nonfarm payrolls (chart) rose by 228,000 jobs month-over-month (m/m) in November, compared to the Bloomberg forecast of a 195,000 increase. The rise of 261,000 seen in October was revised to a gain of 244,000 jobs. The total upward revision to the job gains in October and September was 3,000.

Excluding government hiring and firing, private sector payrolls increased by 221,000, versus the forecasted gain of 195,000, after rising by 247,000 in October, revised from the 252,000 increase that was initially reported. The Department of Labor said employment continued to trend up in professional and business services, manufacturing and healthcare.

The unemployment rate remained at 4.1%, matching estimates, while average hourly earnings were up 0.2% m/m, below projections of a 0.3% increase and versus October's downwardly revised 0.1% decrease. Y/Y, wage gains were 2.5% higher, versus estimates of a 2.7% increase and October's downwardly revised 2.3% rise. Finally, average weekly hours ticked higher to 34.5 from October's unrevised 34.4 rate, where it was forecasted to remain.

Rate hike expectations for when the Fed concludes its meeting next week remained elevated following the relatively favorable employment report but the softer-than-expected wage growth and downward revision to the prior month may have caused some uncertainty regarding the pace of rate hikes in 2018. As we head toward the New Year, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers a look at the key issues to watch in his latest, Schwab Sector Views: 18 Thoughts Heading into '18, pointing out that business optimism is elevated, which could bolster already rising capital investments. This could help support a continuation of the strong labor market.
Schwab's Chief Investment Strategist Liz Ann Sonders points out that capital spending (capex) is likely to be an economic highlight in 2018 and coupled with the continued rebound in productivity is good news for wages in her articles, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle and One Thing Leads to Another: Productivity's Rebound.

The preliminary University of Michigan Consumer Sentiment Index (chart) declined to 96.8 in December, from 98.5 in November, and compared to expectations of an improvement to 99.0. The current economic conditions component of the survey improved but was more than offset by a decline in the expectations part of the report. The 1-year inflation forecast rose to 2.8% from November's 2.5% rate, while the 5-10 year inflation outlook ticked higher to 2.5% from the prior month's level of 2.4%.

Wholesale inventories (chart) were revised lower to a 0.5% m/m decline for October from the preliminary estimate of a 0.4% decrease, where it was forecasted to remain and compared to September's 0.1% gain. Sales grew 0.7% m/m, compared to forecasts of a 0.3% increase and September's upwardly revised 1.4% rise. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—dipped to a 1.25 months pace from September's 1.26 rate.

Treasuries finished mixed, with the yield on the 2-year note dipping 1 basis point (bp) to 1.79%, the yield on the 10-year note remaining at 2.37%, and the 30-year bond rate increasing 1 bp to 2.76%.

The U.S. dollar is extended its weekly gain and Treasury yields are diverged on the heels of the employment data, which followed favorable Chinese trade and Japanese GDP figures. Moreover, the markets cheered a breakthrough in the U.K. Brexit impasse, and a short-term government funding bill late yesterday that should help avoid a U.S. government shutdown this weekend. However, tax reform continues to be a main focus for the markets as the House and Senate grapple with reconciling key differences in their bills.

Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers analysis of the reconciliation process and what investors should be paying attention to, in his article, Tax Reform: What Investors Should Know.

If you have questions regarding how the potential tax overhaul may affect you as an investor, see Hayden's Tax Reform: Frequently Asked Questions.

Europe and Asia higher

European equity markets moved higher, with the markets cheering upbeat economic reports out of the U.S., China and Japan, which overshadowed an unexpected drop in German exports and mixed industrial and manufacturing production figures in the region. Financials led the way, bolstered by a long-awaited deal by regulators to complete the final batch of post-crisis capital rules, which offered clarity for the industry. The U.K. and European Union (EU) reached a deal on three key issues, including the Irish border, that paves the way to break the Brexit negotiation deadlock and likely leads to talks moving to the next phase ahead of next week's EU summit. However, the next stage would revolve around trade and headlines suggested this could be a lengthy process in getting an agreement, which appeared to weigh on the British pound versus the U.S. dollar. The Brexit breakthrough joined the agreement in the U.S. on a short-term government spending bill that likely avoids a near-term shutdown, though the markets continued to eye the U.S. tax reform reconciliation process.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick point out in the video, Political Risk: How Should Investors Respond?, that a long history of these developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are often the result. So, investors should avoid overreacting to the political and geopolitical drama and stick to their long-term financial plans. The euro dipped versus the greenback and bond yields in the region finished mixed.

Stocks in Asia finished higher as the U.S. markets rose to break a string of sluggishness, while economic reports in the region fostered some optimism. Japan's Q3 GDP was revised to a 2.5% quarter-over-quarter annualized pace of growth, from the preliminary estimate of a 1.4% rise, and versus expectations of an adjustment to a 1.5% rate of expansion. China's November exports and imports rose much more than expected resulting in an unexpected widening of the nation's trade surplus. The yen lost ground for a second day amid some rejuvenated global economic optimism, helping lift Japanese share prices. Stocks trading in mainland China and Hong Kong advanced, while securities trading in Australia and India also gained ground and South Korean equities ticked to the upside. The markets rebounded after a recent stumble and Schwab's Jeffrey Kleintop, CFA, and Randy Frederick, discuss in the video, It's All Relative: Why Stocks May Not Be Overvalued.

Stocks nudge higher on week as tech rebounds and tax reform moves closer

U.S. stocks finished the week modestly higher with economic data continuing to paint a positive global backdrop, while the weekend passage of the Senate's tax reform bill fostered optimism that the most sweeping overhaul effort in decades was moving closer to President Donald Trump's desk. Moreover, the tech sector rollover that had pressured the markets as of late, reversed to the upside as the week matured to help nudge the markets into positive territory and the Nasdaq mostly recover early losses. Energy stocks lagged behind as crude oil prices moved to the downside. The U.S. dollar moved noticeably higher and Treasury yields ticked to the upside in choppy trading with political uncertainty in Europe also garnering attention.

Next week, fiscal policy focus will share the spotlight with monetary policy as the Federal Open Market Committee (FOMC) is highly expected to conclude its Wednesday meeting with a 25 bps increase to its target fed funds rate to 1.50% (economic calendar). However, the accompanying updated FOMC projections and Chairwoman Janet Yellen's final press conference shortly after the decision will likely garner the most attention as the markets try to gauge the pace of rate hikes in 2018. The decision will also be joined by releases next week including: JOLTS Job Openings report, the NFIB Small Business Optimism Index, the Consumer Price Index (CPI), the Producer Price Index (PPI), retail sales, Markit's business activity reports, and industrial production and capacity utilization.

As noted in the latest Schwab Market Perspective: The Big Picture Heading into 2018, a better-than-expected 2017 appears to be morphing into a solid start to 2018, but it is unlikely to be as smooth a ride. We believe the bull market still has room to run but it could shape up to be a bumpier ride as expectations and sentiment are elevated. U.S. economic growth appears to be picking up, but with the Federal Reserve tightening policy and inflation likely to heat up, we appear to be in the latter stages of the cycle. Global markets are also poised to have an unprecedented year of performance; which is unlikely to be repeated, but conditions around the world still look largely supportive of further gains.

International reports due out next week to look out for include: Australia—employment change. China—CPI and PPI, lending statistics, retail sales, and industrial production. India—CPI, industrial production, and trade balance. Japan—machine orders, industrial production and capacity utilization, and the Q4 Tankan Large Manufacturing Index. Eurozone—European Central Bank monetary policy decision, industrial production, Markit's business activity reports, and the trade balance, along with German investor sentiment and CPI. U.K.—the Bank of England monetary policy decision, CPI, employment change, and retail sales.

Financial Review

Batten Down the Bonds

Sinclair Noe — November 14, 2016

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DOW + 21 = 18,868
SPX – 0.25 = 2164
NAS – 18 = 5218
10 Y + .10 = 2.22%
OIL + .26 = 43.67
GOLD – 7.60 = 1221.00

Another record high close for the Dow.

U.S. bond yields are sharply higher across the board following a public market holiday on Friday. The yield on the benchmark 10-year Treasury note topped 2.25%; they surged 37 basis points last week, the most in three years, amid speculation Trump’s plans to boost spending and cut taxes will widen the budget deficit and stoke inflation.

The 30-year Treasury bond yield is over 3% for the first time since January. The two-year yield crossed the 1.00% threshold for the first time since January.

The movement has also lit a fire under the greenback, with the U.S. dollar index up more than 1%, hitting 100 for the first time in almost a year.

The global bond rout is intensifying. Long-dated bonds are getting hit hardest in Europe. The selloff wiped a record $1.2 trillion off the value of bonds around the world last week. Investors rotated into stocks, as global developed-market shares beat investment-grade debt by the most since 2011 amid concern the stimulus will stoke inflation and lead the Fed to increase rates.

President-elect Donald Trump has made the first official appointments to his White House administration after a shake-up on Friday that saw VP-elect Mike Pence replace Chris Christie as the head of his transition team. RNC Chairman Reince Priebus has been selected as Chief of Staff, while Trump’s campaign Chairman and former head of news outlet Breitbart, Steve Bannon, will lead as Chief Strategist and Senior Counsel.

The common view is that the inflation trade has been reignited by the election results. If this were so, the two major inflation markers in the commodity market, gold and oil, would have rallied strongly. Instead, gold sold off approximately $70 or over 3% from its level a week before the election, while the price of oil has been slightly weaker. Industrial metals, especially copper, did see major rallies.

This was not across the board, however. Aluminum, which has almost as widespread commercial use as copper, fell about 3%, while copper was up 17% in the days immediately following the election. Tin was up around 6% and nickel 9% from a week earlier. The inflation argument came mostly from action in the global bond markets.

While it is true yields soared, they have been at unsustainably low rates for years now. Still, it looks like the bond market is sending a message about a fiscally expansive, deficit spending growth agenda – there will be price to pay.

And while the Dow and the S&P rallied following the election, the big winner was the Russell 2000 index of smaller stocks. And while small-cap stocks can outperform in inflationary environments, this rally is probably provoked by the idea that small-cap companies are less likely to do business internationally and more likely to get most of their sales domestically. The companies that tend to have most of their sales overseas are tech companies, and the tech-heavy Nasdaq hasn’t rallied at all. So, the stock rally has been selective and not broad-based.

Next, consider that the Federal Reserve will probably raise rates sooner and later. Fed funds futures rates are pricing in an 84% probability of an interest rate increase at the Fed’s meeting in December. PIMCO said the central bank may move three times by the end of 2017. Those rate hikes will hit the markets much sooner than any legislative action, which tends to move very slowly.

Japan’s economic growth handily beat expectations in the July-September period, expanding for a third straight quarter as exports recovered, but weak domestic activity cast doubt on hopes for a sustainable recovery. While GDP grew at an annualized 2.2% pace, household spending and capital investment were flat on quarter.

Mixed Chinese economic data for October came out overnight, released by the National Bureau of Statistics. Retail sales rose a weaker-than-expected 10%, slowing from the previous month’s 10.7% growth, while industrial output expanded 6.1%, matching September’s pace but remaining a hair below expectations.

After gathering in Brussels to discuss the future of Europe-U.S. relations, EU foreign ministers said the bloc would stand by its key foreign-policy positions on issues including the Iran deal, Russia’s annexation of Crimea and climate change, but vowed to work with the Trump administration. Not everyone attended the emergency meeting. Britain’s Boris Johnson called it “unnecessary.”

Colombia’s government and Marxist FARC rebels have agreed on a new peace pact to end a 52-year war, six weeks after the original was narrowly rejected in a referendum amid objections it was too favorable to the rebels. The new accord, which will be presented to Congress for a vote, includes several new provisions – from requiring FARC to surrender money and holdings to infrastructure development for the countryside.

Just one day after the IEA warned the world could drown in oil if production does not fall beneath demand sometime soon, OPEC released a new market whammy, offering up the cartel’s production figures, which largely jive with figures reported by the IEA yesterday: OPEC has increased its oil production. OPEC’s Monthly Oil Market Report revealed daily oil production for the cartel of 33.64 million barrels for October—up by 240,000 barrels per day in September—largely confirming the IEA’s report.

A little over 90% of S&P 500 companies have reported their quarterly results, and it’s become clear that the recession in corporate profits has come to an end. Since the second quarter of 2015, S&P 500 earnings reports have shown a decline in profits – year-over-year. A decline for two consecutive quarters indicates an earnings recession.

Based on the companies that have reported so far this quarter, S&P earnings will be up 2.75% from the prior year’s third quarter. Leading the comeback is the financial sector, which posted growth of 13.1% in profits from the third quarter of last year. According to FactSet, 71% of companies that have reported beat their estimates, higher than the five-year trailing average of 67%.

Samsung Electronics is buying Harman Industries for $112 a share in cash, or a total equity value of about $8 billion, placing the company in the vanguard of the auto industry. The deal – Samsung’s largest acquisition in its history – will reshape the pecking order in the global automotive supply chain.  Samsung could combine its display and semiconductor operations with a business that already provides sound, electronics, and other smart components for a new generation of digitally connected cars.

In Europe, Novartis AG is said to be in talks to acquire U.S. generic-drugs maker Amneal Pharmaceuticals in a deal which could value the closely-held company at as much as $8 billion. Siemens, meanwhile, agreed to buy software company Mentor Graphics for $4.5 billion, a premium of 21 percent on Friday’s closing price.

American Apparel files for bankruptcy. The retailer filed for Chapter 11 bankruptcy protection for the second time in just over a year, (so maybe we should call it Chapter 22) listing assets and liabilities in the range of $100 million to $500 million. The company exited court protection in early 2016 but quickly encountered trouble again.

Toyota will pay up to $3.4 billion to settle claims that some of its trucks and SUVs lacked proper rust protection, leading to premature corrosion of vehicle frames. The proposed settlement covers about 1.5 million Tacoma compact pickups, Tundra full-size pickups and Sequoia SUVs and estimates the value of frame replacements at around $15,000 per vehicle. However, Toyota admitted no liability or wrongdoing in the proposed settlement.

Hedge fund filings will give investors a chance to see what they were betting on when the third quarter ended. Hedge funds have had a tough time of it recently with some $50 billion flowing out of the industry this year. Hedge fund managers are required to disclose their holdings to the SEC in a Form 13F. Filed four times a year, the reports show which sectors these traders were betting on when the quarter ended, roughly 45 days ago.

Out of 13 western states, California and Texas have the highest number of single-family residential homes in extreme risk wildfire areas, per a new report from CoreLogic. CoreLogic’s scale has four categories: low, moderate, high and extreme risk, and 1.8 million homes across 13 western states fall into the high and extreme risk category.

While only a small percentage of the millions of homes that fall somewhere on the scale, these 1.8 million homes represent a combined total reconstruction value of nearly $500 billion. The other 27 million homes on the scale — those at low and moderate risk — have an estimated reconstruction cost value of $6.7 trillion.

Stocks Trim Early Losses but Finish Lower

Charles Schwab: On the Market

Posted: 8/30/2016 4:15 PM ET

Stocks Trim Early Losses but Finish Lower

Domestic stocks finished lower amid heightened monetary policy uncertainty ahead of Friday's highly anticipated labor report, with expectations of a possible one or two rate hike before year end giving a boost to the U.S. dollar to pressure crude oil prices. Gold was lower and Treasuries were mixed, though a better-than-expected read on consumer confidence may have bolstered rate hike expectations. In equity news, the EU said Dow member Apple was granted undue tax benefits in Ireland, while Modelez International halted its pursuit of Hershey.

The Dow Jones Industrial Average (DJIA) declined 49 points (0.3%) to 18,454, the S&P 500 Index shed 4 points (0.2%) to 2,176, and the Nasdaq Composite decreased 9 points (0.2%) to 5,223. In moderate volume, 743 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.63 to $46.35 per barrel, wholesale gasoline declined $0.03 to $1.37 per gallon and the Bloomberg gold spot price decreased $12.03 to $1,311.35 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 96.07.

Hershey Co. (HSY $100) is falling after Mondelez International Inc. (MDLZ $45) announced it has ended discussions with the company regarding a possible combination of the two companies. MDLZ said it determined that there is no actionable path forward toward an agreement following discussions and taking into account recent shareholder developments at HSY. MDLZ traded nicely higher.

Dow member Apple Inc. (AAPL $106) was in focus after the European Union (EU) Commission ruled that Apple was granted undue tax benefits in Ireland of up to 13 billion euros ($14.5 billion). The EU Commission said Ireland must recover from Apple the unpaid tax for the period since 2003 and through 2014, but noted that the amount that Irish authorities should recover could be reduced if other countries were to require Apple to pay more taxes on profits for this period. AAPL and the Irish government both said they will fight the decision. Shares finished lower.

Abercrombie & Fitch Co. (ANF $18) reported a 2Q loss ex-items of $0.25 per share, compared to the expected $0.20 per share shortfall, as revenues declined 4.0% year-over-year (y/y) to $783 million, roughly in line with forecasts. 2Q same-store sales declined 4.0% y/y, versus the expected 4.2% decrease. Shares traded sharply lower after the company said same-store sales are expected to remain challenging through the second half of the year, with a disproportionate effect from flagship and tourist locations.

Potash Corp. of Saskatchewan Inc. (POT $18) and Agrium Inc. (AGU $96) rallied sharply after the two agriculture companies confirmed reports that they are in preliminary merger discussions. The companies said no decision has been made and no agreement has been reached, while there can be no assurance that any transaction will result from these discussions.

United Continental Holdings Inc. (UAL $51) jumped after the airline announced that Scott Kirby has been named president of United Airlines. Kirby held the position of president of American Airlines Group Inc. (AAL $37) since the merger of American and U.S. Airways.

Consumer confidence tops forecasts

The Consumer Confidence Index (chart) rose to 101.1 in August—the highest since September 2015—from the downwardly revised 96.7 level in July and compared to the Bloomberg estimate of 97.0. Sentiment towards the present situation and expectations of business conditions both improved. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—grew to 2.6 from the 0.9 posted in July.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a rise in home prices of 5.1% y/y in June, in line with expectations. Month/month (m/m), home prices were lower by 0.1% on a seasonally adjusted basis for June, matching forecasts.

Treasuries finished mixed, with the yield on the 2-year note losing 1 basis point (bp) to 0.80%, while the yield on the 10-year note ticked 1 bp higher to 1.57% and the 30-year bond rate rose 2 bps to 2.23%. For analysis on the bond markets see our latest article, The Return of the "Bond Vigilantes," at www.schwab.com/insights and follow Schwab on Twitter: @schwabresearch.

Also, for the latest on the subdued market action in the "dog days" of summer, Schwab's Chief Investment Strategist, Liz Ann Sonders offers her latest article, All Summer Long: Will the Extreme Lull in Volatility Persist? at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Ahead of the opening bell tomorrow, the U.S. economic calendar will offer the ADP Employment Change report, forecasted to show private sector payrolls added 175,000 jobs during August, as well as MBA Mortgage Applications. Shortly after trading commences, we will receive the Chicago Purchasing Managers Index, with economists expecting a reading of 54.0 for August, down from the 55.8 registered in July, which will be followed by pending home sales, expected to have increased 0.7% m/m in July.

Europe and Asia higher higher

European equities traded higher, with financials and technology issues leading the way in the wake of the recently boosted U.S. Fed rate hike expectations and eased concerns about the health of the global economy, bolstered by today's upbeat read on U.S. consumer confidence. Also, the euro continued its recent weakness versus the U.S. dollar to aid sentiment, though the global markets remained cautious ahead of Friday's key August nonfarm payroll report in the U.S. However, mining issues saw some pressure, hamstringing the U.K. markets in a return to action following yesterday's holiday, as metal prices were lower and Citigroup offered a bearish outlook for the sector. The British pound dipped versus the greenback, while bond yields in the region finished mixed. In economic news, German consumer price inflation came in cooler than expected for August, while eurozone business and economic confidence slipped for this month. In the U.K. consumer credit decelerated more than expected and mortgage approvals missed forecasts for last month. With global uncertainty remaining elevated to open the door for some possible increased volatility, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly to the upside though conviction remained subdued as the global markets tread lightly amid the recently heightened rate hike expectations in the U.S. ahead of Friday's employment report. Japanese equities dipped following yesterday's rally that was fueled by Bank of Japan's Governor Kuroda's reiterated pledge to deploy further stimulus measures if needed. For more on Japan's potential increased stimulus measures see Jeffrey Kleintop's, CFA, article, What investors need to know about helicopter money at www.schwab.com/oninternational. The downside pressure was pared as Japan reported some relatively better-than-expected July economic data and the yen saw late-day weakness. Japan's overall household spending fell for the fifth-straight month, but by a smaller amount than anticipated, along with retail sales, while the nation's jobless rate unexpectedly dipped. Chinese stocks rose with banking stocks finding support ahead of the sector's earnings releases. Australian securities traded higher, with basic materials and oil & gas issues rebounding from yesterday's declines. Equities in India rallied on optimism that the nation's planned issuance of a new benchmark 10-year bond will boost demand for the nation's debt, per Bloomberg. Finally, South Korean stocks finished higher.

The international docket for tomorrow will remain robust, with releases expected to include industrial production, housing starts, construction orders and vehicle production from Japan, a consumer sentiment read from China, 2Q GDP from India and private sector credit from Australia. Reports from across the pond will include consumer confidence from the U.K., retail sales from Germany and PPI and CPI from France.

Financial Review

Dead Cat Bounce

Sinclair Noe — June 28, 2016

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DOW + 269 = 17,409
SPX + 35 = 2036
NAS + 97 = 4691
10 Y un = 1.46%
OIL + 1.78 = 48.11
GOLD – 12.60 = 1312.50

Stocks bounced back across the globe after a record $3 trillion in market cap was wiped off the board in just two trading days and sterling fell to its lowest level in over 30 years. Hopes of a more coordinated central bank response to support the financial markets and firmer oil prices are helping stocks claw back some of their losses following the Brexit battering.

And after two days of brutal selling, traders are taking a breath and trying to figure out the best strategy moving forward. Even with the gains today, the Dow is down year to date, but the Dow did not take out the lows for the year, set back in February.

Same story with the S&P 500, which found some support yesterday at the 2000 level, after breaching major support around 2040 and then clawing its way above 200-day moving average resistance at 2021. And if you want to get clever, consider the Russell 2000 index of small cap stocks is also down year to date, did not take out the February lows, but did find some support at the May lows.

Now, you can easily understand that big, multi-national companies are affected by what happens in Europe, but why did the small caps take a hit? Do you buy the dips or sell the rallies?

Heads of government of the EU’s member countries are gathered for a two-day meeting of the European Council in Brussels. No country has ever left the bloc, so they are in uncharted territory as they try to figure out how to make Britain’s separation proceed as smoothly as possible. Pressure is also expected to be applied on the U.K. to trigger Article 50, which would actually start a 2 year exit process. The UK might opt for a much faster exit, or they might drag things out. Several Euro leaders have expressed the idea that the UK needs to explain what they are going to do because the uncertainty is not good.

German Chancellor Angela Merkel warned the U.K. to have no illusions about life outside the European Union. Merkel, in her toughest response yet to last week’s British vote, said that the U.K. can’t expect favored treatment once it leaves and that there will be no informal talks on a new relationship before the government in London files Article 50.

The Brits were hoping they could renegotiate trade treaties and just sort of cherry pick the best deal, while not paying into the EU or abiding by rules and regulations they don’t like. Yea, that’s not gonna happen. One of the leading campaigners for the exit side, Nigel Farage from the UK Independence Party, spoke before the European parliament; he was booed. EU Commission President Jean-Claude Juncker called Farage a liar. This is not going to be an amicable divorce.

The British government has abandoned plans to sell down its shareholdings in RBS and Lloyds in light of the Brexit referendum, leaving a multi-billion-pound hole in its finances. The Treasury had planned to cut its exposure to the domestic banks, raising £9-billion-pounds through stock sales, but the date has now been pushed back until at least 2017 given market volatility.

Moody’s will revise the outlook of “a number of big U.K. lenders” to negative from stable due to fallout from last week’s EU referendum. The plan comes just hours after rival Standard & Poor’s stripped the U.K. of its coveted triple-A rating and Fitch downgraded the sovereign debt.

The first bank casualties might be in Italy. Italy is preparing a €40-billion-euro rescue of its financial system as bank shares collapse on the Milan bourse. Italian officials are studying a direct state recapitalization of the banks, to be funded by a special bond issue. Unlike the Eurozone debt crisis in 2011-2012, there is no serious trouble yet in the sovereign debt markets. The ECB is effectively capping yields under quantitative easing. The Euro STOXX index of bank stocks has collapsed by half since last July. And Italian banks are the Achilles Heel of the Eurozone financial system. Non-performing loans have ratcheted up to 18% of total balance sheets.

The stock market sell-off did shake thing up; of course some stocks were hit harder than others.  Apple still has the largest market capitalization among US stocks, but here are some of the leadership changes. Verizon is now bigger than Walmart. Proctor and Gamble is bigger than JPMorgan. Coca-Cola and PepsiCo beat Chevron and Intel, respectively. And Home Depot is now bigger than Disney.

U.S. economic growth slowed in the first quarter but not as sharply as previously estimated. Gross domestic product was revised higher to show a 1.1 percent annual rate, rather than the 0.8 percent pace reported last month. Federal Reserve Chair Janet Yellen told lawmakers last week that data pointed to “a noticeable step-up” in GDP growth in the second quarter. The Atlanta Federal Reserve is currently estimating second-quarter GDP rising at a 2.6 percent rate. But uncertainty stoked by the Brexit vote poses a risk to growth for the rest of year.

U.S. house prices rose 1.1% in April. The S&P/Case-Shiller 20-City Index showed a stronger pace of growth in the three months ending in April. March’s reading was 0.9% higher. Compared to the same period a year ago, prices rose 5.4%, down from 5.5% in March. But there was a stark divide between cities, as usual. Super-hot metros like Portland, Seattle and Denver continue to see double-digit annual price gains, while home prices in older cities like New York and Washington rose only about 2% on an annual basis. Phoenix existing home prices rose 0.7% for April; up 5.5% for the past year.

U.S. consumer confidence moved higher in June. The Conference Board said its consumer confidence index rose to 98 from 92.4 in May. The present situations index rose to 118.3 from 113.2, while the expectations index rose to 84.5 from 78.5. However, the cutoff date was June 16, a week before the British referendum that has roiled financial markets.

Oil prices bounced about 2% today. Still, regular unleaded gasoline fell to $2.30 Monday (the nationwide average price), the cheapest price for this time of year since 2005, according to data from AAA. Consumers are reaping the benefits to the tune of $20 billion. That’s how much AAA estimates drivers have saved at the pump so far this year compared to the same period in 2015; with $5 billion of those savings were in the one-month period since Memorial Day alone.

And we are spending the savings at the pump. Americans spent 12.8 percent more on hotels and motels in the first quarter of 2016 than in the same period in 2014, while food and drink spending rose 16 percent, according to data from the U.S. Bureau of Economic Analysis. Consumers are also fueling their vices, including by spending more money on cigarettes. Not all of those gas savings are going up in smoke, however: Americans are also saving some of it for a rainy day. The average personal saving rate in the first four months of the year rose to 5.6 percent, up from 5.2 percent in the same period in 2015 and 5 percent in 2014.

Volkswagen’s price tag to settle lawsuits in the U.S. over its rigging of diesel emissions tests has jumped to more than $15 billion – $5 billion more than previously reported – with a settlement filed in a San Francisco court. VW’s deal includes $10 billion for buybacks of 475,000 polluting vehicles and nearly $5 billion for fines and funds to boost clean-emissions technology. If you own a VW affected by the emissions scandal you may be entitled to cash compensation plus a buyback of the vehicle, or you could wait for a modification to fix the problem. And if you leased an affected car you might also be entitled to cash compensation.

The U.S. Senate is set to launch a debate for establishing a federal oversight board that would be in charge of restructuring Puerto Rico’s debt where one out of every three dollars it earns in revenue is used to pay creditors. The measure is identical to the plan passed by the House earlier this month, as Congress tries to get something done by July 1, when $2 billion in debt payments come due.

A large “Four Points by Sheraton” sign has gone up outside the Havana hotel that this week becomes the first in Cuba to operate under an American brand since the 1959 revolution. The military-owned Gaviota 5th Avenue Hotel, close to the Caribbean seafront, is one of two hotels that Starwood Hotels & Resorts agreed to manage in a multi-million-dollar deal in March.

Airbnb sued San Francisco. The holiday-rental platform wants to block a law that would force it to remove listings from unregistered hosts or face hundreds of thousands of dollars in fines. It complained that the city is violating federal law by holding it accountable for unregistered apartments.

Biotech news roundup: Endo International has held discussions with Private Equity firms about potential asset sales to reduce its more than $8 billion debt pile. Pfizer is investing $350 million to build its first biotech center in China. Horizon Pharma has hired Bank of America to help it explore selling a significant equity stake that would bolster its balance sheet.

The EU is taking steps that could lead to a third antitrust complaint against Google, this time over its dominance in advertising.  Antitrust charges have been filed against Google for allegedly skewing its search results to favor its own shopping service, and more recently in April, over Google’s conduct with its Android mobile-operating system.

Downside Volatility Continues to Start Week

Charles Schwab: On the Market

Posted: 6/27/2016 4:15 PM ET

Downside Volatility Continues to Start Week

U.S. stocks continued Friday's sell-off in the aftermath of the U.K.'s vote to leave the European Union, with financials and technology issues responsible for the brunt of the decline. Treasury yields continued lose ground, while a preliminary read on services sector activity was unchanged from the previous month and some regional manufacturing data remained in contraction territory. The U.S. dollar surged to the upside and gold was also higher, while crude oil prices were lower.

The Dow Jones Industrial Average (DJIA) fell 261 points (1.5%) to 17,140, the S&P 500 Index lost 37 points (1.8%) to 2,001, and the Nasdaq Composite tumbled 114 points (2.4%) to 4,594. In heavy volume, 1.3 billion shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq. WTI crude oil dropped $1.31 to $46.33 per barrel and wholesale gasoline was $0.04 lower at $1.53 per gallon, while the Bloomberg gold spot price rose $10.89 to $1,326.64 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—jumped 1.1% to 96.48.

Medtronic PLC (MDT $82) inked a deal to acquire circulatory support technology firm Heartware International Inc. (HTWR $58) in a transaction valued at $1.1 billion. As part of the agreement, MDT will pay $58 per share in cash for each share of HTWR, a 93% premium to Friday's closing price, with the purchase expected to close by the end of October. Shares of MDT closed lower, while HTWR rallied over 90%.

Preliminary services sector read unchanged, regional manufacturing remains in contraction

The preliminary Markit U.S. Services PMI Index in June was unchanged from May's final reading of 51.3, with a level above 50 indicating expansion in activity, and compared to the Bloomberg forecast calling for a modest rise to 52.0. The release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and Markit weights its index components differently.

The Dallas Fed Manufacturing Index ticked slightly higher to -18.3 for June from May's unrevised -20.8 level with economists forecasting an improvement to -15.0. A reading below zero denotes contraction.

Treasuries were decidedly higher, with uncertainty remaining after Friday's Brexit vote as the yield on the 2-year note fell 3 basis points (bps) to 0.60%, the yield on the 10-year note declined 10 bps to 1.46%, and the 30-year bond rate decreased 13 bps to 2.28%. For the latest analysis on the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' recent article titled Brexit: What Does It Mean for the Bond Market?, at www.schwab.com/marketinsight. You can also follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will commence with the release of the third and final reading of 1Q GDP, with economic output expected to have ticked higher to a 1.0% quarter/quarter (q/q) annualized rate of expansion, from the 0.8% pace announced in the second release, while personal consumption is expected to be adjusted higher from a 1.9% to a 2.0% q/q increase. Investors will also get a look at the S&P/CaseShiller Home Price Index, forecasted to show home prices in the 20-city composite rose 5.41% y/y during April, and were 0.58% higher m/m on a seasonally-adjusted basis. Finally, after the opening bell, the Consumer Confidence Index and Richmond Fed Manufacturing Index are scheduled for release.

Brexit fallout continued to weigh on Europe, Asia mostly higher despite yen strength

European equities finished lower, extending the severe losses seen last Friday in the wake of the U.K.'s stunning vote to leave the European Union (EU)—known as a Brexit—that sent shockwaves through the global markets with U.K. banks taking the brunt of the burden. Adding to the uncertainty, Scottish First Minister Sturgeon said that a second independence referendum for Scotland was "very much on the table." For the latest on the markets, Schwab's outlook, and other considerations surrounding Brexit, Schwab offers a number of articles for investors to consider, including the latest Schwab Market Perspective: British Shock—What's Next, at www.schwab.com/marketinsight. You can also follow Schwab and on Twitter: @schwabresearch.

U.K. Chancellor Osborne delivered a speech ahead of the market's open in an attempt to calm nerves, saying that despite the uncertainty, "you should not underestimate our resolve" in navigating the unchartered waters ahead. Meanwhile, later in the day in speaking to Parliament, Prime Minister Cameron rejected pleas for a "do-over" Brexit vote, instead appointing a group of officials to prepare for the withdrawal from the EU. The Conservative Party also accelerated the timeframe for a new leader, pulling the timetable back by nearly a month to September 2. For in depth analysis of the issue, as well as what is next, see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, timely article After the Brexit Vote: What Lies Ahead for Markets?, at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. The British pound was lower, adding to its record loss on Friday, and the euro saw pressure versus the U.S. dollar, while bond yields in the region were lower.

Stocks in Asia finished mostly higher, being the first to "dip its toe" in the uncertainty of the aftermath of Friday's severe rout in the wake of the decision by the U.K. to quit the European Union. Japanese equities rallied, despite the yen showing strength, and after an emergency meeting between Japanese policymakers. Prime Minister Abe, Finance Minister Aso and Bank of Japan (BoJ) deputy governor Nakasone concluded their meeting without any substantive moves, but with a pledge to act if necessary, fueling speculation of some sort of intervention by the BoJ with either more stimulus, a BoJ easing, or a combination of the sort. Mainland Chinese stocks advanced and those trading in Hong Kong were flat, with Premier Li saying despite the risks of the Brexit fallout, he still expects to achieve their growth targets. Finally, strength in materials helped Australian securities tick higher, while listings in South Korea and India were both nearly unchanged.

Tomorrow, the international economic docket will be light, offering the Import Price Index from Germany and consumer confidence from France, Italy and South Korea.

Stocks Go So Low as U.K. Sets To Depart EU

Charles Schwab: On the Market

Posted: 6/24/2016 4:15 PM ET

Stocks Go So Low as U.K. Sets To Depart EU

U.S. stocks erased 2016's gains, joining a global rout for equities and the British pound traded to lows not seen in more than 30 years in the wake of the U.K. voting to leave the European Union. Financial and Technology stocks were the largest decliners, while the aftermath of the Brexit vote made it difficult to assess the possible market impact of lower-than-expected reads on domestic durable goods orders and consumer sentiment. Treasuries, gold and the U.S. dollar rallied and crude oil prices experienced a large, sharp drop.

The Dow Jones Industrial Average (DJIA) tumbled 611 points (3.4%) to 17,400, the S&P 500 Index fell 76 points (3.6%) to 2,037, and the Nasdaq Composite plummeted 202 points (4.1%) to 4,708. In heavy volume, 2.5 billion shares were traded on the NYSE and 3.8 billion shares changed hands on the Nasdaq. WTI crude oil dropped $2.47 to $47.64 per barrel and wholesale gasoline was $0.07 lower at $1.54 per gallon, while the Bloomberg gold spot price rallied $62.56 to $1,319.41 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—jumped 2.1% to 95.50. Markets were lower for the week, as the DJIA and the S&P 500 Index decreased 1.6% and the Nasdaq Composite fell 1.9%.

Xerox Corp. (XRX $9) announced Jeff Jacobson will be the company's new Chief Executive Officer once the organization divides into two separate publicly-traded companies. The document solutions company said the split remains on track for the end of the year. Earlier in the month, XRX named Ashok Vemuri as the CEO of the smaller of the two companies, which will be named Conduent. XRX lost ground.

Sonic Corp. (SONC $28) posted fiscal 3Q EPS ex-items of $0.43, a penny above the FactSet estimate, as revenues rose 18.0% y/y to $165.2 million, compared to the projected $164.7 million. Same-store sales rose 2.0% year-over-year, below analysts' view of a 2.4% y/y increase. The drive-in burger chain said it now expects same-store sales for the year to increase 2%-4%, below previous projections of 6%, but it maintained its earnings growth forecast of 20%-25%. Shares closed sharply lower.

Durable goods orders lower than forecasts, consumer sentiment ticks lower

May preliminary durable goods orders (chart) fell 2.2% month-over-month (m/m), compared to Bloomberg's estimate of a 0.8% decline and April's upwardly revised 3.3% gain. Ex-transportation, orders declined 0.3% m/m, versus the 0.1% forecasted increase, and April's unrevised 0.5% gain. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, declined 0.7%, compared to projections of a 0.4% increase, and following the upwardly revised 0.4% dip in the month prior.

The final June University of Michigan Consumer Sentiment Index (chart) was revised to 93.5 from the preliminary level of 94.3, and compared to expectations of a slight dip to 94.1, as the expectations and current conditions components of the report were both revised downward. The index was also lower compared to May's level of 94.7, where it sat at the highest level since June 2015. The 1-year inflation outlook rose to 2.6%, from May's 2.8% rate. The 5-10 year inflation forecast also moved higher to 2.6% from May's 2.3% level.

Treasuries were decidedly higher, with the yields on the 2-year note and the 30-year bond falling 13 basis points (bps) to 0.64% and 2.43%, respectively, while the yield on the 10-year note lost 17 bps to 1.57%. For our latest analysis on the bond markets see the article by Schwab's Chief Fixed Income Strategist, Kathy Jones, titled Global Bonds: A World Without Yield, at www.schwab.com/marketinsight, while you can also follow Kathy on Twitter: @kathyjones.

U.K. vote shocks world, markets in Europe and Asia plunge

European equities finished deep in the red, after the U.K.'s stunning vote to leave the European Union (EU)—known as a Brexit—after four decades sent shockwaves through the global markets—a complete about-face from yesterday's optimism that the U.K. would vote to remain in the EU. The final vote tally was 52% for an exit, 48% against—a close election, as many had expected, however not the outcome that investors had banked on yesterday. In the wake of the results, Prime Minister David Cameron stepped down, saying, "The British people have made a very clear decision to take a different path, and as such I think the country requires fresh leadership." Cameron said he will remain at 10 Downing Street for the next three months, with a new Conservative leader to be appointed by October.

Financials were in the eye of the storm, with the European bank index falling the most ever, while the British pound tumbled to touch a level not seen in over 30 years. Amidst the turmoil, and following Cameron's announcement, Bank of England (BoE) Governor Carney issued an early-morning statement, saying the BoE will pledge 250 billion pounds ($345 billion) to the financial system in what he called, "a period of uncertainty and adjustment." The BoE had previously supplemented funding auctions this month for lenders. Meanwhile, central banks across the globe have shifted to crisis-management mode, as the Swiss National Bank intervened in order to prevent a surge in the franc, the European Central Bank (ECB) said it stands ready to provide liquidity in euros or other currencies, and Bank of Japan Governor Kuroda said the central bank will do its best to provide cash.

Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers in depth analysis of the vote in his timely article After the Brexit Vote: What Lies Ahead for Markets?, at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. Economic news in the region took a backseat to the developments surrounding the Brexit, with France's final GDP data unrevised from previous reports, Italy's retail sales rising less than expectations and Germany's Ifo Business Climate Index was slightly better than forecasts. The euro pared solid early losses, but did finish firmly lower versus the U.S. dollar, while bond yields in the region were negative.

Stocks in Asia finished sharply lower, being the first to react to the decision by the U.K. to quit the European Union, with Japanese equities posting their largest decline in more than 15 years, and triggering a circuit-breaker on Nikkei futures. Japan's Nikkei 225 Index tumbled 7.9%, with the yen surging against its foreign counterparts. Stocks in mainland China lost ground, but were somewhat insulated from the fray after policymakers in the nation championed their management of corporate debt, saying that defaults would not pose a systemic threat as long as the economy continues to be within an acceptable range. Meanwhile, securities trading in Hong Kong snapped a five-session winning streak, while equities in Australia, India and South Korea were sharply lower.

The U.K. has left the building

Stocks finished lower for the week as gains were wiped out early Friday morning on the heels of the U.K.'s highly anticipated vote, where it decided it will exit the European Union. As noted in the recent Schwab Market Perspective: British Shock—What's Next, Britain shocked the financial community and global equity markets plunged as traders searched for perceived safety in the midst of uncertainty. Since the end of the financial-crisis induced global recession in 2009, a series of shocks have helped to keep growth, inflation and stock market performance subdued. The shocks that have taken place in Japan, United States, and Europe may offer us some insight as to the potential duration of the market impact of Brexit. Read more at www.schwab.com/marketinsight.

The added uncertainty from the long awaited Brexit vote seemed to disproportionately increase the volatility in the financials sector. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, takes a deeper dive into some of the factors that most influence the performance of this sector in his recent Schwab Sector Views: Financials: Danger or Opportunity?. Brad notes that the financials sector has been under attack by politicians and unloved by investors since the financial crisis, resulting in some very volatile performance. He also hints at the heavy regulatory burden placed on the financials sector over the past several years. But there are some glimmers of hope here as well. Despite the heated political rhetoric being leveled against the financials sector, there does seem to be an increasing realization that the regulations may have gone too far and had unintended consequences. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Heavy dose of manufacturing data ahead

Next week, the U.S. economic calendar will deliver a look at the health of the manufacturing sector of the economy with the release of the ISM Manufacturing Index, Markit's final Manufacturing PMI for June, the Richmond Fed Manufacturing Index and the Dallas Fed Manufacturing Index. Also, the third and final read for 1Q GDP will be released, with economic output expected to have ticked higher to a 1.0% quarter/quarter annualized rate of expansion, from the 0.8% pace announced in the second release.

Other U.S. reports slated for next week include: Markit's preliminary Composite PMI for June, the Chicago PMI Index, the S&P/Case-Schiller Home Price Index, the Consumer Confidence Index, pending home sales, personal income and spending, construction spending and vehicle sales.

Next week's international reports: Japan—retail sales, industrial production, CPI, vehicle production, housing starts and 2Q Tankan Index. China—manufacturing and non-manufacturing PMIs, industrial profits and the Leading Index. Hong Kong—retail sales and trade data. U.K.—1Q GDP, consumer credit and 1Q business investment. Germany—GfK Consumer Confidence, national and regional CPIs and retail sales. France—1Q GDP, PPI, CPI and consumer spending. Eurozone—consumer confidence and CPI.

Bear(s)-exit the Markets

Charles Schwab: On the Market

Posted: 6/23/2016 4:15 PM ET

Bear(s)-exit the Markets

U.S. stocks rallied and the European markets finished to the upside, despite the palpable uneasiness as to the outcome of the Brexit vote, with current expectations seemingly leaning toward the U.K. remaining in the EU. Domestic economic news was mixed, as jobless claims fell more than expected and new home sales dropped, while a preliminary read on manufacturing bested expectations. Treasuries were lower, crude oil prices were higher, while gold and the U.S. dollar dipped.

The Dow Jones Industrial Average (DJIA) jumped 230 points (1.3%) to 18,011, the S&P 500 Index rose 28 points (1.3%) to 2,113, and the Nasdaq Composite rallied 77 points (1.6%) to 4,910. In moderate volume, 837 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.98 to $50.11 per barrel and wholesale gasoline was $0.02 higher at $1.61 per gallon, while the Bloomberg gold spot price moved $2.03 lower to $1,266.09 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.2% at 93.52.

Macy's Inc. (M $33) announced that Chief Executive Officer (CEO) Terry Lundgren will transition the position of CEO to Jeff Gennette in 1Q 2017. Lundgren will continue as Executive Chairman of the company and work side-by-side with Gennette as President and CEO. Shares were nicely higher.

Bed Bath & Beyond Inc. (BBBY $44) reported fiscal 1Q earnings-per-share (EPS) of $0.80, six cents below the FactSet estimate, as revenues were roughly flat year-over-year (y/y) at $2.7 billion, compared to the projected $2.8 billion. 1Q same-store sales declined 0.5% y/y, versus the estimated 0.6% gain. BBBY lowered its full-year same-store sales outlook. Shares finished higher.

Red Hat Inc. (RHT $78) posted 1Q EPS ex-items of $0.50, roughly in line with forecasts, as revenues rose 18.0% y/y to $568 million, compared to the projected $563 million. RHT issued 2Q and full-year guidance that missed the Street's expectations. Separately, the company announced a new $1.0 billion stock buyback plan and the acquisition of 3scale with terms not disclosed. RHT was lower. 

Jobless claims fall, new home sales retreat from 8-year high

Weekly initial jobless claims (chart) dropped by 18,000 to 259,000 last week, versus the Bloomberg estimate calling for claims to decrease to 270,000, as the prior week's figure was unrevised at 277,000. The four-week moving average declined by 2,250 to 267,000, while continuing claims decreased by 20,000 to 2,142,000, south of the estimated level of 2,150,000.

New home sales (chart) declined 6.0% month-over-month (m/m) in May to an annual rate of 551,000 after reaching the highest level since February 2008 last month, and compared to forecasts of 560,000. The median home price rose 1.0% y/y to $290,400. The supply of new home inventory increased 14.6% m/m to 4.7 months at the current sales pace as sales fell m/m in the Northeast and West, dipped in the South, and rose solidly in the Midwest. New home sales are based on contract signings instead of closings.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) declined 0.2% m/m in May, versus the projected 0.1% increase, and compared to April's unrevised 0.6% gain. Support came from the component pertaining to the yield curve, while jobless claims weighed on the index.

The preliminary Markit U.S. Manufacturing PMI Index for June improved to 51.4 from May's 50.7 level, and above the forecasted modest rise to 50.9, with a reading above 50 denoting expansion in activity.

The Kansas City Fed Manufacturing Activity Index for June improved to 2 from May's -5 level, where it was expected to remain, with a reading north of zero depicting expansion.

Treasuries were lower, as the yield on the 2-year note increased 2 basis points (bps) to 0.77%, while the yields on the 10-year note and the 30-year bond gained 5 bps to 1.73% and 2.55%, respectively. For our latest analysis on the bond markets see the video by Schwab's Managing Director of Trading and Derivatives, Randy Frederick, and Fixed Income Director Collin Martin, CFA, titled Is the ECB Driving European Bond Investors Into the US Bond Market?, at www.schwab.com/insights. Follow Randy and Schwab on Twitter: @randyafrederick and @schwabresearch.

Tomorrow's economic calendar will offer the preliminary durable goods orders report, with economists forecasting a 0.6% m/m decline for May, while ex-transportation, orders are expected to inch 0.1% higher. Rounding out the day will be the final University of Michigan Consumer Sentiment Index, anticipated to fall slightly to a level of 94.0.

Europe rallies on optimism, Asia mixed, as Brexit vote arrives

European equities traded nicely higher, with optimism that the U.K. will vote to remain in the EU fueling a fifth-consecutive session of gains. Financials were one of the best performers and the British pound rose versus the U.S. dollar as the U.K. is voting today on whether to remain or leave the EU—known as a Brexit—with results likely being announced early Friday morning. For our latest analysis on the Brexit issue read our article,  Will the UK Stay or Go? Markets Wait for Brexit Vote at www.schwab.com/insights, while Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his article, Brexit: 5 Things Investors Need to Know. Jeff adds that no matter the outcome, the issue of a Brexit may not be put to rest entirely as EU member parliaments must also agree to the changes being proposed. Nevertheless, the British understand the key role trade has always played in their economy. The British may resent bailed-out banks and bureaucrats in Brussels, but we believe economic considerations will favor the U.K. remaining within the EU. Read more at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. In economic news, the preliminary Markit Eurozone Composite PMI Index—a gauge of business activity in the manufacturing and services sectors—declined to 52.8 in June, from 53.1 in May, and compared to expectations of a dip to 53.0. However, a reading above 50 denotes expansion. The euro gained solid ground on the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mixed with volumes on the lighter side as the global markets awaited the results of today's U.K. Brexit vote. Japanese equities rose, with the yen holding steady during the session, while securities traded in Hong Kong posted a fifth-straight session of gains. Meanwhile basic materials stocks weakened to pressure mainland Chinese securities, as the sector was bogged down by reports that the U.S. may raise duties on some steel products. Finally, markets in Australia and India moved higher, but South Korean equities declined.

While all eyes will likely be on the results of the Brexit vote, other items on the international economic calendar for tomorrow include inflation figures from Japan, trade data from China, GDP from France, retail sales from Italy, and the Ifo Business Climate Index from Germany.

Fence-Sitting Ahead of Brexit Vote

Charles Schwab: On the Market

Posted: 6/22/2016 4:15 PM ET

Fence-Sitting Ahead of Brexit Vote

U.S. equities finished lower in cautious, choppy trading, with the shadow of tomorrow's U.K. Brexit vote hovering over the markets. Meanwhile, energy stocks suffered following a bearish Department of Energy report, while earnings reports from FedEx and Adobe, along with guidance from HP, were met with disappointment. Fed Chair Yellen concluded her two-day monetary policy report to Congress, while existing home sales rose to their highest level in more than nine years. Treasuries finished modestly higher, while gold and the U.S. dollar lost ground.

The Dow Jones Industrial Average (DJIA) fell 49 points (0.3%) to 17,781, the S&P 500 Index lost 3 points (0.2%) to 2,085, and the Nasdaq Composite finished 10 points (0.2%) lower at 4,833. In moderate volume, 812 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.72 to $49.13 per barrel and wholesale gasoline was unchanged at $1.59 per gallon, while the Bloomberg gold spot price moved $2.03 lower to $1,266.09 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.3% at 93.74.

FedEx Corp. (FDX $157) reported fiscal 4Q earnings-per-share (EPS) ex-items of $3.30, above the $3.28 FactSet estimate, as revenues grew 7.4% year-over-year (y/y) to $13.0 billion, north of the projected $12.8 billion. FDX issued current year EPS guidance with a midpoint below analysts' expectations. Shares finished lower.

Adobe Systems Inc. (ADBE $94) posted fiscal 2Q profits of $0.71 per share, above the estimated $0.68, with revenues rising 20.0% y/y to $1.4 billion, roughly in line with forecasts. ADBE issued 3Q EPS guidance that came in mostly below the Street's expectations. Shares were solidly lower.

Shares of HP Inc. (HPQ $13) fell after the company reaffirmed its full-year profit outlook, lowered its cash flow target and announced a plan to change the company's printing supplies inventory management strategy. These overshadowed its raised 3Q EPS guidance.

KB Home (KBH $15) announced fiscal 2Q EPS of $0.17, three cents north of forecasts, as revenues grew 30.2% y/y to $811 million, compared to the expected $753 million. KBH traded nicely higher.

Tesla Motors Inc. (TSLA $197) came under solid pressure after the company yesterday offered about $2.8 billion in all stock to acquire SolarCity Corp. (SCTY $22), which closed higher. TSLA's Chief Executive Officer and Founder Elon Musk noted on a conference call that the board opinion is unanimous at both companies, which he is the largest shareholder and chairman of both.

Existing home sales rise roughly in line with forecasts

Existing-home sales in May rose 1.8% month-over-month (m/m) to a 5.53 million annual rate—the highest annual pace since February 2007—compared to the Bloomberg forecast of a 5.55 million pace. April's figure was revised downward to a 5.43 million annual rate. Compared to last year, sales were 4.5% higher and the median existing-home price was up 4.7% at $239,700—an all-time high. Housing supply came in at a 4.7-month pace at the current sales rate. Sales were higher in the Northeast, South and West, while the Midwest fell. Single-family and condominium and co-op sales both rose.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said the primary driver of the increase in sales was homeowners realizing the equity they have accumulated in recent years and finally deciding to trade-up or downsize, though first-time buyers are still struggling. "Barring further deceleration in job growth that could ultimately temper demand from these repeat buyers, sales have the potential to mostly maintain their current pace through the summer," Yun added.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Summer Lovin', higher wages and a continued improving housing market would go a long way toward improving consumer confidence, and that's what we believe we're seeing. A robust consumer would likely aid the more cyclical sectors, such as technology and consumer discretionary, as well as helping the overall U.S. economy. Read more at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

The MBA Mortgage Application Index rose 2.9% last week, after declining 2.4% in the previous week. The increase came as a 6.5% jump for the Refinance Index more than offset a 2.4% decline for the Purchase Index. The average 30-year mortgage rate fell 3 basis points (bps) to 3.76%.

Federal Reserve Chairwoman Janet Yellen concluded her two-day semiannual monetary policy report to Congress, speaking to the House Financial Services Committee shortly after the opening bell. Her prepared remarks did not differ from yesterday's testimony to the Senate, where she noted that the economy has made further progress. "However, the pace of improvement in the labor market appears to have slowed more recently, suggesting that our cautious approach to adjusting monetary policy remains appropriate," she added. Yellen also stressed that the Central Bank believes the recent slowing in employment growth is "transitory" but it is watching the job market carefully. Moreover, she said a U.K. vote to exit the European Union (EU)—known as a Brexit—"could have significant economic repercussions." Yellen concluded by saying the path of the fed funds rate will depend on economic and financial developments. The global markets are paying close attention to the Q&A session that is underway.

Treasuries finished slightly higher, as the yields on the 2-year and 10-year notes, along with the 30-year bond, lost 2 basis points (bps) to 0.75%, 1.68% and 2.49%, respectively. Schwab's Chief Fixed Income Strategist Kathy Jones provides analysis of the global bond markets in her latest article, Global Bonds: A World Without Yield, at www.schwab.com/marketinsight, and she teams up with Schwab's Managing Director of Trading and Derivatives, Randy Frederick, in the video titled Fed on Pause: Watching and Waiting to Raise Rates, for further analysis on the Fed and the bond markets at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Tomorrow's economic calendar will be the busiest of the week, beginning with weekly initial jobless claims, forecasted to decline to 270,000 from the prior week's 277,000, as well as Markit's preliminary Manufacturing PMI, with economists anticipating activity to move higher into expansionary territory (a reading above 50) for June to a level of 50.9 from May's 50.7. After the opening bell, investors will get a look at new home sales, with forecasts calling for a 9.5% m/m decline for May to an annual rate of 560,000 units, as well as the Leading Index, expected to have gained 0.1% m/m during May, following the 0.6% increase posted in April. Finally, the Kansas City Fed Manufacturing Activity Index will round out the day.

Europe higher, Asia mixed as Brexit vote draws closer

European equities traded mostly higher, as optimism appeared to be holding that the U.K. will vote to remain in the EU, despite recent polls suggesting it remains too close to call. Financials led the markets higher and oil & gas issues contributed modestly to the advance, with crude oil prices flirting with the $50 per barrel mark before some bearish U.S. inventory data. Tomorrow the U.K. will vote on whether to remain or leave the U.K., with results likely being announced early Friday morning. For our latest analysis on the Brexit issue read our article, Will the UK Stay or Go? Markets Wait for Brexit Vote at www.schwab.com/insights, while Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his article, Brexit: 5 Things Investors Need to Know. Jeff adds that no matter the outcome, the issue of a Brexit may not be put to rest entirely as EU member parliaments must also agree to the changes being proposed. Nevertheless, the British understand the key role trade has always played in their economy. The British may resent bailed-out banks and bureaucrats in Brussels, but we believe economic considerations will favor the U.K. remaining within the EU. Read more at at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. The euro and British pound gained ground on the U.S. dollar, while bond yields in the region finished mixed, with earnings and economic data on the light side.

Stocks in Asia finished mixed as the global markets grapple with uncertainty ahead of tomorrow's Brexit vote in the U.K., while digesting testimony from U.S. Fed Chair Yellen to Congress, where she offered little new clues about the timing of future rate hikes. Japanese equities declined, after rallying the past three sessions, with the uncertainty toward the U.K. likely fostering some afternoon strength in the yen. Meanwhile, stocks in Australia and India declined, however those traded in South Korea, mainland China and Hong Kong all gained ground.

A host of manufacturing and services PMI readings from across the globe will be released tomorrow, while Japan will also release its Leading Index, and industrial sales will come from Italy.