Financial Review

Gravy Exuberance

Sinclair Noe — November 22, 2017

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DOW – 64 = 23,526
SPX – 1 = 2597
NAS + 4 = 6867 (record)
RUT – 2 = 1516
10 Y – .04 = 2.32%
OIL + 1.17 = 58.00
GOLD + 11.50 = 1292.50

Cryptocurrency

• Number of Currencies: 914
• Total Market Cap: $249,548,862,151
• 24H Volume: $9,046,604,602

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	8,246.6	$137.75B	$3.63B	40.10%	1	+2.07%	+13.73%
	Ethereum	ETH	378.99	$36.47B	$778.88M	8.61%	0.0461074	+5.32%	+14.63%
	Bitcoin Cash	BCH	1,286.70	$21.66B	$1.49B	16.45%	0.156176	+9.85%	+7.98%
	Ripple	XRP	0.24000	$9.22B	$165.82M	1.83%	0.00002894	+3.83%	+12.55%
	Dash	DASH	581.00	$4.50B	$381.42M	4.22%	0.0707535	+17.94%	+38.08%
	Litecoin	LTC	71.800	$3.87B	$155.87M	1.72%	0.00870235	+2.57%	+12.36%
	Monero	XMR	167.96	$2.56B	$190.09M	2.10%	0.0201912	+18.28%	+37.11%
	IOTA	MIOTA	0.90952	$2.53B	$70.05M	0.77%	0.00011019	+3.23%	+22.42%
	NEO	NEO	36.290	$2.34B	$82.11M	0.91%	0.00436337	+5.88%	+22.92%
	NEM	XEM	0.20396	$1.84B	$6.89M	0.08%	0.00002482	+0.41%	+5.20%

The Nasdaq eked out a small gain to close at a record high. I suggest you celebrate with turkey and pie.

The other major indices closed lower, after hitting records yesterday. Trading volume was very light, which is not surprising given it’s a holiday tomorrow. Stock markets typically rally right around Thanksgiving – maybe it’s the holiday spirit – but if you are looking for guidance into market trends, you won’t find it today.

That didn’t stop Goldman Sachs from offering up their forecast. Goldman analysts say, “The current equity market valuation is certainly stretched in historical terms, but it does not appear unreasonable based on the high level of corporate profitability.”

They think the market will experience “rational exuberance” over the next three years, with prices and valuations all supported by earnings growth. Their target for the S&P 500 at the end of 2018 is 2,850—or about a 10% rise from current levels. That doesn’t sound like rational exuberance to me. They expect the index to rise to 3,000 by the end of 2019 and 3,100 by the end of 2020.

The only thing that threatens the low-volatility regime is the failure to pass the tax bill. “If tax reform fails, S&P 500 will fall near-term by 5% to 2450,” Goldman said. Earnings growth estimates, which Goldman raised, are predicated on the passing of the tax cut bill, higher GDP growth and higher oil prices.

Growth will continue to outperform value in 2018, according to Goldman. But not all growth is the same. Companies that will benefit the most are the ones with secular growth story—not overly expensive and can see their revenues rise by 10%. Companies that are consistently investing in capital expenditure and R&D as well as those that are targets of potential merger and acquisition will see the highest returns.

To the little voice in your head screaming about the CAPE ratios and stretched valuations, Goldman has this to say: “The current equity market valuation is certainly stretched in historical terms, but it does not appear unreasonable based on the high level of corporate profitability. The return on equity (ROE) of the S&P 500 equals 15.4%, which typically corresponds with a price/book multiple of roughly 3x. The index currently trades at a modest premium of 3.3x.”

So, we’ve got secularly higher profit margins, improving GDP, and perhaps some higher energy prices and a little tax reform cherry to top it off, all of which makes sticking it out in stocks perfectly rational, if slightly exuberant. The challenge, of course, is knowing when that exuberance turns to the dark side.

Amidst all the noise and news, there are still a few truisms in the market. For example – Don’t fight the Fed. Today, the Fed released minutes of their Oct. 31-Nov. 1 FOMC policy meeting. The takeaway is that the Fed is going to raise interest rates, again – almost certainly at the December meeting in about 3 weeks.

Policymakers generally agreed the economy was poised for strong growth. Several Fed officials also saw improved chances that the Congress would pass significant tax cuts that would boost business investment.

Several Fed officials warned of the potential for bubbles, “in light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances.” And generally, the FOMC policymakers still haven’t figured out why inflation remains stubbornly low.

While some policymakers said they still needed to see more data before deciding the timing of a rate hike, many of the officials said the jobless rate appeared to be too low for inflation to remain at its current weak level. The central bank has increased rates four times in a tightening cycle that began in late 2015. The Fed currently predicts one more rate rise this year and three more hikes in 2018.

Policymakers confirmed the idea of incremental rate increases, although in the next few months there will be a new crop of policymakers at the Fed; including a new chair, Jerome Powell, taking over from Janet Yellen. In a speech last night, Yellen said that persistently low inflation might not be transitory.

Yellen and her colleagues have previously expressed surprise at an inflation rate that has continued to undershoot the Fed’s official 2% target for much of the economic recovery — a trend that suggests the labor market is not fully healed despite a historically low 4.1% jobless rate. Another sign of trouble: Wages are not rising for most Americans, leading to a loss of purchasing power despite low reported inflation readings.

New orders for U.S.-made capital goods fell in October after three straight months of gains. The Commerce Department said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, declined 0.5 percent last month. That was the biggest drop since September 2016 and followed an upwardly revised 2.1 percent increase in September.

Strong business spending on equipment is helping to boost manufacturing, which accounts for about 12 percent of the U.S. economy. Last month, there were increases in orders for machinery, electrical equipment, appliances and components, primary metals and computers and electronic products.

In a separate report, the Labor Department said initial claims for state unemployment benefits declined 13,000 to a seasonally adjusted 239,000 for the week ended Nov. 18.

The University of Michigan said its consumer sentiment index in November fell to a reading of 98.5 from October’s 100.7. That’s a little bit above the preliminary reading of 97.8 for November and still the second-best reading in 13 years. Assessments both of current and future conditions fell during the month. Still, sentiment is high and that bodes well for the holiday shopping season.

Uber says it covered up a breach that exposed data on millions of customers and drivers. In late 2016, Uber paid hackers $100,000 to destroy data on more than 57 million customers and drivers stolen from the company and decided not to report the matter to victims or authorities.

While the legal implications of Uber’s cover-up are still being examined, The New York Times said Uber might have violated the Federal Trade Commission’s stipulation that companies disclose data breaches and reveal any evidence of a cybersecurity compromise. Uber might have also violated California’s breach-disclosure laws and lying to the FTC while under investigation.

Investigations are being launched in the US, including several state attorneys general, plus in the UK, Australia, and the Philippines. The stolen information included names, email addresses and phone numbers of 57 million Uber users around the world, and the names and license numbers of 600,000 U.S. drivers.

Many people realize that smartphones track their locations. But what if you actively turn off location services, haven’t used any apps, and haven’t even inserted a carrier SIM card? Even if you take all of precautions and opt out of almost everything, phones running Android software gather data about your location and send it back to Google when they’re connected to the internet, a Quartz investigation has revealed.

Since the beginning of 2017, Android phones have been collecting the addresses of nearby cellular towers—even when location services are disabled—and sending that data back to Google. The result is that Google, the unit of Alphabet behind Android, has access to data about individuals’ locations and their movements that go far beyond a reasonable consumer expectation of privacy.

The location-sharing practice does not appear to be limited to any Android phone or tablet. While Google says it doesn’t use the location data it collects using this service, it does allow advertisers to target consumers using location data, an approach that has obvious commercial value.

The company can tell using precise location tracking, for example, whether an individual with an Android phone or running Google apps has set foot in a specific store, and use that to target the advertising a user subsequently sees.

The turkey on your Thanksgiving table this week probably won’t look anything like it would have decades ago. Today’s turkeys are a lot bigger — more than double the size — and faster-growing than the birds our parents or grandparents ate. In 1967, the typical Thanksgiving turkey tipped the scales at 16.7 pounds. By 2015, they weighed in at 30.2 pounds.

And it’s not just turkeys that weigh more. Research has found that people, on average, gain about 1 pound during the holidays. Although, that can add up over the years. Average cost of a Thanksgiving meal for 10 people, according to an American Farm Bureau survey. That’s about 75 cents cheaper than last year and the lowest price since 2013.

Tonight is a big night for bars, second only to New Year’s Eve. It’s easy to understand why. Most Americans have the day off on Thanksgiving. Many return to their hometowns to visit families – and for college students it’s often the first time they’re back in town since leaving for campus. Temptation is high. Be careful on the roadways tonight.

Google tracked searches and found that the most searched for item on the day before Thanksgiving is for ham shops. By Thursday evening, the top search changes to “outlet malls”. It’s estimated we will spend about $6.6 billion online next Monday as part of Cyber Monday, up 16.5 percent from last year. The period from Thanksgiving through Monday is expected to generate nearly $20 billion in online sales.

Financial Review

Trifecta of Records

Sinclair Noe — October 11, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 42 = 22,872 (Record)
SPX + 4 = 2555 (Record)
NAS + 16 = 6603 (Record)
RUT – 1 = 1506
10 Y un = 2.35%
OIL + .39 = 51.31
GOLD + 3.60 = 1292.10

Cryptocurrency

• Number of Currencies: 874
• Total Market Cap: $156,026,671,244
• 24H Volume: $2,398,072,736

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	4,850.1	$80.49B	$1.21B	50.50%	1	+0.52%	+14.92%
	Ethereum	ETH	304.63	$28.94B	$260.03M	10.84%	0.0628673	+0.41%	+4.26%
	Ripple	XRP	0.26500	$10.32B	$161.04M	6.72%	0.00005519	+0.95%	+20.90%
	Bitcoin Cash	BCH	311.00	$5.22B	$123.95M	5.17%	0.0646502	-0.60%	-12.01%
	Litecoin	LTC	50.900	$2.72B	$56.85M	2.37%	0.0105321	+0.26%	-0.29%
	Dash	DASH	297.00	$2.26B	$26.15M	1.09%	0.0612835	-0.35%	-1.68%
	NEM	XEM	0.21342	$1.93B	$2.68M	0.11%	0.00004419	-0.78%	-0.78%
	NEO	NEO	30.170	$1.51B	$33.17M	1.38%	0.00623998	+0.23%	-0.83%
	IOTA	MIOTA	0.48320	$1.35B	$6.68M	0.28%	0.0001002	+0.33%	-9.64%
	Monero	XMR	87.58	$1.33B	$20.99M	0.88%	0.0181158	+0.12%	-2.62%

The Dow Industrials, S&P 500 and Nasdaq Composite all closed at record highs. With the S&P 500 up 14 percent in 2017, investors are betting on strong earnings growth across the S&P 500. Banks take the focus as JPMorgan Chase and Citigroup report results on Thursday, with analysts warning that results in the sector will largely be held back by low trading volumes compared with a year earlier.

Profits at companies in the S&P 500 stock index are expected to increase by 4.6% in the July-thru-September quarter, once corporations have finished reporting results, according to earnings-tracker Thomson Reuters. That’s a sharp deceleration from the 10%-plus gains in the first two quarters of 2017.

The Federal Reserve released the minutes from their September 20^th FOMC meeting. At that meeting, the Fed decided to begin quantitative tightening, by selling off some of the Treasuries and mortgage backed securities held on their balance sheet; they also left interest rates unchanged.

It is widely expected the Fed will hike rates at the December meeting but the minutes reveal policymakers are a bit skeptical. Inflation is still well below the Fed’s target of 2%. They don’t want to wait until inflation goes flying past 2% but they are also at a loss to explain why inflation remains stubbornly low.

Minutes portray the Fed as roughly divided into three camps. The first, which included “many” Fed officials, thought another increase in interest rates “later this year” was likely to be warranted “if the medium-term outlook remained broadly unchanged.”

The second camp, comprising fewer officials, said they were data-dependent and were looking for “confidence that inflation was moving up.” And the remaining “few” said rate hikes should be deferred until inflation “was clearly on a path toward the Fed’s symmetric 2% objective over the medium term.” Bottom line is that the Fed will probably hike rates in December.

For the “data dependent” camp, they are at a disadvantage. The hurricanes have skewed economic reports on inflation and jobs. The September jobs report showed a loss of 33,000 jobs, breaking an 83-month string of consecutive gains, but today’s JOLT survey shows the labor market remains strong.

The Job Openings and Labor Turnover Survey showed job openings in the country fell slightly to 6.08 million in August from a record 6.14 million in July. Some 5.43 million people were hired and 5.23 million lost their jobs. Job openings declined for most industries, though the biggest drop was in education. Educational employment is always hard to capture at the start and end of school years.

Hurricane Harvey may have also had a negative impact at the end of the month. The quits rate among private-sector employees was unchanged at 2.4%. It slipped a notch to 2.1% if government workers are included. Quitting a job is a positive because people voluntarily quit one job before accepting another, hopefully better job. Many firms complain they can’t find enough skilled workers, but available jobs tend to stay open longer. We still have not seen companies willing to pay more to make a good hire.

If you have a Twitter account, or just follow the news, you know that Trump takes credit whenever the stock market hits a record high. It’s a routine that has played out in 2017. The bull market has been running since mid-2009. Trump had nothing to do with the first 7-1/2 years of that rally.

While there have been times this year when the so-called Trump trade — or the promise of business-friendly policies — has undoubtedly been responsible for the gains, there have also been long stretches when other factors were driving returns.

Earnings growth exploded for the first- and second-quarter reporting periods, which largely occurred in April and July. The S&P 500 saw profit growth of 14% during the first three months of the year and 11% for the second quarter, its best stretch since 2011. Trump had nothing to do with that earnings growth. At some point the bull market will end. If Trump takes credit for the past 9 months, he must also be willing to take the blame when the market inevitably crashes, but you know this is a one-way street.

Today, Trump tweeted: “It would be really nice if the Fake News Media would report the virtually unprecedented Stock Market growth since the election. Need tax cuts.” As a matter of economics, Trump’s tax pitch is nonsensical. “Virtually unprecedented stock market growth” is not a problem for tax cuts to solve. The argument for tax cuts is that they might boost a sluggish economy.

During a recession or depression, tax cuts may provide stimulus to get money circulating through the economy, especially if the tax cuts are directed at the middle class. A tax cut directing half the benefits to the richest percentile is more likely to distort the price action of already extended valuations – something that never ends well.

Republicans have “basically just given up on trying to pay for the tax cuts that they’re going to do. They’re now just trying to figure out what size of tax cut could they pass and how could they put together a coalition of 50 percent plus one. A tax cut now would explode the deficit, at the exact time when the Fed is starting quantitative tightening.

Considering the Fed won’t be the big buyer of all that debt, you could reasonably expect debt prices to tumble, pushing yields much higher and slowing economic growth. And this is a tax plan predicated on dynamic scoring and much faster economic growth. The timing for this tax plan is completely wrong. And that is one reason why Trump is having a hard time trying to sell it.

Japan’s main stock index rose to its highest level in almost 21 years on Wednesday. In large part, Japan’s stronger stock market is part of a global rise in optimism. But Japan has some of its own good news to share. Japan’s gross domestic product has expanded for six consecutive quarters, the first time it has gone that long without a contraction in 11 years.

Unemployment is at multi-decade lows, and corporations are experiencing a surge in profits. Even Japan’s longtime economic bugbear — persistent wage and price deflation — has eased, with both consumer prices and incomes showing modest gains.

Spanish authorities gave Catalonia’s separatist leader five days to explain whether his ambiguous statement on secession was a formal declaration of independence and warned that his answer dictated whether they would apply never-used constitutional powers to curtail the region’s autonomy.

Threatening to invoke a section of the Spanish Constitution to assert control over the region, Prime Minister Mariano Rajoy said Catalan president Carles Puigdemont’s response to the central government’s ultimatum would be crucial in deciding “events over the coming days.”

Puigdemont announced on Tuesday that he was using the victory in a banned Oct. 1 referendum to proceed with a declaration of Catalan independence, but proposed freezing its implementation for a few weeks to allow for dialogue and mediation with the government in Madrid.

Airlines are feeling the impact of a brutal hurricane season. Delta Air Lines said net income fell 6% to nearly $1.2 billion during its July to September quarter, with $120 million of the decline blamed on Hurricane Irma last month. JetBlue Airways, meanwhile, projected that operating income could be affected by as much as $105 million through the end of the year.

Meanwhile, Delta Air Lines pledged not to pay import duties on Bombardier’s jetliner, which was socked in the last two weeks with 300 percent tariffs by the U.S. Commerce Department. It’s possible Delta will delay deliveries of the C Series planes, which are scheduled to begin next year. The airline is also considering “various other plans” if the preliminary duties are finalized, he said without elaborating. Delta last year agreed to buy at least 75 of the jets at a list price of more than $5 billion.

Luxury handbag maker Coach is changing its name to Tapestry. Perhaps they are changing names because they think the new name is a good metaphor, or something – but I think they’re just Carole King fans.

Financial Review

No Moral Equivalency

Sinclair Noe — August 16, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 25 = 22,024
SPX + 3 = 2468
NAS + 12 = 6345
RUT + 0.30 = 1383
10 Y – .04 = 2.23%
OIL + .03 = 46.81
GOLD + 11.70 = 1283.80
BITCOIN – 0.41% = 4407.22 USD
ETHEREUM – 4.55% = 304.68

Fallout from Trump’s news conference yesterday resulted in the collapse of his business councils today. Six CEOs quit Trump’s manufacturing council in recent days: Richard Trumka, leader of the AFL-CIO; Thea Lee, an economist and former deputy chief of staff at the AFL-CIO; Scott Paul, head of the Alliance for American Manufacturing; Kenneth Frazier, Merck CEO; Kevin Plank, Under Armour CEO; Brian Krzanich, Intel CEO

This morning, the list of CEOs grew. Inge Thulin, the CEO of 3M, was the seventh executive to quit Trump’s manufacturing council. Here is part of his statement: “I joined the Manufacturing Jobs Initiative in January to advocate for policies that align with our values and encourage even stronger investment and job growth – in order to make the United States stronger, healthier and more prosperous for all people. After careful consideration, I believe the initiative is no longer an effective vehicle for 3M to advance these goals. As a result, today I am resigning from the Manufacturing Advisory Council.”

Denise Morrison, president and CEO of the Campbell Soup Company, resigned from the manufacturing council. Here’s part of her statement: “Racism and murder are unequivocally reprehensible and are not morally equivalent to anything else that happened in Charlottesville. I believe the President should have been – and still needs to be – unambiguous on that point.”

Jeff Immelt, chairman of GE, Alex Gorsky, CEO of Johnson & Johnson, and the CEO of United Technologies, Gregory Hayes, all announced they would leave the council, citing Trump’s recent statements as their reasoning.

Yesterday, Trump tweeted: “For every CEO that drops out of the Manufacturing Council, I have many to take their place. Grand-standers should not have gone on. JOBS!”

But nobody stepped up to be a replacement.

The strategy forum, which is led by Blackstone Group’s Stephen Schwarzman, held a conference call late Wednesday morning and the majority indicated they would leave the group, so a decision was reached to disband.

In a statement from the strategy and policy forum, the group said it was breaking up amid the controversy. “The debate over forum participation has become a distraction from our well-intentioned and sincere desire to aid vital policy discussions on how to improve the lives of everyday Americans.”

Mary Barra, General Motors CEO, issued a statement saying: “Recent events … require that we come together as a country and reinforce values and ideals that unite us — tolerance, inclusion and diversity — and speak against those which divide us — racism, bigotry and any politics based on ethnicity.”

JPMorgan Chase CEO Jamie Dimon said: “The racist behavior on display by these perpetrators of hate should be condemned and has no place in a country that draws strength from our diversity and humanity.” Dimon is also chairman of Business Round-table.

This afternoon, Trump tweeted: “Rather than putting pressure on the business people of the Manufacturing Council and Strategy & Policy Forum, I am ending both. Thank you all!”

Except he didn’t end anything. You can’t fire these people after they already quit. In practical terms, the end of these groups may not make much difference. After all, Trump has achieved so few of his goals on economic policy that the executives’ absence can’t really hurt. It was never clear exactly what the councils were doing other than providing photo opportunities.

Republican leaders in Congress have little appetite for confronting Trump directly. But his sympathetic statements about the white supremacists and Nazis that marched in Charlottesville, Virginia, embarrasses them just like business leaders, and many spoke out today, or more specifically tweeted.

Arizona Senator John McCain tweeted, “There’s no moral equivalency between racists and Americans standing up to defy hate and bigotry. The President of the United States should say so”

Sen. Jeff Flake, a strong critic of Trump, tweeted, “We can’t accept excuses for white supremacy and acts of domestic terrorism. We must condemn. Period.”

Meanwhile, the 2012 Republican nominee Mitt Romney tweeted: “No, not the same. One side is racist, bigoted, Nazi. The other opposes racism and bigotry. Morally different universes.”

Sen. Lindsey Graham issued a statement: “Through his statements yesterday, President Trump took a step backward by again suggesting there is moral equivalency between the white supremacist neo-Nazis and KKK members who attended the Charlottesville rally and people like Ms. Heyer. I, along with many others, do not endorse this moral equivalency.” He continued: “Many Republicans do not agree with and will fight back against the idea that the Party of Lincoln has a welcome mat out for the David Dukes of the world.”

Former Presidents George H. W. Bush and George W. Bush joined the chorus of lawmakers speaking out to condemn the racist violence, saying: “America must always reject racial bigotry, anti-Semitism, and hatred in all forms. As we pray for Charlottesville, we are reminded of the fundamental truths recorded by that city’s most prominent citizen in the Declaration of Independence: we are all created equal and endowed by our Creator with unalienable rights.”

The New York Times’ Andrew Ross Sorkin reported on CNBC that “a number of people” on Wall Street and at Goldman Sachs have called chief economic advisor Gary Cohn to suggest that he resign from the administration. You also must wonder if Treasury Secretary Steven Mnuchin might be considering longer-term reputational damage. Newly installed Chief of Staff John Kelly looked extremely uncomfortable during Trump’s remarks Tuesday.

The dollar turned lower against most major currencies.

Trump’s Charlottesville uproar overshadowed a GOP tax plan roadshow. Top Republican tax writers went to a national shrine for tax cutters — former President Ronald Reagan’s California ranch — hoping to make a sales pitch for a historic overhaul of the U.S. tax code. Republicans have said they want to spend August — usually a quiet month in Washington — building support for a tax overhaul among constituents at home.

Representative Kevin Brady, the Texas Republican who chairs the House Ways and Means Committee said that despite the distractions, tax writers in the White House, Senate and House remain on schedule to produce a plan that can be voted on in 2017.

And Wall Street largely ignored the problems, except for an early morning Trump tweet against Amazon. The tweet read: “Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt – many jobs being lost!” Trump wrote.

Trump has repeatedly targeted Amazon.com, whose CEO Jeff Bezos ​owns the Washington Post, one of several major media outlets that have been swept up in the president’s ongoing fight with the press. Amazon does collect state sales taxes in Washington, D.C., and 45 states that have such a levy.

The Federal Reserve released minutes of the July 25-26 FOMC meeting. Federal Reserve policymakers appeared increasingly wary about recent weak inflation and some called for halting interest rate hikes until it was clear the trend was transitory but it looks like they are ready to begin reducing the Fed’s $4.5 trillion portfolio of Treasury bonds and mortgage-backed securities.

Last month’s meeting, which concluded with a unanimous decision to leave rates unchanged, was marked by a lengthy discussion about the recent soft inflation readings, the minutes showed. The central bank’s preferred inflation measure dropped to 1.5 percent in June from 1.8 percent in February and has remained below its 2 percent target for more than five years.

The lack of inflation spurred concerns the Fed may have to cool its monetary tightening pace even though the economy is growing moderately and the unemployment rate fell to 4.3 percent in July, matching a 16-year low touched in May.

Meanwhile, in an interview published by the Financial Times, Fed Vice Chairman Stanley Fischer called efforts in Washington to rescind regulations put in place after the 2008 financial crisis “mind boggling.” Fischer told the Financial Times , “It took almost 80 years after 1930 to have another financial crisis that could have been of that magnitude, and now after 10 years everybody wants to go back to a status quo before the great financial crisis. And I find that really extremely dangerous and extremely shortsighted.”

In a separate interview on CNBC, Atlanta Federal Reserve President Raphael Bostic said he doesn’t expect the U.S. to achieve the White House goal of 3% growth. The economy has grown around 2% annually since an expansion began in mid-2009.

Housing starts declined 4.8 percent to a seasonally adjusted annual rate of 1.16 million units, hurt by a drop in groundbreaking on single-family projects, The Commerce Department revised June’s sales pace down to 1.21 million units from the previously reported 1.22 million units. Building permits dropped 4.1 percent, with the multi-family segment recording a drop of 11.2 percent. Permits for single-family homes were unchanged.

Urban Outfitters shares were up more than 22% as the company reported earnings that beat estimates, but some analysts say the second-quarter earnings numbers should give investors pause. The chain reported a comparable sales decline of 7.9% and revenue declined from a year ago.

Cisco Systems reported fiscal fourth-quarter revenue and adjusted earnings in line with expectations but predicted another drop in revenue in the next quarter. Cisco dropped in after-hours trade.

Shares of Agilent climbed 4%, after the maker of scientific and medical equipment blew past estimates for its fiscal third quarter and raised guidance for the year.

Financial Review

Send in the Clowns

Sinclair Noe — May 22, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 89 = 20,894
SPX + 12 = 2394
NAS + 49 = 6133
RUT + 9 = 1377
10 Y + .01 = 2.25%
OIL + .48 = 50.81
GOLD + 4.80 = 1261.40

First quarter earnings season is wrapping up, and the big-name reports are getting scarce, with this week’s heavy hitters including Best Buy, Dollar Tree, and Costco. Both the S&P 500 and tech-heavy Nasdaq composite set records early last week before worries about growing political uncertainty in Washington, which could hamper President Trump’s agenda of tax cuts and deregulation, knocked those indexes back from their highs.

On Wednesday, the Congressional Budget Office will release its analysis of the health-care bill that passed the House of Representatives earlier this month. Official Washington will comb through the score, with partisans on each side hoping it suits their talking points. The first CBO score estimated that 24 million more people would be uninsured in 2026, and that number is not expected to change substantially.

Another number could unravel the whole deal.  If the bill isn’t found to save at least $2 billion over 10 years, Republicans won’t be able to use the so-called budget reconciliation process to pass it. Under that process, 51 votes are required to pass legislation in the Senate, versus 60.

Not saving at least $2 billion would mean Republicans would have to start all over again by passing a new budget resolution.

The Trump administration today asked that a major federal court case weighing the fate of the Obamacare cost-sharing subsidies be put on hold again, leaving billions of dollars in payments to insurers up in the air for 2017 and 2018. The subsidies are available to low-income Americans who buy individual health insurance on the ACA exchanges.

In the meanwhile, insurers that are trying to set premium rates for insurance plans to be sold in 2018 are running up against deadlines and have repeatedly asked Congress to fund the subsidies during the transition.

Tomorrow, the White House is scheduled to release Trump’s first full budget. A president’s budget is a wish list, and many of the proposals in it may not become law.

Also Wednesday, the Fed will release the minutes of its May 2-3 meeting. Over the last few week, labor market and inflation data have sent contradicting signals. The labor market supports the hawkish Fed stance. Employment rose 211,000 in April from a wobbly showing in early spring and the unemployment rate dipped to 4.4%, matching the lowest level since May 2007.

On the other hand, core inflation data was soft in both March and April. Today, Dallas Fed President Rob Kaplan said he still expected two rate hikes this year. Perhaps more important than the timing of the next rate hike is what the Fed plans to do about its balance sheet. Chair Janet Yellen and other top officials have claimed for some time that they are eager to begin reducing their nearly $4 trillion in US government and mortgage debt.

And while this may be true at the margin, the truth is that though many of them may make noises about reducing the size of the balance sheet, a sizable and probably most of the Fed officials believe the massive balance sheet is here to stay — indeed, most of them schooled in the modern central banking theories believe a rather large balance sheet is now an essential part of monetary policy.

More than one Fed official has indicated that even a “normal” balance sheet as they currently envision it could total about $2 trillion worth of government and/or housing debt.

President Trump visited Saudi Arabia over the weekend and sealed $110 billion in arms deals with the Saudis, with options running as high as $350 billion over 10 years. Shares of defense firms General Dynamics, Raytheon, and Lockheed Martin all hit record highs before easing to trade up between 0.6 percent and 1.6 percent. Boeing was up 1.5 percent and the biggest boost on the Dow.

Blackstone and Saudi Arabia’s main sovereign wealth fund, the Public Investment Fund, signed a non-binding memorandum of understanding to create a $40 billion vehicle to invest in infrastructure projects, mainly in the United States. Blackstone said it expected the vehicle to have $40 billion of equity commitments, with a $20 billion anchor investment from the PIF and the rest of the money obtained from other investors.

Through this equity and debt financing, Blackstone expects to invest in over $100 billion of infrastructure projects. Today, Trump visited Israel. Next up, the Pope.

Oil prices moved higher on rising confidence that top exporters will this week agree to extend supply curbs, or even deeper cuts. However, energy companies lagged. Iraq announced this afternoon, that it will back a proposal from Saudi Arabia and Russia to extend output cuts for nine months, removing one of the last remaining obstacles to an agreement at the OPEC meeting in Vienna this week.

Iraq, the second largest producer in OPEC, has the worst record of compliance with its pledged cuts, pumping about 80,000 more barrels of oil a day than permitted during the first quarter.

The Supreme Court delivered a unanimous decision on where patent lawsuits may be filed, a setback to patent trolls, or companies that buy patents not to use them but to demand royalties and sue for damages. Such companies have often sued in remote federal courts that have a reputation for friendliness to plaintiffs.

More than 40 percent of patent lawsuits, for instance, are filed in a federal court in East Texas. In recent years, a single judge based in Marshall, Texas, oversaw about a quarter of all patent cases nationwide, more than the number handled by all federal judges in California, Florida and New York combined. The decision was a victory for big technology companies and other patent holders, which have complained about what they called forum shopping in patent cases.

The case, TC Heartland v. Kraft Foods raised the question of whether companies could sue essentially anywhere their products are sold, or in the jurisdiction where it resides.  Today’s Supreme Court decision won’t eliminate patent trolling but it will probably limit the practice.

A divided U.S. Supreme Court rejected two North Carolina congressional districts, saying Republican lawmakers relied too heavily on race when drawing them. The gerrymandered voting districts were used until the 2014 election. The case produced an unusual split: Justice Clarence Thomas, perhaps the most conservative justice, joined the court’s four liberals in the majority.

Ford Motor replaced its chief executive, Mark Fields, and vowed to catch up in the race to build self-driving cars and define a new era in personal mobility.  Jim Hackett, who had overseen the Ford subsidiary that works on autonomous vehicles, immediately takes over as the new CEO.

Fields came under fire from investors and the company’s board for failing to expand the company’s core auto business and for lagging in developing the high-tech cars of the future. But for a Ford CEO, stock price is Job One; Fields’ biggest transgression during his 3-year tenure as Ford CEO was a 40% drop in Ford’s share price.

Hackett said the board had given him a free hand to transform the nation’s No. 2 automaker, including seeking alliances with Silicon Valley firms, changing its product lineup, and divesting itself of unprofitable global operations.

US-based Huntsman Corp. and Switzerland’s Clariant are combining to create a chemical manufacturer with a market value of more than $14 billion. The deal creates a global specialty chemicals company that is 52% owned by Clariant shareholders and valued at about $20 billion when including debt. Clariant makes aircraft de-icing fluids, pesticide ingredients, and plastic coloring. Huntsman makes chemicals used in paint, clothing, and construction.

In the past 30 days, about 40 percent of the Midwest got twice the amount of normal rainfall, with soils saturated from Arkansas to Ohio. While spring showers usually benefit crops, the precipitation has come fast enough to flood some corn and rice fields and trigger quality concerns about maturing wheat. Bad conditions got worse with rain on Friday. There are lakes in some fields.

Planting was off to a fast start in the second half of April, before 10 inches of May rainfall and lower temperatures erased early optimism. Corn and wheat are headed for monthly gains on the Chicago Board of Trade while rough-rice futures are headed for the biggest such advance in six years. Even with the challenges, farmers have made speedy work of planting.

U.S. sowing of corn, soybeans and spring wheat was ahead or even with the five-year average as of May 14, while corn emergence was behind schedule.

For years, Citigroup employees suspected that millions of dollars that the bank was moving to Mexico might be suspicious. Yet the bank failed to sufficiently alert regulators or step up its monitoring for money laundering. From 2007 to 2012, the banking unit generated about 18,000 alerts of suspicious transactions among the 30 million Mexico remittances it processed, yet the bank conducted fewer than 10 investigations.

Today, Citigroup agreed to pay $97 million to settle an investigation into Banamex USA. In exchange, the Justice Department will not charge the bank criminally for the misdeeds of Banamex USA, based in California.

After 146 years, the Greatest Show on Earth, Ringling Bros. and Barnum & Bailey Circus took its final bow. An army of circus performers and technicians end a tradition that first had its roots in 1871 under showman P. T. Barnum. The circus animals, lions, tigers, and bears will be sent to sanctuaries or to work in European circuses.

And if you’re looking for the clowns, well you can find a reasonable facsimile in Washington DC.

Financial Review

Call It Neutral

Sinclair Noe — April 10, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 1 = 20,658
SPX + 1 = 2357
NAS + 3 = 5880
RUT + 2 = 1367
10 Y – .01 = 2.36%
OIL + .91 = 53.15
GOLD + .60 = 1255.40

Fed Chair Janet Yellen held a Q&A session today at the University of Michigan. Yellen said the Fed’s task has shifted from a post-crisis exercise of healing the economy to one aimed at sustaining progress.

Yellen said, “Before, we had to press down on the gas pedal trying to give the economy all of the oomph that we possibly could.”  Now, she says the Fed is trying to “give it some gas, but not so much that we’re pushing down hard on the accelerator.

The appropriate stance of policy now is closer to, let me call it neutral.” That still likely means two more rate hikes this year. Minutes of their March meeting showed that most Fed officials also expect to begin shrinking the bank’s $4.5 trillion balance sheet later this year, gradually reversing emergency bond purchases made during the financial crisis and recession.

In last week’s minutes, the Fed policymakers warned that stock prices were on the high side, specifically saying: “Broad equity price indexes rose further, leaving some standard measures of valuations above historical norms.” And, “some measures of valuations, such as price-to-earnings ratios, rose further above historical norms.”

Now, the Fed is not known for its stock picking or timing skills, but this week the proof is in the putting as earnings season kicks into gear. Earnings of S&P 500 companies are estimated to have risen 10.1 percent in the first three months of the year. The index is currently trading at 17.4 times forward earnings estimates, above its long-term average of 15, according to Thomson Reuters I/B/E/S.

JPMorgan, Citigroup and Wells Fargo are scheduled to report earnings on Thursday. The financial sector has been a darling performer since the election on anticipation of deregulation and tax reform policies that have yet to materialize; so, look for the focus to shift to earnings.

Wells Fargo’s board of directors has released its investigation into the bank’s recent fraudulent-accounts scandal, pinning blame primarily on two former executives. According to the report, Wells Fargo’s board will claw back $28 million in pay from former CEO John Stumpf and $47.3 million from former head of community banking Carrie Tolstedt for their roles in the scandal.

The board determined that Stumpf and Tolstedt did not do enough to address the culture at Wells that set quotas for bank employees to open as many as 2 million credit card and retail banking accounts for customers from 2011 to 2015 without their knowledge. According to the report, Stumpf was aware of individual issues as far back as 2002 but did not become aware of the systemic nature of the problem until 2012.

Even when he did become aware, the board said, Stumpf did not do enough to address the issues.

Today’s report also referenced an internal Wells Fargo report prepared 12 years ago, in 2004 which foretold the fake account scandal. That investigation, titled “Gaming,” warned that Wells Fargo employees had an “incentive to cheat” that was “based on the fear of losing their jobs.” It said that workers felt they couldn’t meet the bank’s unrealistic sales goals “without gaming the system.”

With the newly announced clawbacks, Wells Fargo has taken back nearly $183 million from Stumpf, Tolstedt and other executives. Wells Fargo has been fined $185 million by regulators and been the subject of two congressional inquiries.

Until as late as 2015, even as sales practices were labeled a “high risk” in materials provided to the board of directors’ risk committee, there was a general perception within Wells Fargo’s control functions that sales abuses were a problem of relatively modest significance. The report published today did not seem to recognize a failure on the part of the Board of Directors – no clawbacks there.

And it doesn’t look like the money in fines and clawbacks will do much to compensate the victims of Wells Fargo fraud, specifically the customers and the employees who tried to blow the whistle only to be fired for their efforts to be honest.

We’ve told you about the Libor Rate Rigging scandal, where various traders manipulated the daily fix on the London Interbank Offered Rate, which affects trillions of dollars of transactions around the globe; everything from mortgage loans to credit card rates to complex derivatives. The scandal rocked the financial industry when it was uncovered in 2012.

Now the BBC has released an audio recording that implicates the Bank of England, the central bank, of rate manipulation. According to the recording, The Bank of England repeatedly urged commercial banks to lower their Libor settings during the financial crisis. The BOE has consistently said it wasn’t aware of the Libor manipulation until years after the rigging happened.

In response to the BBC findings, the central bank noted that Libor and other global benchmarks weren’t regulated in the U.K. or elsewhere during the period in question. The rate-rigging scandal first came to public attention in 2012 when an international investigation revealed that several major banks colluded to manipulate Libor.

The recording calls into question evidence given in 2012 to the Treasury select committee by former Barclays boss Bob Diamond and Paul Tucker, the man who went on to become the deputy governor of the Bank of England. At the time, both said that they had only recently become aware of rate manipulation.

Meanwhile, Barclays CEO Jes Staley is in hot water. Staley is a veteran American banker and took the helm at Barclays in December 2015. He pledged to overhaul Barclays’ culture, which had been in the spotlight due to the bank’s involvement in rigging Libor, for which it was ordered to pay a fine of nearly £290 million-pounds.

Staley is accused of twice attempting to use Barclay’s internal security team to track down the authors of two anonymous letters. On the second occasion the security team received assistance from a US law enforcement agency, but still failed to identify the individual.

The whistle-blowing saga began in June 2016 when the board of Barclays received an anonymous letter and a senior executive received a second letter. These letters made allegations about a senior employee who had been recruited by the bank earlier that year. Staley has apologized for his actions and faces a significant cut in his bonus.

Swift Transportation and Knight Transportation are merging in a stock-swap deal, creating a company with a market value of more than $5 billion. Shareholders of Swift will own 54 percent of the new entity and Knight shareholders the rest after the deal closes.

The two companies earned about $5.1 billion in total revenue and $416 million in adjusted operating income last year. The companies expect to achieve about $15 million in cost-saving synergies and pretax revenue in the second half of 2017, and up to $150 million in 2019.

The companies, both based in Phoenix, have a shared history – Jerry Moyes started Swift in 1966, while Randy Knight, who was a part-owner of Swift – founded Knight Transportation along with three cousins in 1990.

Knight’s executive chairman, Kevin Knight, will assume the same title at the new company. Moyes, who retired as co-CEO of Swift last year, will become one of the directors of the new company. The Jerry Moyes family, however, will own about 24 percent of Knight-Swift. The deal will create the largest truckload operator in North America.

AT&T announced it would buy Straight Path Communications, a holder of licenses to wireless spectrum, for $1.25 billion in an all-stock deal as it aims to accumulate the airwaves it needs for a 5G network. AT&T’s offer represents a 162% premium to Straight Path’s closing price on Friday.

After a partisan fight so deep it forced the Senate to go “nuclear” to confirm him, Neil Gorsuch was sworn in as the nation’s newest Supreme Court justice, filling the seat left vacant when Justice Antonin Scalia died last year. In the final months of the Supreme Court’s current term, Gorsuch could break a potential 4-4 deadlock on cases involving religious freedom, racial discrimination, immigration, and other issues.

The court might also have to weigh in on Trump’s executive order restricting travel from majority-Muslim countries. And in the next few years, the justices are expected to consider new cases involving same-sex marriage, abortion, and gun rights.

Toyota said it would invest more than $1.3 billion in its Georgetown, Ky., plant, its largest factory in the world. Although the investment does not include new jobs, the move signals a deepening commitment to the U.S. market.

The 7.5 million-square-foot Kentucky plant makes several vehicles, including the Camry sedan, which Cars.com has dubbed the most made-in-America car in the U.S. based on an assessment of the car’s components. The plant currently has about 8,200 employees, having added 700 in recent months to launch the redesigned 2018 Camry, which was unveiled in January at the Detroit auto show. The investment adds to a $530 million project authorized in 2013 to make a new Lexus vehicle.

What’s the most valuable car company in the USA? No, it is not GM. At the end of January, short interest in Tesla made up about 35% of the float, or shares available for trading. Tesla was burning through cash and had only  delivered 76,230 vehicles in 2016, well below the 80,000 to 90,000 that Wall Street was expecting. General Motors sold about 10 million cars in 2016.

But a funny thing happened – Tesla shares have been moving higher, up 46% so far, this year, a fact that has caused billions of dollars of losses for those who have bet against it. Tesla now has a larger market capitalization than Ford or General Motors.

Fed Report Unravels Job Data Gains

Charles Schwab; On the Market

Posted: 4/5/2017 4:15 PM ET

Fed Report Unravels Job Data Gains

Early gains for U.S. equities that came courtesy of another batch of stronger-than-expected ADP employment data dissolved, after the minutes from the Fed's March meeting showed support among members to begin shrinking the central bank's balance sheet later this year, as well as the potential of no fiscal stimulus until 2018. Adding to the uncertainty were late-day comments from Speaker of the House Ryan regarding tax reform. Treasury yields declined following the Fed report, while some disappointing reads on the services sector also tempered conviction. Meanwhile, crude oil prices ticked slightly higher, despite an unexpected rise in oil inventories, while gold and the U.S. dollar lost modest ground.

The Dow Jones Industrial Average (DJIA) fell 41 points (0.2%) to 20,648, the S&P 500 Index moved 7 points (0.3%) lower to 2,353, and the Nasdaq Composite declined 34 points (0.6%) to 5,864. In heavy volume, 942 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.12 to $51.15 per barrel and wholesale gasoline was unchanged at $1.72 per gallon. Elsewhere, the Bloomberg gold spot price decreased $3.50 to $1,252.78 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 100.46.

Shares of Panera Bread Co. (PNRA $313) rallied over 14% after announcing an agreement to be acquired by JAB for $315 per share in cash, in a transaction valued at about $7.5 billion, including the assumption of approximately $340 million in debt. JAB is an investor in several companies in the consumer goods category, including owning controlling stakes in Keurig Green Mountain, Krispy Kreme, Peet's Coffee & Tea, and Caribou Coffee Company.

Walgreens Boots Alliance Inc. (WBA $81) reported fiscal 2Q earnings-per-share (EPS) of $0.98, or $1.36 ex-items, versus the $1.37 FactSet estimate, as revenues declined 2.4% year-over-year (y/y) to $29.4 billion, compared to the projected $30.2 billion. WBA reaffirmed its full-year EPS outlook. Separately, the company announced a share repurchase program for up to $1.0 billion. Shares were lower.

Monsanto Co. (MON $115) posted fiscal 2Q EPS of $3.09, or $3.19 ex-items, compared to expectations of $2.79, as revenues rose 12.0% y/y to $5.1 billion, above the forecasted $4.7 billion. MON said it expects full-year earnings to be at the high end of its previous guidance and shares gained ground.

ADP report trounces forecasts, services data misses, Fed minutes rouse cation

The ADP Employment Change Report showed private sector payrolls rose by 263,000 jobs in March, well above the Bloomberg forecast of a 185,000 gain, while February's increase of 298,000 jobs was revised to a gain of 245,000. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader March nonfarm payroll report, expected to show an increase of 180,000 jobs (economic calendar). The unemployment rate is forecasted to remain at 4.7%, and average hourly earnings are projected to rise 0.2% month-over-month (m/m).

The March Institute for Supply Management (ISM) non-Manufacturing Index (chart) declined to 55.2—the lowest since October 2016—from February's unrevised 57.6 level, which was the highest since October 2015, and compared to the Bloomberg forecast of a dip to 57.0. New orders and employment both decreased m/m but continued to show expansion, while prices also grew at a slower pace. The ISM said comments from respondents were mostly positive regarding the outlooks for business conditions and overall economy. However, ISM noted that there were several comments about the uncertainty of future government policies on health care, trade and immigration, and the potential impact on business.

The final Markit U.S. Services PMI Index was revised to 52.8 in March from the preliminary 52.9 level, versus estimates of a 53.1 reading, and compared to the 53.8 figure posted in February. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

The services sector is the largest contributor to U.S. economic output and the reports may have disappointed somewhat, but both indexes remained above 50, a level depicting continued expansion. Also, the data is being countered by the much stronger-than-expected ADP employment report, which showed positive "hard data" and added credence to Schwab’s Chief Investment Strategist Liz Ann Sonders' latest article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data, that after a "typical" weak first quarter, economic growth should accelerate. Based on history, soft data—generally survey-based readings, such as consumer and business measures of confidence, as well as purchasing managers' surveys (PMIs)—is likely to retreat, while hard data—quantitative data or actual measures of economic activity—is likely to gain steam but curb your enthusiasm for a more meaningful acceleration due to longer-term pressures. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The MBA Mortgage Application Index fell 1.6% last week, following the previous week's 0.8% decline. The decrease came as a 4.2% fall in the Refinance Index more than offset a 0.7% gain for the Purchase Index. The average 30-year mortgage rate ticked 1 basis point (bp) higher to 4.34%.

At 2:00 p.m. ET, the minutes from the Fed's March monetary policy meeting were released, noting that most officials supported policy to begin shrinking the Fed's $4.5 trillion balance sheet later this year, while also reiterating its outlook for gradual increases in interest rates. The minutes also showed that most members felt that the economy was at or near full employment, but continued to be divided over inflation, with some Fed officials indicating a "limited risk of a marked pickup in inflation," while others thought there were significant upside risks as a result of a strong jobs market. In addition, members felt that any fiscal stimulus may not come to fruition until 2018.

Treasuries finished higher, as the yields on the 2-year and the 10-year notes, as well as the 30-year bond were 2 bps lower at 1.23%, 2.32%, and 2.98%, respectively.

The markets have been choppy amid some upbeat economic data, exacerbated political uncertainty here and abroad, and the Fed's March rate hike and outlook for future increases. Amid this backdrop, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Financials—Opportunity or End of the Run?, at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch. Also, check out our videos by Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, titled, Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low?, and Randy's and Schwab's Chief Fixed Income Strategist, Kathy Jones' discussion, Three Fed Hikes Seen in 2017: How Should Bond Investors Respond, at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Tomorrow's economic calendar will be light, but offer more jobs data ahead of Friday's labor report, as weekly initial jobless claims will be released, forecasted to decline to a level of 250,000 from the 258,000 posted the week prior.

Europe mixed on data and a rebound in financials, Asia higher

European equities finished mixed, with financials rebounding from recent weakness as bond yields paused from a losing streak as of late and on the heels of yesterday's comments from U.S. President Donald Trump regarding changes to regulations in the banking sector. Oil & gas and basic materials also provided support as crude oil prices continued to recover and amid optimism of economic developments in China. However, conviction may have been stymied by tomorrow's beginning of a two-day meeting between the U.S. and China and Friday's U.S. nonfarm payroll report. Political uncertainty also lingered as Brexit negotiations continue and the markets digested last night's debate in France ahead of its key Presidential election later this month. For analysis of the European political front, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Follow Jeff on Twitter: @jeffreykleintop. Also, check out our article, Brexit Begins: What's Next for the U.K., at www.schwab.com/insights, and Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. The euro dipped and the British pound was higher versus the U.S. dollar following reports showing eurozone services output missed forecasts but continued to show expansion, while U.K. activity in the sector easily beat expectations.

Stocks in Asia finished higher, aided by yesterday's modest gains in the U.S. that snapped a two-session losing streak, while gains may have been limited by the highly-anticipated two-day meeting between the U.S. and China beginning tomorrow and Friday's key U.S. labor report. The markets appeared to shrug off lingering political uncertainty in the U.S. and Europe, as well as reports that North Korea conducted another ballistic missile test. For commentary on global trade and China, check out Schwab's Jeffrey Kleintop's, CFA, articles, Top Five Trade Issues Investors Should Be Watching, and The Fed has China in a Tough Spot. Japanese equities rose modestly, with the yen paring a recent rally and reports showing the nation's manufacturing and services sector growth accelerated. Australian securities also advanced, with strength in basic materials and oil & gas issues leading the way amid the continued recovery in crude oil prices and news out of China.

Stocks in mainland China and Hong Kong gained ground in their return to action following a holiday break, as materials and industrial stocks led the way on optimism plans for a new economic zone near Beijing will bolster earnings, per Bloomberg. Meanwhile, South Korea's markets finished flat, while India's bourse rose slightly, hitting a record high in a return to action following yesterday's holiday. Emerging markets have enjoyed strong returns in 2017, led by Indian stocks, which have rebounded sharply after a brief post U.S. election slide. For more on emerging markets read Schwab's Michelle Gibley's, CFA, article, Emerging Markets: Why They Deserve a Place in Your Portfolio. Read all these commentaries at www.schwab.com/oninternational.