Financial Review

A Quiet Friday in August

Sinclair Noe — August 25, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

Subscribe: Android | RSS

DOW + 30 = 21,813
SPX + 4 = 2443
NAS – 5 = 6265
RUT + 3 = 1377
10 Y – .02 = 2.17%
OIL + .43 = 47.86
GOLD + 5.00 = 1291.80
BITCOIN – 1.09% = 4360.42 USD
ETHEREUM – 0.90% = 328.87

For the week, the Dow rose 0.65 percent, the S&P 500 gained 0.72 percent and the Nasdaq climbed 0.79 percent. The weekly gains for equities snapped a two-week skid of declines for the Dow and S&P 500 and a four-week drop for the Nasdaq.

Hurricane Harvey projected to make landfall around Corpus Christi, Texas between 10 PM and midnight but it is now hitting the Texas coast with heavy wind and rain. The storm is more accurately stretched along a wide swath of the coast, with heavy rains as far east as New Orleans and inland beyond San Antonio.

Harvey is now a Category 3 storm, meaning the government now classifies it as a “major” hurricane with 120-mph winds and gusts over 150-mph. Harvey, the strongest storm to hit the U.S. since Wilma in 2005, is forecast to inundate Houston, Corpus Christi and Galveston, cities with more than 2.6 million people combined, with drenching rain and dangerous flooding. Texas Governor Greg Abbott declared a state of disaster for 30 counties. The storm may generate $1.9 billion of economic losses and $1.3 billion in insured losses.

The problem with this hurricane is they don’t see it trailing off in any direction so it’s just going to hover Harvey could deliver a one-two punch that could also spell trouble for the Houston Ship Channel. One forecast model shows the storm returning to the Gulf of Mexico before making a second landfall closer to Galveston, sending a storm surge into the channel, which carries more than 163 million tons of cargo per year.

The surge, coupled with the rains, could bring about water levels higher than ever recorded in the Houston metropolitan area. A storm surge of up to 12 feet may occur near the Padre Island National Seashore. Storm surges account for close to half of all hurricane deaths. It is going to be an issue for the ship channels.

Harvey may dump as much as 35 inches of rain on areas of Texas over the next week. Usually, you don’t get peak rainfall and peak surge at the same time. If the forecast holds for Houston, rainwater would be running down streams and rivers while ocean water is surging up to meet it. In other words, that unprecedented amount of rain will have nowhere to go.

A large metro area like Houston is also particularly vulnerable to flooding. Large swathes of the city are concrete and asphalt, which prevents rainwater from properly draining. It doesn’t help that Houston is naturally a low-lying city with clay soil that doesn’t drain well anyway. Sewage drainage will probably be a problem and clean water may also be affected. And not just humans are affected – all sorts of wildlife will be moving to higher ground.

The Federal Emergency Management Agency is sending staff and supplies to the region. Flooding will probably close roads and inundate power plants, while strong winds may disrupt utilities’ systems and knock out power to hundreds of thousands of homes and businesses. Anadarko Petroleum, Exxon Mobil and Royal Dutch Shell are among the energy explorers that have shut platforms in the Gulf of Mexico.

Midstream LP shut natural gas capacity in south-central Texas; and Enbridge evacuated non-essential workers from some platforms. BNSF was halting traffic from Galveston Island late Thursday and holding Galveston-bound trains until further notice. Cameron LNG begins evacuating workers ahead of Hurricane Harvey.

Gasoline futures hit a 4-month high in intraday trade. It is estimated the hurricane will push gas prices up by about 10-cents per gallon in the short-term. One of the worst things that can happen to a wind farm is too much wind. The storm could knock out between 2.1 and 3.6 gigawatts of power near the Texas coast.

The weather is fine in Jackson Hole, Wyoming. It’s a nice place to go fly fishing. This morning, Janet Yellen delivered what is probably her final speech to the Jackson Hole Economic Summit, an annual gathering of central bankers.

Yellen defended the government’s response to the 2008 financial-market meltdown while outlining some areas that regulators could review to improve efficiency in the financial system. Yellen focused on financial regulation and veered away from monetary policy. Yellen said reforms put in place after the 2007 to 2009 crisis have strengthened the financial system without impeding economic growth and any changes to these rules should remain modest.

That pretty much signals that she is not expecting to be re-nominated when her term expires in February.

European Central Bank president Mario Draghi also spoke at Jackson Hole. Draghi said he still is not seeing much inflation in the Eurozone and “a significant degree of monetary accommodation is still warranted.” Draghi said protectionist policies pose a “serious risk” for growth in the global economy.

Gary Cohn, who was president of Goldman Sachs before accepting a position in the Trump administration as head of the White House national economic council, is considered the front-runner to replace Yellen as the next Chair of the Federal Reserve.

Today Cohn said he had come under “enormous pressure” to resign after Trump equivocated in his denunciation of white supremacist groups, saying there had been “very fine people on both sides” at the demonstrations. The economic adviser said he had considered stand down but decided to stay on after discussions with the president. The New York Times reported he had gone as far as drafting a letter of resignation.

Treasury Secretary Steven Mnuchin said on Friday the nation’s debt ceiling will be raised in September and that after talks with congressional leaders from both parties everyone is “on the same page.” Mnuchin says he’s hopeful about getting a tax-code overhaul done by the end of this year after flatly stating he was “wrong” about finishing a deal by August.

Investors are fleeing U.S. stocks in a way they haven’t since 2004. According to a new Bank of America Merrill Lynch, for 10 straight weeks a total of $30 billion has left U.S. stocks, marking the longest streak of outflows since 2004.

Investors turned instead to emerging markets and European and Japanese stocks, which saw $36 billion in inflows over the last 10 weeks. The 10-week outflow from U.S. stocks comes despite the S&P 500’s nearly 1 percent gain this quarter and a record high on Aug. 8.

Some of the top sectors of the year have seen significant outflows, including tech, financials, and the consumer sectors. The only sector that has seen inflows – defense stocks. By investing style, investors withdrew $1.6 billion from U.S. growth stock funds and $1.1 billion from U.S. value stock funds

A South Korean court found Lee Jae-yong, heir to the Samsung empire and its de facto leader, guilty on charges of bribery and embezzlement, and other crimes. The court sentenced Lee to five years in prison. That’s less than the 12-year term prosecutors were hoping for. But it’s long enough to ensure that he will spend time behind bars.

Lee’s father, Lee Kun-hee, himself was once convicted for tax evasion, but he never served prison time because sentences of up to three years can be suspended. The ruling puts a cap on months of proceedings that tied the country’s single most important company to a corruption scandal revolving around former president Park Geun-hye. Park was impeached in March and is herself separately on trial.

The court found Lee guilty of providing $6.3 million in bribes to Park’s personal confidante, to secure approval for a merger between two Samsung subsidiary companies that gave Lee more power at the expense of other shareholders. Lee will appeal the conviction.

The conviction also marks a win for Koreans hoping to hold accountable the country’s chaebol—the country’s family-run conglomerates, which the public has increasingly resented for their corruption and grip on the economy. Newly-elected president Moon Jae-in made chaebol reform a key part of his campaign platform.

From exploding phones to execs charged with embezzlement, it has been an eventful year for Samsung, and none of those problems seem to matter. Samsung shares have gained 40% over the past year, a rise worth some $85 billion in market cap.

YouTube has expanded the internet-delivered YouTube TV subscription service into 14 new U.S. markets, which makes it available to half of all U.S. households. YouTube added the Phoenix market in July. According to Google, YouTube TV now offers the most markets with live local broadcast feeds from the four major broadcasters — ABC, CBS, Fox and NBC — than any over-the-top competitor.

Rivals in the space include AT&T’s DirecTV Now, Dish Network’s Sling TV, Hulu, Sony’s PlayStation Vue and FuboTV. However, the YouTube TV “skinny bundle” is missing big chunks of the cable dial. Unavailable on the service: networks from Turner, including CNN, TBS and TNT; Viacom; Discovery Communications; and Scripps Networks Interactive. HBO also isn’t available as an option, but Showtime is.

How much traction YouTube TV has gained to date isn’t fully clear; Google hasn’t released any subscriber numbers. But the service, and the other OTT contenders, are clearly appealing to a consumer segment that’s looking for a cheaper alternative to cable, satellite and telco TV — and traditional pay-TV customers are continuing to dwindle.

After weeks of relative slumber, gold traders were rudely awoken to a surge in volume and volatility. In a span of one minute, gold futures contracts equaling more than 2 million ounces traded. Prices spike, then dropped just as fast, and gold settled slightly higher for the session.

We don’t know who or why. But so much for a quiet Friday in late August.

Stocks Mixed Amid Persistent Uncertainty

Charles Schwab: On the Market

Posted: 8/25/2017 4:15 PM ET

Stocks Mixed Amid Persistent Uncertainty

U.S. equities finished out the week mixed in a choppy session, as a morning relief rally succumbed to the recent persistent uncertainty. Early gains came as political concerns seemed to have eased somewhat, with President Trump's top economic advisor Gary Cohn suggesting he will not leave his post. However, the highly-anticipated speeches from Fed Chair Janet Yellen and ECB President Mario Draghi didn’t offer anything new to remedy swirling anxiety surrounding global monetary policy. The U.S. dollar fell following Yellen’s and Draghi’s remarks, but bounced off the lows of the day, and Treasury yields ticked lower, while gold was higher and crude oil prices were mixed.

The Dow Jones Industrial Average (DJIA) rose 30 points (0.1%) to 21,814, the S&P 500 Index added 4 points (0.2%) to 2,443, and the Nasdaq Composite shed 6 points (0.1%) to 6,266. In light-to-moderate volume, 663 million shares were traded on the NYSE and 1.4 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.44 to $47.87 per barrel and wholesale gasoline lost $0.01 at $1.62 per gallon. Elsewhere, the Bloomberg gold spot price gained $4.42 to $1,290.82 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 92.50. Markets were higher for the week, as the DJIA increased 0.6%, the S&P 500 Index rose 0.7% and the Nasdaq Composite gained 0.8%.

Ulta Beauty Inc. (ULTA $212) reported Q2 earnings-per-share (EPS) of $1.83, above the $1.78 FactSet estimate, as revenues grew 20.6% year-over-year (y/y) to $1.3 billion, roughly matching expectations. Q2 same-store sales rose 11.7% y/y, just shy of the 12.0% increase that the Street had projected. ULTA issued Q3 EPS guidance that had a midpoint below estimates, while its revenue and same-store sales outlooks were roughly in line with projections. For the full-year, the company raised its guidance. Shares finished solidly lower.

Broadcom Ltd. (AVGO $246) posted fiscal Q3 EPS of $1.14, or $4.10 ex-items, compared to the expected $4.03, as revenues rose 18.0% y/y to $4.5 billion, roughly in line with estimates. BRCM issued Q4 revenue guidance that was mostly in line with forecasts. Shares were lower as the company suggested some areas of weakness in its hard disk drive and data center segments that are fostering some concerns on the Street.

GameStop Corp. (GME $19) announced Q2 earnings of $0.22 per share, or $0.15 ex-items, compared to the $0.18 estimate, as revenues rose 3.4% y/y to $1.7 billion, above the projected $1.6 billion. Q2 same-store sales rose 1.9%, versus the expected 2.2% decline, but its gross margin declined y/y and missed the Street's forecasts. GME reaffirmed its full-year EPS outlook and said it expects same-store sales to be at the high end of its previous guidance. Shares fell sharply on analyst concerns about the lighter-than-expected gross margin.

Early look at July manufacturing demand show core orders grew

July preliminary durable goods orders (chart) fell 6.8% month-over-month (m/m), compared to the Bloomberg estimate of a 6.0% drop, and June's 6.4% jump was unrevised. Ex-transportation, orders were 0.5% higher m/m, compared to forecasts of a 0.4% gain and versus June's unrevised 0.1% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, grew 0.4%, in line with projections, and following the unrevised flat reading posted in the month prior.

The headline figure was driven by the volatile component of transportation equipment as nondefense aircraft and parts orders fell nearly 71% m/m, more than offsetting a 48% rise in defense aircraft and parts, and following the prior month's 129% surge. Demand for computers and related products, along with electrical equipment, appliances and components led the rise in core durable goods orders, partially offset by declines in orders for communications and machinery goods.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: What Makes the World Go Around?, the industrial sector is often overlooked but is at the center of much of what occurs in the global economy. Improving global growth and a solid U.S. economy should bode well for industrials. However, the diversity of the group and monetary and fiscal uncertainty keep us from upgrading the sector … for now. Read more on the Markets & Economy page at www.schwab.com and follow us on Twitter: @schwabresearch.

Treasuries were mostly higher, as the yield on the 2-year note was little changed at 1.33%, while the yield on the 10-year note decreased 3 basis points (bps) to 2.17% and the 30-year bond rate declined 2 bps to 2.75%.

Treasury yields came under pressure in the wake of Fed Chairwoman Janet Yellen's speech at the Fed's symposium in Jackson Hole, Wyoming. Amid the backdrop of festering global monetary policy uncertainty on signs of steady economic growth but low inflation, Yellen offered little in terms of economic and monetary policy commentary, focusing on financial regulation. She pointed out progress in putting in place a regulatory and supervisory structure to lower risks to financial stability and achieving a stronger financial system. Yellen added that any changes to post-crisis financial reforms should be "modest." She did note that "substantial progress has been made" toward the Fed's economic objectives of maximum employment and price stability. The markets were looking for any clues to the possibility of another rate hike this year and if the Central Bank will begin the process of shrinking its behemoth $4.5 trillion balance sheet next month as most are expecting.

Similar to Yellen, European Central Bank President (ECB) Mario Draghi steered clear from commenting on future monetary policy in his afternoon speech at the Fed symposium, instead focusing on trade and tax regulations. The euro jumped following Draghi’s remarks, adding pressure to the U.S dollar, as the lack of commentary toward future policy only added to the recent uncertainty.

For more on the Fed gathering, see the video by Schwab's Chief Fixed Income Strategist Kathy Jones titled, Jackson Hole Agenda: What's Next for the Fed and ECB? on the Insights & Ideas page at www.schwab.com. Follow Kathy on Twitter: @kathyjones.

Europe gives up gains, Asia mostly higher as monetary policy eyed

European stocks relinquished early gains and finished mostly lower, with the euro and British pound gaining noticeable ground on the greenback after Fed Chair Janet Yellen offered few new clues to monetary policy at the highly-anticipated Fed symposium in Jackson Hole, Wyoming. Caution appeared evident ahead of today's speech by ECB President Draghi at the Fed's symposium. Bond yields in the region finished mixed. Germany reported Q2 GDP growth of 2.1% y/y, in line with forecasts, and versus the 1.9% expansion posted in Q1. In other economic news, the expectations component of the August German business confidence report unexpectedly improved, while French consumer confidence dipped as expected for this month.

Amid the backdrop of solid earnings and economic growth, along with lingering political and trade uncertainty, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA offers his articles, Earnings may be about to do something they've never done before, on the Markets & Economy page at www.schwab.com, as well as Top Five Trade Issues Investors Should Be Watching on the International Investing page. Jeff and Vice President of Trading and Derivatives, Randy Frederick deliver the video, Political Risk: How Should Investors Respond? on the Insights & Ideas page. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished mostly higher to close out the week even as potential volatility-boosting speeches from the Fed and ECB loomed on the horizon, while U.S. political and global trade uncertainty festered. Japanese equities rose, with the yen extending yesterday's decline, and as the Asian country reported that national consumer price inflation rose in line with expectations in July, while Tokyo consumer price inflation for August came in hotter than expected. Mainland Chinese stocks and those listed in Hong Kong rallied, with earnings results in the region boosting sentiment, while securities in South Korea overcame early weakness and ticked slightly higher. For a look at emerging markets, see Schwab's Jeffrey Kleintop's CFA, article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com. Shares in Australia finished flat and Indian markets were closed for a holiday.

Stocks avoid third straight weekly decline

U.S. stocks rebounded from back-to-back weekly declines in typical late-August subdued volume. Earnings season wrapped up with mixed results from the consumer discretionary and staples sectors, but Q2 remained on track to post profit growth breaching 9.0% and revenue expansion topping 5.0%. Even as U.S. political uncertainty festered, sentiment appeared soothed by reports of progress on tax reform and as President Donald Trump's top economic advisor Gary Cohn suggested he will not leave his post. Signs of continued global growth likely buoyed the markets, with eurozone and U.S. business activity reports from Markit showing expansion persisted in August, helping overshadow disappointing U.S. existing and new home sales reports. Stocks showed some resiliency in the face of lingering global monetary policy as highly-anticipated speeches by Fed Chair Yellen and ECB President Draghi came into focus ahead their September monetary policy meetings. The U.S. Dollar Index fell back to lows not seen since May 2016 and crude oil prices continued to drop, while the Treasury yield curve flattened a bit.

Next week, low volume, politics and the geopolitical front will likely remain sources of volatility, but a robust back-end loaded U.S. economic calendar is poised to garner attention, headlined by Friday's August nonfarm payroll report. Consumer Confidence and the second (of three) read on Q2 GDP will get the ball rolling, followed by July personal income and spending data, while August releases of the ISM Manufacturing Index, final University of Michigan Consumer Sentiment Index and auto sales will join the labor report to close out the week.

As noted in the latest Schwab Market Perspective: Volatility Returns!, the latest bout of volatility illustrates why investors should stay focused on the longer-term. Risks for a more substantial pullback in the near-term still exist, as valuations remain elevated. After a weak first quarter, U.S. economic growth has rebounded, with an improving employment picture, tightening labor market, rising median wage growth, and a relatively healthy consumer. Even though past performance is no indication of future results, a prolonged bear market has never occurred outside the context of a recessionary environment. Looking at the Index of Leading Economic Indicators (LEI) from the Conference Board, there are no signs of a coming recession and the U.S. economy is getting some support from the rest of the world. Read more on the Markets & Economy page at www.schwab.com.

International reports due out next week that deserve a mention include: Australia—building approvals. China—industrial profits, Manufacturing and non-Manufacturing PMIs. India—Q2 GDP. Japan—household spending, retail sales, and industrial production. Eurozone—economic confidence, unemployment rate, consumer price inflation and Markit's Manufacturing PMI, along with German retail sales and unemployment change. U.K.—mortgage approvals and Markit's Manufacturing PMI.

Stocks Snap Out of Recent Funk

Charles Schwab: On the Market

Posted: 8/22/2017 4:15 PM ET

Stocks Snap Out of Recent Funk

The U.S. equity markets joined their foreign counterparts in a global rally, courtesy of reports suggesting signs of tax reform progress that helped to tamp down omnipresent geopolitical worries. Treasury yields were higher and the U.S. dollar was flat amid another low-key economic calendar, as well as Friday's looming speeches from Fed Chief Yellen and ECB President Draghi at the key symposium in Jackson Hole, Wyoming. Meanwhile and crude oil prices gained modest ground and gold was lower.

The Dow Jones Industrial Average (DJIA) advanced 196 points (0.9%) to 21,900, the S&P 500 Index was 24 points (1.0%) higher at 2,453, and the Nasdaq Composite jumped 84 points (1.4%) to 6,297. In light-to-moderate volume, 688 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.30 higher to $47.83 per barrel and wholesale gasoline was up by $0.01 to $1.59 per gallon. Elsewhere, the Bloomberg gold spot price decreased $6.77 to $1,285.11 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 93.55.

Toll Brothers Inc. (TOL $37) reported fiscal Q3 earnings-per-share (EPS) of $0.87, above the $0.69 FactSet estimate, as revenues rose 18.0% year-over-year (y/y) to $1.5 billion, roughly in line with forecasts. The luxury homebuilder issued full-year revenue guidance with a midpoint just shy of the Street's estimates, while narrowing its outlook for deliveries for the year. Shares of TOL came under pressure.

DSW Inc. (DSW $18) posted Q2 EPS of $0.35, or $0.38 ex-items, versus the projected $0.29, with revenues growing 3.3% y/y to $680 million, above the estimated $666 million. The shoe retailer's Q2 same-store sales rose 0.6% y/y, compared to the expected 2.2% drop. DSW reaffirmed its full-year guidance, while announcing a new $500 million share repurchase program. Shares rallied.

Medtronic PLC. (MDT $82) announced fiscal Q1 earnings of $0.74 per share, or $1.12 ex-items, compared to the forecasted $1.08, as revenues rose 3.0% y/y to $7.4 billion, mostly matching estimates. MDT reaffirmed its full-year guidance. MDT traded lower.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA points out in his latest article, Earnings may be about to do something they've never done before, the earnings estimates for the world's companies have risen back to $30 again for the fourth time in 10 years. Without a rise in earnings above $30, stock prices may find it difficult to move any higher. Thanks to solid global growth supporting all the major regions of the world a break out above $30 now appears more likely than it has in a decade. Read more on the Markets & Economy page at www.schwab.com and follow Jeff on Twitter: @jeffreykleintop.

Macy's Inc. (M $20) was nicely higher after the retailer announced restructuring plans, in addition to the appointment of former Senior Vice President of eBay North America, Hal Lawton, as President, effective September 8. 

Regional manufacturing report continues to show solid growth

The Richmond Fed Manufacturing Activity Index remained at July's unrevised 14 level in August, versus the Bloomberg expectation of a decline to 10, with a reading above zero denoting expansion.

Treasuries are lower with the yields on the 2-year and 10-year notes, along with the 30-year bond, rising 2 basis points to 1.32%, 2.20% and 2.78%, respectively.

Treasury yields and the U.S. dollar are gaining ground and action remains choppy as the markets grapple with monetary policy uncertainty in the face of mostly upbeat economic data and persistent low inflation, while the Fed is expected to begin to reduce its behemoth balance sheet. This sets the stage for Friday's key Fed symposium in Jackson Hole, Wyoming, where Fed Chief Janet Yellen and European Central Bank (ECB) President Mario Draghi are expected to speak.

As noted in the latest Schwab Market Perspective: Volatility Returns!, the Federal Reserve is likely to embark on its quantitative tightening (QT) plan, in order to slowly unwind its bloated balance sheet. We have confidence that the Fed has little desire to jolt the financial markets, but it and the market are in uncharted territory as unwinding a $4.5 trillion balance has never been done historically. We continue to believe this will be an additional volatility-driver. Read more on the Markets & Economy page at www.schwab.com.

Tomorrow, the preliminary Markit Manufacturing and Services PMI Indexes with don the economic calendar, with economists anticipating readings of 53.5 and 55.0, respectively, while housing data will be released in the form of new home sales, forecasted to be flat m/m during July at an annual rate of 610,000 units, and weekly MBA Mortgages Applications will also be reported.

Europe higher despite data and looming ECB speech, Asia up in cautious trading

European equities finished mostly higher, with the euro and British pound losing ground on the U.S. dollar, and as basic materials issues led the way. The markets shrugged off lingering geopolitical concerns, and caution ahead of speeches by Fed Chair Yellen and ECB President Draghi in Jackson Hole, Wyoming, on Friday. A disappointing read on German investor sentiment, which deteriorated for a third-straight month in August, also did not derail the advance in the region. Bond yields in the region mostly moved to the upside. Schwab's Jeffrey Kleintop, CFA points out in his article, What are fund flows telling us about trends and risks in the global stock market?, the trends in money flows this year show a change to a rising overall inflow of money as investors take note of better overall stock market performance and a preference for ETF that invest in non-U.S. markets. The underlying distribution of money flows appears to be driven by fundamentals or diversification, rather than purely by performance or geopolitical risk aversion, suggesting a trend that is more deeply rooted (although some markets may be vulnerable in the event of an escalation of geopolitical risk). Investors may want to consider these trends as they consider the global diversification in their own portfolio. Read more on the Markets & Economy page at www.schwab.com.

Stocks in Asia finished mostly higher though the markets appeared to remain cautious ahead of this week's speeches from central bank leaders in the U.S. and Europe. Also, focus on the Korean peninsula remained amid heightened tensions between North Korea and the U.S., with the latter conducting its annual joint military drills with South Korea. South Korea's markets moved modestly higher. For more on the geopolitical front, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the International Investing page at www.schwab.com, as well as Schwab's Chief Investment Strategist Liz Ann Sonders' latest commentary, Twist and Shout: United States Takes on North Korea … Implications for Stocks on the Markets & Economy page. Follow Liz Ann on Twitter: @lizannsonders. Mainland Chinese stocks inched higher, while those traded in Hong Kong gained solid ground. Meanwhile, markets in Australia advanced and Indian securities nudged to the upside, but Japanese equities dipped modestly, extending a recent losing streak even as the yen pared some of a recent gain.

The Markit Manufacturing PMI Indexes from across the globe will dominate tomorrow's international economic calendar, while consumer confidence from the Eurozone is also on tap.

Stocks Close Near Lows Amid Flow of DC Woes

Charles Schwab: On the Market

Posted: 8/17/2017 4:15 PM ET

Stocks Close Near Lows Amid Flow of DC Woes

U.S. stocks closed sharply lower with tech listings under scrutiny and leading the decline after results from Dow member Cisco Systems disappointed on its profit margin outlook. The pressure on equities developed early and accelerated toward the end of the trading session as the dysfunction in DC continues and monetary policy uncertainty remains. Treasuries, gold and crude oil prices were higher and the U.S. dollar ticked to the upside after paring its initial advance. In other economic developments, reads on weekly jobless claims, manufacturing and Leading Indicators were upbeat, but had seemingly little impact.

The Dow Jones Industrial Average (DJIA) fell 274 points (1.2%) to 21,750, the S&P 500 Index dropped 38 points (1.5%) to 2,430, and the Nasdaq Composite tumbled 123 points (1.9%) to 6,222. In moderate volume, 739 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.31 to $47.09 per barrel and wholesale gasoline was $0.03 higher at $1.59 per gallon. Elsewhere, the Bloomberg gold spot price gained $5.66 to $1,288.77 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 93.67.

Dow member Wal-Mart Stores Inc. (WMT $80) reported Q2 earnings-per-share (EPS) of $0.96, or $1.08 ex-items, compared to the $1.07 FactSet estimate, as revenues grew 2.1% year-over-year (y/y) to $123.4 billion, above the forecasted $122.8 billion. Q2 U.S. same-store sales rose 1.8% y/y, in line with expectations. The company highlighted increased traffic at store levels and on-line. WMT issued Q3 EPS and same-store sales guidance with midpoints slightly below estimates, while raising the low end of its full-year profit outlook. Shares were under pressure.

Dow component Cisco Systems Inc. (CSCO $31) announced fiscal Q4 EPS of $0.48, or $0.61 ex-items, compared to the projected $0.61, as revenues declined 4.0% y/y to $12.1 billion, roughly in line with forecasts. The company noted that it made progress transitioning its business to more software and recurring revenue. CSCO issued Q1 earnings and revenue guidance that matched estimates, while its profit margin outlook missed expectations. Shares traded lower.

L brands Inc. (LB $38) posted Q2 earnings of $0.48 per share, versus the $0.45 estimate, on previously reported revenues of $2.8 billion. The retailer said its Q2 same-store sales decline of 8.0% y/y was below its expectations. The company said the exit of swim and apparel categories had a negative impact on total company and Victoria's Secret same-store sales. LB issued Q3 EPS guidance that missed forecasts and it lowered its sales outlook, while lowering its full-year profit projection. Shares closed lower.

Jobless claims decline, Leading Indicators continue to climb

Weekly initial jobless claims (chart) declined by 12,000 to 232,000 last week, below the Bloomberg forecast of 240,000, with the prior week’s figure being unrevised at 244,000. The four-week moving average dipped by 500 to 240,500, while continuing claims decreased 3,000 to 1,953,000, south of estimates of 1,955,000.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for July rose 0.3% month-over-month (m/m), matching projections, and compared to last month's unadjusted 0.6% increase. This was the eleventh-straight monthly gain for the index, bolstered by ISM new orders, the yield curve, and consumer expectations, which more than offset the negative impact of building permits.

Industrial production (chart) was up 0.2% m/m in July, below estimates calling for a 0.3% gain, and compared to June's unrevised 0.4% increase. Manufacturing production dipped as output in the auto sector fell substantially and excluding the sector, manufacturing activity expanded. Mining and utilities production rose solidly. Capacity utilization remained at June's upwardly revised 76.7% rate, in line with forecasts. Capacity utilization is 3.2 percentage points below its long-run average.

The Philly Fed Manufacturing Index (chart) in August dipped to 18.9 from 19.5 in July, though a reading above zero indicates expansionary activity, compared to estimates of a decline to 18.0.

Treasuries ticked higher, with the yields on the 2-year note and the 30-year bond dipping 3 basis point (bps) to 1.30% and 2.78%, respectively, while the yield on the 10-year note declined 4 bps to 2.19%. Treasury yields and the U.S. dollar have been choppy as of late as some upbeat economic data has countered persistent subdued inflation reports, and yesterday's Fed meeting minutes showed the Central Bank is grappling with the divergence between the tightening labor market and low inflation. Also, the markets appeared to showing a dovish takeaway from the European Central Bank's July meeting minutes, while global sentiment continues to recover as concerns about the heightened tensions between North Korea and the U.S. recede.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Twist and Shout: United States Takes on North Korea … Implications for Stocks the S&P 500 was hit with a sharp near-1.5% reversal last Thursday, followed by a relief rally. We don't believe significant military escalation is the likely outcome of the battle of wills between President Trump and North Korea’s Kim Jong Un. But it is a year ending in "7" and there are other forces at work which could keep stocks in a choppy pattern for the next couple of months. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Tomorrow, the lone release from the U.S. economic calendar will be the preliminary University of Michigan Consumer Sentiment Index for August, expected to have ticked higher to a reading of 94.0 from July's final read of 93.4.

Europe lower on monetary policy uncertainty, Asia mixed

European equities traded to the downside, as the markets grappled with monetary policy uncertainty, with yesterday's Fed meeting minutes revealing division regarding the divergence between the strong labor market and low inflation. Also, today's look at the July European Central Bank (ECB) meeting showed policymakers were concerned about the overheating of the euro, fostering uncertainty regarding the central bank's timing of the removal of stimulus measures. This comes on the heels of yesterday's reports that ECB President Mario Draghi will not introduce a new policy message at next week's key Fed symposium in Jackson Hole, Wyoming. The economic calendar delivered a larger-than-expected eurozone trade surplus and stronger-than-forecasted U.K. retail sales. The euro declined and the British pound dipped versus the U.S. dollar, while bond yields in the region were lower.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA points out in his article, What are fund flows telling us about trends and risks in the global stock market?, that the money coming into ETFs is flowing into a broad range of stock markets featuring a preference for international stocks and revealing a surprising disconnect with the performance and geopolitical risk of the underlying markets. Read more on the Markets & Economy page at www.schwab.com and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed following some relatively upbeat data in the region, while the markets grappled with monetary policy uncertainty as yesterday's Fed minutes showed the Central Bank remains divided on the strong labor market and low inflation. Also, the exacerbated political dysfunction in the U.S. garnered attention, though concerns about the tensions between North Korea and the U.S. continued to fade.

Japanese equities dipped as the yen gained ground following a larger-than-expected trade surplus in the nation and as the U.S. dollar lost ground. Australian securities also slipped, even as the nation's employment growth topped expectations. Shares in mainland China finished higher, while those traded in Hong Kong declined. Indian stocks ticked higher and South Korean equities advanced. Markets in South Korea continued to trade near all-time highs despite the recently flared-up geopolitical tensions in the region, and Schwab's Jeffrey Kleintop, CFA, offers his articles, Missiles and Markets: An investor guide to geopolitical risks and The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com.

The international economic docket for tomorrow will be light, with reports to include PPI from Germany, the current account from both Italy and the Eurozone, as well as construction output from the latter.

Stocks Bounce with Financials in the Lead

Charles Schwab: On the Market

Posted: 6/28/2017 4:15 PM ET

Stocks Bounce with Financials in the Lead

U.S. equities posted solid gains with financials leading the way, adding to their recent rebound, and as Treasury yields at the mid-to-long end of the curve saw gains. Technology issues stabilized from their recent tumble and energy stocks gained ground on an uptick in crude oil prices, despite an unexpected bearish inventory report. The U.S. dollar finished nearly unchanged after a choppy session, on some euro volatility and as comments from Bank of England Governor Carney boosted the pound. Gold was higher.

The Dow Jones Industrial Average (DJIA) rose 144 points (0.7%) to 21,455, the S&P 500 Index increased 21 points (0.9%) to 2,441, and the Nasdaq Composite jumped 88 points (1.4%) to 6,234. In moderate volume, 854 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.50 to $44.74 per barrel and wholesale gasoline was $0.02 higher at $1.47 per gallon. Elsewhere, the Bloomberg gold spot price increased $3.03 to $1,250.20 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 95.99.

General Mills Inc. (GIS $57) reported Q4 earnings-per-share (EPS) of $0.69, or $0.73 ex-items, versus the $0.71 FactSet estimate, as revenues declined 3.0% year-over-year (y/y) to $3.8 billion, roughly in line with forecasts. GIS issued current year EPS guidance that came in slightly below forecasts. Separately, the company increased its quarterly dividend by 2.1% to $0.49 per share. Shares were higher.

KB Home (KBH $24) posted fiscal Q2 EPS of $0.33, above the projected $0.26, as revenues grew 24.0% y/y to $1.0 billion, north of the expected $930 million. Home deliveries rose 11% y/y, while net order and backlog values both posted mid-to-high double-digit growth. KBH said the housing market recovery continues on a steady path, supported by favorable industry fundamentals, while raising its full-year guidance. KBH gained ground.

Spectranetics Corp. (SPNC $38) surged over 25% after Royal Philips NV (PHG $36) agreed to acquire the maker of devices to treat cardiac disease for $38.50 per share in cash or about $1.7 billion.

The recent tech sector volatility remains in focus, and we discuss this in the latest article, Tech's Rough Ride: Is There More Turmoil Ahead? on the Insights & Ideas page at www.schwab.com, and be sure to follow us on Twitter: @schwabresearch. Moreover, Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, The Space Between … Tech Today Doesn't Resemble Tech Circa 2000, that in typical fashion, the financial media may have gone a little overboard with its breathless reporting on the recent "tech wreck." She adds that tech companies' fundamentals and valuations look vastly dissimilar to the 2000 era. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

This volatility surrounding the tech sector has fostered some rotation among the major sectors and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, provides us with a fresh method to view the 11 major sectors in his latest Schwab Sector Views: From the Top Down on the Markets & Economy page at www.schwab.com.

Pending home sales unexpectedly decline, mortgage applications fall

Pending home sales declined 0.8% month-over-month (m/m) in May, versus the Bloomberg projection of a 1.0% increase, and following the downwardly revised 1.7% drop registered in April. Compared to last year, sales were 0.5% higher, matching forecasts. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which surprised to the upside in May.

The MBA Mortgage Application Index fell 6.2% last week, following the previous week's 0.6% rise. The drop came as an 8.6% fall in the Refinance Index was met with a 4.1% decline for the Purchase Index. The average 30-year mortgage rate remained at 4.13%.

The advance goods trade deficit narrowed more than expected to $65.9 billion in May, from the downwardly revised $67.1 billion in April, and compared to the Bloomberg expectation of $66.0 billion.

Preliminary wholesale inventories rose 0.3% m/m in May, versus forecasts for a 0.2% increase, and following April's favorably revised 0.4% decrease.

Treasuries were mixed, as the yield on the 2-year note declined 2 basis points (bps) to 1.35%, while the yield on the 10-year note ticked 1 bp higher to 2.22% and the 30-year bond rate rose 2 bps to 2.77%. Bond yields have rebounded somewhat as of late from depressed levels and Schwab's Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. We expect the Federal Reserve to continue to tighten monetary policy and reduce its balance sheet gradually, assuming inflation doesn't slip further. Read more, including how we feel investors should position themselves in this environment on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

Finally, the political front remains in focus with yesterday's delay in the Senate healthcare bill vote until after the July 4th holiday exacerbating uncertainty, while the debt ceiling debate continues and the markets are looking for any developments on tax and regulatory reforms, as well as other reflationary policy implementation. As such, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, on the Insights & Ideas page at www.schwab.com.

Tomorrow's economic docket will consist of the third and final read for Q1 GDP, with economists anticipating no revision to the quarterly 1.2% annualized growth rate in the second release, nor the 2.2% increase in personal consumption, as well as weekly initial jobless claims, forecasted to tick lower to 240,000 from the prior week's 241,000.

European mixed amid euro and pound volatility, Asia mostly lower on uncertainties

European equities finished mixed following a brief afternoon recovery on a short-lived reverse to the downside for the euro on reports that European Central Bank (ECB) members are saying the markets misjudged President Mario Draghi's comments yesterday. The euro moved back into the green, extending yesterday's rally that came as the markets appeared to have a hawkish takeaway from Draghi's speech. He pointed out a strengthening and broadening recovery, while saying that pressures on inflation are temporary and that "the threat of deflation is gone and reflationary forces are at play." Bond yields in the region finished mixed. Amid this backdrop, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com. The British pound rallied versus the U.S. dollar as Bank of England Governor Mark Carney said policy makers may need to begin the removal of stimulus if the trade-off between growth and inflation continues to lessen and the central bank will discuss this in the coming months. Oil & gas issues pared early pressure as crude oil prices reversed losses. Political uncertainty continued to linger ahead of key elections in the eurozone and as U.K. Brexit negotiations are set to ramp up. Jeff and Vice President of Trading and Derivatives, Randy Frederick offer the video, Political Risk: How Should Investors Respond?, on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. In economic news, French consumer confidence jumped and Spanish retail sales rebounded.

Stocks in Asia finished mostly lower following the declines in the U.S. and Europe yesterday that came courtesy of the continued rollover in technology stocks, the delayed U.S. healthcare bill vote and hawkish commentary from ECB President Draghi that boosted the euro. Japanese equities declined, with the yen choppy following a recent decline. Mainland Chinese stocks and those in Hong Kong declined amid the aforementioned headwinds, and ahead of Friday's release of manufacturing and services sector reports. Meanwhile, Australian securities advanced nicely, led by strength in basic materials, oil & gas and financial issues amid a rise in global bond yields and continued rebound in crude oil prices, while markets in South Korea and India declined. For a look at the global landscape, see Schwab's Jeffrey Kleintop's, CFA, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com.

Tomorrow's international economic calendar will include retail sales and the trade balance from Japan, CPI from Spain, consumer and business confidence from the Eurozone, and CPI from Germany.

Stocks Close with Minor Gains

Charles Schwab: On the Market

Posted: 6/8/2017 4:15 PM ET

Stocks Close with Minor Gains

U.S. stocks fluctuated between gains and losses before ultimately closing to the upside as the European Central Bank's monetary policy decision, testimony from former FBI Director Comey and today's election in the U.K. had seemingly little impact on the markets. Treasury yields continued to rebound to lend some support to financial shares, while crude oil prices recovered modestly after tumbling yesterday, the U.S. dollar rose and gold was lower.

The Dow Jones Industrial Average (DJIA) increased 9 points to 21,183, the S&P 500 Index gained 1 point to 2,434, and the Nasdaq Composite added 24 points (0.4%) to 6,322. In moderately-heavy volume, 910 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.08 to $45.64 per barrel and wholesale gasoline was unchanged at $1.49 per gallon. Elsewhere, the Bloomberg gold spot price decreased $6.23 to $1,280.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 97.01.

Alibaba Group Holding Ltd. (BABA $142) traded solidly higher after the Chinese-based e-commerce company projected a sharp 45-49% year-over-year (y/y) increase in revenue for the current year, easily topping analysts' expectations.

J.M. Smucker Co. (SJM $129) reported fiscal Q4 earnings-per-share (EPS) of $0.96, or $1.80 ex-items, versus the FactSet estimate of $1.72, as revenues declined 1.0% y/y to $1.8 billion, roughly in line with expectations. SJM issued current year EPS guidance with a midpoint that exceeded the Street's estimates. The company also announced an increase to its cost management program. Shares finished lower.

Nordstrom Inc. (JWN $45) rallied sharply after the company announced that members of the Nordstrom family are exploring the possibility of pursuing a going private transaction.

Jobless claims decline but top expectations

Weekly initial jobless claims (chart) declined by 10,000 to 245,000 last week, above the Bloomberg forecast of 240,000, with the prior week’s figure being revised higher by 7,000 to 255,000. The four-week moving average increased by 2,250 to 242,000, while continuing claims dipped by 2,000 to 1,917,000, south of estimates of 1,920,000.

For more on the employment picture, see Schwab’s Chief Investment Strategist Liz Ann Sonders' latest article, Turn Down For What: Why is Job Growth Slowing?, in which she discusses last Friday’s weak jobs report that raised alarm bells about slowing job growth, but notes that perhaps it's natural at this stage in the cycle. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Treasuries were lower, with the yield on the 2-year note rising 1 basis point (bp) to 1.32%, while the yields on the 10-year note and the 30-year bond gained 2 bps to 2.19% and 2.85%, respectively.

Treasury yields have rebounded somewhat from recent pressure that has come amid heightened political uncertainty on both sides of the Atlantic, mixed economic data, and the market grappling with the Fed's highly expected rate hike next week and the likelihood that the Fed could begin the process of shrinking its large balance sheet later this year. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the Fed's potential changes to its bloated balance sheet and the impact on the bond markets in her article, Will the Fed Reduce Its Balance Sheet? What Bond Investors Should Know on the Fixed Income page at www.schwab.com. Follow Kathy on Twitter: @kathyjones. Also, Liz Ann Sonders addresses this in her commentary, Gimme Three Steps … and a Stumble? on the Markets & Economy page, pointing out that reducing the gargantuan balance sheet is a form of tightening and the transition from quantitative easing (QE) to quantitative tightening (QT) begs the question whether we are heading into another period of heightened volatility.

However, the stock markets have taken this in stride, recently revisiting record high territory, and we discuss this in our article, Stocks and Bonds Rally: Can Both Be Right?. The two major asset classes appear to be pitted against one another in a tug-of-war over where the economy is headed. Many investors can't reconcile the diverging market action with a common view of the economy, and the situation could raise concerns about the fallout from a potentially messy divorce. Read more on the Insights & Ideas page at www.schwab.com.

Tomorrow, the U.S. economic calendar will be light, with the lone major release expected to be wholesale inventories, forecasted to have declined 0.3% m/m in April, matching the dip seen in the month prior.

European stocks mixed, Asia mostly higher

European equities finished mixed, with the markets digesting the expected unchanged monetary policy decision by the European Central Bank (ECB). The results from today's U.K. election were also anticipated, with recent polls showing the race has narrowed as the nation continues Brexit negotiations. Italian stocks got a boost from eased early election concerns as a new election law failed in parliament. For commentary on the political front check out Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?. The ECB offered mixed guidance, dropping its reference to the possibility of further declines in interest rates, but maintaining that it could increase the size or duration of its bond-buying operations if needed. The markets paid close attention to ECB President Mario Draghi's customary press conference that followed the decision, with the focus on the central bank's tweak to its language about the risks to economic growth. The ECB upgraded its economic outlook to risks being broadly balanced, from tilted to the downside, while noting that growth is estimated to proceed at a somewhat faster pace than previously expected. Draghi pointed out that economic expansion has yet to translate into stronger inflation dynamics and noted that the central bank did not discuss tapering its asset purchase program at the meeting. The euro and British pound were lower versus the U.S. dollar, and bond yields in the region mostly moved to the downside.

Financials were higher following eased Spanish banking sector concerns yesterday, while Reuters reported that Italian banks are assessing a rescue plan for a troubled bank. Basic materials got a boost from some upbeat Chinese trade data, while oil & gas issues were sluggish in the wake of yesterday's tumble on bearish U.S. oil inventory data and telecommunications lagged behind. In other economic news, German industrial production rose more than expected in April, eurozone Q1 capital spending topped forecasts, and France's trade deficit widened by a smaller amount than expected in April.

Stocks in Asia finished mostly to the upside following the gains seen in the U.S. and some mixed data in the region. The markets also awaited results from today's U.K. election, the ECB's monetary policy decision, and testimony from fired FBI Director Comey in the U.S. Stocks appeared to shrug off lingering geopolitical concerns amid tensions in the Middle East toward Qatar and continued missile tests from North Korea. As such, Schwab's Jeffrey Kleintop, CFA, offers his articles, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, as well as, Top Five Trade Issues Investors Should Be Watching on the International Investing page. Chinese stocks advanced, aided by a favorable report on the nation's trade activity, with exports growing more than expected in May. Australian securities rose following the data and despite yesterday's tumble in crude oil prices that weighed on oil & gas issues on some bearish U.S. oil inventory data, while South Korean shares also moved to the upside.

Japanese equities declined on some choppiness in the yen as reports suggested the Bank of Japan is mulling how to communicate its eventual exit from monetary policy stimulus, without giving the impression that this in on the agenda anytime soon, per Bloomberg. Stocks in Japan came under pressure following a downward revision to the nation's Q1 GDP growth, which was adjusted to a 1.0% annualized quarter-over-quarter pace of expansion, from the preliminary estimate of a 2.2% increase and compared to the projected revision to a 2.4% gain. The unfavorable adjustment came as oil inventories dropped and private consumption was revised lower. For a look at the global economic front, see Jeffrey Kleintop's video, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com. Finally, Indian stocks declined following late-yesterday's expected unchanged monetary policy decision.

The international economic calendar for tomorrow will include the Tertiary Industry Index from Japan, PPI and CPI from China, trade data and labor costs from Germany and construction output, trade balance, manufacturing production and industrial production from the U.K.

Stocks Continue Rise to New Highs

Charles Schwab: On the Market

Posted: 12/8/2016 4:15 PM ET

Stocks Continue Rise to New Highs

U.S. stocks continued to add to weekly gains as the major domestic indexes joined a global equity advance following a mixed monetary policy decision from the European Central Bank. Treasury yields extended gains, the U.S. dollar and crude oil prices also moved higher and gold declined. On the equity front, financials were stand-out winners, while Lululemon Athletica rallied on an upbeat earnings report.

The Dow Jones Industrial Average (DJIA) advanced 65 points (0.3%) to 19,615, the S&P 500 Index gained 5 points (0.2%) to 2,246 and the Nasdaq Composite added 24 points (0.4%) to 5,417. In moderately-heavy volume, 975 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil added $1.07 to $50.84 per barrel and wholesale gasoline was $0.01 lower at $1.50 per gallon. Elsewhere, the Bloomberg gold spot price declined $3.02 to $1,170.97 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.8% to 101.08.

Lululemon Athletica Inc. (LULU $69) reported 3Q earnings-per-share (EPS) ex-items of $0.47, above the $0.43 FactSet estimate, as revenues rose 13.0% year-over-year (y/y) to $544 million, topping the expected $541 million. 3Q same-store sales grew 7.0% y/y, exceeding the expected gain of 5.2%. The yoga apparel company issued 4Q guidance that was a bit shy of estimates, while offering a stronger-than-expected full-year EPS outlook. Separately, the company announced a $100 million share repurchase plan. Shares surged.

Costco Wholesale Corp. (COST $158) posted fiscal 1Q profits ex-items of $1.17 per share, below the forecasted $1.19, as revenues rose 3.2% y/y to $28.1 billion, versus the projected $28.3 billion. COST achieved a 1.0% y/y increase in 1Q same-store sales, compared to the expected 1.2% gain. Shares finished solidly higher despite the results, as the company noted that traffic seemed to have hit a trough and come back a little, pointing out that "It certainly seems like it's back on the mend."

Dow member Chevron Corp. (CVX $115) announced that its 2017 capital expenditures budget is expected to be $19.8 billion, down at least 15.0% versus 2016. CVX closed higher. For more on the energy sector in the wake of the OPEC production cut last month, see our article, Are Things Finally Looking Up for the Oil Industry?, at www.schwab.com/insights, and follow Schwab on Twitter: @schwabresearch.

H&R Block Inc. (HRB $23) announced a fiscal 2Q loss of $0.67 per share, compared to the expected shortfall of $0.68, with revenues rising 2.3% y/y to $131 million, above the forecasted $127 million. Shares declined amid concerns about the potential impact on demand for the company's tax prep services of President-elect Donald Trump's potential tax reforms.

Jobless claims decline

Weekly initial jobless claims (chart) fell by 10,000 to 258,000 last week, above the Bloomberg forecast calling for a decline to 255,000, as the prior week figure was unrevised at 268,000. The four-week moving average rose by 1,000 to 252,500, while continuing claims fell by 79,000 to 2,005,000, south of the estimated level of 2,048,000.

For our latest look at employment, see Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Welcome to the Working Week: An Update on Jobs. Liz Ann also offers her latest article, You've Got to Earn It: Valuations Aided by Improving "E," where she points out that economic and earnings momentum has picked up—and not just post-election, with the latter expected to grow by more than 12% in 2017. She concludes that valuations are reasonable considering inflation; but that also represents a risk factor next year. Read both these articles at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Treasuries were lower with the yield on the 2-year note ticking 1 basis point (bp) higher to 1.10%, the yield on the 10-year note gaining 5 bps to 2.39%, and the 30-year bond rate advancing 7 bps to 3.09%.

With bond yields having spiked since the surprise presidential election and amid elevated December rate hike expectations, which have been bolstered by some mostly stronger-than-expected economic data, see Schwab's Chief Fixed Income Strategist, Kathy Jones' latest article, Bond Market Outlook: Higher Rates and Known Unknowns at www.schwab.com/onbonds. Kathy notes the prospect of fiscal stimulus and tax reform under the new administration is driving bond yields higher, and we believe the upward trend is likely to continue into 2017. However, there are many "known unknowns" about policy that could affect the outlook for investors. We suggest investors take a cautious approach to the bond market, focusing on high quality domestic bonds and keeping the average portfolio duration in the short to intermediate term until there is more clarity.

Be sure to check out Kathy's video with Schwab's Vice President of Trading and Derivatives, Randy Frederick titled How Will Expected December Interest Rate Hike Affect Markets in 2017?, at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Releases for the U.S. economic calendar tomorrow will consist of wholesale inventories, expected to have declined 0.4% m/m during October after rising 0.1% in September, and the preliminary University of Michigan Consumer Sentiment Index for December, projected to move higher to 94.5 from the 93.8 registered for November's final read.

Europe higher in choppy action following ECB decision, Asia joins global market rally

European equities finished higher after a bout of choppiness in the wake of the monetary policy decision from the European Central Bank (ECB), which expectedly decided to leave its benchmark interest rate unchanged and extend its asset purchase program by about nine months. Briefly following the decision, the euro rallied and stocks moved to the downside as the ECB announced that during the nine-month extension, asset purchases will be lowered to a monthly pace of 60 billion euros from the current pace of 80 billion euros.

However, the knee-jerk reaction reversed, with the euro falling and stocks extending a winning streak to four sessions. The ECB noted that if its outlooks for inflation—"a sustained adjustment in the path of inflation consistent with its inflation aim"—and the economy become less favorable it intends to increase the asset purchase program in terms of size and/or duration. Also, the ECB eased the restrictions on the types of assets it can purchase as it will be allowed to buy bonds with a yield below the deposit rate, which was previously a minimum eligibility requirement. The central bank issued updated economic projections, saying it expects the economic expansion to proceed at a moderate but firming pace, leaving its outlook for real GDP growth broadly unchanged from its September forecasts. Basic materials and financials showed strength following the decision, with bond yields in the region moving higher.

Amid the choppiness in the markets and the likelihood of continued global volatility, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Follow Jeff on Twitter: @jeffreykleintop. Italian stocks continued to rebound from the failed Italian referendum over the weekend that exacerbated political uncertainty in the region as it was the first step of several that could pave the way for an Italian exit from the European Union (EU). Schwab's Director of International Research, Michelle Gibley, CFA, discusses the uncertain political front in the region in her latest article, Europe Votes: Could More Countries Reject the EU? Read all these articles at www.schwab.com/oninternational. The British pound finished lower versus the U.S. dollar.

Stocks in Asia finished mostly higher following strong rallies in the U.S. and Europe yesterday, bolstered by speculation ahead of today's European Central Bank decision which yielded an extension of its asset purchase program. Japanese equities gained ground despite some strength in the yen and a disappointing revision to the nation's 3Q GDP growth. Japan's economic output grew at a 1.3% annualized quarter-over-quarter pace, revised down from the preliminary estimate of a 2.2% rate of expansion, and compared to expectations of a 2.3% gain. The negative revision was led by decreases in capital spending and private inventories. Australian securities advanced with weakness in oil & gas issues on yesterday's extension of losses for crude oil prices being more than offset by strength in financials and basic materials stocks.

Stocks in India rallied to rebound from yesterday's decline that followed the Reserve Bank of India's unexpected decision to not cut its benchmark interest rates. South Korean equities jumped to extend a winning streak to three sessions. Stocks in Hong Kong rose as the markets continue to adjust to this week's start of the exchange trading link between Hong Kong and Shenzhen. Chinese markets also digested a relatively favorable November trade report, which showed exports snapped a seven-month losing streak and imports grew much more than expected. Securities trading in Shanghai finished lower. In the wake of the China data, Schwab's Jeffrey Kleintop, CFA, offers his latest article, Happy Unrecession: The Alice in Wonderland economy, noting that while volatility may lie ahead for stocks, a prolonged bear market and recession seem unlikely for 2017. Read more at www.schwab.com/oninternational.

Tomorrow, the international economic docket will yield the BSI All Industry Index from Japan, CPI, PPI and foreign direct investment from China and home loans from Australia. Reports from across the pond are expected to include trade data and labor costs from Germany, industrial and manufacturing production from France and trade data and construction output from the U.K.

Financial Review

Your Money and Your Life

Sinclair Noe — September 26, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW – 166 = 18,094
SPX – 18 = 2146
NAS – 48 = 5257
10 Y – .03 = 1.59%
OIL + 1.14 = 45.62
GOLD + .80 = 1338.90

We are less than 2 hours from the beginning of the debate. More than 100 million Americans are expected to tune in to the presidential debate between Clinton and Trump. It is expected to run 90 minutes, no commercials. Beyond that, it is hard to say what will happen. Listen closely tonight. It’s your money and your life.

The International Energy Forum, which includes representatives of producing and consuming countries, is meeting this week in Algiers. Oil ministers from OPEC, the Organization of the Petroleum Exporting Countries, and other crucial oil-producing countries, including Russia, may use the forum to work on a deal aimed at propping up oil prices.

Since OPEC announced the meeting back in August, Brent oil prices have seesawed between $45 and $50, largely driven by comments by different oil ministers and leaders. Reaching an agreement will probably require overcoming tensions between the two big OPEC powers: Saudi Arabia and Iran. The Saudis quashed a freeze deal in April, when the Iranians refused to participate.

Expectations are low that the informal talks will lead to a freeze in oil production. Even if agreement on a freeze is reached, several smaller oil producing nations might not stick to a deal. Libya is set to bring back around 600,000 barrels per day (although those claims are questionable), and Nigeria has already returned somewhere between 200,000 and 300,000 barrels per day of interrupted supply.

And the US, not part of the talks, might see shale output ramp up production. The IEA expects global supplies to exceed demand through next year, and inventories to continue to build through 2017. Crude oil and refined product inventories are only slightly down from record levels, and will take a few more years to get worked through. All of that is to say there is a good chance that ample supplies could ensure relatively low oil prices for several years, perhaps as long as towards the end of this decade. Meanwhile, there are alternatives; more and more hybrids and electric vehicles, reducing demand.

Bank of Japan Governor Haruhiko Kuroda reaffirmed his pledge to do whatever it takes to boost growth and inflation, including taking interest rates further into negative territory. The central bank boss expressed concerns over the persistently low level of inflation in Japan and said he’d use all necessary tools to get inflation back to the 2% target. That includes cutting interest rates deeper below zero as well as keeping a target for long-term interest rates.

Forget about Brexit, forget about the U.S. election and forget about the struggling oil market: The biggest risk to the global economy comes from China, where a looming credit bubble is threatening to dramatically slow economic growth, according to Ken Rogoff, the former chief economist of the International Monetary Fund. In an interview with the BBC, Rogoff said a “hard landing” for the world’s second largest economy is imminent and there’s little other countries can do to prepare for it.

European Central Bank President Mario Draghi addressed the Euro Parliament this morning. Draghi said the euro zone economy is coping well with global uncertainty, such as Britain’s vote to leave the European Union, even if the outlook for external demand has worsened.

Sales of newly-constructed homes dropped 7.6% in August but beat forecasts. The Commerce Department reports new home sales ran at a 609,000 seasonally adjusted annual rate; that was 20.6% higher compared to a year ago. The median sales price in August was $284,000, continuing a downward trend. That was the lowest since September 2014 and 5.4% below year-ago levels. There were 4.6 months’ worth of homes available at the current pace of sales in August.

Deutsche Bank is at an all-time low. Shares of the investment bank tumbled below €11-euro after German Chancellor Angela Merkel ruled out a bailout. Merkel also declined to intervene in Deutsche’s legal battle with the U.S. Justice Department, which earlier this month announced it may seek up to $14 billion from the bank to resolve investigations into crisis-era mortgage securities.

Deutsche Bank is a major player in derivatives markets; it is the largest German lender and the fourth largest European bank by assets with $1.9 trillion as of 2015, behind Crédit Agricole, BNP Paribas and HSBC. If Deutsche has to raise cash, and if it has trouble doing so, credit conditions in Germany could tighten. Deutsche Bank responded by saying it did not require assistance from Berlin and had not requested it.

The legal battle with the Department of Justice took a strange turn, just after it was announced. Deutsche said it would not pay $14 billion for mortgage related abuses. Deutsche was a big player in the subprime CDO market – that’s Collateralized Debt Obligations. Essentially they were involved in taking really lousy mortgage debt and bundling it with other, not-so-lousy debt to make the whole package look better; this also allowed them to sell BBB risk at AAA prices.

Deutsche also worked with John Paulson to create really lousy CDO’s, which Paulson shorted, or bet against. Paulson was up front about his intent to create CDOs that would fail. Deutsche apparently had no problem in helping him. Goldman Sachs also worked with Paulson, but Deutsche did not reveal that info to investors. In other words, they were sleazy and they tried to hide it. And Deutsche printed nearly twice as much in collateralized debt obligations than Goldman.

Deutsche has about $6 billion in legal reserves to pay a fine; anything over that amount and they will struggle.  And remember that the Italian banks are struggling with a crisis of their own. If Italian banks are bailed out, or collapse, Deutsche is next in line, either for a bailout or for a collapse.

Former Wells Fargo employees have filed a class action seeking $2.6 billion or more for workers who tried to meet aggressive sales quotas without engaging in fraud and were later demoted, forced to resign or fired. The lawsuit, filed on behalf of people who worked for Wells in California over the past decade, also includes current employees.

Last week, Stumpf testified before a Senate committee. On Thursday, the House Financial Services Committee will hold a hearing on the fake bank accounts created at Wells Fargo. The bank’s chief executive, John Stumpf, has been invited to testify. Maybe they can ask him why those workers were fired for not committing fraud.

Last week, Mylan CEO Heather Bresch testified before the House Oversight Committee about the price hikes on its allergy drug auto injector called EpiPen. It had said it made $100 off each $608 two-pack of the drug it sold. Not exactly. According to The Wall Street Journal Mylan “substantially reduced its calculation of EpiPen profits by applying the statutory US tax rate of 37.5%.” Mylan paid a 7.4% tax rate last year after moving its business to The Netherlands for tax purposes.

Maurice “Hank” Greenberg, the former chief executive of American International Group, is expected to take the witness stand tomorrow in his civil fraud trial, which recently got underway in a New York State court. The 91-year-old Greenberg’ testimony could last several days. He has fought the accusations for more than a decade. Greenberg and another former AIG executive, Howard Smith, face charges that they engineered phony reinsurance transactions intended to make AIG’s numbers look better to Wall Street.

Congress has until midnight on Friday to pass legislation funding the government as the fiscal year draws to a close. Without a budget, the government could shutdown.

The plan to sell Takata to a rescuer, slated by year-end, is likely to extend into 2017 as some bidders want to drag the air bag maker through bankruptcy to wipe out most of its debt. Takata faces about $10 billion in costs to recall inflators worldwide, according to market estimates, and there is also the prospect of legal liabilities related to at least 14 deaths.

Digital map maker HERE will introduce a new set of traffic services this week that allows drivers to see what live road conditions are like miles ahead of them using data from competing automakers, instead of crowd-sourced data. BMW, Daimler and Volkswagen will all contribute to the service, marking their first big collaboration since they bought HERE from Nokia last year.

The union representing Canadian auto workers has won approval for a new four-year contract with General Motors, securing future support for Canada’s auto sector and eventually giving GM more capacity for its pickup trucks in the U.S. The deal, which was ratified by 64.7% of Unifor workers, clears the way for $544 million in local investment, better job security and wage increases, but less favorable pensions than before. The contract might also serve as a template for negotiations with Fiat Chrysler, which faces an October 10 deadline with Unifor.

CBOE Holdings confirmed that it has agreed to buy Bats Global Markets in a cash and stock deal valued at about $3.2 billion. Bats jumped 20 percent Friday on a report that the two companies were in talks. CBOE said it expects to use BATS’ trading technology and will migrate all trading to a single platform.

The world’s largest synthetic rubber maker, Lanxess, has agreed to buy Chemtura for $2.5 billion. Using existing cash and new debt to purchase the specialty chemical maker, Lanxess said it will seek to improve its additives business for lubricants and flame retardants. Both boards have unanimously approved the deal, which is expected to close in mid-2017.

Do you remember Google Glass? Snapchat is getting into the hardware business, unveiling a pair of sunglasses with a built-in wireless video camera. The product, called Spectacles, contains a 115-degree wide view lens, can record clips with a length of up to 10 seconds, and will be priced at $129.99. Snapchat has also renamed itself Snap Inc. and its website says it’s a camera company.