Stocks Diverge as Financials Lag

Charles Schwab: On the Market

Posted: 3/29/2017 4:15 PM ET

Stocks Diverge as Financials Lag

U.S. stocks finished the regular trading session mixed as crude oil extended a rebound and as the U.K. formally began the process to exit the European Union. Financial shares lagged with Treasury yields remaining under pressure despite some hawkish Fed commentary. In equity news, Vertex Pharmaceuticals announced positive results from two studies of its experimental treatment for cystic fibrosis. Gold and the U.S. dollar ticked higher.

The Dow Jones Industrial Average (DJIA) declined 42 points (0.2%) to 20,659, the S&P 500 Index increased 3 points (0.1%) to 2,361, and the Nasdaq Composite was 22 points (0.4%) higher at 5,898. In moderate volume, 728 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.14 higher to $49.51 per barrel and wholesale gasoline gained $0.03 to $1.67 per gallon. Elsewhere, the Bloomberg gold spot price ticked $0.63 higher to $1,252.45 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—advanced 0.2% to 99.93.

RH (RH $44), also known as Restoration Hardware, was solidly higher after issuing 1Q and full-year 2017 revenue guidance that topped the Street's expectations, while its full-year earnings-per-share (EPS) outlook also had a midpoint that exceeded estimates. The company noted that while it expects revenue growth to accelerate, operating margins to expand, and to generate significant free cash flow in fiscal 2017, "we are taking a cautiously optimistic approach to our outlook given the uncertain macro environment in addition to the many initiatives and investments we are undertaking." The upbeat guidance accompanied its 4Q earnings report that it pre-announced last month.

Vertex Pharmaceuticals Inc. (VRTX $108) is charging higher after the company announced positive results from two final-stage studies of its experimental treatment for cystic fibrosis. The company said it will apply for U.S. regulatory approval in the third quarter.

Dave & Buster's Entertainment Inc. (PLAY $60) saw solid pressure after the company reported a 3.2% year-over-year (y/y) gain in 4Q same-store sales, missing the FactSet estimate of a 3.7% increase. The Company did top the Street's EPS expectations and matched revenue forecasts.

Mortgage applications dip

The MBA Mortgage Application Index declined 0.8% last week, following the previous week's 2.7% drop. The decrease came as a 2.9% fall in the Refinance Index more than offset a 1.2% gain for the Purchase Index. The average 30-year mortgage rate fell 13 basis points (bps) to 4.33%.

Pending home sales jumped 5.5% month-over-month (m/m) in February, versus the Bloomberg projection of a 2.5% gain, and following the unrevised 2.8% drop registered in January. Compared to last year, sales were 2.4% lower. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which fell more than expected in February from the fastest pace since 2007.

Treasuries were higher, with the yield on the 2-year note declining 3 bps to 1.27% and the yields on the 10-year note and the 30-year bond decreasing 4 bps to 2.38% and 2.99%, respectively.

Treasury yields continued to pullback, though the U.S. dollar recovered slightly from its recent slide. The markets are grappling with calmed concerns about a faster-than-expected pace of Fed rate hikes this year and flared-up political uncertainty in the wake of last week's failed U.S. healthcare reform bill, which has contributed to the pullback in the stock markets.

For analysis of the Fed's actions on the bond markets, see the video 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' video, 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.

However, economic data has been solid, and Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data, after a "typical" weak first quarter, economic growth should accelerate and based on history, soft data is likely to retreat, while hard data is likely to accelerate. Read more at www.schwab.com/marketinsight, and follow Liz Ann on Twitter: @lizannsonders.

Amid this backdrop, see our commentary titled, Stay Disciplined: Resilient Bull Market Is No Cause for Complacency, at www.schwab.com/insights, and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar  will deliver the third and final read for 4Q GDP, with economists expecting the headline figure to be revised higher to a 2.0% quarter-over-quarter annualized rate of expansion from the 1.9% posted in the second report, but down from the 3Q final read of 3.5%. Also, weekly initial jobless claims will be reported and are expected to have decreased by 14,000 to a level of 247,000.

Europe shows some resiliency, Asia mixed

European equities finished mostly higher, with oil & gas issues leading the way as crude oil prices added to yesterday's recovery, bolstered by some bullish U.S. oil inventory data. Most markets shrugged off the expected triggering of article 50 by the U.K. to begin formal negotiations to leave the European Union (EU), known as Brexit. The British pound saw some pressure to help U.K. stocks, but was well off the worst levels of the day. The beginning of the Brexit clock, which could take multiple years to complete the exit process, comes as a key French Presidential election looms and the Scottish First Minister Sturgeon is proposing a new independence referendum that has been rejected by the British government. For analysis of the European political front, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's video, Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights, and Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. Follow Jeff on Twitter: @jeffreykleintop. The euro lost ground on the U.S. dollar and bond yields in the region finished lower.

Stocks in Asia finished mixed, with global political uncertainty continuing to hamstring conviction, though sentiment found some support after yesterday's rebound in U.S. stocks that snapped a string of losses. The advance in the U.S. came courtesy of an unexpected jump in Consumer Confidence and comments out of Washington that suggested last week's failed healthcare reform efforts will likely not derail President Donald Trump's plans for tax reform and infrastructure spending. Japanese equities ticked higher, with the yen retreating after a recent rally but gains were likely limited by a softer-than-expected read on the nation's retail sales for last month. Crude oil's rebound that led a recovery in the commodity sector helped lift Australian securities. Stocks trading in South Korea, India and Hong Kong rose, while mainland Chinese shares declined with the property sector seeing some pressure as some local governments rolled out more measures to cool the real estate sector, per Bloomberg. Markets in Asia also continued to grapple with the March Fed rate hike and outlook for future increases this year, as discussed by Schwab's Michelle Gibley, CFA, in her recent article, Fed Rate Hikes May Benefit Japanese Stocks, and Jeffrey Kleintop, CFA, in his commentary, The Fed has China in a Tough Spot at www.schwab.com/oninternational.

Tomorrow's international economic docket will be relatively light, offering new home sales from Australia, CPI from Germany and consumer confidence from the Eurozone.

Stocks Manage Mild Moves and Mixed Finish

Charles Schwab: On the Market

Posted: 7/13/2016 4:15 PM ET

Stocks Manage Mild Moves and Mixed Finish

U.S. stocks paused a bit from their recent rally with the major indexes closing mixed and near the flatline as a drop in crude oil prices weighed on energy issues. Investors may have been exercising some additional caution ahead of some key earnings reports out of the financial sector later this week. In economic news, the Fed released its Beige Book, mortgage applications jumped for a second-straight week and import prices rose. Treasuries and gold were higher, while the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) rose 24 points (0.1%) to 18,372, the S&P 500 Index was flat at 2,152, and the Nasdaq Composite shed 17 points (0.3%) to 5,006. In moderate volume, 823 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil was $2.05 lower at $44.75 per barrel, wholesale gasoline declined $0.05 to $1.38 per gallon and the Bloomberg gold spot price increased $8.70 to $1,343.62 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.2% lower at 96.29.

CSX Corp. (CSX $28) released 2Q earnings about an hour before the closing bell, correcting information that was released via Twitter earlier in the day. CSX announced earnings-per-share (EPS) of $0.47 versus the FactSet estimate of $0.44, while revenues declined 11.9% year-over-year to $2.68 billion, just shy of forecasts. The company noted that looking forward it continues to expect 2016 full-year earnings per share to decline, reflecting the ongoing transition in the energy markets, along with the impact of the strong U.S. dollar and low commodity prices. Shares of CSX traded higher.

Juno Therapeutics Inc. (JUNO $30) rallied after the company announced that the U.S. Food and Drug Administration (FDA) has removed the clinical hold on the Phase 2 clinical trial of its blood cancer treatment. As a result, JUNO said the trial, known as ROCKET, will resume.
Teva Pharmaceutical Industries Ltd. (TEVA $54) gained ground after the company raised its 2Q EPS and revenue guidance. Both figures were above FactSet estimates.

Fed releases Beige Book, mortgage applications jump back-to-back

The Federal Reserve's Beige Book, a tool summarizing economic activity across the nation used by the Federal Open Market Committee (FOMC) to prepare for its next two-day meeting set to conclude on July 27, was released in afternoon action. The report showed that U.S. economic activity continued to expand at a modest pace across most regions and while employment continued to increase during the period, the rate of growth ranged from little change to moderate. Consumer spending, though positive, was reported as showing some signs of softening and manufacturing was mixed and reporting districts noted that the outlook remained positive but deteriorated. As noted in the recent Schwab Market Perspective: Looking Beyond Britain, while we agree that the July FOMC meeting is likely off the table for a move on rates, we aren’t dismissing the possibility of a hike later in the year. A lot can happen in a few months and if financial markets stabilize, the job market remains healthy, and inflation pressures rise the Fed could look to move toward a more “normal” rate, while also giving it some room to act if/when the U.S. economy begins showing recession risks. Read the whole article at www.schwab.com/marketinsight.

The MBA Mortgage Application Index rose 7.2% last week, after jumping 14.2% in the previous week. The second-straight solid weekly gain was led by a 11.2% rise for the Refinance Index, while the Purchase Index came in flat. The average 30-year mortgage rate fell 6 basis points (bps) to 3.60%.

The Import Price Index (chart) rose 0.2% month-over-month (m/m) for June, compared to the Bloomberg projection of a 0.5% increase, and May's unrevised 1.4% gain. Compared to last year, prices were lower by 4.8%, versus the 4.6% forecasted drop, and following May's unrevised 5.0% fall.

Treasuries were higher, with the yield on the 2-year note declining 2 bps to 0.67%, the yield on the 10-year note decreasing 4 bps to 1.47% and the 30-year bond rate falling 5 bps to 2.17%. Bond yields gave back some of their two-day recovery from recent pressure that has come from the U.K. Brexit fallout, which exacerbated global growth concerns, as well as dampened expectations for a Fed rate hike this year. Against this backdrop, read our article, Uncharted Waters: What Record-Low Yields Mean for Investors, at www.schwab.com/insights and follow Schwab on Twitter: @schwabresearch.

Tomorrow, the U.S. economic calendar will yield the release of the Producer Price Index, expected to have increased 0.3% for May after rising 0.2% the month prior, and weekly initial jobless claims, forecasted to show an increase to a level of 265,000.

Europe modestly retreats from steep rally, Asia extends winning streak

European equities finished slightly lower on the heels of a four-session rally that came as the global markets recovered from the fallout from the late-June vote in the U.K. to leave the European Union, known as a Brexit. Financials lagged as Italian banking worries festered, while energy issues were bogged down by a drop in crude oil prices in the wake of a mixed U.S. oil inventory report. However, the appointment of Home Secretary Theresa May as the new U.K. Prime Minister cleared up some political uncertainty, while hopes of further stimulus measures in Japan and expectations of a rate cut from the Bank of England tomorrow added some support. With volatility remaining elevated, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides Three Reasons Why Now is Not the Time to Retreat from Global Diversification at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. In economic news, eurozone industrial production in May dropped more than expected. The euro traded higher and the British pound fell versus the U.S. dollar, while bond yields in the region lost ground.

Stocks in Asia extended their recent winning streak to three days as the global markets continued to recover from the post Brexit fallout pressure, remaining buoyed by expectations of further Japanese stimulus measures, and some political clarity in the U.K. Japanese equities rose, adding to the rally as of late as expectations continued to be elevated that Prime Minister Abe, coming off his ruling party's convincing weekend upper house election victory, is close to announcing more aggressive stimulus measures. Gains in Japan came even as the yen rebounded somewhat from its recent drop and as a Japanese government spokesperson denied an earlier media report that suggested government officials are considering "helicopter money" as a policy option. For more on Japan's potential increased stimulus measures see Schwab's Jeffrey Kleintop's, article, What investors need to know about helicopter money, at www.schwab.com/oninternational.

Stocks trading in mainland China and Hong Kong extended their recent gains on speculation that the government is taking steps to support investor sentiment, per Bloomberg. After the closing bell, China reported a slightly smaller-than-expected drop in June exports, which came ahead of Thursday night's release of the nation's 2Q GDP report, expected to show year-over-year growth slowed to 6.6% from 6.7% in 1Q. Finally, equities in Australia and South Korea advanced, while Indian securities were mostly flat, despite late-yesterday's mostly upbeat data on the nation's industrial production and consumer price inflation.

The international economic docket for tomorrow will be limited, with expected economic reports consisting of inflation expectations, employment data and new vehicle sales from Australia. Meanwhile, in central bank action, tomorrow the Bank of England is expected to announce a 25 basis point reduction to its official bank rate, which would lower the rate to 0.25%, while the Bank of Korea will also meet and is expected to leave its benchmark interest rate unchanged at 1.25%.