Markets Mixed Amid Political Uncertainty

Charles Schwab: On the Market

Posted: 7/18/2017 4:15 PM ET

Markets Mixed Amid Political Uncertainty

The U.S. equity markets were mixed, as continued pressure on Treasury yields and a disappointing report from Goldman Sachs pressured financials, but a blowout quarter from Netflix gave consumer discretionary stocks a boost. Meanwhile, political uncertainty was elevated as the Senate's healthcare bill failed again and a read on home-builder sentiment disappointed. Crude oil, gold and the U.S. dollar were higher.

The Dow Jones Industrial Average (DJIA) fell 55 points (0.3%) to 21,575, the S&P 500 Index gained 2 points (0.1%) to 2,461, and the Nasdaq Composite increased 30 points (0.5%) to 6,344. In light to moderate volume, 694 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.38 to $46.40 per barrel and wholesale gasoline was $0.02 higher at $1.58 per gallon. Elsewhere, the Bloomberg gold spot price gained $7.80 to $1,241.91 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 94.67.

Dow member Goldman Sachs Group Inc. (GS $223) reported Q2 earnings-per-share (EPS) of $3.95, compared to the FactSet estimate of $3.38, as revenues dipped 1.0% year-over-year (y/y) to $7.9 billion, versus the projected $7.6 billion. GS topped estimates for most of its business units, but its fixed income currency and commodity unit's activity noticeably missed expectations. The company said a mixed operating environment persisted into Q2 as conditions continued to support underwriting and M&A, while also constraining certain market-making activity. Shares were lower.

Bank of America Corp. (BAC $24) posted Q2 profits of $0.46, above the projected $0.43, as revenues increased 7.0% y/y to $22.8 billion, versus the expected $21.9 billion. Trading revenues were slightly ahead of forecasts, while its net interest income and margin came in a bit shy of estimates. BAC lost ground.

Dow component Johnson & Johnson (JNJ $134) announced Q2 EPS of $1.40, or $1.83 ex-items, compared to projections of $1.79, with revenues rising 1.9% y/y to $18.8 billion, just below the $19.0 billion estimates. JNJ raised its full-year guidance, and shares were higher.

Dow member UnitedHealth Group Inc. (UNH $185) reported Q2 earnings of $2.32 per share, or $2.46 ex-items, versus the projected $2.38, as revenues grew 8.0% y/y to $50.1 billion, compared to the expected $50.0 billion. UNH raised its full-year EPS outlook, and shares were higher.

Netflix Inc. (NFLX $184) posted Q2 EPS of $0.15, one penny shy of estimates, as revenues increased 32.3% y/y to $2.8 billion, roughly in line with expectations. The company's net subscriber additions easily topped expectations. NFLX issued Q3 guidance that was well above estimates. Shares of NFLX rallied.

With Q2 earnings season ramping up and the stock markets at record highs, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Where's the Next Bubble?, and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, provides analysis of the major market sectors in his latest Schwab Sector Views: Christmas in July! (Status of the Consumer) on the Markets & Economy page at www.schwab.com. Be sure to follow us and Jeff on Twitter: @schwabresearch and @jeffreykleintop.

Homebuilder sentiment falls

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month dropped to 64 from June's downwardly revised level of 66, and below the Bloomberg forecast calling for a 67 reading. This was the lowest since November but remains well above the 50 mark, the point of separation for good versus poor conditions. The NAHB said its members are telling it they are growing increasingly concerned over rising material prices, particularly lumber.

Tomorrow, housing construction activity will be in focus, with the release of June housing starts and building permits (economic calendar). Starts are projected to snap a three-month streak of losses, rising 6.2% month-over-month (m/m) to an annual rate of 1,160,000 units, while permits are expected to increase 2.8% to an annual rate of 1,201,000 units, after posting back-to-back monthly declines. Weekly MBA Mortgage Applications will also be reported.

Schwab's Brad Sorensen, CFA, paints a pretty positive picture for the American consumer in his latest Schwab Sector Views, but adds that there are some concerning things that keep us from being overwhelmingly bullish on the consumer. Brad notes that while confidence remains high according to surveys, actions have been slower to come around as housing formations have only just started to tick higher, retail sales growth has been relatively tepid, and auto purchases have shown signs of rolling over. Read more on the Markets & Economy page at www.schwab.com.

The Import Price Index (chart) decreased 0.2% month-over-month (m/m) for June, matching the Bloomberg projection, and compared to May's upwardly revised 0.1% decrease. Compared to last year, prices were up by 1.5%, above forecasts calling for a 1.3% rise and following May's upwardly revised 2.3% increase.

Treasuries were higher, as the yield on the 2-year note dipped 1 basis point (bp) to 1.35%, while the yields on the 10-year note and the 30-year bond dropped 5 bps to 2.27% and 2.86%, respectively.

Bond yields and the U.S. dollar have slipped as of late following brief rebounds, pressured by continued subdued inflation data, exacerbated by Fed Chair Janet Yellen's dovish semi-annual monetary policy testimony last week. Schwab's Chief Fixed Income Strategist 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. Read more on the Fixed Income page at www.schwab.com, where Kathy also discusses, Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.

The political front remains in focus as the highly scrutinized revised Senate healthcare bill appears to be getting scrapped again, and focus appears to be shifting to repealing Obamacare instead of replacing it. This adds credence to Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's Washington Midyear Update: 4 Key Issues for Investors to Watch, where he points out dysfunction, drama and ethical issues in the White House have combined with Republican infighting on Capitol Hill to bog down the policy agenda. There's growing concern among congressional Republicans that the much-anticipated policy changes will need to be significantly scaled back—or that they may not happen at all. Read more on the Insights & Ideas page at www.schwab.com.

Europe sees pressure on political uncertainty and data, Asia mixed

European equities finished broadly lower, with another setback for the U.S. healthcare bill and the continued U.K. Brexit negotiations adding to political uncertainty. For analysis of the political front see Schwab's 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?. Follow Randy on Twitter: @randyafrederick. Technology issues led to the downside as the markets digested ramped up earnings season on both sides of the pond. In economic news, German investor confidence declined for a second-straight month, while U.K. inflation data came in mostly below forecasts. The British pound saw some pressure versus the U.S. dollar on the data. The euro rose versus the greenback, ahead of this week's monetary policy decision by the European Central Bank, while bond yields extended a recent slide to weigh on financials, along with a negative reaction to earnings reports from the sector out of the U.S. Basic materials came under pressure.

Stocks in Asia finished mixed to mostly lower, following flared-up U.S. political uncertainty, while the yen gained ground to pressure Japanese equities after returning to action following yesterday's holiday break. The markets are also eyeing this week's monetary policy decision by the Bank of Japan. Australian securities fell sharply amid a broad-based decline among sectors, while those traded in South Korea finished flat, holding at a record high. Stocks in India dropped, retreating from a record high. With these markets at or near all-time highs, Schwab's Jeffrey Kleintop, CFA, offers his article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com. However, stocks in mainland China and Hong Kong advanced, with property-related issues leading a late-day charge as an upbeat property price report joined a recent string of stronger-than-expected data, headlined by yesterday's Q2 GDP report. In the wake of the data, Schwab's Jeffrey Kleintop, CFA, offers his 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 be very light, with the lone report of note being PPI from South Korea.

Stocks Lower Amid Mixed Economic News

Charles Schwab: On the Market

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

Stocks Lower Amid Mixed Economic News

While off the worst levels of the day, U.S. equities finished lower after the domestic economic calendar offered a host of mixed reports. Homebuilder sentiment cooled, industrial production and capacity utilization came in just shy of estimates, while weekly jobless claims fell and regional manufacturing activity continued to be upbeat. Treasuries were lower, as was gold, while the U.S. dollar was nearly flat.

The Dow Jones Industrial Average (DJIA) fell 15 points (0.1%) to 21,356, the S&P 500 Index declined 5 points (0.2%) to 2,433, and the Nasdaq Composite lost 29 points (0.5%) to 6,166. In moderate volume, 881 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.27 to $44.46 per barrel and wholesale gasoline was $0.01 higher at $1.44 per gallon. Elsewhere, the Bloomberg gold spot price decreased $6.53 to $1,254.33 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 97.47.

Kroger Co. (KR $25) announced Q1 net earnings of $0.32 per diluted share or $0.58 ex-items compared to the FactSet expectation of $0.58 per share, while revenues increased 4.9% year-over-year (y/y) to $36.3 billion, topping forecasts. The company also lowered its 2017 GAAP net earnings guidance. Shares of KR were down over 15%.

Product solutions company Jabil Inc. (JBL $29) reported Q3 earnings results that showed a loss of $0.14 per share or a positive $0.31 ex-items, compared to the $0.29 FactSet consensus estimate, while revenues rose 4.1% to approximately $4.5 billion, roughly matching expectations. JBL traded lower.

The Nasdaq was again decisively to the downside with the recent pressure on technology issues persisting. As a spotlight remains on tech, Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, addresses the situation in his recent Schwab Sector Views: Technology—Too Far or Room to Run?. Brad informs us that the technology sector has been on a remarkable run. It was the best-performing sector over the past three- and 12-month periods. After a run like that, it makes sense that investors are asking if tech may have gone too far. Could a retrenchment be in store? Read the whole article on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Heavy dose of economic data points

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month declined to 67 from May's downwardly revised level of 69 and while it may be at a four-month low in June, remains near the highest levels in approximately 12 years. The 50 mark is the point of separation for good versus poor conditions. The NAHB said that although still quite strong, the figures might be hinting at an easing of optimism in an industry where more workers are desperately needed to break ground on new projects. And businesses might also be less confident since post-election buoyancy has given way to legislative gridlock.

Industrial production (chart) was unchanged month-over-month (m/m) in May, falling shy of estimates calling for a 0.2% increase, and following April's upwardly revised 1.1% rise, which was the strongest surge in nearly seven years. Manufacturing production declined, while mining and utilities output ticked higher. Capacity utilization ticked lower to 76.6%, compared to April's unrevised 76.7%, and shy of forecasts expecting a tick higher to 76.8%.

Weekly initial jobless claims (chart) declined by 8,000 to 237,000 last week, below the Bloomberg forecast of 241,000, with the prior week’s figure unrevised at 245,000. The four-week moving average decreased by 1,000 to 243,000, while continuing claims increased by 18,000 to 1,935,000, north of estimates of 1,920,000.

The Empire Manufacturing Index showed output from the New York region jumped further-than-expected into expansion territory (a reading above zero) for June. The index leaped to 19.8 from May's unrevised -1.0 level, with forecasts calling for a reading of 5.0.

The Philly Fed Manufacturing Index (chart) in June declined to 27.6 after rising to 38.8 in May, though a reading above zero indicates expansionary activity, and compared to estimates of a decline to 24.9.

The Import Price Index (chart) declined 0.3% month-over-month (m/m) for May, below the Bloomberg projection of a 0.1% decline, and compared to April's downwardly revised 0.2% increase. Compared to last year, prices were up by 2.1%, short of forecasts calling for 2.9% and following April's downwardly revised 3.6% increase.

Treasuries were lower, as the yields on the 2-year note and the 30-year bond increased 2 bps to 1.35% and 2.79%, respectively, while the yield on the 10-year note gained 3 bps to 2.16%. Yesterday, the U.S. Federal Reserve raised the target range for the federal funds rate by 25 bps. Schwab's Chief Fixed Income Strategist, Kathy Jones addresses the latest Fed decision in her recent article Fed Raises Rates, Sticks With Plans for One More Hike This Year. Read the whole article to find out what Kathy found surprising as well as detailed analysis on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

More housing data is in store on tomorrow’s economic calendar, with housing starts and building permits scheduled for release, with starts forecasted to have increased 0.4% m/m during May to an annual rate of 1,223,000 units and permits to have risen 0.2% m/m to an annual rate of 1,249,000 units, followed by the preliminary University of Michigan Consumer Sentiment Index, expected to remain at the prior month’s 97.1 level.

European and Asian shares saw pressure

European equities traded broadly lower with retailers and commodity producers leading the decent. The decline developed on the heels of yesterday's Fed decision and in the wake of the Bank of England (BoE) keeping its monetary policy unchanged as expected, though the number of officials at the BoE calling for a rate hike has now increased to three versus the five officials who voted to stay the current policy path. In other central bank action, the Swiss National Bank kept both its target range and the rate charged on sight deposits unchanged, as expected. In economic developments in the region, consumer price inflation reports out of France and Italy were mostly in line with projections, retail sales figures in the U.K. were well short of expectations and the trade balance for the Eurozone was narrower than anticipated.

The euro moved lower versus the U.S. dollar, while the British pound erased an early decline that ensued following the BoE decision and traded higher against the greenback. Bond yields in the region were mostly higher. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses the recent action in the global bond markets and what it may be signaling in his latest article,Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia traded mostly lower with energy issues leading the decline on the heels of yesterday's Fed decision to increase the target range for the federal funds rate by 25 basis points and as crude oil prices continued to slide. Mainland Chinese stocks ticked to the upside, as the People's Bank of China (PBoC) appears to be holding off on any immediate increases to borrowing costs. The PBoC raised money-market costs shortly following its U.S. counterpart tightening in March. However, securities in Hong Kong fell sharply, with property firms under heavy pressure after the city's monetary authority raised borrowing costs shortly following the U.S. Fed's monetary policy decision yesterday. Japanese equities slipped, with exporters underperforming as the yen advanced versus the U.S. dollar and held gains, while traders in the island nation await Friday's decision from the Bank of Japan when it concludes its latest monetary policy meeting. Markets in Australia also fell, despite a report showing the country's jobless rate declined to its lowest level in over four years with the strong jobs report also sending the Australian dollar higher versus all of its major peers. Finally, stocks in India declined.

For a more detailed picture of our current global economic landscape, see the latest video from Schwab's Jeffrey Kleintop, CFA, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com.

In addition to the conclusion of the aforementioned Bank of Japan monetary policy meeting, tomorrow’s international economic calendar will hold Italy’s trade balance and CPI from the Eurozone.

Financial Review

Seven Straight

Sinclair Noe — July 18, 2016

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

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DOW + 16 = 18,533
SPX + 5 = 2166
NAS + 26 – 5055
10 Y – .02 = 1.58%
OIL – .73 = 45.22
GOLD- 8.60 = 1329.50

The Dow is on a seven-session winning streak, capped by another record close. The S&P 500 is on a record setting streak as well. This tells us two things: first, the markets are strong, and second, the markets are overbought and due for a breather. Just because a market is overbought, it does not mean it can’t continue to climb higher. The markets can be irrational longer than you can be solvent.

Financial markets have shown resilience after Friday’s failed coup attempt in Turkey, although Turkey’s Borsa Istanbul 100 Index sank 7.1% and Turkish bonds sold off, pushing yields up about 7%. Still, the Turkish lira rallied 3% today. Despite the complacency and thousands of arrests, the turmoil is far from finished.

More than 90 of the biggest U.S. companies will report results this week, giving a clearer picture of an earnings recession. Based on analysts’ forecasts for companies in the S&P 500 index, Thomson Reuters predicts adjusted earnings per share for the second quarter will be down 4.7% from a year earlier, following a 5% drop in Q1.

Bank of America said its quarterly profit fell to $4.2 billion, down from $5.1 billion. Revenue also fell, but results beat expectations; which seems to be a recurring trend with the financial stocks’ earnings reports this season.

Hasbro posted second-quarter earnings per share of 41 cents, up from 33 cents in the same period a year earlier. The results beat estimates of 39 cents. But Hasbro shares dropped 7% today. Hasbro sales are closely tied to movies, such as Frozen and Star Wars, and sales results show Star Wars toys may have peaked.

After the close, Netflix reported sales grew to $2.1 billion, up 28 percent more than a year ago. Netflix reported EPS of 9 cents a share, a gain from 6 cents a year ago. But Netflix earnings reports are all about subscriber growth and that proved a disappointment. The company added 1.52 million new customers overseas, compared with an April projection of 2 million. Netflix also added 160,000 in the U.S., bringing the company total to 83.2 million. The company had predicted about 500,000 new domestic customers. Shares dropped 17% in after-hours trade.

Yahoo’s quarterly revenue exceeded analysts’ estimates, even as it declined. Profit missed estimates. The company is expected to stop taking bids and make a decision about a potential sale of the company. Suitors so far have included Verizon, AT&T and private equity firms; and earlier offers have ranged in price from about $3.75 billion to $6 billion, depending on what assets are part of the bid.

The National Association of Home Builders’ index fell to 59. Any reading over 50 signals improvement. All three of the index’s sub-gauges slipped. The index of current conditions eased one point to 63, while the gauge for the upcoming six months fell three points to 66. Buyer traffic was down one point to 45. Builder confidence hit a ten-year high last fall but fell back after that. Builders continue to report trouble finding lots and labor.

Japanese telecommunications company Softbank has agreed to purchase ARM Holdings for $32 billion. The proposed acquisition represents a 43 percent premium over the company’s closing share price last week. If you own a smartphone, you almost certainly own a product designed by ARM Holdings.  It has designed the chips for more than 95% of the world’s smartphones. The Cambridge, England-based firm is strictly a designer and not a manufacturer. The 4,000-employee outfit draws up the blueprint for microprocessors for smartphones and other devices and then charges partners such as Qualcomm for using those schematics. ARM was founded in 1990, a spinoff of a collaboration between Apple and Acorn Computer. ARM focused on designing chips that consumed the least energy.

The deal is believed to be the largest acquisition ever of a European tech company. The deal is the first major cross-border transaction in Britain since the Brexit vote. Worries over the British economy have weakened the value of the pound sterling and made it cheaper for foreign companies like SoftBank to hunt for deals there. Compared with this same time in 2015, for example, pound-denominated assets are 30 percent cheaper for buyers holding yen. The deal is seen as a bet on the “internet of things,” a new stage in the evolution of network technology, when cars, buildings and household items may be connected through embedded electronics.

ExxonMobil is getting into a bidding war. ExxonMobil Corp has made a bid worth at least $2.2 billion for InterOil Corp and its stake in a rich Papua New Guinea gasfield, winning the support of its target and topping an offer from Australia’s Oil Search Ltd. Exxon is a partner with Oil Search in the country’s only liquefied natural gas terminal, PNG LNG. Oil Search is also a partner, along with InterOil and Total, in another proposed gas export project, Papua LNG.

When Oil Search made its $2.2 billion offer for InterOil in May in conjunction with Total, it did so with the idea that it could save money and increase returns by integrating the two projects. Having Exxon take InterOil’s place in Papua LNG would accomplish the same goal at none of the cost. Exxon’s bid values InterOil at $2.5 billion.

Berkshire Hathaway agreed to buy Medical Liability Mutual Insurance. The target company is the largest underwriter of medical professional liability insurance in New York and will convert from a policyholder-owned to a stock business. Terms were not disclosed.

Due to a Hawaiian regulatory order dismissing the companies’ merger application, NextEra Energy and Hawaiian Electric have announced the termination of their plans to combine. Under the merger agreement’s conditions, NextEra will pay Hawaiian Electric a $90 million break-up fee and up to $5 million for reimbursement of expenses associated with the transaction.

Volkswagen executives in the U.S. have pledged to compensate 650 American franchise dealers who have been dented by the carmaker’s emissions crisis. The decision, which came at a meeting on Friday, marked the first time VW acknowledged that dealers would get compensation for the economic damage they suffered from the scandal.

Fiat Chrysler Automobiles is under investigation by the U.S. Justice Department for fraud, according to Bloomberg news. Prosecutors are scrutinizing whether the car-maker violated U.S. securities laws, although details of the investigation are still sketchy at this time. A civil lawsuit against Fiat Chrysler may provide clues about what prosecutors are looking at.

A Chicago-area dealer alleges the company inflated its U.S. car sales by paying dealers to report selling more vehicles than they actually did. Fiat Chrysler is also fighting investor claims that the auto maker played down the economic impact of manufacturing problems that led to expensive recalls. A lawsuit, filed in September in federal court in Manhattan by a group of investors, alleges the company made false and misleading statements about flaws in its manufacturing process and quality control that led to at least 11 million vehicles being recalled.