Stocks Bounce Off Lows

Charles Schwab: On the Market

Posted: 6/1/2016 4:15 PM ET

Stocks Bounce Off Lows

U.S. equities were able to battle back and finish near the unchanged mark, as crude oil prices pared losses to close with only slight losses, domestic manufacturing reports bested forecasts, and the Fed's Beige Book reported continued modest growth in the economy. The resiliency for stocks came in the face of early pressure from mixed business activity reports out of China, as well as marked caution ahead of tomorrow's European Central Bank and OPEC meetings. Treasuries finished mixed, while gold and the U.S. dollar were lower.

The Dow Jones Industrial Average (DJIA) inched 2 points higher to 17,789, the S&P 500 Index also added 2 points (0.1%) to 2,099, and the Nasdaq Composite gained 4 points (0.1%) to 4,952. In moderate volume, 892 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude declined $0.09 to $49.01 per barrel, wholesale gasoline was $0.01 higher at $1.62 per gallon, and the Bloomberg gold spot price declined $3.09 to $1,212.23 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 95.39.

Michael Kors Holdings Ltd. (KORS $46) reported fiscal 4Q earnings-per-share (EPS) of $0.98, one penny north of the FactSet estimate, as revenues increased 10.9% year-over-year (y/y) to $1.2 billion, roughly in line with forecasts. 4Q same-store sales rose 0.3% y/y, versus the anticipated 0.2% gain. KORS issued stronger-than-expected full-year EPS guidance, but its sales outlook missed expectations. Separately, the company announced a new $1 billion share repurchase program. Shares were nicely higher.

Salesforce.com Inc. (CRM $84) announced an agreement to acquire enterprise cloud commerce solutions company, Demandware Inc. (DWRE $75), for $75.00 per share in cash, in a transaction valued at about $2.8 billion. CRM dipped, while DWRE surged over 50%.

Under Armour Inc. (UA $36) lowered its full-year guidance due to the developments related to the bankruptcy proceedings of The Sports Authority. Shares fell.

The major automakers reported U.S. May sales today, with Fiat Chrysler Automobiles NV's (FCAU $7) Chrysler brand's sales growing 9.5% y/y, compared to the FactSet estimate of a 7.7% gain. The figures are being adjusted to reflect two fewer selling days this year compared to a year ago. However, Ford Motor Co's (F $13) adjusted sales rose 1.9%, just below the forecasted 2.0% gain, while General Motors Co's (GM $30) sales fell 11.1%, compared to the projected 3.1% decrease, and Toyota Motor Corp's (TM $103) sales dropped 2.0%, versus the expected 0.7% decline. Shares of all four of the automakers traded lower.

Manufacturing activity picks up

The Institute for Supply Management (ISM) Manufacturing Index (chart) in May remained in expansion territory (above 50) for the third-straight month after unexpectedly rising to 51.3 from April's 50.8 level, and compared to the Bloomberg forecast calling for a dip to 50.3. Supplier deliveries, customers' inventories and prices all rose solidly, with the latter moving above 60. However, new orders and production both dipped but remained solidly above 50, while employment continued to contract.

TThe final Markit U.S. Manufacturing PMI Index was revised to 50.7 for May from the 50.5 preliminary level, where it was expected it to remain. The index was down slightly from the 50.8 level posted in April. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

As noted in the Schwab Market Perspective: Stocks Stuck in the Muck, there is hope for U.S. stocks in the second half of the year, and investors should be aware of the less-told story. The bounce in crude could help to support the improvement in manufacturing we’ve seen recently and we need to see a few more positive readings in a row to become more convinced, but stocks could begin to sniff out the improvement. Also, the U.S. economy will likely be buoyed by a perking up consumer, which Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses in his latest Schwab Sector Views: What is the State of U.S. Consumer Spending?. Read both articles at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Construction spending (chart) fell 1.8% month-over-month (m/m) in April, versus projections of a 0.6% advance, and following March's upwardly revised 1.5% gain. Residential spending declined 1.5% m/m, while non-residential spending decreased 2.1%.

The MBA Mortgage Application Index declined 4.1% last week, after rising by 2.3% in the previous week. The drop came as a 3.9% decrease for the Refinance Index was met with a 4.7% fall for the Purchase Index. The average 30-year mortgage rate remained at 3.85%.

The Federal Reserve's Beige Book, a read on economic activity across the nation, was released in afternoon action. The report showed that the U.S. economy expanded at a modest pace, and while employers continued to add jobs during the period, the tight labor market pushed wages slightly higher. Manufacturing was mixed in most districts, but the decline in oil prices continued to hinder the energy industry, hence causing the Dallas district to report only marginal growth. For our latest analysis on the heightened Fed rate hike expectations see the video by Schwab's Chief Fixed Income Strategist, Kathy Jones and Managing Director of Trading and Derivatives, Randy Frederick, titled Is the Market Underestimating the Fed?, and follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick. Also check out our article, What If the Fed Raises Interest Rates?, and follow Schwab on Twitter: @schwabresearch. Get the video and article at www.schwab.com/insights.

Treasuries finished mixed, as the yield on the 2-year note rose by 1 basis point (bp) to 0.89%, while the yield on the 10-year note was flat at 1.84% and the 30-year bond rate fell 3 bps to 2.62%.

Tomorrow, the domestic economic calendar will offer weekly initial jobless claims, forecasted to show a slight uptick to a level of 270,000, as well as the ADP Employment Change Report, with economists anticipating a 173,000 increase in private sector jobs during May following the 156,000 rise in April.

Europe and Asia see pressure on China data and ahead of key meetings

European equities traded lower, though off the lows of the day following the upbeat U.S. manufacturing data. Oil & gas issues came under pressure as crude oil prices extended yesterday's drop amid dampened expectations that tomorrow's meeting between the Organization of the Petroleum Exporting Countries (OPEC) will yield any coordinated action. Also, some mixed business activity reports in China stymied global growth optimism, while concerns about the possibility that the U.K. could vote to leave the European Union (EU), known as a Brexit, remained. The concerns flared-up yesterday as opinion polls ahead of the June 23 referendum showed support for a Brexit increased, per Bloomberg. The British pound added to yesterday's drop versus the U.S. dollar. For analysis on the issue read our article, Brexit: Will the UK Leave the EU?, at www.schwab.com/insights. Moreover, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his article, Brexit: 5 Things Investors Need to Know, at www.schwab.com/oninternational, and be sure to follow Jeff on Twitter: @jeffreykleintop.

Conviction may have also been hampered by tomorrow's looming monetary policy decision from the European Central Bank. In economic news, Markit's final Eurozone Manufacturing PMI Index was unrevised at 51.5 for May, in line with forecasts, and below the 51.7 level posted in April, though a reading above 50 denotes expansion. However, May manufacturing growth in Switzerland unexpectedly accelerated and output from the sector in the U.K. surprisingly nudged back into expansion territory. Financials also saw pressure as Italian banking sector concerns resurfaced on a report that they may be asked to inject more funds into the nation's resolution fund. The euro traded higher versus the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mostly to the downside as Japanese stocks fell on a jump in the yen, while some mixed data out of China hamstrung sentiment. Japanese equities fell, as the yen rallied on the confirmation that Prime Minister Abe will postpone a planned 2017 sales tax hike to 2019. The move was widely expected and had contributed to the recent run in Japanese stocks, and it appeared to cause some concerns to flare-up regarding the delay's impact on the country's fiscal issues. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers analysis of Japan in his latest article, Japan: Another Recession Coming?.

Mainland Chinese stocks and those traded in Hong Kong declined, as traders digested some mixed business activity reports. The nation's official Manufacturing PMI Index clung to expansion territory (above 50) in May, remaining at April's 50.1 level, versus the 50.0 reading projected by economists. However, China's non-Manufacturing PMI Index slipped to 53.1 last month from 53.5 in April, suggesting growth in the more heavily-weighted services sector activity slowed. Schwab's Jeffrey Kleintop discusses China data in his article, Trust but Verify: Five Independent Indicators of China's Economy. Also, Schwab's Director of International Research, Michelle Gibley, CFA, offers 5 Reasons China Won't Crash the Global Economy in 2016. Read all the articles at www.schwab.com/oninternational, and follow Schwab on Twitter: @schwabresearch.

Australian securities fell, despite reporting stronger-than-expected 1Q GDP growth of 1.1% quarter-over-quarter, versus the expected 0.8% expected expansion and the upwardly revised 0.7% growth registered in 4Q. Oil & gas issues saw pressure on weaker crude oil prices and financials weighed on the markets. Meanwhile, Indian stocks bucked the trend and gained ground on the heels of late-yesterday's stronger-than-expected 1Q GDP report, while South Korean equities finished flat.

For tomorrow, in addition to the European Central Bank's monetary policy meeting, the international economic calendar will hold consumer confidence from Japan, employment data from Spain, and PPI from the eurozone.