Stocks Manage Slight Gains

Charles Schwab: On the Market

Posted: 8/3/2016 4:15 PM ET

Stocks Manage Slight Gains

U.S. stocks ticked higher amid a rebound in crude prices following a mixed oil inventory report, while a rally for the European banking sector assisted in buoying financials. Treasuries finished slightly higher and the U.S. dollar managed decent gains following upbeat domestic services sector and employment reports. Gold was lower. In equity news, shares of AIG jumped on the heels of better-than-expected 2Q results and as its Board of Directors authorized the repurchase of an additional $3.0 billion of its common stock.

The Dow Jones Industrial Average (DJIA) added 41 points (0.2%) to 18,355, the S&P 500 Index gained 7 points (0.3%) to 2,164 and the Nasdaq Composite increased 22 points (0.4%) to 5,160. In moderate volume, 883 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rallied $1.32 to $40.83 per barrel and wholesale gasoline added $0.04 to $1.35 per gallon, while the Bloomberg gold spot price declined $5.62 to $1,357.95 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 95.54.

Time Warner Inc. (TWX $78) reported 2Q earnings-per-share (EPS) ex-items of $1.29, above the $1.16 FactSet estimate, as revenues decreased 5.4% year-over-year (y/y) to $7.0 billion, compared to the expected $7.1 billion. TWX raised its full-year earnings outlook and announced a 10% investment in Hulu LLC and its Turner unit has separately signed an agreement for its full suite of networks to be carried on Hulu's live-streaming service slated for launch early next year. Shares finished nicely higher.

American International Group Inc. (AIG $58) posted 2Q after-tax operating income of $0.98 per share, versus the projected $0.92, while noting that its confidence in reaching its 2017 financial targets "is high." AIG also authorized the repurchase of an additional $3.0 billion of its common stock. AIG rallied.

Electronic Arts Inc. (EA $79) announced fiscal 1Q EPS ex-items of $0.07, compared to the expected loss of $0.02 per share, as revenues decreased 1.6% y/y to $682 million, versus the estimated $651 million. EA reaffirmed its full-year revenue outlook. Shares closed higher.

Kate Spade & Co. (KATE $16) tumbled after the apparel and accessories company posted 2Q EPS ex-items of $0.11, below the forecasted $0.14, and lowered its full-year profit and revenue guidance.

Services sector activity continues to show solid expansion

The Institute for Supply Management (ISM) non-Manufacturing Index (chart) declined to 55.5 in July from 56.5 in June—the highest since November 2015—and compared to the Bloomberg forecast of a dip to 55.9. However, the index continued to depict expansion with a reading above 50. New orders ticked higher and business activity dipped, with both remaining near the 60 mark, while employment declined but continued to grow. The ISM said the majority of comments from respondents reflect stability and continued growth for their respective companies and a positive outlook on the economy.

The final Markit U.S. Services PMI Index was revised to 51.4 in July from the preliminary level of 50.9, versus the expected upward revision to 51.0 and matching June's reading. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

Non-manufacturing activity dwarfs manufacturing in terms of U.S. economic output, driven by the consumer. As noted in the Schwab Market Perspective: New Records…Same Skepticism, jobless claims are reinforcing a healthier employment picture and wage growth is starting to perk up, while housing continuing to be a bright spot indicates better confidence among consumers. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The ADP Employment Change Report showed private sector payrolls rose by 179,000 jobs in July, above forecasts of 170,000 and June's upwardly revised gain of 176,000. Today’s ADP data, comes ahead of Friday's broader July nonfarm payroll report, expected to show an increase of 180,000 jobs, while private sector payrolls are expected to rise 170,000  (economic calendar).

The MBA Mortgage Application Index declined 3.5% last week, after falling 11.2% in the previous week. The drop came as a 4.2% decrease for the Refinance Index was accompanied by a 2.4% decline for the Purchase Index. The average 30-year mortgage rate dipped 2 basis points (bps) to 3.67%.

Tomorrow, the U.S. economic calendar will offer factory orders, which are forecasted to decline by 1.9% m/m in June, after falling 1.0% in May. Also, weekly initial jobless claims will be released, expected to have ticked slightly lower to a level of 265,000 from the previous week's 266,000.

Treasuries were higher, with the yields on the 2-year and 10-year notes losing 2 bps to 0.66% and 1.54%, respectively, while the 30-year bond rate dipped 1 bp to 2.30%. Bond yields have been choppy as of late in the wake of the Fed leaving its monetary policy unchanged and 2Q GDP growth decisively missing expectations last week.

Schwab's Chief Investment Strategist, Liz Ann Sonders provides analysis of last week's Fed's decision in her commentary, A Hopeful Transmission: Fed Holds Rates Steady, But… and Schwab's Chief Fixed Income Strategist, Kathy Jones discusses in her article, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?. Read both articles at www.schwab.com/marketinsight and follow Liz Ann and Kathy on Twitter: @lizannsonders and @kathyjones.

European stocks mixed, Asia mostly lower

European equities finished mixed amid a recovery for the recently-hammered Italian banking sector and a rebound for financial listings. Oil & gas issues also moved higher, with crude oil prices rebounding from their recent tumble to bear market territory. A favorable eurozone business activity report appeared to have a limited impact, as Markit's Eurozone Composite PMI Index—a gauge of output from both the services and manufacturing sectors—was revised higher to 53.2 for July, from the preliminary estimate of 52.9, where it was expected to remain. A reading above 50 denotes expansion and the index showed a slight acceleration in growth from the 53.1 level posted in June.

The euro and British pound lost ground versus the U.S. dollar, while bond yields in the region were mostly higher. However, conviction may have been stymied ahead of tomorrow's monetary policy decision from the Bank of England (BoE), and as the recent tumble in crude oil prices has caused global growth concerns to flare up. Bloomberg estimates are calling for the BoE to cut its benchmark interest rate by 25 bps rate to 0.25% but to not expand its asset purchases. Amid heightened global volatility Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers  Three Reasons Why Now is Not the Time to Retreat from Global Diversification and Five ways investors can make the most of slower growth. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished lower on the heels of the declines in the U.S. and Europe yesterday, which were led by the renewed drop in crude oil prices which recently fell into bear market territory. Moreover, Japanese equities dropped as the yen held onto its rally that has come courtesy of market disappointment toward Japan's latest stimulus measures in the wake of yesterday's details of its latest fiscal spending package. The Hong Kong Hang Seng Index returned to action following yesterday's weather-related closure, with energy issues and property-related stocks leading a decline, while mainland Chinese listings reversed early losses to close higher. South Korean stocks decreased, as did those traded in Australia, with financials leading the decline as yesterday's rate cut by the Reserve Bank of Australia continued to be met with a negative reaction. Finally, Indian equities traded lower amid the recent pullback in emerging markets and some likely caution as lawmakers in the country began talks regarding a unified tax bill, per Bloomberg. Schwab's Director of International Research, Michelle Gibley, CFA, offers a look at the global political landscape in her article, Performing Reformers: How Political Change Can Affect Stocks, at www.schwab.com/oninternational.

In addition to the aforementioned monetary policy decision from the Bank of England tomorrow, a light international economic docket is expected to include the current account balance from China and retail sales from Australia.