Stocks Grab Gains

Charles Schwab: On the Market

Posted: 6/7/2017 4:15 PM ET

Stocks Grab Gains

U.S. equities avoided a third-straight session of losses as a mild advance was led by the financial sector which likely received a boost from a modest rebound in Treasury yields. In domestic economic news, weekly mortgage applications rose, but the afternoon release of consumer credit showed borrowing increased well below forecasts. Additional caution may have been exercised ahead of tomorrow's U.K. election and monetary policy decision from the European Central Bank. The U.S. dollar was nearly unchanged, gold was lower and crude oil prices tumbled following a government inventory report.

The Dow Jones Industrial Average (DJIA) increased 37 points (0.2%) to 21,174, the S&P 500 Index gained 4 points (0.2%) to 2,433, and the Nasdaq Composite added 22 points (0.4%) to 6,297. In moderate volume, 883 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil dropped $2.47 to $45.72 per barrel and wholesale gasoline was $0.06 lower at $1.49 per gallon. Elsewhere, the Bloomberg gold spot price decreased $7.42 to $1,286.97 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.68.

Dave & Buster's Entertainment Inc. (PLAY $73) reported Q1 earnings-per-share (EPS) of $0.98, or $0.87 ex-items, versus the $0.81 FactSet estimate, with revenues rising 16.1% year-over-year (y/y) to $304 million, slightly above the projected $300 million. Q1 same-store sales rose 2.2% y/y, below the forecasted 2.7% gain. The company raised its full-year EPS outlook but its guidance for revenue for the year had a midpoint that was a bit shy of estimates. Shares finished higher.

Navistar International Corp. (NAV $30) posted a fiscal Q2 loss of $0.86 per share, compared to the estimated $0.08 per share shortfall, as revenues declined 5.0% y/y to $2.1 billion, roughly in line with expectations. The truck and engine maker's North American sales topped forecasts. NAV reiterated its full-year guidance as it expects a stronger second half, driven by backlog and improving industry conditions. Shares traded lower.

Consumer credit misses forecasts and weekly mortgage applications rise

Consumer credit, released in the final hour of trading, showed consumer borrowing advanced by $8.2 billion during April, well short of the $15.0 billion forecast of economists polled by Bloomberg, while March's figure was adjusted higher to an increase of $19.5 billion from the originally reported $16.4 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, climbed by $6.7 billion, while revolving debt, which includes credit cards, increased by $1.5 billion.

The MBA Mortgage Application Index increased 7.1% last week, following the previous week's 3.4% decline. The rise came as a 3.4% gain in the Refinance Index was met with a 10.0% jump for the Purchase Index. The average 30-year mortgage rate decreased 3 basis points (bps) to 4.14%.

Treasuries dipped, with the yield on the 2-year note ticking 1 bp higher to 1.31%, while the yields on the 10-year note and the 30-year bond rose 3 bps to 2.18% and 2.84%, respectively.

Treasury yields have come under pressure as of late amid heightened political uncertainty and mixed economic data, headlined by last week's softer-than-expected May nonfarm payroll report, which caused some uncertainty regarding the pace of further Fed rate hikes after next week's highly-expected increase. Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Turn Down For What: Why is Job Growth Slowing?, last Friday’s weak jobs report raised alarm bells about slowing job growth, but 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.

Meanwhile, the likelihood that the Fed could begin the process of shrinking its large balance sheet later this year has fostered uncertainty, as discussed by Schwab's Chief Fixed Income Strategist, Kathy Jones 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. Liz Ann Sonders also 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, 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.

Europe gives up early gains, Asia mixed as global events loom

European equities gave up early gains and finished lower, ahead of tomorrow's monetary policy decision by the European Central Bank (ECB), which Bloomberg reported could deliver a reduction in the central bank's inflation outlook in the wake of the recent drop in energy prices. The euro came under pressure in choppy trading ahead of the ECB's decision. Energy issues moved lower as crude oil prices tumbled in the wake of an unexpected jump in U.S. oil inventories. However, technology issues continued to move higher and eased Spanish banking sector concerns helped the financial sector, along with some stability in bond yields after recent pressure. Political uncertainty remained elevated on both sides of the pond, ahead of tomorrow's U.K. election and U.S. testimony of fired FBI Director Comey. Recent polls continue to show a narrowing of the race in the U.K., fostering some uncertainty as Brexit negotiations roll on and votes loom in Germany and Italy later this year.

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?. Moreover, for a look at the global economic front, see Jeff's video, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com. In economic news, German factory orders fell more than expected. The British pound ticked higher versus the greenback and bond yields in the region moved mostly to the upside.

Stocks in Asia finished mixed following the back-to-back declines in the U.S. and as the global markets tread cautiously ahead of this week's U.K. election and monetary policy meeting by the ECB, while eyeing the looming testimony by fired FBI Director Comey in the U.S. As political uncertainty remains elevated, geopolitical uneasiness continues in the wake of the cut ties with Qatar by several Middle East nations. 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. Japanese equities finished nearly unchanged, with the yen paring yesterday's jump, while Australian securities also finished little changed on the heels of the nation's Q1 GDP report, which showed growth slowed to a 1.7% y/y pace, from the 2.4% expansion posted in Q4, but slightly above estimates of a 1.6% increase. Indian shares advanced ahead of the Reserve Bank of India's monetary policy decision, which after the close it kept its policy stance unchanged as expected but lowered its inflation outlook. South Korean equities declined and stocks trading in Hong Kong dipped, despite eased Chinese liquidity concerns and some upbeat foreign investment figures, which helped lift mainland Chinese shares, along with optimism regarding the inclusion of its stocks to the MSCI.

The international economic docket for tomorrow will be headlined by Japan as the island nation releases Q1 GDP, trade data and bank lending figures. Additional releases will include the trade balance from Australia, the current account from France, 1Q GDP from the Eurozone and the aforementioned monetary policy decision from the European Central Bank.