Geopolitics Pressure Stocks

Charles Schwab: On the Market

Posted: 9/25/2017 4:15 PM EDT

Geopolitics Pressure Stocks

 

U.S. equities finished lower, as a fresh threat from North Korea exacerbated already-downtrodden sentiment that followed results from Germany's national election over the weekend that looks to complicate government coalition negotiations. Treasury yields were lower, despite a surprising jump in a regional manufacturing report, and the U.S. dollar was higher after the euro saw pressure following the election results, while gold and crude oil prices rallied.

The Dow Jones Industrial Average (DJIA) declined 54 points (0.2%) to 22,296, the S&P 500 Index lost 6 points (0.2%) to 2,497, and the Nasdaq Composite tumbled 56 points (0.9%) to 6,371. In moderate volume, 842 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.56 to $52.22 per barrel and wholesale gasoline was $0.04 higher at $1.67 per gallon. Elsewhere, the Bloomberg gold spot price increased $13.80 to $1,311.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 92.67.

Dow member General Electric Co. (GE $25) announced that it has agreed to sell its GE Industrial Solutions business to Swiss engineering company, ABB Ltd. (ABB $25), for $2.6 billion. GE gained modest ground and shares of ABB dipped.

Genuine Parts Co. (GPC $94) announced an agreement to acquire European auto parts and tool distributor, Alliance Automotive Group, for a total purchase price of about $2.0 billion. GPC rallied on the deal.

Target Corp. (TGT $59) announced that it will raise its minimum hourly wage for all team members to $11 in October, along with a commitment to increase the minimum to $15 by the end of 2020. TGT also reiterated its most recent sales and EPS guidance for Q3 and full-year. Shares finished lower.

Treasury yields dip, U.S. dollar up, geopolitics and political uncertainty reign

Treasuries were higher, as the yield on the 2-year note dipped 1 basis point (bp) to 1.42%, the yield on the 10-year note declined 3 bps to 2.22%, and the 30-year bond rate decreased 2 bps to 2.77%.
Treasury yields have dipped after a recent rally and the U.S. dollar extended its bounce from multi-year lows hit earlier this month amid lingering global monetary policy uncertainty, while the euro saw pressure after a national election in Germany. Geopolitical concerns flared-up in late-morning action to exacerbate sentiment following reports that North Korea's foreign minister said President Trump's latest comments amount to a declaration of war. The markets continue to digest last week's monetary policy decision from the Fed, which expectedly signaled an October start for the reduction of the Central Bank's massive $4.5 trillion balance sheet, but resuscitated expectations for another rate hike in December. The Fed's decision is discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her commentary, The Fed's on the QT, on the Market Commentary page at www.schwab.com, where you can also find Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, analysis of the global monetary policy front in his article, How the Shift by Central Banks May Affect the Stock Market. Follow Liz Ann and Jeff on Twitter: @lizannsonders and @jeffreykleintop.

The Dallas Fed Manufacturing Activity Index surprisingly jumped further into a level depicting expansion (a reading above zero). The index rose to 21.3 in September—the highest since February—from 17.0 in August, and versus the Bloomberg forecast of a decline 11.5.

The week's economic calendar will begin to heat up tomorrow with some housing data in the form of the S&P CoreLogic Case-Shiller Home Price Index, expected to show the 20-city composite increased 5.7% year-over-year for the month of July, matching that seen the month prior, as well as new home sales, with economists forecasting a 2.5% month-over-month rise in August to a level of 585,000 units following July's decline. Rounding out the day will be the Conference Board's Consumer Confidence Index, anticipated to indicate a slight downtick to a level of 120.0 for September, from the 122.9 posted in August. Other notable reports this week include: preliminary durable goods orders, personal income and spending, the final look at Q2 GDP, the Chicago PMI Index and the final September University of Michigan Consumer Sentiment Index. A host of Fedspeak is poised to garner attention, culminating with Fed Chairwoman Janet Yellen's speech on inflation, uncertainty and monetary policy, which will include a Q&A segment. As noted in the latest Schwab Market Perspective: A Cat and Mouse Fall, volatility has ramped up a bit in the traditionally-slow final weeks of summer, which could be a preview of a bumpy fall for investors. Solid economic data and strong corporate earnings should allow the bull market to continue, but fiscal and monetary uncertainties present risks. Read more on the Market Commentary page at www.schwab.com, and follow us on Twitter: @schwabresearch.

Europe dips as German election and geopolitics eyed, Asia mixed 

European equity markets finished mostly lower, with political uncertainty ensuing after the weekend's national election in Germany where Chancellor Angela Merkel won a fourth term but her margin of victory fostered concerns about the potential complex negotiations in forming a coalition government. 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. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Also, the markets were pressured late in the day as U.S. stocks fell on reports of North Korea's latest threat toward the U.S. The euro fell versus the U.S. dollar, with an unexpected decline in German business confidence for September likely adding to the pressure. The euro held onto losses after European Central Bank (ECB) President Mario Draghi noted today in a speech that the ECB will keep as much monetary policy support in place that the region needs to complete its transition to a new balanced growth trajectory characterized by sustained price stability.

The British pound dipped late in the session versus the greenback, while Brexit negotiations resume today on the heels of last week's speech by U.K. Prime Minister Theresa May, which appeared to disappoint as it lacked details on the path to leave the European Union. For a look at the Brexit process, see our article, Brexit Begins: What's Next for the U.K?, on the Insights & Ideas page at www.schwab.com. Financials saw some pressure and led to the downside as bond yields in the region were mostly lower and as the Bank of England called for banks to hold additional capital.

 Stocks in Asia finished mixed as the markets reacted to a national election in Germany, while anticipating a call for a snap election in Japan. For analysis of global investing amid this backdrop, see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page at www.schwab.com. The yen came under pressure to boost Japanese equities, along with some upbeat manufacturing data and reports that Prime Minister Abe will announce a new economic package. After the closing bell, Abe called for the snap election after saying he will dissolve the lower house of parliament this week, while announcing an $18 billion economic package. However, stocks in China and Hong Kong came under pressure amid increased measures to curb the housing market. Recent data showing China's property prices have been cooling had fostered some speculation that this could slowdown government measures to curb the housing market. Meanwhile, securities traded in South Korea and India lost ground, and markets in Australia finished flat.

For tomorrow, the international economic calendar will hold consumer price inflation from Japan, consumer sentiment from South Korea, import prices from Germany, and sentiment data from France.