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Tuesday, September 26, 2017

Markets Mixed

Charles Schwab: On the Market
Posted: 9/26/2017 4:15 PM EDT

Markets Mixed
U.S. equities finished mixed and near the flatline, unable to hold onto an early morning advance, as ramped up North Korean rhetoric and festering geopolitical anxiety were met with uncertainty from Federal Reserve Chair Janet Yellen's speech today in Cleveland. Treasuries, gold and crude oil prices all finished lower, while the U.S. dollar gained ground. News on the economic front was mixed, as September new home sales surprisingly decreased, consumer confidence inched lower and regional manufacturing activity unexpectedly jumped further into expansion territory.

The Dow Jones Industrial Average (DJIA) declined 12 points (0.1%) to 22,284, the S&P 500 Index was nearly unchanged at 2,497, and the Nasdaq Composite gained 10 points (0.2%) to 6,380. In moderate volume, 737 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.39 to $51.88 per barrel and wholesale gasoline was $0.02 lower at $1.65 per gallon. Elsewhere, the Bloomberg gold spot price tumbled $14.64 to $1,296.14 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 93.02.

After the close yesterday, Red Hat Inc. (RHT $110) reported Q2 earnings per share (EPS) of $0.77 ex-items, versus the $0.67 FactSet estimate, while revenues jumped 20.6% year-over-year (y/y) to $723 million. The open source solutions company's CEO stated that strong demand for technologies that enable hybrid cloud computing contributed to accelerated revenue growth in the first half of the fiscal year. Shares of RHT were nicely higher.

Darden Restaurants Inc. (DRI $78) today announced Q1 EPS of $0.99 ex-items, matching the FactSet estimate, while its consolidated revenues increased 12.9% y/y to approximately $1.9 billion. The company reaffirmed its fiscal 2018 financial outlook, which includes the expected full financial impact of hurricanes Harvey and Irma. DRI shares finished lower.

Amid a host of developments including the recent war of words between President Trump and North Korea's Kim Jong Un, raging culture wars, potential healthcare reform, uninvited and unwanted hurricanes, toxic partisan conflict in DC; and the Fed taking a giant step toward policy normalization, Schwab's Chief Investment Strategist Liz Ann Sonders, dives deep to provide us an update on investor sentiment. Read her latest article Comfortably Numb? An Update on Investor Sentiment, on the Market Commentary page at and follow Liz Ann on Twitter: @lizannsonders.

New home sales unexpectedly decline, regional manufacturing surprises to the upside

New home sales (chart) surprisingly declined 3.4% month-over-month (m/m) in August to an annual rate of 560,000, below the forecasts calling for 585,000 units and the upwardly revised 580,000 unit pace in July. The median home price was up 0.4% y/y to $300,200. New home inventory increased to 6.1 months of supply at the current sales pace from 5.7 in July. Sales fell m/m in the Northeast, South, and West, but were flat in the Midwest. New home sales are based on contract signings instead of closings. The impact of the three recent major hurricanes may increase the volatility of the economic data for a few months.

The Consumer Confidence Index (chart) dipped to a level of 119.8 in September from the downwardly revised 120.4 in August, and compared to the Bloomberg estimate of a 120.0 reading. The Present Situation Index declined, while the Expectations Index of business conditions for the next six months rose marginally. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—declined to 14.5 from the 16.0 level posted in August.

The Richmond Fed Manufacturing Activity Index jumped to 19 in September, versus an unrevised level of 14 in August and compared to the Bloomberg expectation of a decline to 13, with a reading above zero denoting expansion.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.8% y/y gain in home prices in July, versus the Bloomberg expectation of a 5.7% increase. Month-over-month (m/m), home prices were up nearly 0.4% on a seasonally adjusted basis for July, topping forecasts calling for a 0.2% rise.

Federal Reserve Chair Janet Yellen addressed the National Association for Business Economics today in Cleveland, where the Fed head noted that trends in employment, wages and prices may have shifted from what the central bank forecasters had originally expected. Yellen indicated that though the central bank expects that longer-run inflation should trend toward its two percent target, the Fed is making room for the possibility that it could be wrong.

Treasuries were lower, as the yields on the 2-year and 10-year notes, as well as the 30-year bond all advanced 2 basis points to 1.44%, 2.24% and 2.78%, respectively.

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 Liz Ann Sonders in her commentary, The Fed's on the QT, on the Market Commentary page at, 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.

Tomorrow's economic calendar will hold preliminary durable goods orders, forecasted to have gained 1.5% m/m during August following July's 6.5% plunge, while ex-autos, orders are expected to gain 0.4% m/m. As well, pending home sales will be reported, with economists anticipating a 0.2% m/m decline for August after falling 0.8% in July, and MBA Mortgage Applications will round out the day.

European equities lack decisive direction, Asia finishes mostly lower

European equities oscillated between gains and losses before ultimately closing mixed amid the rising tension between North Korea and the United States and as the outgoing government of Germany's Chancellor Merkel rejected a proposal to pool euro-area sovereign debt. The proposal, supported by French President Macron, would have been aimed at utilizing the region's bailout fund, the European Stability Mechanism (ESM), with a goal of granting additional powers to the ESM to turn it into a sort of European Monetary Fund. The German Chancellor is in the midst of complex coalition talks in an attempt to build a new 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 Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Elsewhere, a recent speech by U.K. Prime Minister Theresa May seemingly failed to spark trade negotiation optimism; though some European Finance Ministers said the speech was constructive and likely a step in the right direction as EU leaders will have their first chance to approve trade talks in mid-October. The British Prime Minister is meeting with the President of the European Council today, while their counterparts held a fourth round of Brexit discussions in Brussels. For a look at the process, see our article, Brexit Begins: What's Next for the U.K?, on the Insights & Ideas page at The euro and British pound dipped versus the U.S. dollar and bond yields in the region were mixed. In economic developments, import prices for Germany rose in line with forecasts, business confidence in France missed expectations and finance loans for housing in the U.K. increased, but were lower than projections.

Stocks in Asia finished mostly to the downside, but losses were limited as the markets seemingly attempted to stabilize amid the recent host of catalysts. Mainland Chinese equities and those traded in Hong Kong advanced modestly, after both indexes came under pressure yesterday amid increased measures aimed at curbing the country's housing market where record home sales helped to spark a surge in Chinese property developers this year. Japanese securities decreased amid strength in the yen, and as minutes released from the Bank of Japan's July meeting indicated some optimism regarding consumer price inflation. Separately, the island nation also released economic data that showed producer price inflation slightly exceeded expectations. Markets in Australia declined, led lower by consumer discretionary issues, stocks in South Korea fell amid the festering North Korean rhetoric, while Indian listings were also lower. 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

Tomorrow's international economic calendar will be light with the only item of note being industrial orders from Italy.

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