North Korea Tensions Rattle Markets

Charles Schwab: On the Market

Posted: 9/5/2017 4:15 PM ET

North Korea Tensions Rattle Markets

U.S. equities began the holiday-shortened week solidly lower, as risk appetites were severely limited following this weekend's claim that North Korea detonated a hydrogen bomb and reports that it may be preparing another ICBM launch. Treasury yields fell sharply on the uneasiness and the U.S. dollar lost ground, while gold rose and crude oil prices were mixed.

The Dow Jones Industrial Average (DJIA) tumbled 234 points (1.1%) to 21,753, the S&P 500 Index lost 19 points (0.8%) to 2,457, and the Nasdaq Composite declined 60 points (0.9%) to 6,376 In moderately heavy volume, 909 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.37 to $48.66 per barrel and wholesale gasoline lost $0.05 to $1.70 per gallon. Elsewhere, the Bloomberg gold spot price was $8.10 higher at $1,341.97 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.5% to 92.21.

Dow member United Technologies Corp. (UTX $111) announced an agreement to acquire Rockwell Collins Inc. (COL $131) for $140.00 per share in cash and UTX stock, for a total equity value of about $23.0 billion. Under the terms of the deal, each COL shareowner will receive $93.33 per share in cash and $46.67 in shares of UTX. United Technologies said the deal is expected to be accretive to its earnings after the first full year following closing. UTX finished lower and COL ticked higher as the stock had jumped recently on speculation of the deal.

Insmed Inc. (INSM $27) surged nearly 120% after the company announced positive results from a late-stage trial of its treatment for certain lung diseases and that it intends to seek accelerated approval and request a priority review.

Factory orders mixed to kick off the week

Factory orders (chart) fell 3.3% month-over-month (m/m) in July, matching the Bloomberg expectation, while June's figure was positively revised to a 3.2% increase. However, stripping out the volatile transportation component, orders rose 0.5% and June's 0.2% decline was upwardly revised to a 0.1% gain. July durable goods orders—preliminarily reported two weeks ago—were unrevised at a 6.8% drop versus forecasts of an adjustment to a 2.9% decrease. Nondefense aircraft and parts fell sharply after June's surge, while electrical equipment, along with computers and electronic products, rose solidly.

Today's report kicked off the holiday shortened week that will bring a flood of key reports for the markets to digest, including the July trade balance, August ISM non-Manufacturing and Markit Services PMI Indexes, the Fed's Beige Book, and final Q2 productivity and labor costs. Also, the international calendar will bring a plethora of trade reports, and monetary policy decision from the European Central Bank (ECB).

Today's report kicked off the shortened week's economic calendar that will culminate with tomorrow's releases of MBA mortgage applications, the trade balance and the Fed's Beige Book, a summary of business activity across the nation used as a tool to prepare for this month's two-day monetary policy meeting ending on the 20th. However, the headlining data could be the August ISM non-Manufacturing and final Markit's Services PMI Indexes, on the heels of today's upbeat services sector reports in China and eurozone. ISM's report is projected to improve to 55.5 from 53.9 in July and Markit's release is forecasted to be unrevised at the preliminary level of 56.9, and up from July's 54.7 figure. Readings above 50 for both reports denote expansion.

As noted in the latest Schwab Market Perspective: A Preview of Coming Attractions?, limited risk of an economic recession keeps us in the bull market camp, notwithstanding near-term risks of fiscal and monetary uncertainties. Read more on the Markets & Economy page at www.schwab.com.

Treasuries rallied, as the yield on the 2-year note decreased 6 basis points to 1.29%, the yield on the 10-year note fell 10 bps to 2.07%, and the 30-year bond rate was 9 bps lower at 2.69%. Risk aversion flared back up in the wake of claims that North Korea detonated a hydrogen bomb over the weekend, weighing on Treasury yields and the U.S. dollar. This continues to accompany lingering global monetary policy, trade and U.S. political uncertainties.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her article, What's the Bigger Risk: Bond Market Bubble or Complacency?, we think bond yields are likely to rise from current levels as the economy continues to improve and the Federal Reserve tightens policy, but we don’t see a bubble in the market. We suggest managing the duration in your bond portfolio to mitigate the risk of rising rates. We also suggest managing your exposure to the higher risk parts of the fixed income markets where yields are low and the risk premium offered versus Treasuries is low. Read more on the Fixed Income page at www.schwab.com, and for analysis of investing styles, see Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Radioactive II: Could the Tide Finally Be Turning for Active vs. Passive?, on the Markets & Economy page. Follow Kathy and Liz Ann on Twitter: @kathyjones and @lizannsonders.

For our latest analysis of the political front, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's newest article, Congress Returns to Face Debt Ceiling, Government Shutdown Deadlines, on the Insights & Ideas page at www.schwab.com.

Europe declines, Asia mixed amid festering geopolitical concerns 

European equity markets finished mostly lower, with the euro and British pound gaining ground on the U.S. dollar, while the global markets remained skittish as tensions with North Korea continued to fester. Amid this backdrop, Schwab's Chief Investment Strategist Liz Ann Sonders offers her article, Twist and Shout: United States Takes on North Korea … Implications for Stocks on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders. Bond yields in the region lost ground, even as China posted favorable services sector data and a report from Markit showed eurozone manufacturing and services sectors continued to expand for August. This comes ahead of this week's monetary policy decision by the ECB. However, a separate report showed eurozone retail sales declined in July. Bucking the trend, Swiss markets ticked higher as today's subdued consumer price inflation data followed yesterday's disappointing Q2 GDP report to appear to ease concerns about the Swiss National Bank normalizing monetary policy. Also, German markets moved higher with automakers getting a boost from positive comments about diesel technology from Chancellor Merkel and yesterday's solid gain in August car registrations, while the aforementioned Markit report showed the nation's business activity grew more than expected.

For a look at global stock investing, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished mixed as sentiment remained cautious after this weekend's claim that North Korea detonated a hydrogen bomb, while the markets digested a report that showed growth in China's key services sector activity accelerated. Japanese equities fell, with the yen extending gains, while those traded in South Korea gave up early gains and dipped, with media reports suggesting North Korea is preparing another intercontinental ballistic missile (ICBM) test. Schwab's Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans. Read more on the International Investing page at www.schwab.com, as well as his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks. Markets in Australia ticked higher, with the Reserve Bank of Australia holding its monetary policy stance steady as expected. Stocks in mainland China and Hong Kong were little changed after the Caixin PMI Services Index increased to 52.7 for August, from 51.5 in July, with a reading above 50 denoting expansion. Finally, Indian equities advanced modestly.

For tomorrow, the international economic calendar will offer GDP from Australia, manufacturing orders from Germany, and retail sales from Italy.