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Thursday, October 26, 2017

Gains Taper Near Close

Charles Schwab: On the Market
Posted: 10/26/2017 4:15 PM EDT

Gains Taper Near Close
After being higher for most of the day, the U.S. stock markets finished mixed, with gains in the tech sector on Twitter's quarterly results being tempered by health care issues following a disappointing outlook from Celgene. Treasury yields were higher amid mixed economic data, including a disappointing pending home sales report, while the U.S. dollar rallied with the euro seeing pressure in the wake of the European Central Bank's decision to cut and extend its stimulus measures. Crude oil prices were higher and gold was lower.

The Dow Jones Industrial Average (DJIA) rose 72 points (0.3%) to 23,401, the S&P 500 Index increased 3 points (0.1%) to 2,560, while the Nasdaq Composite was 7 points (0.1%) lower at 6,557. In moderate volume, 875 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil added $0.46 to $52.64 per barrel and wholesale gasoline gained $0.01 to $1.70 per gallon. Elsewhere, the Bloomberg gold spot price lost $11.30 to $1,266.23 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 1.1% higher at 94.70.

Twitter Inc. (TWTR $20) reported a Q3 net loss of $0.03 per share, or earnings-per-share (EPS) of $0.10 ex-items, versus the $0.06 FactSet estimate, as revenues declined 4.0% year-over-year (y/y) to $590 million, above the projected $587 million. The company said daily active users grew 14.0% y/y and monthly active users rose 4.0%. TWTR issued Q4 operating earnings guidance that topped forecasts. Shares rallied.

Comcast Corp. (CMCSA $36) posted Q3 earnings of $0.55 per share, or $0.52 ex-items, versus the projected $0.49, with revenues declining 1.6% y/y to $21.0 billion, compared to the forecasted $21.1 billion. CMCSA's video subscribers fell but by a slightly smaller amount than expected. The company said it increased operating earnings despite the impact of the severe storms and the uneven comparison due to the Rio Olympics. Shares finished lower.

Ford Motor Co. (F $12) announced Q3 EPS of $0.39, or $0.43 ex-items, compared to the expected $0.33, as automotive revenues rose 0.9% y/y to $33.6 billion, above the forecasted $33.0 billion. F raised the low end of its full-year EPS outlook. Shares were higher.

United Parcel Service Inc. (UPS $119) reported Q3 EPS of $1.45, in line with forecasts, as revenues grew 7.0% y/y to $16.0 billion, above the expected $15.6 billion. The company cited the impact of natural disasters, but said it saw balanced shipment growth and yield expansion, while its international profit rose solidly. UPS raised the low end of its full-year earnings outlook. Shares were higher.

Shares of Celgene Corp. (CELG $100) tumbled after the company lowered its 2017 revenue outlook and its long-term guidance for 2020, due to certain market dynamics and recent pipeline events. The updated guidance accompanied its Q3 earnings report, which showed revenues were softer than expected as sales of its psoriasis drug Otezla severely missed estimates. This also comes as the company announced last week that its highly-anticipated drug for Crohn's disease failed a late-stage trial.

In late-day action, the Wall Street Journal reported that CVS Health Corp. (CVS $73) was in talks to acquire Aetna Inc. (AET $179). Neither company commented on the headline. Shares of AET rallied on the news, while CVS was slightly lower.

Jobless claims rise

Weekly initial jobless claims (chart) rose by 10,000 to 233,000 last week, but below forecasts of an increase to 235,000, with the prior week’s figure being revised higher by 1,000 to 223,000. The four-week moving average dropped by 9,000 to 239,500, while continuing claims decreased 3,000 to 1,893,000, north of estimates of 1,890,000.

The advance goods trade deficit widened slightly more than expected to $64.1 billion in September, from the upwardly revised $63.3 billion in August, and compared to expectations of $64.0 billion.
Preliminary wholesale inventories increased 0.3% month-over-month (m/m) in September, versus forecasts for a 0.4% increase, and following August's downwardly revised 0.8% rise.

Pending home sales were flat m/m in September, versus projections of a 0.5% rise, and following the negatively-revised 2.8% drop registered in August. Compared to last year, sales were 5.4% lower, versus estimates of a 4.2% drop. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which unexpectedly rose in September.

The Kansas City Fed Manufacturing Activity Index for October unexpectedly showed growth (a reading above zero) accelerated, with the index rising to 23, versus forecasts for it to remain at September's 17 level.

Treasuries were lower, as the yields on the 2-year and 10-year notes, as well as the 30-year bond, were all 2 basis points higher at 1.62%, 2.45% and 2.96%, respectively.

The U.S. dollar rallied as the euro dropped in the wake of the monetary policy decision from the European Central Bank (ECB). Bond yields and the U.S. dollar have received some support from continued global economic and earnings optimism, most recently yesterday's solid gain in durable goods orders, as well as relative optimism regarding tax reform.

Tomorrow, the economic calendar will culminate with the first look (of three) at Q3 GDP, projected to show growth slowed a bit to a quarter-over-quarter (q/q) annualized rate of 2.6%, from the 3.1% pace seen in Q2, with personal consumption decelerating to a rise of 2.1% from 3.3%. Although the hurricanes are likely to have some impact, growth is projected to remain steady and post the best two-quarter performance since early 2015, per Bloomberg. The final University of Michigan Consumer Sentiment Index is also slated for release, with economists anticipating a reading of 101.1, matching the preliminary report, but above the 95.1 posted in September.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Trying to Reason With Hurricane Season: The Aftermath of "Harma," that we expect to see a boost in economic activity associated with the recovery/rebuilding efforts. Liz Ann also points out in her latest article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle, that U.S. business capital spending (capex) has already picked up; but an even sharper recovery could be in the cards for 2018, while tax reform—if we get it—would be an additional kicker courtesy of the proposed 100% depreciation allowance. She adds that the pick-up in capex is a relatively new bright spot for the U.S. economy; and in 2018 it will likely be a shining characteristic of the latter innings of an economic expansion.

Europe higher as ECB trims and extends stimulus measures

European equity markets traded higher, with the euro seeing solid pressure versus the U.S. dollar as the European Central Bank announced following its monetary policy meeting that it will cut its bond buying program in half in January. However, the ECB said it will extend the time frame for its purchases to September, with the possibility of another extension if needed, while committing to a substantial reinvestment of maturing debt in 2018 and for an extended period. The announcement came as the ECB left rates unchanged and the markets paid close attention to President Mario Draghi's customary press conference that followed the decision, in which he appeared to foster a dovish takeaway regarding his views on the inflation and eurozone economic growth. Schwab's Jeffrey Kleintop, CFA, offers analysis of the global monetary policy front in his article, How the Shift by Central Banks May Affect the Stock Market. Bond yields in the region were lower following the ECB's announcement. The British pound also saw some pressure. Spanish stocks led the way, rallying on eased concerns toward the Catalonia turmoil.

Stocks in Asia finished mixed following the declines in the U.S. yesterday, while the markets digested a flood of diverging earnings reports and awaited the monetary policy decision out of the eurozone from the ECB. Japanese equities gained modest ground, rebounding after snapping a 16-day winning streak yesterday, with some upbeat earnings reports helping overshadow strength in the yen. Schwab's Liz Ann Sonders discusses with Randy Frederick in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?. Stocks in mainland China advanced, but those traded in Hong Kong decreased, while a disappointing earnings report from the semiconductor sector weighed on South Korean securities, despite the nation reporting stronger-than-expected Q3 GDP growth. Finally, markets in Australia and India advanced.

Tomorrow’s international economic calendar will offer CPI and PPI from Japan, PPI from Australia, retail sales from Spain and housing prices from the U.K.

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