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Tuesday, November 07, 2017

Markets Continue to Notch Record Highs

Charles Schwab: On the Market
Posted: 11/6/2017 4:15 PM EST

Markets Continue to Notch Record Highs
U.S. equities were slightly higher, achieving more record highs, courtesy of strength in the technology and energy sectors. Crude oil prices rallied on turmoil in the Middle East amid a corruption crackdown in Saudi Arabia, while Broadcom's unsolicited $105 billion takeover proposal for Qualcomm, and a chip deal between Dow member Intel and AMD, gave techs a boost. Treasury yields and the U.S. dollar were a tad lower amid a dormant economic calendar, while gold was higher. 

The Dow Jones Industrial Average (DJIA) rose 9 points to 23,548, the S&P 500 Index advanced 3 points (0.1%) to 2,591, and the Nasdaq Composite increased 22 points (0.3%) to 6,786. In moderately heavy volume, 852 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil jumped $1.71 to $57.35 per barrel and wholesale gasoline gained $0.04 to $1.83 per gallon. Elsewhere, the Bloomberg gold spot price was $11.53 higher at $1,281.44 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 94.75.

Broadcom Ltd. (AVGO $278) announced a proposal to acquire Qualcomm Inc. (QCOM $63) for $70.00 in cash and stock, in a transaction valued at $105 billion excluding debt. Under the terms of the deal, QCOM stockholders will receive $60 in cash and $10 in BRCM stock for each share owned. QCOM confirmed receiving the unsolicited proposal and said it will assess it in order to pursue the course of action that is in the best interests of its shareholders. This would be the largest deal for the tech sector in history. QCOM was higher and AVGO also gained ground.

Advanced Micro Devices Inc. (AMD $12) rallied after announcing that it designed a semi-custom graphics processor unit (GPU) that will be integrated into a new multi-chip processor package from Dow member Intel Corp. (INTC $47). INTC also traded higher.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers timely analysis of our outperform rating we have held for some time on the technology sector in his latest, Schwab Sector Views: Technology Trick or Treat?.

In late day action, CNBC's David Faber reported that Twenty-First Century Fox, Inc. (FOXA $27) has been in talks to sell most of the company to Walt Disney Co. (DIS $101), citing people familiar with the matter. According to the report, talks have been taking place over the last few weeks, with no certainty to a deal being completed. Neither company commented on the report. Shares of both firms were higher on the news.

CVS Health Corp. (CVS $67) reported Q3 earnings-per-share (EPS) of $1.26, or $1.50 ex-items, versus the FactSet estimate of $1.48, as revenues rose 3.5% year-over-year (y/y) to $46.2 billion, roughly in line with forecasts. The company issued Q4 EPS guidance that matched expectations and narrowed its full-year profit outlook. Shares were lower as analysts expressed disappointment regarding its profit margin and same-store sales performance out of its retail unit, which both declined y/y.
Michael Kors Holdings Ltd. (KORS $55) posted fiscal Q2 profits of $1.32 per share, or $1.33 ex-items, compared to the forecasted $0.83, with revenues growing 5.4% y/y to $1.2 billion, topping the expected $1.1 billion. Q2 same-store sales declined 2.5% y/y, versus the anticipated 4.5% decrease. The luxury retailer raised its full-year outlook, and shares jumped over 15%.

Economic front quiet today

Treasuries finished higher amid a dormant economic calendar, as the yield on the 2-year note was flat at 1.61%, while the yields on the 10-year note and the 30-year bond dipped by 1 basis point to 2.32% and 2.80%, respectively.

The yield curve flattened and the U.S. dollar was little changed last week as the markets assessed the likelihood of a December rate hike by the Fed and President Trump's pick of Fed Governor Jay Powell as the next Chairman of the Central Bank. Also, global economic data continues to paint a positive picture and tax reform remains a source of uncertainty in the wake of last week's House bill.
Schwab's Chief Fixed Income Strategist Kathy Jones and Vice President of Trading and Derivatives, Randy Frederick discuss in the video, Should a Change in Fed Leadership Matter to Investors?, while Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest commentary, House Tax Reform Bill: What Investors Need to Know.

The week's relatively light economic calendar will get moving tomorrow with the release of the JOLTS Job Openings report, with the measure of unmet demand for labor forecasted to show 6.1 million jobs were available to be filled during September, matching that seen in August, while in the final hour of trading consumer credit will be reported, with consumer borrowing for September expected to have increased to $17.8 billion from the $13.1 billion registered in August.

As noted in the latest Schwab Market Perspective: Stocks Aren't so Spooky, global and domestic economic growth, along with a solid earnings picture and a potential tax reform tailwind, suggest investors should remain at their target equity allocations. Pullbacks are possible but a recession doesn’t appear to be in the cards in the near term, which historically has meant the risk of a pullback turning into a bear market is low.

Europe dips as week begins, Asia mixed

European equity markets dipped as the global markets appeared cautious ahead of a host of key economic data this week in Asia, and amid remaining global political and monetary policy uncertainties. The corruption crackdown in Saudi Arabia also garnered some attention. Global sentiment has jumped to lead the recent rally in the stock markets and Schwab's Liz Ann Sonders and Randy Frederick note in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?, that there seems to be no end in sight to the bull market in equities, but that doesn’t mean there’s nothing to worry about. Stocks mostly shrugged off stronger-than-expected German factory orders and Markit's eurozone manufacturing and services sector activity report. In other economic news, U.K. new car registrations fell in October. The euro overcame losses and was little changed, while the British pound gained ground on the U.S. dollar. Bond yields in the region moved lower.

Stocks in Asia finished mixed following the extended weekly winning streak in the U.S., bolstered by a flood of upbeat economic reports, while the markets were likely cautious ahead of a busy week of data for the region and as President Trump began his tour of Asia. The Reserve Bank of Australia (RBA) is expected to deliver its monetary policy decision, while Japan will report its machine orders figures and China will release its trade data. Stocks in Japan and Hong Kong finished flat, while mainland Chinese equities advanced modestly. Meanwhile, markets in Australia and South Korea dipped, but securities in India ticked slightly higher.

In addition to the aforementioned RBA policy meeting, the international economic calendar will include retail sales from the U.K., the Eurozone and Italy, as well as industrial production from Germany.

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