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Monday, November 20, 2017

Shortened Holiday Week Begins Positive

Charles Schwab: On the Market
Posted: 11/20/2017 4:15 PM EST

Shortened Holiday Week Begins Positive
U.S. equities began the week modestly higher, getting a lift from a jump in Leading Indicators, but volume and conviction seemed subdued ahead of this week’s Thanksgiving holiday break. Festering U.S. tax reform uncertainty and collapsed German coalition talks also kept a lid on gains. Treasury yields were mostly higher and the U.S. dollar gained ground, but crude oil and gold finished lower. News on the equity front was sparse, with Marvell Technology's $6.0 billion agreement to acquire rival chipmaker Cavium garnering some attention. 

The Dow Jones Industrial Average (DJIA) rose 72 points (0.3%) to 23,430, the S&P 500 Index added 3 points (0.1%) at 2,582, and the Nasdaq Composite gained 8 points (0.1%) to 6,791. In moderate volume, 732 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.29 to $56.42 per barrel and wholesale gasoline was unchanged at $1.74 per gallon. Elsewhere, the Bloomberg gold spot price tumbled $15.12 to $1,277.30 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.4% to 94.04.

Marvell Technology Group Ltd. (MRVL $21) announced an agreement to acquire rival chipmaker Cavium Inc. (CAVM $84) for $80.00 per share in cash and stock, in a transaction valued at about $6.0 billion. Under the terms of the deal, CAVM stockholders will receive $40.00 in cash and 2.1757 shares of MRVL for each share owned. MRVL was higher and CAVM rallied over 10%.

Leading Index jumps to kick off holiday-shortened week

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for October jumped 1.2% month-over-month (m/m), well above the Bloomberg projection of a 0.8% rise, and versus September's upwardly revised 0.1% gain. With the upward revision to September this was the fourteenth-straight monthly gain, bolstered by jobless claims, ISM new orders, the yield curve and consumer expectations. Nondefense capital goods orders excluding aircraft was the lone component that was negative.

Tomorrow, the holiday-shortened week will roll on with the economic calendar delivering the release of October existing home sales, projected to tick 0.2% higher m/m to an annual rate of 5.4 million, following September's 0.7% rebound from the hurricane-impacted drop in August. The rebound in housing and today's LEI after the hurricanes suggests the impact on GDP could be limited as a dip in economic activity appears to be followed by a boost associated with the recovery/rebuilding efforts as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her article, Trying to Reason With Hurricane Season: The Aftermath of "Harma."

Treasuries finished lower, as the yield on the 2-year note rose 3 basis points (bps) to 1.75%, the yield on the 10-year note gained 1 bp to 2.36%, and the 30-year bond rate was flat at 2.78%.

Treasury yields and the U.S. dollar have moved higher with the markets continuing to focus on the global political front as coalition talks in Germany collapsed, though uncertainty regarding U.S. tax reform remains the main source of attention. Last week the House passed its version of tax reform, which has significant differences from the Senate's version, which is expected to vote next week, opening the door for what could be a complicated reconciliation process.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest commentary, Tax Reform Bills Progress, but Many Hurdles Remain, noting that we believe the prospects for a tax reform bill being signed into law before the end of the year are improving, but a number of tricky steps must still be overcome. For investors, we still think it is too early to take any drastic action. The bill is virtually certain to be changed many times in the weeks ahead. If and when a tax bill passes, there will be time to review the details and amend your tax and financial plans accordingly.

Europe shrugs off German political anxiety, Asia mixed amid U.S. tax reform uncertainty 

European equity markets moved higher, with the markets overcoming early losses and shrugging off flared-up political concerns as German government coalition talks collapsed. The euro remained lower versus the U.S. dollar. The British pond gained modest ground on the greenback even as Brexit talks remain at a standoff. The political focus joins festering U.S. tax reform uncertainty and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick offer the video, Political Risk: How Should Investors Respond?. Bond yields in the region mostly dipped.

Stocks in Asia finished mixed on the heels of Friday's declines in the U.S. on tax-reform uncertainty, while volatility that ramped up in the bond markets in India and Japan continued a retreat from recent multi-decade highs. Japanese equities declined, extending a pullback from highs not seen since 1992 hit earlier this month, with the yen choppy and as the island nation reported that exports rose solidly in October but slightly below expectations. Securities in Australia and South Korea also saw declines. However, stocks in India ticked higher, with focus on a flare-up in volatility in the nation's bond market after last week's credit rating upgrade by Moody's and as the Reserve Bank of India said late Friday that it will scrap a debt sale. Indian bonds jumped the most in a year, per Bloomberg. For analysis of emerging market bond investing, check out Schwab's Chief Fixed Income Strategist, Kathy Jones' latest article, Emerging Market Bonds: Time for Caution. Elsewhere, listings in mainland China and Hong Kong gained ground, with both markets overcoming some heavy early losses stemming from government measures to clamp down on the shadow banking system.

Tomorrow’s international economic calendar will include the minutes from the Reserve Bank of Australia’s last monetary policy meeting, the All Industry Index from Japan, industrial orders and the trade balance from Spain, and public sector net borrowing from the U.K.

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