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Wednesday, December 06, 2017

Stocks Little Changed Following Two-Day WobbleStocks Mostly Flat After Overcoming Morning Lows

Charles Schwab: On the Market
Posted: 12/6/2017 4:15 PM EST

Stocks Little Changed Following Two-Day WobbleStocks Mostly Flat After Overcoming Morning Lows
U.S. stocks overcame some early weakness to finish the regular trading session fairly flat. U.S. tax reform continued to garner attention as the reconciliation process has begun. Treasury yields were lower and crude oil prices fell, while the U.S. dollar extended recent gains and gold was higher. Dow member Home Depot traded to the downside after announcing an accelerated business investment plan and the kidney dialysis services company DaVita agreed to sell its medical group to a unit of Dow component UnitedHealth for approximately $4.9 billion. 

The Dow Jones Industrial Average (DJIA) declined 40 points (0.2%) to 24,141, the S&P 500 Index was nearly unchanged at 2,629, and the Nasdaq Composite traded 14 points (0.2%) higher to 6,776. In moderate volume, 801 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.66 to $55.96 per barrel and wholesale gasoline fell $0.06 to $1.66 per gallon. Elsewhere, the Bloomberg gold spot price ticked $1.39 higher to $1,267.79 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.2% higher at 93.55.

DaVita Inc (DVA $69) announced an agreement to sell its DaVita Medical Group to Optum, a unit of Dow member UnitedHealth Corp. (UNH $220), for about $4.9 billion in cash. DVA rallied and UNH dipped.

Dow member Home Depot Inc. (HD $181) reaffirmed its full-year guidance and announced a new $15 billion share repurchase program, along with providing an update on its strategic priorities including its intent to accelerate business investment over the next three years. The boosted investment plans pressured shares of HD due to concerns about margin expansion as it issued its long-term goal for operating margins that missed expectations.

Dave & Buster's Entertainment Inc. (PLAY $53) reported Q3 earnings-per-share (EPS) of $0.29, or $0.27 ex-items, versus the $0.24 FactSet estimate, as revenues rose 9.3% year-over-year (y/y) to $250 million, compared to the forecasted $256 million. Q3 same-store sales declined 1.3% y/y, versus the expected 1.0% decrease. PLAY raised its full-year earnings guidance, but lowered its sales outlook, while its longer-term guidance appeared to please the Street. Shares traded solidly higher.

ADP private sector payroll report matches forecasts

The ADP Employment Change Report showed private sector payrolls rose by 190,000 jobs in November, matching the Bloomberg forecast, while October's increase of 235,000 jobs was unrevised. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday's broader November nonfarm payroll report, expected to show jobs grew by 195,000 and private sector payrolls rose by 200,000 (economic calendar). The unemployment rate is forecasted to remain at 4.1% and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

Final Q3 nonfarm productivity (chart) was unrevised at the preliminary estimate of a 3.0% rate of growth on an annualized basis, versus expectations of a revised 3.3% rise. Q2 productivity was unrevised at a 1.5% gain. Unit labor costs were adjusted to 0.2% decrease, from the initial report of a 0.5% increase, and versus the forecast calling for an adjustment to a 0.2% rise. Q2 labor costs were revised lower to a 1.2% drop.

The MBA Mortgage Application Index rose 4.7% last week, following the prior week's 3.1% decline. The increase came as a 9.0% jump in the Refinance Index was met with a 2.4% increase in the Purchase Index. The average 30-year mortgage rate dipped 1 basis point (bp) to 4.19%.
Treasuries traded higher, with the yields on the 2-year and 10-year notes dipping 2 bps to 1.80% and 2.33%, respectively while the 30-year bond rate decreased 1 bp to 2.72%.

The U.S. dollar added to its recent gains with European currencies seeing pressure, while Treasury yields dipped from levels near the top end of the year's trading range. The markets continue to await the expected competitive tax reform reconciliation process between the House and Senate as they try to find compromises on some key differences of their bills.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Tax Bill Passes Senate, Clearing Key Hurdle, reaching consensus between the two chambers won’t be easy; there are significant differences between the two bills that will need to be resolved. The conference process will begin this week and Republican leaders are optimistic that a deal can be struck within a matter of days. Complicating matters, the two chambers also must find time this week to avert a government shutdown and approve legislation that extends funding to keep the government open and operating.

The tech sector has seen some volatility as of late with the prospects of tax reform improving and fostering some noticeable sector rotation, which Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, I Melt with You: Anatomy of a Market Melt Up, is a healthy occurrence, for now.

The U.S. economic calendar for tomorrow will be light, starting with weekly initial jobless claims, forecasted to have ticked higher to a level of 240,000 from 238,000. Consumer Credit will be released in the final hour of trading to round out the day, expected to have increased by $17.0 billion in October, after expanding $20.8 billion in September.

Europe mixed on data, Asia falls amid global retreat

European equity markets finished mixed in the wake of the recent global market pullback recently after a strong year, while the euro lost some ground on the U.S. dollar and technology issues remained under pressure. Financials were also lower along with bond yields in the region. The economic calendar delivered a surprising rise in German factory orders. The British pound lost ground versus the greenback, amid ramped up uncertainty as Brexit negotiations remain deadlocked and British Prime Minister May faces political pressures regarding her stance during the talks on how to resolve the Irish border issue. May has only a few days left to reach a deal on the Irish border issue as the European Union is due to decide on whether Brexit talks can move to the next stage. The markets also grappled with the looming highly expected contested U.S. tax reform reconciliation process. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick point out in the video, Political Risk: How Should Investors Respond?, that a long history of these developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are often the result. So, investors should avoid overreacting to the political and geopolitical drama and stick to their long-term financial plans.

Stocks in Asia finished decisively lower amid a global market retreat as of late, with technology issues leading the slide, while traders assess the strong global rally this year and U.S. tax reform heads for a likely contested reconciliation process. The global rally and recent volatility is discussed by Schwab's Jeffrey Kleintop, CFA, and Randy Frederick, in the video, It's All Relative: Why Stocks May Not Be Overvalued. The yen showed some strength as risk aversion nudged higher, weighing on Japanese equities. Stocks trading in mainland China and Hong Kong declined, with the markets giving back some of the year's strong gains and concerns about government regulations lingered. South Korean shares traded lower. Australian securities slipped after the nation reported softer-than-expected Q3 GDP growth. Indian stocks finished lower ahead of today's monetary policy decision by the Reserve Bank of India (RBI). After the closing bell, the RBI left its monetary policy and benchmark interest rates unchanged as expected.

The international economic docket for tomorrow will include the trade balance from Australia, the Leading Index from Japan, industrial production from Germany, and house prices from the U.K.

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