Dow Unable to Hold Gains

Charles Schwab: On the Market

Posted: 6/23/2017 4:15 PM ET

Dow Unable to Hold Gains

The U.S. equity markets finished out the week mixed, with early gains for the Dow fading in the final hour of trading, and the S&P 500 and Nasdaq posting only modest gains. Technology and energy stocks were the day’s winners, with crude oil prices stabilizing, but a fall in consumer discretionary issues put a lid on the gains. Treasuries were mostly flat following reads that showed services and manufacturing activity missed expectations, but remained at levels depicting expansion, while the new home sales report for May topped forecasts. Gold was higher and the U.S. dollar was unchanged.

The Dow Jones Industrial Average (DJIA) declined 1 point to 21,396, the S&P 500 Index moved 4 points (0.2%) higher to 2,438, and the Nasdaq Composite gained 29 points (0.5%) to 6,265. In heavy volume, 2.0 billion shares were traded on the NYSE and 3.8 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.27 to $43.01 per barrel and wholesale gasoline was unchanged at $1.42 per gallon. Elsewhere, the Bloomberg gold spot price increased $5.35 to $1,255.86 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 97.25. Markets were higher for the week, as the DJIA inched 0.1% higher, the S&P 500 Index rose 0.2%, and the Nasdaq Composite jumped 1.8%.

Global software company BlackBerry Ltd. (BBRY $10) announced Q1 results of $0.02 per share, topping the FactSet consensus estimate of a flat reading, while revenues were short of estimates and dropped 42.5% year-over-year (y/y) to $244 million. Shares of BBRY were sharply lower.

In the latest Schwab Sector Views: From the Top Down, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, provides us with a fresh method to view the 11 major sectors of the stock market. Brad explains that with our sector views we often zero in on individual sectors or industries by looking at them from a “bottom up” perspective. By that we mean, focusing on fundamental factors such as industry-specific order trends or changes to the regulatory environment in a bid to determine whether a given sector may outperform or underperform the market. However, “top-down” issues, such as the state of the economy, large-scale political or geopolitical change, or the interest rate environment, can also have a major impact on performance. Read the whole article on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

New home sales beat expectations, manufacturing and services data miss slightly

New home sales (chart) increased 2.9% month-over-month (m/m) in May to an annual rate of 610,000, above forecasts calling for 590,000 units, and compared to the upwardly revised 593,000 unit pace in April. The median home price jumped 16.8% y/y to a record $345,800. New home inventory remained at 5.3 months of supply at the current sales pace. Sales were down m/m in the Northeast and Midwest regions. Y/Y, sales were higher in the South and West, though lower in Midwest and flat in the Northeast. New home sales are based on contract signings instead of closings.

The preliminary Markit U.S. Manufacturing PMI Index unexpectedly declined to 52.1 for June, below May's final read of 52.7, and compared to estimates calling for an improved level of 53.0. The preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector this month dipped to 53.0 from May's reading of 53.6, versus forecasts of slight decline to 53.5. Readings above 50 for both reports denotes expansion in activity.

Treasuries were nearly unchanged following the data, as the yields on the 2-year and 10-year notes, along with the 30-year bond, were flat at 1.34%, 2.14% and 2.72%, respectively. In the Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer', Schwab's Chief Fixed Income Strategist, Kathy Jones informs us that the bond market continues to confound the experts. Each year since the end of the recession in 2009, consensus expectations have called for higher bond yields and the death of the 35-year bond bull market. Yet 10-year Treasury yields are now nearly 200 basis points lower than in 2010. For Schwab's viewpoint on the second half of 2017 be sure to read the whole article on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

Europe lower on Brexit vote 1-year anniversary, Asia mixed

European equities traded lower with food and beverage companies leading the decline following some reports that showed economic activity eased and as oil prices stabilized, while Brexit discussions continued. Yesterday, U.K. Prime Minister Theresa May told European Union (EU) leaders that EU citizens in Britain will be able to continue living there after the country leaves the bloc and the Prime Minister will be making this statement to the British Parliament on Monday when details of her proposal will be published by the government. In economic news in the region, flash Markit manufacturing and services PMI reads for the region diverged as a continued surge of manufacturing activity was offset by softer services growth, though job creation for the manufacturing base is near a ten-year high.

The euro and British pound moved higher versus the U.S. dollar and bond yields in the region were mostly to the upside. In his recent article, Are bonds signaling a major stock market peak?, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, informs us that by examining yield curves from around the world, the prognosis on the likelihood of a global recession and bear market is favorable. While the risk may be rising, the yield curves indicate that the risk of recession is currently modest—except for the United Kingdom—based on historical evidence but history doesn't guarantee future performance. Read the whole article on the Insights & Ideas page at www.schwab.com where you can also find Schwab's article, Brexit Begins: What's Next for the U.K.? and also follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mixed as crude oil prices stabilized after recently entering bear market territory. Japanese equities rose modestly, snapping a string of losses, with the yen little changed versus its U.S. counterpart. Mainland Chinese stocks advanced after staging a late session rally that ensued amid speculation that government-backed funds were used to steady the market, per Bloomberg. Markets in the Asian nation had come under pressure late yesterday after reports surfaced that the China Banking Regulatory Commission had asked some lenders to review their exposure to Chinese firms involved in relatively recent large acquisitions. Meanwhile, listings in Hong Kong were nearly unchanged. Indian securities dropped, giving up early gains, which was largely attributed to profit-taking ahead of a long weekend, and Australian stocks gained ground despite being weighed down by financial stocks after a state-based version of the federal bank levy was introduced and as the Australian dollar traded lower versus the U.S. dollar. Finally, South Korean equities were also higher.

Equities squeak by with gains despite low oil

U.S. stocks finished the trading week higher, as the Nasdaq surged to reclaim some of the losses that it had accumulated the week prior, while the Dow and the S&P 500 saw modest weekly advances. A consistent decline in crude oil prices, which stabilized after reaching bear-market territory, weighed on equities throughout the remainder of the week and prices will likely continue to be eyed as market participants debate whether the slide was supply- or demand-driven. The U.S. economic calendar remained dormant until Wednesday and though the datapoints delivered were mostly in line or above expectations they were unable to provide any decisive direction for the broader markets. Healthcare stocks were standout winners this week after receiving a solid boost in the wake of the U.S. Senate introducing its bill aimed at replacing the Affordable Care Act on Thursday.

Schwab's experts believe the recent economic confusion may be contributing to investor skepticism as they detail in the latest Schwab Market Perspective: Shifting Sentiment?. We believe the pullback in both tech and the overall market was healthy and served to correct some overly optimistic sentiment conditions. But temper your enthusiasm for a sharp rebound like we’ve seen in the past. The new variable in the equation is a Fed that is more hawkish than the market in terms of the expected trajectory of rate hikes. A bit of volatility returned to Wall Street, with indexes pulling back from record highs and the leading sector performer to this point in the year, technology, experiencing a decent-sized pullback. Read more on the Markets & Economy page at www.schwab.com and follow us on Twitter: @schwabresearch.

Next week, the U.S. economic calendar will paint details of the broad economic landscape with the release of the third and final read for Q1 GDP. And unlike this week, the domestic docket will hit the Street running with the manufacturing sector likely to be in focus following Monday's release of May durable goods orders before opening the bell.

Other U.S. reports slated for next week include: the Chicago PMI Index, the S&P/Case-Schiller Home Price Index, the Consumer Confidence Index, pending home sales, personal income and spending, the final University of Michigan Consumer Sentiment Index for June, and wholesale inventories.

International reports due out next week include: Australia—new home sales and private sector credit. China—industrial profits, current account and manufacturing and non-manufacturing PMIs. Japan—PPI, Leading Index, retail sales, jobless rate, CPI, industrial production, vehicle production, housing starts and construction orders. U.K.—house prices, consumer credit, mortgage approvals, GDP, Index of Services, business investment and the GfK Consumer Confidence Index. Eurozone—consumer confidence and CPI and German CPI, Ifo business climate survey, retail sales, GfK Consumer Confidence and Index of Services.

Stocks off Lows, but Stay Red on Close

Charles Schwab: On the Market

Posted: 4/21/2017 4:15 PM ET

Stocks off Lows, but Stay Red on Close

U.S. stocks finished lower with financial stocks leading the decline, while an extension of recent losses for crude oil prices also weighed on the energy sector. Traders were likely exercising some caution ahead of this weekend's first round of a key French Presidential election. In economic news, existing home sales hit the fastest annual pace in over a decade and business activity reports missed forecasts. In other developments, President Trump stated that there will likely be an announcement on tax reform next week on Wednesday or shortly thereafter. Treasury yields were mixed and the U.S. dollar and gold were higher.

The Dow Jones Industrial Average (DJIA) declined 31 points (0.2%) to 20,548, the S&P 500 Index decreased 7 points (0.3%) to 2,349, and the Nasdaq Composite shed 6 points (0.1%) to 5,911. In moderate volume, 931 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.09 to $49.62 per barrel and wholesale gasoline was $0.02 lower at $1.65 per gallon. Elsewhere, the Bloomberg gold spot price increased $2.92 to $1,284.82 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 99.91. Markets were higher for the week, as the DJIA advanced 0.5%, the S&P 500 Index gained 0.9%, and the Nasdaq Composite rallied 1.8%.

Dow member General Electric Co. (GE $30) reported 1Q earnings-per-share (EPS) of $0.10, or $0.21 ex-items, compared to the FactSet estimate of $0.17, as revenues declined 1.0% year-over-year (y/y) to $27.7 billion, versus the projected $26.4 billion. The company said it expects cash flow to improve throughout the remainder of the year, while reaffirming its 2017 guidance. Shares closed lower amid analyst concerns about the company's cash that came in weaker than expected.

Dow component Visa Inc. (V $91) posted fiscal 2Q earnings of $0.18 per share, or $0.86 ex-items, compared to the projected $0.79, with revenues rising 23.0% y/y to $4.5 billion, above the estimated $4.3 billion. The company reaffirmed its full-year revenue outlook, while announcing a new $5.0 billion share repurchase program. V finished flat. 

Mattel Inc. (MAT $22) announced a 1Q loss of $0.33 per share, or a loss of $0.32 ex-items, versus the expected shortfall of $0.17, as revenues declined 15.0% y/y to $736 million, below the forecasted $794 million. The company said its softer-than-expected results were due to a retail inventory overhang coming out of the holiday period, but it remains encouraged by strong performance at retail for its key core brands. Shares fell.

Honeywell International Inc. (HON $127) reported 1Q EPS of $1.71, or $1.66 ex-items, above the expected $1.62, as revenues were flat y/y to $9.5 billion, topping the forecasted $9.3 billion. HON finished nicely higher.

Existing home sales hit fastest pace in over a decade, business activity slips

Existing-home sales in March rose 4.4% month-over-month (m/m) to a 5.71 million annual rate—the fastest pace since February 2007—compared to the Bloomberg forecast of a 5.60 million pace. February's figure was revised to a 5.47 million annual rate. Sales of single-family homes rose 4.3% m/m and purchases of condominium and co-op units grew 5.0%. The median existing-home price was up 6.8% y/y at $236,400. Housing supply came in at a 3.8-month pace at the current sales rate, and the inventory of homes for sale is down 6.6% y/y. Sales grew in all regions except for the West. Existing home sales are based on contract closings instead of signings and account for the majority of the housing sales market.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said, "The early returns so far this spring buying season look very promising as a rising number of households dipped their toes into the market." Yun pointed out that finding available properties to buy continues to be a strenuous task, and sales will go up as long as inventory does.

Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Housing—Building Bubble or Growing Trouble?, discusses the constrained supply in the housing market, which is conspiring with price gains, an uptick in mortgage rates, and modest wage gains to decrease affordability for homebuyers. Brad concludes that we believe the housing market is a modestly positive contributor to overall U.S. economic activity. Read more on the Markets & Economy page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch.

The preliminary Markit U.S. Manufacturing PMI Index came in at 52.8 for April, below March's final read of 53.3, and compared to estimates calling for an improved level of 53.8. The preliminary Markit U.S. Services PMI Index for April declined to 52.5 from March's reading of 52.8, versus forecasts of an improvement to 53.2. Readings above 50 for both reports denote expansion in activity.

Treasuries straddled the unchanged mark, with yield on the 2-year note dipping 1 basis point (bps) to 1.18%, the yield on the 10-year note flat at 2.23% and the 30-year bond rate gaining 1 bp to 2.89%. 

For analysis of the moves in the bond and currency markets see Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Senior Fixed Income Research Analyst, Collin Martin's, CFA, video What's Driving the Ongoing Drop in Long-Term Bond Yields? on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick. Also, Schwab's Chief Fixed Income Strategist, Kathy Jones discusses, Three Reasons to Own Bonds When the Fed is Raising Interest Rates on the Markets & Economy page at www.schwab.com. Follow Kathy on Twitter: @kathyjones.

Europe mixed ahead of French election, Asia diverges amid lingering uncertainty

European equities finished mixed to little changed, with financials extending a recovery as the recent pressure on bond yields continued to show relative signs of lessening, but oil & gas issues fell as crude oil prices added to a weekly slide. The markets appeared cautious in the face of heightened geopolitical and political uncertainty as France heads for the first round of its key Presidential election this weekend, exacerbated by yesterday's terrorist attack in the nation. Also, the U.K. approved an election for June this week and German elections are slated for later this year. For more on the political front in the region, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? on the Insights & Ideas page at www.schwab.com. Also, check out our article, Brexit Begins: What's Next for the U.K.?, on the Insights & Ideas page at www.schwab.com, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com. In economic news, eurozone business activity in the manufacturing and services sectors unexpectedly showed expansion accelerated slightly for April, while U.K. retail sales fell more than expected for March. The euro and British pound were lower versus the U.S. dollar.

Stocks in Asia finished mostly to the upside, on the heels of the solid gains in the U.S. yesterday that were fueled by a plethora of earnings reports that tilted to the positive side and comments that caused U.S. tax reform optimism to resurface. Japanese equities gained ground, with the yen holding onto recent weakness and as a report showed that growth in the nation's manufacturing output accelerated slightly in April. Australian securities advanced and shares trading in South Korea were also higher. However, Indian stocks dipped, while mainland Chinese equities finished flat and Hong Kong listings ticked lower with festering concerns about regulatory crackdowns continuing to hamstring sentiment in the world's second largest economy. Political and geopolitical concerns remained, ahead of this weekend's key French election and amid recent rhetoric from North Korea. For analysis of the global front, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, and his article, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

Stocks show some resiliency coming out of Easter break

U.S. stocks followed a long holiday weekend with a weekly advance despite lingering headwinds off elevated geopolitical and political concerns, as well as a pullback in crude oil prices on U.S. supply concerns that pressured the energy sector. Earnings season heated up and appeared to provide some support as about 71% of the 94 companies that reported results from the S&P 500 Index topped forecasts and 82% bested earnings estimates, per data compiled by Bloomberg. However, the Dow lagged the major markets, with gains being limited by disappointing earnings reports from International Business Machines Corp. (IBM $161), Verizon Communications Inc. (VZ $48) and Goldman Sachs Group Inc. (GS $217). The markets got a late-week boost by comments from U.S. Treasury Secretary Mnuchin that appeared to foster resurfaced tax-reform optimism. Treasury yields and the U.S. dollar remained in focus, with both extending recent slides but showing modest signs of life as the week matured to help financials rebound, along with upbeat earnings from Morgan Stanley (MS $42), while exacerbating the pressure on crude oil prices.

Looking to next week, along with ramped-up earnings season, the economic calendar will deliver reads on new home sales, durable goods orders, Consumer Confidence and the University of Michigan Consumer Sentiment Index. However, the headlining report will likely be the first look (of three) at 1Q GDP, projected to show growth slowed from a quarter-over-quarter annualized rate of 2.1% in 4Q to 1.3%. The docket will deliver a good mix of "soft" data (confidence/survey-based) and "hard" data, which have diverged to cause some concern in the markets. We note in the latest Schwab Market Perspective: Reassessing Risk and Reflation, that some convergence between the two is expected, and this topic is drilled into by Schwab’s Chief Investment Strategist Liz Ann Sonders in her article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data.

Per the Schwab Market Perspective, investors appear to be shying away from risk, resulting in the recent pullback in stocks. We view this as temporary, although patience will be required and sharper downturns could occur within the ongoing bull market as political and geopolitical uncertainty abounds, while the Fed has begun to address the slow draining of its balance sheet. Global earnings have aided stock market gains, but the expectations bar is getting higher to hurdle. The next several weeks should show whether gains will persist or if expectations may have gone too far. Read both these articles on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

International reports due out next week include: Australia—Consumer Price Inflation (CPI). China—industrial profits. Japan—Bank of Japan monetary policy decision, CPI, retail sales and industrial production. Eurozone—European Central Bank monetary policy decision and CPI, along with German retail sales. U.K.—1Q GDP and consumer confidence.

Markets Lose on Trifecta of Events

Charles Schwab: On the Market

Posted: 8/2/2016 4:15 PM ET

Markets Lose on Trifecta of Events

U.S. equities finished solidly lower amid a triple dose of negativity, with global sentiment dampened on festering European banking concerns, disappointment surrounding Japan's stimulus measures, as well as a drop into bear market territory for crude oil prices. Meanwhile, dismal July domestic auto sales figures didn't help matters. Treasuries were mixed on the heels of a divergent domestic personal income and spending report, the U.S. dollar was lower and gold moved higher.

The Dow Jones Industrial Average (DJIA) fell 91 points (0.5%) to 18,314, the S&P 500 Index declined 14 points (0.6%) to 2,157 and the Nasdaq Composite tumbled 46 points (0.9%) to 5,138. In moderately-heavy volume, 931 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.55 to $39.51 per barrel, wholesale gasoline inched $0.01 higher to $1.31 per gallon, while the Bloomberg gold spot price rose $12.30 to $1,365.45 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% lower at 95.09.

Dow member Procter & Gamble Co. (PG $87) reported fiscal 4Q earnings-per-share (EPS) ex-items of $0.79, above the $0.74 FactSet estimate, as revenues decreased 3.0% year-over-year (y/y) to $16.1 billion, versus the projected $15.8 billion. PG warned that core 1Q EPS will be disproportionately affected by foreign exchange headwinds and the impact of lost finished product sales to its Venezuelan subsidiaries. Shares finished higher.

Dow component Pfizer Inc. (PFE $36) posted 2Q EPS ex-items of $0.64, two cents above expectations, with revenues growing 11.0% y/y to $13.2 billion, versus the projected $13.0 billion. PFE reaffirmed its full-year guidance and shares were lower.

CVS Health Corp. (CVS $98) announced 2Q EPS ex-items of $1.32, above the expected $1.30, as revenues rose 17.6% y/y to $43.7 billion, below the forecast $44.3 billion. CVS issued 3Q earnings guidance that was mostly above expectations, and raised its full-year profit outlook. Shares were nicely higher. 

The major automakers reported U.S. July sales today, with Ford Motor Co's (F $12) sales falling 2.8%, below the FactSet estimate of a 0.3% decrease, while General Motors Co's (GM $30) sales dropped 1.9%, compared to the projected 0.1% dip. Fiat Chrysler Automobiles NV's (FCAU $6) Chrysler brand's sales ticked 0.3% higher y/y, compared to the expected 2.3% gain. Toyota Motor Corp. (TM $110) posted a 1,5% y/y decline in sales, besting the 3.8% shortfall expected, and Volkswagen AG (VLKAY $29) saw an 8.1% y/y decline in sales for the month, well above the 20% plunge forecast. Shares of all five of the automakers were lower.

Personal income and spending report mixed

Personal income (chart) was 0.2% higher month-over-month (m/m) in June, below the Bloomberg forecast of a 0.3% rise and matching May's unrevised increase. Personal spending came in 0.4% higher m/m last month, north of expectations of a 0.3% gain and matching May's unrevised rise. The June savings rate as a percentage of disposable income was 5.3%. The PCE Deflator rose 0.1% m/m, below forecasts of a 0.2% increase. Compared to last year, the deflator was 0.9% higher, matching estimates. Excluding food and energy, the PCE Core Index was 0.1% higher m/m, in line with expectations, and the index was up 1.6% y/y, in line with estimates.

Treasuries were mixed, as the yield on the 2-year note dipped 1 basis point (bp) to 0.68%, while the yield on the 10-year note ticked 1 bp higher to 1.54%, and the 30-year bond rate gained 3 bps to 2.30%. Bond yields have rebounded somewhat from last week's drop that came courtesy of the Fed leaving its monetary policy unchanged and 2Q GDP growth decisively missing expectations.  

Schwab's Chief Investment Strategist, Liz Ann Sonders provides analysis of last week's Fed's decision in her commentary, A Hopeful Transmission: Fed Holds Rates Steady, But… and Schwab's Chief Fixed Income Strategist, Kathy Jones discusses in her article, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?. Read both articles at www.schwab.com/marketinsight and follow Liz Ann and Kathy on Twitter: @lizannsonders and @kathyjones.

Tomorrow the domestic economic calendar will bring some reads on the key services sector for July courtesy of the Institute for Supply Management's (ISM) non-Manufacturing Index and Markit's final Services PMI Index. ISM's index is projected to decline to 55.9 from 56.5 in June, and Markit's index is anticipated to be revised slightly higher to 51.0 from the preliminary level of 50.9, just shy of June's 51.4 figure. However, both reports are projecting continued expansion in the services sector as denoted by readings above 50.

Although last week's 2Q GDP report disappointed, the consumer spending component was a bright spot and today's personal spending data came in stronger than expected, suggesting the consumer may be poised to bolster the U.S. economy. As noted in the latest Schwab Market Perspective: New Records…Same Skepticism, the U.S. economy continues to show signs of improvement, with jobless claims reinforcing a healthier employment picture, wage growth starting to perk up, and housing continuing to be a bright spot and indicating better confidence among consumers. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

As well, the ADP Employment Change report is slated for release, forecast to show private sector payrolls added 170,000 jobs during July, as well as MBA Mortgage Applications.

Europe and Asia lower amid banking concerns and Japan stimulus details

European equities finished lower, with oil & gas issues remaining weak as the recent tumble in crude oil prices to bear market territory weighed on the energy sector. Financials led to the downside, amid festering uneasiness toward the Italian banking sector in the wake of late-Friday's European banking sector stress test results. Mixed earnings reports in the region, coupled with lackluster global economic data as of late and disappointment toward Japan's new stimulus measures weighed on the markets, overshadowing a rate cut in Australia today. Amid this backdrop, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification. Read more at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. The euro and the British pound were higher versus the U.S. dollar, while bond yields in the region gained ground. Switzerland's markets saw some pressure in a return to action following yesterday's holiday, on the heels of some disappointing retail sales and manufacturing data.

Stocks in Asia finished mostly lower with energy issues seeing pressure as crude oil prices continued to fall yesterday, entering bear market territory. Japanese equities dropped sharply, with the yen gaining ground late in the session, while the markets appeared to be disappointed by details of the government's fiscal stimulus package announced last week and approved after the markets closed. Markets in Australia declined, bogged down by oil & gas and basic materials issues, while failing to get a boost from the expected monetary policy decision from the Reserve Bank of Australia (RBA) to cut its benchmark interest rate by 25 bps to 1.50%. The RBA noted that the global economy is continuing to grow at a lower-than-average pace, with conditions becoming more difficult for a number of emerging markets, while inflation remains quite low. Jeffrey Kleintop, CFA, offers Five ways investors can make the most of slower growth, at www.schwab.com/oninternational. Meanwhile, Indian securities and those traded in South Korea's declined, but mainland Chinese listings bucked the trend to finish higher, rising for the first time in three sessions, led by property-related issues, and those traded in Hong Kong were closed due to the impact of tropical storm Nida on the region.

For tomorrow, the Markit Service PMI Indexes from around the globe will likely dominate the international economic calendar, with other reports scheduled for release to include wage data from Australia and retail sales from the Eurozone.

Financial Review

Inversion Dysfunction

Sinclair Noe — November 23, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 31 = 17,792
SPX – 2 = 2086
NAS – 2 = 5102
10 YR YLD – .01 = 2.25%
OIL + .09 = 41.99
GOLD – 8.50 = 1069.70
SILV – .04 = 14.25

Belgian authorities have extended a lockdown of Brussels for a fourth straight day after police raids searching for those behind last week’s Paris attacks failed to find a prime suspect. The Belgians say they have credible threats of imminent attacks against public gathering places like shopping malls and public transportation. The lockdown will see Brussels’ subway and many shops closed, as well as schools, offices, and mosques; although it is doubtful the terrorists are in mosques.

France’s economy slowed following the Nov. 13 terror attacks in Paris. However, that slowdown in the eurozone’s second-largest member wasn’t sharp enough to slow the Eurozone as a whole.

Economic activity in the eurozone grew at the fastest pace since May 2011 in November, giving some optimism over the health of the region’s economy. Markit’s flash composite Purchasing Managers’ Index climbed to 54.4 from 53.9 last month, as a recovery continued to be led by the service sector. Growth meanwhile accelerated to a three-month high in Germany, where Markit’s flash composite PMI rose to 54.9 from 54.2, fueled by a big improvement in new business.

A reading of manufacturing sentiment in the US fell in November to its lowest level in 25 months. The flash manufacturing purchasing managers index from Markit fell to a reading of 52.6 from 54.1 in October, with all five of the PMI components deteriorating. Any reading above 50 indicates the manufacturing sector is still expanding.

Sales of previously owned homes in the U.S. fell 3.4% in October to an annual rate of 5.36 million. Despite the decline last month, existing home sales are still 3.9% higher compared to the same period a year ago. The National Association of Realtors reports the median price of homes sold in October, meanwhile, was 5.8% higher vs. a year ago at $219,600.

Foreclosures and short sales dropped to 6% in October, down from 9% a year ago, and the lowest level since the National Association of Realtors stared tracking distressed sales in October 2008. By region, existing home sales in the West fell 8.7% in October, but are still 2.7% above a year ago.

The economic data continues to show steady, although sluggish growth; in other words, good enough for a rate hike in about 3 weeks when the FOMC meets. And we have been hearing from the Fed policymakers that they generally think it is time for a rate hike, with the caveat that they are data dependent.

Their intentions have been well telegraphed, and the data would have to be pretty nasty to avoid a rate hike. The Fed has pretty much run out of reasons to keep rates at zero, and leaving rates unchanged would raise a red flag that something evil is lurking. So we can figure that a rate hike has now been priced into the market, and then the question is how much more they will tighten and over what period of time. And the most likely answer is small and slow; again, this has been priced into the markets.

By about the middle of next year we should learn more about how the Fed will handle its balance sheet. And the big question is whether the Fed can pull it off. Other central banks have been less-than-successful in their efforts to pull off of the zero bound, not exactly a hopeful precedent.

Profits from S&P 500 companies have fallen by about $25 billion in the first three quarters of this year, and a further drop is expected before the end of 2015 as energy companies battle with lower oil prices and a sharp rally in the dollar hits exporters. About 96% of S&P 500 companies have reported third quarter results so far, and their aggregate net income from continuing operations for the first three quarters is $804 billion, compared with $828 billion for the first three quarters last year.

The aggregate revenue for S&P 500 companies has fallen by $287 billion over the same period last year. On a share-weighted basis, S&P 500 profits were down 3.3 percent on year in the third quarter, making this earnings season the worst since 2009, and marking a second consecutive quarter of negative earnings growth.

Oil futures were volatile in early trade today, failing to hold on to a sharp but brief bounce higher after Saudi Arabia said it would work with global oil producers toward stable prices. Oil futures spiked higher after the announcement from the Saudi Press Agency. The rebound soon lost steam, because the remarks were in line with previous Saudi statements. So far, there’s little indication Saudi Arabia is prepared to begin cutting production.

Copper lost 2% to the lowest level since 2009. Nickel touched the lowest in more than a decade; there is a supply glut right now. The London Metal Exchange’s index of six industrial metals is having its worst year since the global financial crisis in 2008.

Charts of the commodity indices are the definition of a downtrend since 2011. Two factors in the energy and materials sectors: a supply glut and a stronger dollar. That means some downward pressure on stocks, but generally good news for consumers. The average nationwide price of unleaded gasoline is expected to hit $1.99 on Thanksgiving; that’s down about 82 cents from Thanksgiving last year. I’ve seen prices around $1.85 a gallon here in Phoenix.

Pfizer and Allergan will merge in a tax inversion deal worth about $160 billion that would create the world’s biggest drug maker by sales. The takeover would be the largest inversion ever, moving one of the top names in corporate America to a foreign country. Such deals enable a U.S. company to move abroad and take advantage of a lower corporate tax rate; in this case, the new Pfizer will have corporate headquarters in Dublin Ireland, even though their administrative headquarters will be in New York.

A Pfizer-Allergan combo would still face anti-trust scrutiny, but the US Treasury, concerned about losing tax revenue, has been taking steps to clamp down on tax inversion deals, but it doesn’t look like the existing rules are enough to stop this deal. Pfizer is confident the deal will pay off in lower taxes and cost cutting, unless…, unless Medicaid and Medicare changed their rules and started negotiating drug prices; in which case they could require that administrative headquarters match corporate headquarters, or else.

Looking to create the world’s largest ATM maker, Diebold has launched a $1.8 billion bid in stock and cash for German rival Wincor Nixdorf. A deal would see the two companies land about 35% of the ATM market, leaving NCR, the global number two, with an estimated share of 25%. Wincor expects the transaction to yield at least $160M in annual cost savings.

Petco agreed to be acquired by CVC Capital and the Canadian Pension Plan Investment Board for $4.6 billion. Petco, the No.2 U.S. pet supplies retailer, had been put up for sale by a group of investors led by private equity firms TPG Capital LP and Leonard Green & Partners. It’s not the first time. The two buyout firms took the company private in 2000 for $600 million, and then took it public again in 2002. Then they bought it back again in 2006 in a $1.7 billion deal, taking it private again.

AstraZeneca has finalized plans to divest its Crohn’s disease drug Entocort by selling U.S. rights to the medicine to Perrigo for $380 million. The move is part of AstraZeneca’s “externalization” drive, which aims to sell non-core products to help it fill a short-term revenue gap caused by older drugs, while investing in a pipeline of new medicines.

Walmart can’t wait for Cyber Monday. So, they are starting a day early, launching all its Cyber Monday deals on the Sunday after Thanksgiving rather than the early hours of Monday morning as in previous years. Actually, the starting line is already blurred. A number of retailers are promoting deals for ‘Black Friday’ – the day after Thanksgiving and traditionally one of the busiest shopping days – weeks in advance.

A jury in West Virginia has been struggling with the idea of sending a CEO to jail. The CEO is Don Blankenship; the company is Massey Energy. The trial was to determine whether Blankenship is guilty of conspiring to break safety laws, defrauding mine regulators and lying to both investors and regulators about mine safety. Massey’s Big Branch mine in West Virginia turned out to be anything but safe; an explosion in 2010 killed 29 people. In the year leading up to that catastrophe, mine inspectors had cited it nearly 500 times, often for “significant and substantial” violations. Blankenship faces 30 years in jail if convicted.

The prosecutors seem to have laid out a damning pattern of facts. Blankenship clearly raked in millions in compensation. He was a micromanager, with a staff of individuals whom prosecutors derided as “yes men”, who seems – based on some documents and tape recordings he himself made of his own phone calls – to have been concerned about the costs of safety regulations and their impact on production levels. Orders reached the miners to cover up safety violations, and it seemed clear to many from who they had originated, according to testimony. But for now, the jury is deadlocked.

Facebook’s Mark Zuckerberg has announced he will take two months of paternity leave after his daughter’s birth, though he did not say when she is due, or who would be his interim successor. Facebook allows its U.S. employees to take up to four months of paid maternity or paternity leave, which they can use all at once or throughout the year.