Stocks See Solid Gains Following Jobs Report

Charles Schwab: On the Market

Posted: 7/8/2016 4:15 PM ET

Stocks See Solid Gains Following Jobs Report

U.S. stocks rallied early and never looked back in the wake of the June labor report which showed a solid improvement in monthly job creation, though the unemployment rate ticked higher and growth in average hourly earnings was shy of forecasts. Treasuries were mixed following the jobs report, while in the final hour of trading consumer credit was shown to have expanded more than expected. Crude oil prices edged lower, the U.S. dollar was nearly unchanged and gold was slightly higher.

The Dow Jones Industrial Average (DJIA) rallied 251 points (1.4%) to 18,147, the S&P 500 Index surged 32 points (1.5%) to 2,130, and the Nasdaq Composite jumped 80 points (1.6%) to 4,957. In moderately heavy volume, 920 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil was $0.27 higher at $45.41 per barrel, wholesale gasoline added $0.01 to $1.37 per gallon and the Bloomberg gold spot price increased $5.89 to $1,366.34 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.25. Markets were higher for the week, as the DJIA gained 1.1%, the S&P 500 Index increased 1.3% and the Nasdaq Composite rallied 1.9%.

Gap Inc. (GPS $23) reported that net sales for the five-week period ended July 2, 2016 rose by 2% to $1.57 billion, compared to a 1% decline a year ago, with growth from its Old Navy segment driving the results for the clothing retailer. Shares of GPS finished nicely higher.

Polycom Inc. (PLCM $12) announced that it has agreed to be acquired by privately-held Siris Capital Group LLC for a price of $12.50 per share in cash. The offer is subject to PLCM's termination of its existing merger agreement with Mitel Networks Corp. (MITL $7). The transaction is valued at roughly $2.0 billion, including debt, a 13.6% premium over its previous offer from MITL. Shares of both companies closed sharply higher.

U.S. jobs jump, but unemployment ticks higher, while consumer credit tops estimates

Nonfarm payrolls (chart) rose by 287,000 jobs month-over-month (m/m) in June, compared to the Bloomberg forecast of a 180,000 increase. The disappointing rise of 38,000 seen in May was downwardly revised to a gain of 11,000 jobs. The total downward revision to job gains in May and April was 6,000. Excluding government hiring and firing, private sector payrolls increased by 265,000, versus the forecasted gain of 170,000, after declining by 6,000 in May, negatively revised from the 25,000 rise that was initially reported. Gains were seen in professional & business services with an increase of 38,000 jobs, telecommunications, with a 28,000 rise following the 32,000 decline registered in May due primarily to the Verizon strike, while manufacturing jumped 14,000.

The unemployment rate rose to 4.9% from 4.7%, compared to expectations of an increase to 4.8%, while average hourly earnings grew by 0.1% m/m, below projections of a 0.2% increase, and May's 0.2% rise was unadjusted. Finally, average weekly hours remained at May's unrevised 34.4 hours level, matching projections.

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $18.6 billion during May, topping the $16.0 billion forecast of economists polled by Bloomberg, while April's figure remained near a level of $13.4 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $16.2 billion, while revolving debt, which includes credit cards, rose by $2.4 billion.

Treasuries were mixed, with the yield on the 2-year note increasing 2 basis points (bps) to 0.61%, while the yield on the 10-year note decreased 3 bps to 1.36%, and the 30-year bond rate declined 4 bps to 2.10%. Bond yields have seen pressure lately, falling to record lows, as the global markets continue to grapple with the impact of the U.K. Brexit vote, and Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis in her recent article titled, Brexit: What Does It Mean for the Bond Market?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones. Also, for more on the Brexit fallout with a focus on sectors, see the latest Schwab Sector Views: Sector Impact of Brexit from Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, at www.schwab.com/marktetinsight, while you can also follow Schwab on Twitter: @schwabresearch.

European markets get a boost from U.S. labor report, Asia mostly lower

European equities finished the week on a high note, notching solid gains following an upbeat U.S. labor report. The British pound continued to slowly recover from its rout that pushed it to a 31-year low versus the U.S. dollar this week in the wake of the Brexit vote, while a one-off special consumer confidence survey in the U.K. to measure sentiment following the Brexit vote showed a drop to a reading of -9 from the -1 posted in an earlier, regularly-scheduled monthly release. For deeper analysis of the impact of the Brexit vote, see the Schwab Center for Financial Research's recent article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight and be sure to check out the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, titled Brexit Aftershock: When Will the Markets Calm Down?, at www.schwab.com/insights. Follow Randy and Jeff on Twitter: @randyafrederick and @jeffreykleintop. Additional economic news in the region was mixed, as trade data out of Germany and the U.K. were mostly in line with forecasts, while industrial production in France fell short of expectations. The euro lost ground versus the U.S. dollar, while bond yield in the region were lower.

Stocks in Asia finished mostly lower, as the post-Brexit rally lost steam amid global growth concerns, ahead of the release of Friday's U.S. employment report. Flight-to-safety continued to boost the yen, pushing Japanese equities lower, while some attention may have shifted to the country's upper house elections, to be held this weekend. Australian securities ticked higher despite a sharp cut in the forecast for iron ore prices from the nation's Department of Industry, Innovation and Science, and following the credit outlook downgrade from Standard & Poor's on Thursday. Chinese stocks were lower amid rising worries over the country's banking sector, after a report showed non-performing loans exceeded $299.2 billion in May, upping banks' bad-loan ratio to 2.15%. Meanwhile, South Korean equites fell and Indian listings also lost ground.

Jobs report gives boost to stocks

Despite a sluggish start, U.S. stocks were higher for the holiday-shortened week as equities rallied on Friday, shaking off some of the post Brexit hangover, with the Dow topping 18,000 and the S&P 500 closing above 2,100. Gains for stocks transpired on the heels of the June labor report, which showed a solid improvement from May's disappointing figures for jobs created during the month. Our experts note in the recent Schwab Market Perspective: Looking Beyond Britain, that healthy job growth and the possible support to inflation from higher wages lead us to wonder if market expectations around Fed policy may have gone too far. The futures market indicates roughly no chance of a hike for the balance of the year; while rate cut expectations have come back in play. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

In addition to the jobs data, some other positive domestic economic reports included a decline in weekly jobless claims and a jump in mortgage applications, while the Institute for Supply Management (ISM) non-Manufacturing Index showed growth accelerated more than expected, rising to 56.5 in June, the highest since November 2015. However, factory orders declined and durable goods orders were revised to a 2.3% drop, slightly lower than the initial estimate.

Unofficial start to 2Q earnings season next week

Next week's economic docket will heat back up, with key releases of retail sales, the Consumer Price Index (CPI), the Producer Price Index (PPI), the Fed's Beige Book, industrial production and capacity utilization, along with the preliminary University of Michigan Consumer Sentiment Index for July.

2Q earnings season will also unofficially kick-off next week as Alcoa Inc. (AA $11) is expected to report results after the close on Monday. As noted in the recent Schwab Market Perspective, some questions have come to light recently regarding what consequences the uncertainty in Europe and a potential strengthening of the U.S. dollar may have. We'll start to get an initial view on those questions in the next few weeks as second quarter earnings season ramps up. Read the whole article at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

International reports slated for next week include: Japan—machine and machine tool orders, PPI, industrial production and capacity utilization and the Tertiary Industry Index. China—foreign direct investment, trade data, industrial production, retail sales and 2Q GDP. India—car sales, CPI, industrial production and trade data. U.K.—construction output and the Bank of England will announce its rate decision. Germany—Wholesale Price Index and CPI. Eurozone—industrial production, trade balance and CPI.

Stocks Disagree on Direction Ahead of Jobs Data

Charles Schwab: On the Market

Posted: 7/7/2016 4:15 PM ET

Stocks Disagree on Direction Ahead of Jobs Data

U.S. stocks closed the trading session mixed with some modest early gains fading as investors may have been exercising some caution ahead of tomorrow's June labor report release. Crude oil prices reversed solidly lower on the heels of a weekly report that showed stockpiles fell less than forecasted, while weekly jobless claims declined and ADP reported a better-than-expected increase for private sector jobs. Treasuries and gold were lower and the U.S. dollar was higher.

The Dow Jones Industrial Average (DJIA) declined 23 points (0.1%) to 17,896, the S&P 500 Index decreased 2 points (0.1%) to 2,098, and the Nasdaq Composite added 18 points (0.4%) to 4,877. In moderate volume, 864 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil was $2.29 lower at $45.14 per barrel, wholesale gasoline dropped $0.07 to $1.36 per gallon and the Bloomberg gold spot price decreased $3.76 to $1,360.02 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 96.27.

PepsiCo Inc. (PEP $107) reported core 2Q EPS of $1.35, above the $1.29 FactSet estimate, on revenues of $15.4 billion that matched expectations. The snack and soft drink maker credited strength in the U.S. market and its cost-cutting initiatives that were able to overcome weaker sales abroad. PEP also raised its full-year forecasts. Shares of PEP closed nicely higher.

Danone SA (DANOY $14) has agreed to buy WhiteWave Foods Co. (WWAV $56) for $10 billion, in a move to add the Denver-based company's popular Silk soy milk brand to its expanding organic food segment. WWAV shareholders will receive $56.25 per share in cash for each share owned, a 19% premium to Wednesday's closing price. Danone's Chief Executive Officer Faber said the acquisition will "allow us to double the size of our U.S. business and become the world leader in organic." DANOY finished slightly higher, while WWAV rallied.

Jobs data highlights economic calendar

Weekly initial jobless claims (chart) declined by 16,000 to 254,000 last week, versus the Bloomberg estimate of 270,000. The prior week's figure of 270,000 was downwardly revised to 268,000. The four-week moving average declined by 2,500 to 264,750, while continuing claims fell 44,000 to 2,124,000, north of the estimated level of 2,123,000.

The ADP Employment Change Report showed private sector payrolls rose by 172,000 jobs in June, above forecasts of 151,000, while May's gain of 173,000 jobs was revised lower to a 168,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of tomorrow's broader June nonfarm payroll report, expected to show an increase of 180,000 jobs, while private sector payrolls are expected to rise 170,000 (economic calendar). The unemployment rate is forecasted to tick higher to 4.8% from 4.7% and average hourly earnings are projected to rise 0.2% month-over-month (m/m).

In the final hour of trading tomorrow, we will also receive the latest consumer credit report, which is expected to show consumer borrowing for the month of May expanded by a level of $16.0 billion, after increasing by $13.4 billion in April.

Treasuries were mostly lower, with the yield on the 2-year note increasing 1 basis point (bp) to .059% and the yield on the 10-year note gaining 2 bps to 1.39%, while the yield on the 30-year bond was nearly unchanged at 2.14%. Bond yields have come under pressure as of late, falling to record lows as the global markets continue to grapple with the impact of the U.K. Brexit vote, and Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis in her recent article titled, Brexit: What Does It Mean for the Bond Market?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones. Also, for more on the Brexit fallout, see the latest Schwab Sector Views: Sector Impact of Brexitfrom Schwab Director of Market and Sector Analysis, Brad Sorensen, CFA, at www.schwab.com/marktetinsight, and follow Schwab on Twitter: @schwabresearch.

Europe rebounds from three-day fall, Asia mixed 

European equities finished higher, rebounding from a three-day drop, as optimism re-surfaced that central banks will be supportive in the wake of the U.K. Brexit vote, which has fueled risk aversion and global growth concerns, and after yesterday's minutes from the Fed's June meeting showed continued dovishness. Also, anxiety toward the Italian banking sector softened amid increased hopes that a resolution to aid the battered sector can be achieved. Moreover, the British pound recovered somewhat after falling to a 31-year low versus the U.S. dollar. For deeper analysis of the impact of the Brexit vote, see the Schwab Center for Financial Research's recent article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight and be sure to check out the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, titled Brexit Aftershock: When Will the Markets Calm Down?, at www.schwab.com/insights. Follow Randy and Jeff on Twitter: @randyafrederick and @jeffreykleintop.

Economic news in the region was mixed, with a better-than-expected read on U.K. industrial production being somewhat overshadowed by a surprising decline in production out of Germany, while France's trade deficit narrowed and housing prices in the U.K. rose above forecasts. The euro was lower versus the U.S. dollar, while bond yields in the region were higher.

Stocks in Asia finished mixed, with the angst surrounding the U.K. Brexit vote fallout easing somewhat, but the global growth concerns remained. The flight-to-safety continued to boost the yen, which fostered a decline for Japanese equities. Elsewhere, Australian securities managed gains despite Standard & Poor's lowering the nation's AAA-credit rating outlook to negative from stable, saying "the government's fiscal stance may no longer be compatible with the country's high level of indebtedness." The move follows last weekend's general elections that rendered inconclusive results. Mainland Chinese stocks were mostly flat, but securities trading in Hong Kong gained ground for the sixth-straight day. Meanwhile, South Korean stocks rose and Indian equities inched higher following yesterday's holiday.

The international economic docket for tomorrow will yield trade data from Japan and Germany, industrial and manufacturing production from France and labor costs and the trade balance from the U.K.

Stocks Hold Gains

Charles Schwab: On the Market

Posted: 7/1/2016 4:15 PM ET

Stocks Hold Gains

Domestic stocks pared gains Friday afternoon, but still managed to finish the trading session in the green ahead of the extended holiday weekend, which will keep all U.S. markets shuttered on Monday in observance of Independence Day. Some upbeat manufacturing reports aided in the early equity gains, while Treasuries were mixed, the U.S. dollar was lower and gold and crude oil prices were higher.

The Dow Jones Industrial Average (DJIA) rose 19 points (0.1%) to 17,949, the S&P 500 Index gained 4 points (0.2%) to 2,103, and the Nasdaq Composite added 20 points (0.4%) to 4,863. In moderate volume, 844 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.66 to $48.99 per barrel and wholesale gasoline was $0.01 higher at $1.51 per gallon, while the Bloomberg gold spot price increased $19.95 to $1,341.85 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 95.66. Markets were nicely higher for the week, as the DJIA and the S&P 500 Index surged 3.2% and the Nasdaq Composite rallied 3.3%.

Micron Technology Inc. (MU $13) reported a fiscal 3Q loss of $0.08 per share, compared to the $0.10 per share shortfall estimated by FactSet, with revenues falling 25.0% year-over-year (y/y) to $2.9 billion, versus the projected $3.0 billion. The memory chip maker issued 4Q revenue guidance that was mostly below expectations and forecasted an unexpected loss, while announcing plans to cut 2,400 jobs as part of its cost savings program. Shares finished solidly lower.

The major automakers reported U.S. June sales today, with Fiat Chrysler Automobiles NV's (FCAU $6) Chrysler brand's sales growing 10.8% y/y, compared to the FactSet estimate of a 4.9% gain. The figures were adjusted to reflect one more selling day this year compared to the same period a year ago. Ford Motor Co's (F $13) adjusted sales rose 2.3%, above the forecasted 0.7% gain, while General Motors Co's (GM $29) sales fell 5.4%, compared to the projected 5.2% decrease. Shares of all three were higher.

Manufacturing activity picks up steam

The Institute for Supply Management (ISM) Manufacturing Index (chart) in June remained in expansion territory (above 50) for the fourth-straight month after increasing to 53.2 from May's 51.3 level, where Bloomberg forecasted it to remain. New orders, production and employment led a broad-based advance, with the exception of prices, which dropped but remained above the 60 mark.

The final Markit U.S. Manufacturing PMI Index was revised slightly lower to 51.3 for June from the 51.4 preliminary level, and compared to the projected downward revision to 51.2. However, the index was up from the 50.7 level posted in May. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

The upbeat manufacturing reports add credence to our view in the Schwab Market Perspective: British Shock—What's Next, the U.S. economy is fairly healthy and should manage to stay out of recession territory in the near term, although risks have risen. However, the continued extreme interest rate environment seems to us to be influencing corporate decision making—although likely not in the way policy makers were hoping. Stock buybacks and increased dividend payments seems to be the choice of many companies, while they remain reluctant to invest substantially in equipment and material that has longer-term potential benefits. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Construction spending (chart) unexpectedly dropped 0.8% month-over-month (m/m) in May, versus projections of a 0.6% advance, and following April's downwardly revised 2.0% drop. Residential spending was flat m/m, while non-residential spending fell 1.3%.

Treasuries finished mixed, with the yield on the 2-year note ticking 1 basis point (bp) higher to 0.59%, while the yield on the 10-year note dipped 3 bps to 1.44% and the 30-year bond rate declined 6 bps to 2.23%. Bond yields continue to see pressure in the aftermath of the U.K. Brexit vote and Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis in her recent article titled, Brexit: What Does It Mean for the Bond Market?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

Please note: All U.S. markets will be closed on Monday in observance of the Independence Day holiday.

Europe rally extends to four days, Asia mostly higher amid mixed data

European equities finished higher, with the markets extending their post-Brexit shock recovery rally to four sessions, with the U.K. FTSE leading the way with a more than 7.0% surge on the week. The rally was bolstered by yesterday's statement from Bank of England (BoE) Governor Carney that suggested the central bank will likely need to deploy stimulus measures in the wake of the Brexit vote. Also, banking stocks overcame early weakness amid reports that the BoE is planning to cut banks' capital requirements as early as next week, per Bloomberg. The euro was higher and the British pound declined versus the U.S. dollar, while bond yields in the region finished mostly lower.

For deeper analysis of the impact of the Brexit vote, see the Schwab Center for Financial Research's recent article, Brexit: What Investors Should Know, at www.schwab.com/marketinsight and be sure to check out the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, titled Brexit Aftershock: When Will the Markets Calm Down?, at www.schwab.com/insights. For analysis on global monetary policy, see Schwab's Jeffrey Kleintop's latest article, What investors need to know about helicopter money, at www.schwab.com/marketinsight. Follow Randy and Jeff on Twitter: @randyafrederick and @jeffreykleintop.

In economic news, the final Markit Eurozone Manufacturing PMI Index was revised upward for June to 52.8—the highest level of the year—from the preliminary figure of 52.6, where it was expected to remain. A reading above 50 denotes expansion and growth accelerated from May's level of 51.5.

Stocks in Asia finished mostly to the upside, aided by the three-day Brexit recovery rallies posted in the U.S. and Europe yesterday, which were bolstered by a signal from the BoE of further stimulus measures in the wake of the surprising U.K. vote. Stocks moved higher as the markets sifted through a plethora of mixed economic data in the region. Japan's 2Q Tankan survey of sentiment in the large manufacturing sector came in unchanged, versus the decline that was expected—though a majority of the responses were taken before the Brexit vote was determined. Separate reports showed Japan's household spending fell and core consumer price inflation declined in line with forecasts for May. In China, the nation's official Manufacturing PMI Index dipped as expected to the demarcation point between expansion and contraction, while a separate read on the activity in the sector by Caixin/Markit showed the contraction accelerated for June. However, China's official non-Manufacturing PMI Index showed growth in the key services sector accelerated in June. Schwab's Jeffrey Kleintop, offers Five ways investors can make the most of slower growth, at www.schwab.com/oninternational.

Brexit shock recovery rally puts positive spin on week

Although Friday's U.K. Brexit downside shock carried over to the beginning of the week, U.S. stocks snapped back and rallied to close sharply higher, pushing the S&P 500 into positive territory for 2Q and the year. Crude oil prices recovered and the European markets rebounded sharply, led by the U.K., to aid the global rally, which was underpinned by pledges from central banks—notably the Bank of England—to support the financial markets from the likely impact of the Brexit vote. However, global bond yields continued to drop, with U.S. Treasury yields hitting record lows. Schwab's Jeffrey Kleintop offers analysis for investors in his article, After the Brexit Vote: What Lies Ahead for Markets?, at www.schwab.com/oninternational. Jeff notes that it may take some time for the shock to work through the economic, financial and political systems in the U.K. and Europe. As a result, global stocks may fall further. No two market shocks are the same, but in some of the other shocks since the financial crisis, markets have recovered in three to four months. Investors with longer time horizons may want to maintain their diversified asset allocations, which can help portfolios weather volatility over time.

Short week but long economic docket

Although the global markets will likely continue to grapple with the Brexit fallout, next week's U.S. economic calendar will bring a plethora of key reports. The docket will be headlined by the minutes from the Federal Reserve's June meeting, the ISM non-Manufacturing Index and Friday's June nonfarm payroll report. However, the data has the potential to be discounted somewhat as the impact of the Brexit vote is not likely to show in the data, and it has dampened expectations of a near-term Fed rate hike. As noted in the Schwab Market Perspective, the Fed is unlikely to raise rates in the foreseeable future, and could look to add some sort of support to the economy or financial institutions if needed. The next several weeks could be a tumultuous time in global markets, and investors need to keep a longer-term view in mind. Global stock markets have tended to ultimately rebound from other sharp declines—often fairly quickly. It can be tough to get back on track once things reverse, so we recommend investors use volatility to tactically keep allocations in line with their long-term strategic targets. Read more at www.schwab.com/marketinsight.

Other notable U.S. releases slated for next week include: factory orders, the trade balance, and the ADP employment change report.

International reports due out next week include: Australia—Reserve Bank of Australia monetary policy decision, trade balance and retail sales. China—Caixin/Markit Services PMI Index. India—Services PMI Index. Japan—trade balance. Eurozone—Markit's business activity reports, retail sales and the European Central Bank's June meeting minutes. U.K.—manufacturing and industrial production releases, trade balance and Markit's business activity reports.

Downside Volatility Continues to Start Week

Charles Schwab: On the Market

Posted: 6/27/2016 4:15 PM ET

Downside Volatility Continues to Start Week

U.S. stocks continued Friday's sell-off in the aftermath of the U.K.'s vote to leave the European Union, with financials and technology issues responsible for the brunt of the decline. Treasury yields continued lose ground, while a preliminary read on services sector activity was unchanged from the previous month and some regional manufacturing data remained in contraction territory. The U.S. dollar surged to the upside and gold was also higher, while crude oil prices were lower.

The Dow Jones Industrial Average (DJIA) fell 261 points (1.5%) to 17,140, the S&P 500 Index lost 37 points (1.8%) to 2,001, and the Nasdaq Composite tumbled 114 points (2.4%) to 4,594. In heavy volume, 1.3 billion shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq. WTI crude oil dropped $1.31 to $46.33 per barrel and wholesale gasoline was $0.04 lower at $1.53 per gallon, while the Bloomberg gold spot price rose $10.89 to $1,326.64 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—jumped 1.1% to 96.48.

Medtronic PLC (MDT $82) inked a deal to acquire circulatory support technology firm Heartware International Inc. (HTWR $58) in a transaction valued at $1.1 billion. As part of the agreement, MDT will pay $58 per share in cash for each share of HTWR, a 93% premium to Friday's closing price, with the purchase expected to close by the end of October. Shares of MDT closed lower, while HTWR rallied over 90%.

Preliminary services sector read unchanged, regional manufacturing remains in contraction

The preliminary Markit U.S. Services PMI Index in June was unchanged from May's final reading of 51.3, with a level above 50 indicating expansion in activity, and compared to the Bloomberg forecast calling for a modest rise to 52.0. The release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and Markit weights its index components differently.

The Dallas Fed Manufacturing Index ticked slightly higher to -18.3 for June from May's unrevised -20.8 level with economists forecasting an improvement to -15.0. A reading below zero denotes contraction.

Treasuries were decidedly higher, with uncertainty remaining after Friday's Brexit vote as the yield on the 2-year note fell 3 basis points (bps) to 0.60%, the yield on the 10-year note declined 10 bps to 1.46%, and the 30-year bond rate decreased 13 bps to 2.28%. For the latest analysis on the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' recent article titled Brexit: What Does It Mean for the Bond Market?, at www.schwab.com/marketinsight. You can also follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will commence with the release of the third and final reading of 1Q GDP, with economic output expected to have ticked higher to a 1.0% quarter/quarter (q/q) annualized rate of expansion, from the 0.8% pace announced in the second release, while personal consumption is expected to be adjusted higher from a 1.9% to a 2.0% q/q increase. Investors will also get a look at the S&P/CaseShiller Home Price Index, forecasted to show home prices in the 20-city composite rose 5.41% y/y during April, and were 0.58% higher m/m on a seasonally-adjusted basis. Finally, after the opening bell, the Consumer Confidence Index and Richmond Fed Manufacturing Index are scheduled for release.

Brexit fallout continued to weigh on Europe, Asia mostly higher despite yen strength

European equities finished lower, extending the severe losses seen last Friday in the wake of the U.K.'s stunning vote to leave the European Union (EU)—known as a Brexit—that sent shockwaves through the global markets with U.K. banks taking the brunt of the burden. Adding to the uncertainty, Scottish First Minister Sturgeon said that a second independence referendum for Scotland was "very much on the table." For the latest on the markets, Schwab's outlook, and other considerations surrounding Brexit, Schwab offers a number of articles for investors to consider, including the latest Schwab Market Perspective: British Shock—What's Next, at www.schwab.com/marketinsight. You can also follow Schwab and on Twitter: @schwabresearch.

U.K. Chancellor Osborne delivered a speech ahead of the market's open in an attempt to calm nerves, saying that despite the uncertainty, "you should not underestimate our resolve" in navigating the unchartered waters ahead. Meanwhile, later in the day in speaking to Parliament, Prime Minister Cameron rejected pleas for a "do-over" Brexit vote, instead appointing a group of officials to prepare for the withdrawal from the EU. The Conservative Party also accelerated the timeframe for a new leader, pulling the timetable back by nearly a month to September 2. For in depth analysis of the issue, as well as what is next, see Schwab's Chief Global Investment Strategist, Jeffrey Kleintop's, CFA, timely article After the Brexit Vote: What Lies Ahead for Markets?, at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. The British pound was lower, adding to its record loss on Friday, and the euro saw pressure versus the U.S. dollar, while bond yields in the region were lower.

Stocks in Asia finished mostly higher, being the first to "dip its toe" in the uncertainty of the aftermath of Friday's severe rout in the wake of the decision by the U.K. to quit the European Union. Japanese equities rallied, despite the yen showing strength, and after an emergency meeting between Japanese policymakers. Prime Minister Abe, Finance Minister Aso and Bank of Japan (BoJ) deputy governor Nakasone concluded their meeting without any substantive moves, but with a pledge to act if necessary, fueling speculation of some sort of intervention by the BoJ with either more stimulus, a BoJ easing, or a combination of the sort. Mainland Chinese stocks advanced and those trading in Hong Kong were flat, with Premier Li saying despite the risks of the Brexit fallout, he still expects to achieve their growth targets. Finally, strength in materials helped Australian securities tick higher, while listings in South Korea and India were both nearly unchanged.

Tomorrow, the international economic docket will be light, offering the Import Price Index from Germany and consumer confidence from France, Italy and South Korea.

Stocks Go So Low as U.K. Sets To Depart EU

Charles Schwab: On the Market

Posted: 6/24/2016 4:15 PM ET

Stocks Go So Low as U.K. Sets To Depart EU

U.S. stocks erased 2016's gains, joining a global rout for equities and the British pound traded to lows not seen in more than 30 years in the wake of the U.K. voting to leave the European Union. Financial and Technology stocks were the largest decliners, while the aftermath of the Brexit vote made it difficult to assess the possible market impact of lower-than-expected reads on domestic durable goods orders and consumer sentiment. Treasuries, gold and the U.S. dollar rallied and crude oil prices experienced a large, sharp drop.

The Dow Jones Industrial Average (DJIA) tumbled 611 points (3.4%) to 17,400, the S&P 500 Index fell 76 points (3.6%) to 2,037, and the Nasdaq Composite plummeted 202 points (4.1%) to 4,708. In heavy volume, 2.5 billion shares were traded on the NYSE and 3.8 billion shares changed hands on the Nasdaq. WTI crude oil dropped $2.47 to $47.64 per barrel and wholesale gasoline was $0.07 lower at $1.54 per gallon, while the Bloomberg gold spot price rallied $62.56 to $1,319.41 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—jumped 2.1% to 95.50. Markets were lower for the week, as the DJIA and the S&P 500 Index decreased 1.6% and the Nasdaq Composite fell 1.9%.

Xerox Corp. (XRX $9) announced Jeff Jacobson will be the company's new Chief Executive Officer once the organization divides into two separate publicly-traded companies. The document solutions company said the split remains on track for the end of the year. Earlier in the month, XRX named Ashok Vemuri as the CEO of the smaller of the two companies, which will be named Conduent. XRX lost ground.

Sonic Corp. (SONC $28) posted fiscal 3Q EPS ex-items of $0.43, a penny above the FactSet estimate, as revenues rose 18.0% y/y to $165.2 million, compared to the projected $164.7 million. Same-store sales rose 2.0% year-over-year, below analysts' view of a 2.4% y/y increase. The drive-in burger chain said it now expects same-store sales for the year to increase 2%-4%, below previous projections of 6%, but it maintained its earnings growth forecast of 20%-25%. Shares closed sharply lower.

Durable goods orders lower than forecasts, consumer sentiment ticks lower

May preliminary durable goods orders (chart) fell 2.2% month-over-month (m/m), compared to Bloomberg's estimate of a 0.8% decline and April's upwardly revised 3.3% gain. Ex-transportation, orders declined 0.3% m/m, versus the 0.1% forecasted increase, and April's unrevised 0.5% gain. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, declined 0.7%, compared to projections of a 0.4% increase, and following the upwardly revised 0.4% dip in the month prior.

The final June University of Michigan Consumer Sentiment Index (chart) was revised to 93.5 from the preliminary level of 94.3, and compared to expectations of a slight dip to 94.1, as the expectations and current conditions components of the report were both revised downward. The index was also lower compared to May's level of 94.7, where it sat at the highest level since June 2015. The 1-year inflation outlook rose to 2.6%, from May's 2.8% rate. The 5-10 year inflation forecast also moved higher to 2.6% from May's 2.3% level.

Treasuries were decidedly higher, with the yields on the 2-year note and the 30-year bond falling 13 basis points (bps) to 0.64% and 2.43%, respectively, while the yield on the 10-year note lost 17 bps to 1.57%. For our latest analysis on the bond markets see the article by Schwab's Chief Fixed Income Strategist, Kathy Jones, titled Global Bonds: A World Without Yield, at www.schwab.com/marketinsight, while you can also follow Kathy on Twitter: @kathyjones.

U.K. vote shocks world, markets in Europe and Asia plunge

European equities finished deep in the red, after the U.K.'s stunning vote to leave the European Union (EU)—known as a Brexit—after four decades sent shockwaves through the global markets—a complete about-face from yesterday's optimism that the U.K. would vote to remain in the EU. The final vote tally was 52% for an exit, 48% against—a close election, as many had expected, however not the outcome that investors had banked on yesterday. In the wake of the results, Prime Minister David Cameron stepped down, saying, "The British people have made a very clear decision to take a different path, and as such I think the country requires fresh leadership." Cameron said he will remain at 10 Downing Street for the next three months, with a new Conservative leader to be appointed by October.

Financials were in the eye of the storm, with the European bank index falling the most ever, while the British pound tumbled to touch a level not seen in over 30 years. Amidst the turmoil, and following Cameron's announcement, Bank of England (BoE) Governor Carney issued an early-morning statement, saying the BoE will pledge 250 billion pounds ($345 billion) to the financial system in what he called, "a period of uncertainty and adjustment." The BoE had previously supplemented funding auctions this month for lenders. Meanwhile, central banks across the globe have shifted to crisis-management mode, as the Swiss National Bank intervened in order to prevent a surge in the franc, the European Central Bank (ECB) said it stands ready to provide liquidity in euros or other currencies, and Bank of Japan Governor Kuroda said the central bank will do its best to provide cash.

Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers in depth analysis of the vote in his timely article After the Brexit Vote: What Lies Ahead for Markets?, at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. Economic news in the region took a backseat to the developments surrounding the Brexit, with France's final GDP data unrevised from previous reports, Italy's retail sales rising less than expectations and Germany's Ifo Business Climate Index was slightly better than forecasts. The euro pared solid early losses, but did finish firmly lower versus the U.S. dollar, while bond yields in the region were negative.

Stocks in Asia finished sharply lower, being the first to react to the decision by the U.K. to quit the European Union, with Japanese equities posting their largest decline in more than 15 years, and triggering a circuit-breaker on Nikkei futures. Japan's Nikkei 225 Index tumbled 7.9%, with the yen surging against its foreign counterparts. Stocks in mainland China lost ground, but were somewhat insulated from the fray after policymakers in the nation championed their management of corporate debt, saying that defaults would not pose a systemic threat as long as the economy continues to be within an acceptable range. Meanwhile, securities trading in Hong Kong snapped a five-session winning streak, while equities in Australia, India and South Korea were sharply lower.

The U.K. has left the building

Stocks finished lower for the week as gains were wiped out early Friday morning on the heels of the U.K.'s highly anticipated vote, where it decided it will exit the European Union. As noted in the recent Schwab Market Perspective: British Shock—What's Next, Britain shocked the financial community and global equity markets plunged as traders searched for perceived safety in the midst of uncertainty. Since the end of the financial-crisis induced global recession in 2009, a series of shocks have helped to keep growth, inflation and stock market performance subdued. The shocks that have taken place in Japan, United States, and Europe may offer us some insight as to the potential duration of the market impact of Brexit. Read more at www.schwab.com/marketinsight.

The added uncertainty from the long awaited Brexit vote seemed to disproportionately increase the volatility in the financials sector. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, takes a deeper dive into some of the factors that most influence the performance of this sector in his recent Schwab Sector Views: Financials: Danger or Opportunity?. Brad notes that the financials sector has been under attack by politicians and unloved by investors since the financial crisis, resulting in some very volatile performance. He also hints at the heavy regulatory burden placed on the financials sector over the past several years. But there are some glimmers of hope here as well. Despite the heated political rhetoric being leveled against the financials sector, there does seem to be an increasing realization that the regulations may have gone too far and had unintended consequences. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Heavy dose of manufacturing data ahead

Next week, the U.S. economic calendar will deliver a look at the health of the manufacturing sector of the economy with the release of the ISM Manufacturing Index, Markit's final Manufacturing PMI for June, the Richmond Fed Manufacturing Index and the Dallas Fed Manufacturing Index. Also, the third and final read for 1Q GDP will be released, with economic output expected to have ticked higher to a 1.0% quarter/quarter annualized rate of expansion, from the 0.8% pace announced in the second release.

Other U.S. reports slated for next week include: Markit's preliminary Composite PMI for June, the Chicago PMI Index, the S&P/Case-Schiller Home Price Index, the Consumer Confidence Index, pending home sales, personal income and spending, construction spending and vehicle sales.

Next week's international reports: Japan—retail sales, industrial production, CPI, vehicle production, housing starts and 2Q Tankan Index. China—manufacturing and non-manufacturing PMIs, industrial profits and the Leading Index. Hong Kong—retail sales and trade data. U.K.—1Q GDP, consumer credit and 1Q business investment. Germany—GfK Consumer Confidence, national and regional CPIs and retail sales. France—1Q GDP, PPI, CPI and consumer spending. Eurozone—consumer confidence and CPI.

Friday, May 16, 2014 - Nervous About Recovering in the Recovery

Financial Review with Sinclair Noe

DOW + 44 = 16491
SPX + 7 = 1877
NAS + 21 = 4090
10 YR YLD + .02 =  2.52%
OIL + .68 = 102.18
GOLD – 4.10 = 1293.70
SILV - .11 = 19.45

Stocks were all over the place this week; we had record highs for the Dow Industrial Average and the S&P 5oo Index, topping 1900 for the first time, even as small caps slipped and internet stocks tumbled. For the week, the Dow slipped 0.6 % and the S&P 500 dipped 0.03 %, while the Nasdaq gained 0.5 %. Bonds enjoyed a very nice week indeed, with the yield on the 10 year Treasury note moving from a high for the week of 2.66% to a low of 2.47%. Isn’t it awesome when the Dow hits a record high but everything else flatlines or shrinks? Maybe we are in a recovery, but maybe we need to recover from the recovery.

Recent economic data has been mixed, and reports released Friday added to concerns about the lackluster recovery. The preliminary Reuters / University of Michigan consumer sentiment index for May was at 81.8, down from 84.1 in April. Housing starts increased in April at a seasonally adjusted annual rate of 1,072,000. This is 13.2 % above the revised March estimate of 947,000 and is 26.4 % above the April 2013 rate of 848,000.

Earlier in the week we got the PPI and CPI inflation numbers. On the retail level the core inflation rate increased to 1.8% year over year. The Fed has begun to chirp about deflation fears at just exactly the time that core inflation is turning higher, not that inflation is high, but it isn’t exactly deflationary at the moment.

We also saw a report from the New York Fed on household debt; Americans are swimming in it. For the first quarter, debt stood at$11.6 trillion. To put it in perspective, if Americans’ household debt was an economy, it would be the third largest in the world.

The fastest growing debt category: student loans, which top $1 trillion. Pew Research reported this week that four in ten U.S. households (37%) headed by an adult younger than 40 have student debt. Households with student loan debt have a median net worth of $8,700 compared to $64,700 for households without student debt.

The report says high levels of debt are restraining household formations. Slower household formation means less demand for buying homes or apartments, which, in turn, translates into less construction and construction jobs. And even young households looking to buy residential real estate have a harder time getting a mortgage.

There wasn’t much economic news this week but we did have a few interesting surveys. Gallup’s annual Economy and Personal Finance poll finds 59% of Americans are nervous about retirement and afraid they will run out of money. And the idea of needing a million dollars to secure a comfortable retirement, well that plan is now considered obsolete, what with rising medical costs, disappearing pensions, insufficient 401(k)s, and low interest rates.

Meanwhile, the most surprising poll results came from CNBC’s Millionaire Survey which finds a majority of millionaires consider inequality a major problem and about two-thirds support higher taxes on the wealthy; in other words, they think they probably should pay more in taxes; just a bit more in taxes, nothing too big.

David Tepper manages the Appaloosa Fund. He is the highest paid hedge fund manager in the world. Last year he pulled down $3.5 billion, which is more than you and I combined. Tepper rarely talks publicly about the markets but he was at an investing conference in Las Vegas the other day and he decided to talk. Tepper says he’s nervous about the markets: "There are times to make money, this is a time to not lose money.”

Tepper's biggest concerns hinge on economic growth prospects and its effect on stock prices. He said his opinion would be different if the economy was growing at 4%. Even adjusting for the weather, the economy looks to be growing much more slowly than he expected. Indeed, US GDP grew by 0.1% in the first quarter of 2014. That's a problem, Tepper says, because stocks on average are trading at 16 times next year's expected earnings. That means investors are expecting relatively strong bottom lines and if the economy is growing more slowly than expected, profits are likely to disappoint.  Tepper says he is also concerned about deflation, given the sluggish economic growth prospects; consequently, he has gone, at least in part, to cash.  Tepper says he’s “nervous”.

Give me a break. The guy just made $3.5 billion last year and he’s nervous. Lee Trevino, the famous golfer was once asked if he got nervous standing over a putt that could win a tournament and possibly pay several hundred thousand dollars. Trevino said no, he didn’t get nervous anymore, but when he was younger he used to get nervous, before he went on the pro circuit he made money betting on golf games in west Texas. Trevino said he used to get nervous standing over a putt that could win or lose $20 dollars, when he only had $5 in his pocket.

A new poll by Bloomberg indicates that financial professionals are quite concerned about deflation in the Eurozone. About three-quarters of them say it’s a greater threat to the region than inflation. Some individual countries such as Portugal have already experienced deflation this year, and the inflation rate in the 18-nation bloc as a whole was 0.7% in April.

This isn’t the only problem plaguing the Eurozone. A report from the Global Sustainability Institute says Britain is running out of energy. Britain has just 5.2 years of oil, 4.5 years of coal and three years of its own gas remaining. France fares even worse, with less than one year to go before it runs out of all three fossil fuels. Germany, it was claimed, has 250 years of coal remaining but less than a year of oil. Italy has less than a year of gas and coal, and only one year of oil. The report concludes that some countries are becoming increasingly vulnerable to rising energy prices and reliant on resource-rich neighbors, while alternative energy sources need to be developed. One thing the crisis in Ukraine has clearly demonstrated is that energy is a new weapon.

In a new report, Standard & Poor’s Rating Services argues that climate change will hit country’s economic growth rates, their external performance, public finances, and sovereign credit ratings; and not in a good way. Despite a surge in extreme weather events, S&P has not, to date, revised the rating of a sovereign as a result. The report says that, “assuming that extreme weather events are on the rise in terms of frequency and destruction, how this trend could feed through to our ratings on sovereign states bears consideration."

According to S&P, poorer and lower-rated countries will be the hardest hit by climate change. All of the 20 nations ranked most-vulnerable by S&P are emerging markets, with the vast majority in Africa or Asia.

Telecommunications regulators formally proposed new "net neutrality" rules that may let Internet service providers charge content companies for faster and more reliable delivery of their traffic to users. Federal Communications Commission Chairman Tom Wheeler has come under fire from consumer advocates and technology companies for proposing to allow some "commercially reasonable" deals in which content companies could pay broadband providers to prioritize traffic on their networks.

Critics worry the rules would create "fast lanes" for companies that pay up and slower traffic for others, although Wheeler has pledged to prevent "acts to divide the Internet between 'haves' and 'have nots.'" The FCC's proposal tentatively concludes that some pay-for-priority deals may be allowed, but asks whether "some or all" such deals should be banned and how to ensure paid prioritization does not relegate any traffic to "slow lanes."

The Federal Communications Commission has just granted itself the ability to either protect or condemn the free Internet, depending on how you read the net neutrality rules the agency will consider making law in the coming months. FCC Chairman Tom Wheeler’s response to criticism has thus far consisted mostly of pleas for people to trust that the agency knows what it’s doing, but he may be the only one.

The problem is that no one can agree on what the agency is promising. Some believe that the FCC is working to increase its power and stifle innovation in the broadband market, poking its nose into every deal Internet service providers try to make. Others think that the proposed rules don’t go far enough, and that unless it is willing to reclassify broadband companies to be subject to the same laws as telephone companies, it can’t protect the free Internet. The rules as they are currently written are wide open to interpretation and abuse.

The FCC is still ignoring the peering and interconnection agreements that allow companies like Comcast to charge both companies and consumers for access to its network. It’s still manned by people who fought the principles it’s now trying to defend. And it’s still the same agency whose own incompetence threatened the Internet in the first place. There is a good chance the FCC could kill the internet, and if so, the first blows were delivered this week.

This week’s economic calendar was light, next week will be lighter. The Fed will release the minutes from the April 29-30 meeting on Wednesday. The Fed heads take their dog and pony show on the road, with Janet Yellen delivering a commencement address at New York University on Wednesday. Among the district presidents giving speeches, the list includes: Richard Fisher (Dallas) and John Williams (San Francisco) on Monday; Charles Plosser (Philadelphia) and William Dudley (New York), Tuesday; Esther George (Kansas City) and Narayana Kocherlakota (Minneapolis) and Dudley again, Wednesday; and Williams again, Thursday.

Two major reports on April housing demand are on tap next week. Sales of existing homes will be reported Thursday, followed by Friday’s new home sales report.