Financial Review

Drifting

Sinclair Noe — June 5, 2017

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DOW – 22 = 21,184
SPX – 2 = 2436
NAS – 10 = 6295
RUT – 8 = 1396
10 Y + .02 = 2.18%
OIL – .27 = 47.39
GOLD + .80 = 1280.30
BITCOIN + 4.68% = 2864.70
ETHEREUM +.91% = 247.50

The markets were drifting today. After hitting record highs Friday on a very weak May Jobs Report, there just wasn’t any good news to push the markets higher. There was a bit of negative or sideways news.

On the economic data side, the Institute for Supply Management reported that their non-manufacturing index slipped to 56.9% in May, down slightly from April but still in positive territory.

The government said productivity was unchanged in the first three months of 2017 instead of declining at a 0.6% annual rate. The biggest change: The increase in output, or how many goods and services companies produce, was raised to 1.7% from 1%. The number of hours employees worked, meanwhile, was revised to a slightly higher 1.7% gain instead of 1.6%.

The updated figures show that labor costs rose more slowly than initially reported, a sign companies continue to keep costs down despite a steadily expanding economy and growing shortages of skilled labor.

Hourly compensation — pay and benefits — rose a revised 2.2% in the first quarter, but after adjusting for inflation workers lost ground. Real compensation fell 0.9%.

The upward revision in the first quarter doesn’t change the underlying weakness in productivity, the key to a higher standard of living.

Factory orders dipped 0.2% in April. For the year to date, orders are 4.4% higher than in the same period a year ago. Excluding transportation, which can be volatile, orders rose 0.1% during the month, and are 5.5% higher compared to the same period in 2016.

Activity is ticking up, but so are inventories. Stockpiles rose a seasonally adjusted 0.1% during the month and are 2.5% higher than a year ago.

Markets shrugged off the news of a series of attacks which killed several people and injured dozens in the heart of London on Saturday. The UK has a parliamentary election scheduled for Thursday, pitting the Conservative Incumbent Prime Minister Theresa May against Labor leader Jeremy Corbyn.

With the London attack dominating attention, a reduction in the number of police officers in England and Wales by almost 20,000 during May’s six years as interior minister from 2010 to 2016 shot to the top of the election agenda. Whatever the outcome of the election, the UK still must deal with Brexit.

The UK has slipped to become least attractive developed market for sovereign wealth funds one year after the 2016 Brexit referendum, according to a survey by asset manager Invesco. A survey of 97 sovereign wealth funds, pension funds and central banks with a combined $12 trillion in assets rated the UK 5.5 out of 10 for investor attractiveness, down from 7.5 in 2016.

Germany was the most attractive market in Europe, with a score of 7.8, while Italy and France followed with 6.1. The US was the most attractive place in the world to invest, earning a rating of 8 out 10.

Also on Thursday, former FBI Director James Comey is scheduled to testify before the Senate Intelligence Committee as part of the committee’s Russia-related investigation.

Saudi Arabia, Bahrain, Egypt and the United Arab Emirates have cut diplomatic relations with Qatar, having accused Qatar of supporting terrorism and destabilizing the region. The US’ biggest concentration of military personnel in the Middle East are located at an Air Force base near the Qatari capital of Doha, and is home to some 11,000 US military personnel.

The rift could cause problems for OPEC’s plans to cut oil production. With production capacity of about 600,000 barrels per day (bpd), Qatar’s crude output ranks as one of the smallest among the Organization of the Petroleum Exporting Countries, but tension within the cartel could weaken the supply deal aimed at supporting prices.

President Trump outlined a plan to privatize the US air traffic control system. The FAA spends nearly $10 billion a year on air traffic control funded largely through passenger user fees, and has spent more than $7.5 billion on next-generation air traffic control reforms in recent years.

The Aircraft Owners and Pilots Association said it will not support a plan that imposes fees on small plane owners. The major airlines generally favor the idea but Delta is opposed, saying that privatization would not save money, and would drive up ticket costs and could create a national security risk.

The proposal would require congressional approval. The president will hold a rally in Ohio on Wednesday to make a case for his $1 trillion infrastructure proposal.

The Supreme Court ruled 9-0 today that the SEC’s recovery remedy known as “disgorgement” is subject to a five-year statute of limitations. The justices sided with New Mexico-based investment adviser Charles Kokesh, who previously was ordered by a judge to pay $2.4 million in penalties plus $34.9 million in disgorgement of illegal profits after the SEC sued him.

Kokesh was sued by the SEC in 2009 for misappropriating investors’ money. His penalties covered conduct within the five-year statute of limitations, but the disgorgement covered conduct that largely occurred outside that time frame. The ruling represented a major victory for Wall Street firms, whose Securities Industry and Financial Markets Association trade group had urged the justices to curb the SEC’s powers.

The Supreme Court agreed to hear a major case on privacy rights in the digital age that will determine whether police officers need warrants to access past cellphone location information kept by wireless carriers, or whether that information is protected by Fourth Amendment rights to be free from unreasonable search and seizure.

The legal fight has raised questions about how much companies protect the privacy rights of their customers. The major wireless carriers receive tens of thousands of requests a year from law enforcement for what is known as “cell site location information”

The justices agreed to hear an appeal brought by a man who was arrested in 2011 as part of an investigation into a string of armed robberies in the Detroit area over the preceding months. Police helped establish that the suspect was near the scene of the crimes by securing cell site location information from his cellphone carrier.

The Supreme Court has twice in recent years ruled on major cases concerning how criminal law applies to new technology, on each occasion ruling against law enforcement. In 2012, the court held that a warrant is required to place a GPS tracking device on a vehicle. Two years later, the court said police need a warrant to search a cellphone that is seized during an arrest.

While the S&P 500 is up 9 percent this year, three of its 11 sectors — energy, telecommunications services and financials — are down by an average of 7.7 percent. The common factor in these 3 sectors is that they were all up big in the fourth quarter, perhaps too much, too fast; and now they have fallen back to earth.

Where has the big money been flowing in this market? It’s been a great year for big tech stocks, and a meager one for the small caps; the Nasdaq 100 index is up 20 percent this year, while the Russell 2000 has risen by less than 3 percent.

Markets worldwide are being propped up by a secret weapon of sorts: robust cash holdings that are at their highest in almost three decades. While stocks globally have benefited from rebounding earnings growth, bonds have also rallied amid declining inflation expectations and uncertainty around the pace of Federal Reserve interest-rate hikes.

Underpinning gains in both asset classes is $5 trillion of capital that is sitting on the sidelines and serving as a reservoir for buying on weakness. This excess cash acts as a backstop for financial assets, both bonds and equities, because any correction is quickly reversed by investors deploying their excess cash to buy the dip.

Goldman Sachs has issued a report looking at where hedge funds are investing and noted that technology is the favorite sector by far of professional investors. Hedge funds and large-cap mutual funds disagree about the prospects of the financial sector, which has been a shining spot of the Trump trade since the presidential election.

Hedge funds particularly love the “FAANG” stocks: Facebook, Apple, Amazon, Netflix and Google parent Alphabet. Last week, Amazon topped $1,000 per share. Today, Alphabet topped $1,000 per share. So, really, it has been easy to see where the big money has been flowing.

Today, Apple dropped about 1%, even as they presented their annual developers’ conference.

Apple unveiled a Siri-powered smart speaker, the HomePod. It runs $349, which is far more expensive than competing products. Apple is a bit late to the party. Amazon launched its Echo, priced at $179. Six months ago, Google introduced the Google Home speaker priced at $109.

They all use voice commands to play music, tell you the weather, read news, and answer questions. Apple ran through all the big improvements it's made to the software that runs on iPhones, iPads, and Macs. And they announced various tweaks to watches, computers, etc., etc., blah, blah.

Sorry, but these Apple conferences just don’t carry to “wow” factor they used to. It really looked like Apple was behind the curve when it comes to AI, and other big things that might get investors excited.

Separately, Foxconn’s CEO said that Apple and Amazon will join in Foxconn’s bid for Toshiba’s chip business. Representatives for Apple and Amazon declined to comment. The Japanese government has said it will block any deal that would risk the transfer of Toshiba’s key chip technology out of the country.

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.

Bear(s)-exit the Markets

Charles Schwab: On the Market

Posted: 6/23/2016 4:15 PM ET

Bear(s)-exit the Markets

U.S. stocks rallied and the European markets finished to the upside, despite the palpable uneasiness as to the outcome of the Brexit vote, with current expectations seemingly leaning toward the U.K. remaining in the EU. Domestic economic news was mixed, as jobless claims fell more than expected and new home sales dropped, while a preliminary read on manufacturing bested expectations. Treasuries were lower, crude oil prices were higher, while gold and the U.S. dollar dipped.

The Dow Jones Industrial Average (DJIA) jumped 230 points (1.3%) to 18,011, the S&P 500 Index rose 28 points (1.3%) to 2,113, and the Nasdaq Composite rallied 77 points (1.6%) to 4,910. In moderate volume, 837 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.98 to $50.11 per barrel and wholesale gasoline was $0.02 higher at $1.61 per gallon, while the Bloomberg gold spot price moved $2.03 lower to $1,266.09 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.2% at 93.52.

Macy's Inc. (M $33) announced that Chief Executive Officer (CEO) Terry Lundgren will transition the position of CEO to Jeff Gennette in 1Q 2017. Lundgren will continue as Executive Chairman of the company and work side-by-side with Gennette as President and CEO. Shares were nicely higher.

Bed Bath & Beyond Inc. (BBBY $44) reported fiscal 1Q earnings-per-share (EPS) of $0.80, six cents below the FactSet estimate, as revenues were roughly flat year-over-year (y/y) at $2.7 billion, compared to the projected $2.8 billion. 1Q same-store sales declined 0.5% y/y, versus the estimated 0.6% gain. BBBY lowered its full-year same-store sales outlook. Shares finished higher.

Red Hat Inc. (RHT $78) posted 1Q EPS ex-items of $0.50, roughly in line with forecasts, as revenues rose 18.0% y/y to $568 million, compared to the projected $563 million. RHT issued 2Q and full-year guidance that missed the Street's expectations. Separately, the company announced a new $1.0 billion stock buyback plan and the acquisition of 3scale with terms not disclosed. RHT was lower. 

Jobless claims fall, new home sales retreat from 8-year high

Weekly initial jobless claims (chart) dropped by 18,000 to 259,000 last week, versus the Bloomberg estimate calling for claims to decrease to 270,000, as the prior week's figure was unrevised at 277,000. The four-week moving average declined by 2,250 to 267,000, while continuing claims decreased by 20,000 to 2,142,000, south of the estimated level of 2,150,000.

New home sales (chart) declined 6.0% month-over-month (m/m) in May to an annual rate of 551,000 after reaching the highest level since February 2008 last month, and compared to forecasts of 560,000. The median home price rose 1.0% y/y to $290,400. The supply of new home inventory increased 14.6% m/m to 4.7 months at the current sales pace as sales fell m/m in the Northeast and West, dipped in the South, and rose solidly in the Midwest. New home sales are based on contract signings instead of closings.

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) declined 0.2% m/m in May, versus the projected 0.1% increase, and compared to April's unrevised 0.6% gain. Support came from the component pertaining to the yield curve, while jobless claims weighed on the index.

The preliminary Markit U.S. Manufacturing PMI Index for June improved to 51.4 from May's 50.7 level, and above the forecasted modest rise to 50.9, with a reading above 50 denoting expansion in activity.

The Kansas City Fed Manufacturing Activity Index for June improved to 2 from May's -5 level, where it was expected to remain, with a reading north of zero depicting expansion.

Treasuries were lower, as the yield on the 2-year note increased 2 basis points (bps) to 0.77%, while the yields on the 10-year note and the 30-year bond gained 5 bps to 1.73% and 2.55%, respectively. For our latest analysis on the bond markets see the video by Schwab's Managing Director of Trading and Derivatives, Randy Frederick, and Fixed Income Director Collin Martin, CFA, titled Is the ECB Driving European Bond Investors Into the US Bond Market?, at www.schwab.com/insights. Follow Randy and Schwab on Twitter: @randyafrederick and @schwabresearch.

Tomorrow's economic calendar will offer the preliminary durable goods orders report, with economists forecasting a 0.6% m/m decline for May, while ex-transportation, orders are expected to inch 0.1% higher. Rounding out the day will be the final University of Michigan Consumer Sentiment Index, anticipated to fall slightly to a level of 94.0.

Europe rallies on optimism, Asia mixed, as Brexit vote arrives

European equities traded nicely higher, with optimism that the U.K. will vote to remain in the EU fueling a fifth-consecutive session of gains. Financials were one of the best performers and the British pound rose versus the U.S. dollar as the U.K. is voting today on whether to remain or leave the EU—known as a Brexit—with results likely being announced early Friday morning. For our latest analysis on the Brexit issue read our article,  Will the UK Stay or Go? Markets Wait for Brexit Vote at www.schwab.com/insights, while Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his article, Brexit: 5 Things Investors Need to Know. Jeff adds that no matter the outcome, the issue of a Brexit may not be put to rest entirely as EU member parliaments must also agree to the changes being proposed. Nevertheless, the British understand the key role trade has always played in their economy. The British may resent bailed-out banks and bureaucrats in Brussels, but we believe economic considerations will favor the U.K. remaining within the EU. Read more at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. In economic news, the preliminary Markit Eurozone Composite PMI Index—a gauge of business activity in the manufacturing and services sectors—declined to 52.8 in June, from 53.1 in May, and compared to expectations of a dip to 53.0. However, a reading above 50 denotes expansion. The euro gained solid ground on the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mixed with volumes on the lighter side as the global markets awaited the results of today's U.K. Brexit vote. Japanese equities rose, with the yen holding steady during the session, while securities traded in Hong Kong posted a fifth-straight session of gains. Meanwhile basic materials stocks weakened to pressure mainland Chinese securities, as the sector was bogged down by reports that the U.S. may raise duties on some steel products. Finally, markets in Australia and India moved higher, but South Korean equities declined.

While all eyes will likely be on the results of the Brexit vote, other items on the international economic calendar for tomorrow include inflation figures from Japan, trade data from China, GDP from France, retail sales from Italy, and the Ifo Business Climate Index from Germany.

Fence-Sitting Ahead of Brexit Vote

Charles Schwab: On the Market

Posted: 6/22/2016 4:15 PM ET

Fence-Sitting Ahead of Brexit Vote

U.S. equities finished lower in cautious, choppy trading, with the shadow of tomorrow's U.K. Brexit vote hovering over the markets. Meanwhile, energy stocks suffered following a bearish Department of Energy report, while earnings reports from FedEx and Adobe, along with guidance from HP, were met with disappointment. Fed Chair Yellen concluded her two-day monetary policy report to Congress, while existing home sales rose to their highest level in more than nine years. Treasuries finished modestly higher, while gold and the U.S. dollar lost ground.

The Dow Jones Industrial Average (DJIA) fell 49 points (0.3%) to 17,781, the S&P 500 Index lost 3 points (0.2%) to 2,085, and the Nasdaq Composite finished 10 points (0.2%) lower at 4,833. In moderate volume, 812 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.72 to $49.13 per barrel and wholesale gasoline was unchanged at $1.59 per gallon, while the Bloomberg gold spot price moved $2.03 lower to $1,266.09 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.3% at 93.74.

FedEx Corp. (FDX $157) reported fiscal 4Q earnings-per-share (EPS) ex-items of $3.30, above the $3.28 FactSet estimate, as revenues grew 7.4% year-over-year (y/y) to $13.0 billion, north of the projected $12.8 billion. FDX issued current year EPS guidance with a midpoint below analysts' expectations. Shares finished lower.

Adobe Systems Inc. (ADBE $94) posted fiscal 2Q profits of $0.71 per share, above the estimated $0.68, with revenues rising 20.0% y/y to $1.4 billion, roughly in line with forecasts. ADBE issued 3Q EPS guidance that came in mostly below the Street's expectations. Shares were solidly lower.

Shares of HP Inc. (HPQ $13) fell after the company reaffirmed its full-year profit outlook, lowered its cash flow target and announced a plan to change the company's printing supplies inventory management strategy. These overshadowed its raised 3Q EPS guidance.

KB Home (KBH $15) announced fiscal 2Q EPS of $0.17, three cents north of forecasts, as revenues grew 30.2% y/y to $811 million, compared to the expected $753 million. KBH traded nicely higher.

Tesla Motors Inc. (TSLA $197) came under solid pressure after the company yesterday offered about $2.8 billion in all stock to acquire SolarCity Corp. (SCTY $22), which closed higher. TSLA's Chief Executive Officer and Founder Elon Musk noted on a conference call that the board opinion is unanimous at both companies, which he is the largest shareholder and chairman of both.

Existing home sales rise roughly in line with forecasts

Existing-home sales in May rose 1.8% month-over-month (m/m) to a 5.53 million annual rate—the highest annual pace since February 2007—compared to the Bloomberg forecast of a 5.55 million pace. April's figure was revised downward to a 5.43 million annual rate. Compared to last year, sales were 4.5% higher and the median existing-home price was up 4.7% at $239,700—an all-time high. Housing supply came in at a 4.7-month pace at the current sales rate. Sales were higher in the Northeast, South and West, while the Midwest fell. Single-family and condominium and co-op sales both rose.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said the primary driver of the increase in sales was homeowners realizing the equity they have accumulated in recent years and finally deciding to trade-up or downsize, though first-time buyers are still struggling. "Barring further deceleration in job growth that could ultimately temper demand from these repeat buyers, sales have the potential to mostly maintain their current pace through the summer," Yun added.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Summer Lovin', higher wages and a continued improving housing market would go a long way toward improving consumer confidence, and that's what we believe we're seeing. A robust consumer would likely aid the more cyclical sectors, such as technology and consumer discretionary, as well as helping the overall U.S. economy. Read more at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

The MBA Mortgage Application Index rose 2.9% last week, after declining 2.4% in the previous week. The increase came as a 6.5% jump for the Refinance Index more than offset a 2.4% decline for the Purchase Index. The average 30-year mortgage rate fell 3 basis points (bps) to 3.76%.

Federal Reserve Chairwoman Janet Yellen concluded her two-day semiannual monetary policy report to Congress, speaking to the House Financial Services Committee shortly after the opening bell. Her prepared remarks did not differ from yesterday's testimony to the Senate, where she noted that the economy has made further progress. "However, the pace of improvement in the labor market appears to have slowed more recently, suggesting that our cautious approach to adjusting monetary policy remains appropriate," she added. Yellen also stressed that the Central Bank believes the recent slowing in employment growth is "transitory" but it is watching the job market carefully. Moreover, she said a U.K. vote to exit the European Union (EU)—known as a Brexit—"could have significant economic repercussions." Yellen concluded by saying the path of the fed funds rate will depend on economic and financial developments. The global markets are paying close attention to the Q&A session that is underway.

Treasuries finished slightly higher, as the yields on the 2-year and 10-year notes, along with the 30-year bond, lost 2 basis points (bps) to 0.75%, 1.68% and 2.49%, respectively. Schwab's Chief Fixed Income Strategist Kathy Jones provides analysis of the global bond markets in her latest article, Global Bonds: A World Without Yield, at www.schwab.com/marketinsight, and she teams up with Schwab's Managing Director of Trading and Derivatives, Randy Frederick, in the video titled Fed on Pause: Watching and Waiting to Raise Rates, for further analysis on the Fed and the bond markets at www.schwab.com/insights. Follow Kathy and Randy on Twitter: @kathyjones and @randyafrederick.

Tomorrow's economic calendar will be the busiest of the week, beginning with weekly initial jobless claims, forecasted to decline to 270,000 from the prior week's 277,000, as well as Markit's preliminary Manufacturing PMI, with economists anticipating activity to move higher into expansionary territory (a reading above 50) for June to a level of 50.9 from May's 50.7. After the opening bell, investors will get a look at new home sales, with forecasts calling for a 9.5% m/m decline for May to an annual rate of 560,000 units, as well as the Leading Index, expected to have gained 0.1% m/m during May, following the 0.6% increase posted in April. Finally, the Kansas City Fed Manufacturing Activity Index will round out the day.

Europe higher, Asia mixed as Brexit vote draws closer

European equities traded mostly higher, as optimism appeared to be holding that the U.K. will vote to remain in the EU, despite recent polls suggesting it remains too close to call. Financials led the markets higher and oil & gas issues contributed modestly to the advance, with crude oil prices flirting with the $50 per barrel mark before some bearish U.S. inventory data. Tomorrow the U.K. will vote on whether to remain or leave the U.K., with results likely being announced early Friday morning. For our latest analysis on the Brexit issue read our article, Will the UK Stay or Go? Markets Wait for Brexit Vote at www.schwab.com/insights, while Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses in his article, Brexit: 5 Things Investors Need to Know. Jeff adds that no matter the outcome, the issue of a Brexit may not be put to rest entirely as EU member parliaments must also agree to the changes being proposed. Nevertheless, the British understand the key role trade has always played in their economy. The British may resent bailed-out banks and bureaucrats in Brussels, but we believe economic considerations will favor the U.K. remaining within the EU. Read more at at www.schwab.com/marketinsight, and be sure to follow Jeff on Twitter: @jeffreykleintop. The euro and British pound gained ground on the U.S. dollar, while bond yields in the region finished mixed, with earnings and economic data on the light side.

Stocks in Asia finished mixed as the global markets grapple with uncertainty ahead of tomorrow's Brexit vote in the U.K., while digesting testimony from U.S. Fed Chair Yellen to Congress, where she offered little new clues about the timing of future rate hikes. Japanese equities declined, after rallying the past three sessions, with the uncertainty toward the U.K. likely fostering some afternoon strength in the yen. Meanwhile, stocks in Australia and India declined, however those traded in South Korea, mainland China and Hong Kong all gained ground.

A host of manufacturing and services PMI readings from across the globe will be released tomorrow, while Japan will also release its Leading Index, and industrial sales will come from Italy.