Dow Continues Rally, Techs Sock Nasdaq

Charles Schwab: On the Market

Posted: 12/4/2017 4:15 PM EST

Dow Continues Rally, Techs Sock Nasdaq

 

The Dow added to its recent surge, with economic optimism getting a boost from another strong read on domestic business spending, while the Senate's passage of its tax reform bill over the weekend added to the enthusiasm. However, sustained weakness in the tech sector continued to weigh on the Nasdaq. Treasury yields and the U.S. dollar were higher ahead of a busy week of economic reports that will culminate with Friday's nonfarm payroll report, while crude oil and gold were lower.

The Dow Jones Industrial Average (DJIA) rose 58 points (0.2%) to 24,290, the S&P 500 Index lost 3 points (0.1%) to 2,639, and the Nasdaq Composite tumbled 72 points (1.1%) to 6,775. In heavy volume, 987 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.89 to $57.47 per barrel and wholesale gasoline declined $0.05 to $1.69 per gallon. Elsewhere, the Bloomberg gold spot price decreased $4.42 to $1,276.20 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 93.23.

CVS Health Corp. (CVS $72) announced an agreement to acquire Aetna Inc. (AET $179) for $207 per share in cash and stock, valued at about $69 billion, excluding debt. Under the terms of the deal, Aetna stockholders will receive $145 in cash and 0.8378 CVS Health shares for each share owned. Shares of both companies were lower.

Italy's Prysmian SpA (PRYMY $16) announced an agreement to acquire Kentucky-based General Cable Corp. (BGC $30) for $30 per share in cash, for a total value of about $3 billion, including the assumption of debt. Shares of BGC rallied over 35%.

Dollar, rates and stocks gain ground on tax reform and continued robust business spending

Treasuries finished lower, as the yield on the 2-year note rose 3 basis points (bps) to 1.80%, while the yields on the 10-year note and the 30-year bond advanced 1 bp to 2.37% and 2.76%, respectively.
Treasury yields and the U.S. dollar moved to the upside and the stock markets added to last week's strong gains, bolstered by the Senate's passing of its tax reform bill over the weekend. Now the reconciliation process looms as the House and Senate have to find some key areas of compromise before a tax reform bill can go to President Donald Trump's desk for a signature.

Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary,Tax Reform Bills Progress, but Many Hurdles Remain, negotiations between the House and Senate will likely be extremely challenging, given the differences between the two approaches. For investors, we still think it is too early to take any drastic action. If and when a tax bill passes, there will be time to review the details and amend your tax and financial plans accordingly. Regardless of the outcome of the tax bill, it’s always a good idea to meet with your tax and financial advisors before the end of the year to review your current financial situation and discuss your plans for the coming year.

Factory orders (chart) dipped 0.1% month-over-month (m/m) in October, better than the Bloomberg expectation of a 0.4% decline, and versus September's upwardly revised 1.7% gain. Stripping out the volatile transportation component, orders rose 0.8% and September's 0.7% gain was revised to a 1.1% increase. October durable goods orders—preliminarily reported last week to have dropped 1.2%—were favorably adjusted to a 0.8% decrease, and compared to forecasts of a revised 1.0% decline. Also, nondefense capital goods orders excluding aircraft, a gauge of business spending, were revised higher to a 0.3% decrease from the initially-reported 0.5% decline.

The highlight of the report was the upward revision to the gauge of business spending, which has risen for four-straight months, with an average month gain of 1.3% for the period. This adds credence to Schwab's Chief Investment Strategist Liz Ann Sonders' view that an even sharper recovery could be in the cards for U.S. business capital spending in 2018, while tax reform—if we get it—would be an additional kicker in her article, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle.

Today's release kicked off a busy economic calendar that will continue tomorrow with a look at the all-important services sector in the form of the ISM non-Manufacturing Index, with economists forecasting a slight decline in the reading for November to a level of 59.0 from October's 60.1, as well as Markit's final Services PMI Index for November, expected to post a reading of 54.7, in line with its preliminary report, but below the 55.3 registered the month prior, while the trade balance will round out the day's docket, with the deficit expected to widen to $47.1 billion during October from September's $43.5 billion.

Europe higher on U.S. tax reform, Brexit negotiations in focus, Asia mixed

The European equity markets rallied, with financials a noticeable gainer along with industrials. Bond yields in the region were mostly higher, while the euro declined versus the U.S. dollar on the weekend's tax reform bill passage by the Senate and upbeat U.S. business spending data, which bolstered global economic optimism. The British pound reversed to the downside on the greenback after the meeting between Prime Minister Theresa May and European Commission President Juncker ended without reaching a deal on an Irish border issue. The meeting was highly expected to produce a deal and likely help Brexit talks end a deadlock. With volatility showing some signs of life last week, in his article, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, tackles the question, Are Stocks too Expensive?, noting that although world stock market valuations are above average, similar valuations have produced double-digit gains over the following 12 months during the past 50 years. Jeff concludes that valuations support a globally diversified portfolio offering the best diversification benefits in 20 years.

Stocks in Asia finished mixed as the markets grapple with the weekend's tax reform bill passing in the U.S. Senate, along with flared-up uncertainty regarding what possible ramifications former U.S. NSA advisor Mike Flynn's guilty plea for lying to the FBI may have for the Trump administration. This news on Friday caused the U.S. stock markets to dip but they held onto solid weekly gains. Stocks in Japan, mainland China and Australia all lost ground, but securities traded in South Korea, Hong Kong and India saw modest gains. Although showing some signs of choppiness, the global stock markets remain nicely higher for the year that has been bolstered by the broadest economic growth in a decade. This is expected to continue in 2018 as discussed by Schwab's Jeffrey Kleintop, CFA, in his article, 5 Reasons Investors Should Give Thanks.

Services PMI readings from across the globe will dominate tomorrow's international economic calendar, with other reports of note to include retail sales from the U.K. and the Eurozone, new home sales from Australia, and industrial production from Spain. In central bank action, the Reserve Bank of Australia will meet, with no change to its benchmark interest rate expected.

Stocks Close Trading Day and Week Higher

Charles Schwab: On the Market

Posted: 11/3/2017 4:15 PM EDT

Stocks Close Trading Day and Week Higher

 

U.S. stocks overcame some early weakness to finish the regular trading session higher as gains were led by the tech sector in the wake of Dow member Apple's earnings results and guidance. Also, services sector growth unexpectedly jumped to a more than 12-year high to overshadow the October labor report, which showed fewer jobs were added than expected and a lack of monthly wage growth. Treasury yields were little changed and the dollar rose. Crude oil prices were higher and gold traded lower. 

The Dow Jones Industrial Average (DJIA) rose 23 points (0.1%) to 23,539, the S&P 500 Index advanced 8 points (0.3%) to 2,588, and the Nasdaq Composite increased 49 points (0.7%) to 6,764. In moderately heavy volume, 813 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.10 to $55.64 per barrel and wholesale gasoline added $0.02 to $1.79 per gallon. Elsewhere, the Bloomberg gold spot price shed $6.04 to $1,270.09 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 94.92. Markets were higher for the week, as the DJIA increased 0.5%, the S&P 500 Index gained 0.3% and the Nasdaq Composite advanced 0.9%.

Dow member Apple Inc. (AAPL $173) reported fiscal Q4 earnings-per-share (EPS) of $2.07, above the $1.87 FactSet estimate, as revenues grew 12.0% year-over-year (y/y) to $52.6 billion, exceeding the forecasted $50.7 billion. The company said it had record Q4 revenue with y/y growth for all its product categories and its best quarter ever for services. AAPL issued Q1 revenue guidance with a midpoint that was just ahead of expectations as it is "looking forward to a great holiday season," with its new products including iPhone 8, Apple Watch Series 3, and Apple TV 4K, along with the launch of iPhone X. Shares traded nicely higher.

Apple's earnings results were the latest from the heavyweights in the tech sector to exceed estimates, and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers timely analysis of our outperform rating we have held for some time on the group in his latest, Schwab Sector Views: Technology Trick or Treat?. Brad notes that the technology sector’s strong run could continue, but risks for the sector have risen and investors should be careful not to get overly concentrated.

Starbucks Corp. (SBUX $56) posted fiscal Q4 EPS of $0.54, or $0.55 ex-items, compared to the projected $0.55, with revenues little changed y/y at $5.7 billion, below the expected $5.8 billion. Global same-store sales increased 2.0% y/y, missing the forecast calling for 3.3% growth. SBUX issued 2018 earnings guidance that came in below estimates. Separately, the company raised its quarterly dividend by 20% to $0.30 per share. Shares rose.

Pandora Media Inc. (P $5) announced a Q3 loss of $0.34 per share, or a $0.06 per share shortfall ex-items, versus the projected loss of $0.08 per share, as revenues rose 8.0% y/y to $379 million, south of the expected $380 million. The music streaming service company's advertising revenues were softer than expected and its users shrank solidly y/y. As such, P issued Q4 guidance that missed estimates and shares fell.

October labor report misses, services sector growth hits rare territory

Nonfarm payrolls (chart) rose by 261,000 jobs month-over-month (m/m) in October, compared to the Bloomberg forecast of an 313,000 increase. The decline of 33,000 seen in September was revised to a gain of 18,000 jobs. The total upward revision to the job gains in September and August was 90,000. Excluding government hiring and firing, private sector payrolls increased by 252,000, versus the forecasted gain of 302,000, after rising by 15,000 in September, revised from the 40,000 decrease that was initially reported. The report likely continued to reflect noise from the hurricanes, but employment at food services and drinking places recovered from September's drop, while employment rose in professional and business services, manufacturing and healthcare.

The unemployment rate dipped to 4.1% from 4.2%, where it was forecasted to remain, while average hourly earnings were flat m/m, below projections of a 0.2% increase and versus September's unrevised 0.5% increase. Y/Y, wage gains were 2.4%, versus estimates of a 2.7% increase and September's downwardly revised 2.8% rise. Finally, average weekly hours remained at September's unrevised 34.4 rate, matching forecasts.

Despite the disappointing wage growth figure, December Fed rate hike expectations remain elevated as this week's monetary policy decision reinforced the likelihood of an increase next month as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her article, Fed Stands Pat in November; Gets Ready to Go in December. Liz Ann also notes that we expect two-to-three rate hikes in 2018, and the market's expectations may have to rise to meet the Fed's, representing a shift.
The trade balance (chart) showed that the deficit came in at $43.5 billion in September, compared to estimates of $43.2 billion. August's deficit was upwardly revised to $42.8 billion. Exports rose 1.1% m/m to $196.8 billion, while imports increased by 1.2% to $240.3 billion.

Factory orders (chart) rose 1.4% m/m in September, above expectations to match August's unrevised gain. Stripping out the volatile transportation component, orders advanced 0.7% and August's 0.4% rise was revised to a 0.6% gain. September durable goods orders—preliminarily reported last week to have grown 2.2%—were downwardly revised to a 2.0% increase, matching forecasts. Also, nondefense capital goods orders excluding aircraft, a gauge of business spending, were revised up to a 1.7% gain from the initially-reported 1.3% increase, posting the third-straight monthly rise of over 1.0%.

The October Institute for Supply Management (ISM) non-Manufacturing Index (chart) unexpectedly jumped to a level above 60 for only the fourth time in its history and the highest level since August 2005. The Index rose to 60.1from September's unrevised 59.8 level, and compared to forecasts of a decline to 58.5. A reading above 50 denotes expansion. New orders dipped m/m to 62.8, business activity rose to 62.2, and employment improved to 57.5. Prices fell but remained elevated at 62.7. Non-manufacturing activity accounts for a large majority of U.S. economic output and the ISM said respondents' comments continue to indicate a positive outlook for business conditions, and the economy as we begin the fourth quarter.

The final Markit U.S. Services PMI Index was revised to 55.3 in October from the preliminary 55.9 level, where it was expected to remain, and matching September's level. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

Treasuries were little changed, with the yield on the 2-year flat at 1.61%, while the yields on the 10-year note and the 30-year bond declined 1 basis point to 2.33% and 2.81%, respectively.
Treasury yields and the U.S. dollar were relatively quiet as the markets grappled with data that bolstered the continued favorable global economic landscape, along with President Donald Trump's pick of Fed Governor Jay Powell as the next Fed Chairman. Also, tax reform uncertainty lingered in the wake of Thursday's release of the House's bill.

Schwab's Chief Fixed Income Strategist Kathy Jones and Vice President of Trading and Derivatives, Randy Frederick discuss in the video, Should a Change in Fed Leadership Matter to Investors?, while Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest commentary, House Tax Reform Bill: What Investors Need to Know.

Europe mixed and Asia mostly higher to close out the week 

European equity markets finished mixed, with technology issues getting a slight boost from Apple's favorable earnings report, while the markets digested the mixed U.S. nonfarm payroll report, which was countered by the jump in services sector activity. Yesterday's pick of a new Fed Chief by President Trump and the House's tax reform bill in the U.S. fostered some uncertainty. The British pound rebounded modestly from yesterday's drop that came courtesy of the Bank of England's rate hike that was accompanied by a dovish outlook for future increases. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of the changed global monetary policy landscape in his article, How the Shift by Central Banks May Affect the Stock Market. In economic news, Markit's U.K. business activity report for October showed growth in output unexpectedly jumped. The euro was down and bond yields in the region lost ground. Spanish stocks fell amid festering political tensions.

Stocks in Asia finished mostly to the upside as the markets grappled with Thursday's pick of a new Fed Chief by President Trump and details of the House's tax reform bill in the U.S. Technology issues got a boost from Apple's stronger-than-expected earnings and outlook. However, volume was lighter than usual as markets in Japan were closed for a holiday. Mainland Chinese shares declined and stocks trading in Hong Kong rose following Markit's services sector output report that showed growth accelerated in October, while concerns about regulatory crackdowns by the government and the recent selloff in the bond markets festered. Australian securities gained ground with mining issues seeing strength, while Indian listings advanced. South Korean stocks traded to the upside. Schwab's Liz Ann Sonders and Randy Frederick discuss the recent global market rally in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?.

Stocks tilt toward the upside amid data and lingering uncertainties

The S&P 500 Index finished largely flat but skewed to the upside, and the Dow and Nasdaq posted their eighth-straight weekly gains, as earnings and economic data remained robust and mostly painted an upbeat picture. Personal spending, productivity, Consumer Confidence, and the ISM Manufacturing Index all showed solid growth leading into Friday's host of data. Earnings season rolled down the home stretch and remained on track to top expectations, with 67% of the 405 companies in the S&P 500 that have reported exceeding revenue forecasts and 77% besting earnings estimates, per data compiled by Bloomberg. However, momentum for stocks was likely stunted by lingering fiscal and monetary policy uncertainties. Along with the Fed's monetary policy decision that preserved December rate hike expectations, and a rate increase by the Bank of England, President Trump announced his pick for the next head of the Central Bank and the House's tax reform bill was highly scrutinized. Technology issues extended their rally as upside earnings surprises continued, headlined by Apple, while energy stocks led to the upside as crude oil prices extended a weekly string of gains. The telecom sector was the worst performer as earnings results have lagged to exacerbate ongoing concerns toward the group. Healthcare stocks also saw pressure in the wake of mixed results from Dow member Pfizer Inc. (PFE $35) and Aetna Inc. (AET $171), along with the heightened political trepidations. Amid the flood of events and data, the Treasury yield curve flattened and the U.S. dollar was little changed.

Next week, earnings season will continue to downshift and the economic calendar will be relatively light, with the JOLTS Job Openings report and the preliminary November University of Michigan Consumer Sentiment Index headlining the docket. However, fiscal and monetary policy grappling is poised to continue and possibly add some volatility for the markets.

As noted in the latest Schwab Market Perspective: Stocks Aren't so Spooky, global and domestic economic growth, along with a solid earnings picture and a potential tax reform tailwind, suggest investors should remain at their target equity allocations. Pullbacks are possible but a recession doesn’t appear to be in the cards in the near term, which historically has meant the risk of a pullback turning into a bear market is low.

International reports due out next week that deserve a mention include: Australia—Reserve Bank of Australia monetary policy decision. China—trade balance, CPI and PPI. India—industrial production. Japan—machine orders and trade balance. Eurozone—Markit's business activity reports, investor confidence and retail sales, along with German factory orders and trade balance. U.K.—industrial and manufacturing production, Markit's business activity reports and trade balance.

Stocks Continue Recent Record Run

Charles Schwab: On the Market

Posted: 10/5/2017 4:15 PM EDT

Stocks Continue Recent Record Run

 

Adding to recent record highs, U.S. stocks showed resiliency amid lingering geopolitical and monetary policy uncertainty, buoyed by upbeat reads on domestic business spending and jobless claims, while the trade balance narrowed more than expected. Tomorrow, the key nonfarm payroll report for September will be in focus. Treasury yields, crude oil prices and the U.S. dollar were higher and gold experienced a minor decline. In equity news, Constellation Brands topped Q2 earnings expectations, Bloomberg reported that Amazon is testing its own delivery service and Netflix announced it will raise prices for its popular services.

The Dow Jones Industrial Average (DJIA) increased 114 points (0.5%) to 22,775, the S&P 500 Index advanced 14 points (0.6%) to 2,552, and the Nasdaq Composite rallied 51 points (0.8%) to 6,585. In moderate volume, 746 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.81 to $50.79 per barrel and wholesale gasoline was $0.03 higher at $1.61 per gallon. Elsewhere, the Bloomberg gold spot price dipped $6.37 to $1,268.48 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 93.96.

Constellation Brands Inc. (STZ $209) reported fiscal Q2 earnings-per-share (EPS) of $2.48, or $2.47 ex-items, versus the $2.17 FactSet estimate, as revenues rose 3.1% year-over-year (y/y) to $2.1 billion, roughly in line with expectations. The company's beer shipments rose solidly y/y, while its wine and spirits shipments declined. STZ raised its full-year EPS outlook. Shares traded nicely higher.

United Parcel Service Inc. (UPS $118) saw pressure and FedEx Corp. (FDX $222) dipped in early action before finishing flat, on a Bloomberg report that Amazon.com Inc. (AMZN $981) is testing its own delivery service to rival these companies, according to people familiar with the matter. AMZN and FDX did not comment on the report. A spokesman from UPS told Bloomberg that Amazon is a valued customer and it supports all its customers with industry-leading e-commerce solutions and expect to expand these relationships further in the future.

Netflix Inc. (NFLX $194) rallied after announcing that it will raise prices for its most popular service by 10% as it adds more exclusive TV shows and movies.

Jobless claims decline, trade balance shrinks, factory orders rise

Weekly initial jobless claims (chart) decreased by 12,000 to 260,000 last week, below the Bloomberg forecast of a decline to 265,000, with the prior week’s figure being unrevised at 272,000. The four-week moving average fell by 9,500 to 268,250, while continuing claims rose 2,000 to 1,938,000, south of estimates of 1,950,000.

The trade balance (chart) showed that the deficit came in at $42.4 billion in August, compared to estimates of $42.7 billion. July's deficit was downwardly revised to $43.6 billion. Exports gained 0.4% month-over-month (m/m) to $195.3 billion, while imports dipped by 0.1% to $237.7 billion.

Factory orders (chart) rose 1.2% m/m in August, above expectations of a 1.0% gain, while July's figure was unrevised at a 3.3% drop. Stripping out the volatile transportation component, orders advanced 0.4% and July's 0.5% rise was unrevised. August durable goods orders—preliminarily reported last week—were positively revised to a 2.0% increase versus forecasts of an unadjusted 1.7% rise. Also, nondefense capital goods orders excluding aircraft, a gauge of business spending, were revised higher to a 1.1% gain from the initially-reported 0.9% increase, posting the second-straight monthly gain of over 1.0%.

Treasuries were lower, with the yields on the 2-year and 10-year notes, as well as the 30-year bond rising 2 basis points (bps) to 1.49%, 2.35% and 2.89%, respectively.

Treasury yields and the U.S. dollar have rebounded noticeably in the past month, with the 10-year rate off of levels not seen since November 2016 and the greenback from multi-year lows. Expectations have jumped that the Fed will announce another rate hike in December as signs of an uptick in inflation joined a positive global economic background, while the Central Bank is set begin to shrink its behemoth balance sheet this month. Also, the recently released tax reform framework appeared to foster some fiscal policy optimism but faces a long road that began with today's House approval of its budget resolution.

However, the stock markets continue to grind out record highs and amid this backdrop, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's article, Tax Reform Framework Released, But The Road Ahead Is Long. Also, Schwab's Chief Investment Strategist Liz Ann Sonders offers her article on the stock market resiliency in the face of a plethora of things to worry about titled, Comfortably Numb? An Update on Investor Sentiment. Read these articles and other timely commentary from our Schwab experts on the Market Commentary page at www.schwab.com. Follow Schwab and Liz Ann on Twitter: @schwabresearch and @lizannsonders.

This bring us to tomorrow's September nonfarm payroll report, expected to show jobs grew by 80,000, after August's 156,000 gain, while private sector job growth is projected at 72,000 on the heels of the prior month's 165,000 increase (economic calendar). The unemployment rate is expected to remain at 4.4%. The noticeable decline in job growth figures to below the 176,000 monthly average thus far this year is likely to be discounted by the expected impact of last month's hurricanes. However, the wage component of the release is likely to remain a key focus giving the uncertain inflation backdrop. Average hourly earnings are expected to rise 0.3% m/m, after August's 0.1% increase, and remain at a 2.5% y/y growth rate.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, analyzes the relationship between inflation and unemployment in his article, Inflation May Be The Biggest Question For Investors In 2018, on the Market Commentary page at www.schwab.com. Jeff notes that global labor markets may now be at a point where wages may finally rise more rapidly and if central banks move too aggressively in anticipation of a tightening global labor market reviving inflation, the impact of their actions on financial conditions could undermine the bull market in stocks. Follow Jeff on Twitter: @jeffreykleintop.

Wholesale inventories and consumer credit are other reports due out tomorrow.
Europe mostly higher, Asia little changed

European equity markets finished mostly to the upside, shrugging off a plethora of remaining uncertainties, with Spanish stocks rebounding noticeably after a bout of volatility as Catalonia's fight for independence fostered political uncertainty after its weekend secession vote was deemed illegal. Also, the euro and British pound lost ground on the U.S. dollar to help the markets, with the U.S. dollar extending a rebound on some upbeat economic data. Bond yields in the region finished mixed. In economic news, growth in German retail and construction sectors decelerated, while U.K. new car registrations fell. The minutes from the European Central Bank's (ECB) monetary policy meeting last month showed the central bank sees any reassessment of the monetary policy stance as needing to proceed in a very gradual and cautious manner, while maintaining sufficient flexibility.

U.K. Brexit and political uncertainty continued to linger, exacerbated by yesterday's mishaps at a speech by Prime Minister Theresa May. For analysis of political and Brexit uncertainties, see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Political Risk: How Should Investors Respond?, and our article,Political Risk: How Should Investors Respond?, and our article, Brexit Begins: What's Next for the U.K?, on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick. Uncertainty regarding who will be the Fed Chief in the U.S. festers in the wake of the ECB and Bank of England signaling last month moves to tighten monetary policy. As such, Schwab's Jeffrey Kleintop, CFA, offers analysis in his article, How the Shift by Central Banks May Affect the Stock Market, on the Market Commentary page at www.schwab.com.

Stocks in Asia finished near the unchanged mark but tilted to the downside despite another round of record highs in the U.S., with Japanese stocks pausing at levels not seen in more than two years, while Indian shares snapped a four-session winning streak and Australian markets were hamstrung after an unexpected drop in August retail sales. However, volume remained lighter than usual, with markets in mainland China, Hong Kong and South Korea all closed for holidays. Schwab's Jeffrey Kleintop, CFA, and Randy Frederick offer a look at global investing in the video, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page at www.schwab.com.

Tomorrow, the international economic docket will include labor cash earnings and the Leading Index from Japan, factory orders from Germany and house prices and unit labor costs from the U.K.

North Korea Tensions Rattle Markets

Charles Schwab: On the Market

Posted: 9/5/2017 4:15 PM ET

North Korea Tensions Rattle Markets

U.S. equities began the holiday-shortened week solidly lower, as risk appetites were severely limited following this weekend's claim that North Korea detonated a hydrogen bomb and reports that it may be preparing another ICBM launch. Treasury yields fell sharply on the uneasiness and the U.S. dollar lost ground, while gold rose and crude oil prices were mixed.

The Dow Jones Industrial Average (DJIA) tumbled 234 points (1.1%) to 21,753, the S&P 500 Index lost 19 points (0.8%) to 2,457, and the Nasdaq Composite declined 60 points (0.9%) to 6,376 In moderately heavy volume, 909 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.37 to $48.66 per barrel and wholesale gasoline lost $0.05 to $1.70 per gallon. Elsewhere, the Bloomberg gold spot price was $8.10 higher at $1,341.97 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.5% to 92.21.

Dow member United Technologies Corp. (UTX $111) announced an agreement to acquire Rockwell Collins Inc. (COL $131) for $140.00 per share in cash and UTX stock, for a total equity value of about $23.0 billion. Under the terms of the deal, each COL shareowner will receive $93.33 per share in cash and $46.67 in shares of UTX. United Technologies said the deal is expected to be accretive to its earnings after the first full year following closing. UTX finished lower and COL ticked higher as the stock had jumped recently on speculation of the deal.

Insmed Inc. (INSM $27) surged nearly 120% after the company announced positive results from a late-stage trial of its treatment for certain lung diseases and that it intends to seek accelerated approval and request a priority review.

Factory orders mixed to kick off the week

Factory orders (chart) fell 3.3% month-over-month (m/m) in July, matching the Bloomberg expectation, while June's figure was positively revised to a 3.2% increase. However, stripping out the volatile transportation component, orders rose 0.5% and June's 0.2% decline was upwardly revised to a 0.1% gain. July durable goods orders—preliminarily reported two weeks ago—were unrevised at a 6.8% drop versus forecasts of an adjustment to a 2.9% decrease. Nondefense aircraft and parts fell sharply after June's surge, while electrical equipment, along with computers and electronic products, rose solidly.

Today's report kicked off the holiday shortened week that will bring a flood of key reports for the markets to digest, including the July trade balance, August ISM non-Manufacturing and Markit Services PMI Indexes, the Fed's Beige Book, and final Q2 productivity and labor costs. Also, the international calendar will bring a plethora of trade reports, and monetary policy decision from the European Central Bank (ECB).

Today's report kicked off the shortened week's economic calendar that will culminate with tomorrow's releases of MBA mortgage applications, the trade balance and the Fed's Beige Book, a summary of business activity across the nation used as a tool to prepare for this month's two-day monetary policy meeting ending on the 20th. However, the headlining data could be the August ISM non-Manufacturing and final Markit's Services PMI Indexes, on the heels of today's upbeat services sector reports in China and eurozone. ISM's report is projected to improve to 55.5 from 53.9 in July and Markit's release is forecasted to be unrevised at the preliminary level of 56.9, and up from July's 54.7 figure. Readings above 50 for both reports denote expansion.

As noted in the latest Schwab Market Perspective: A Preview of Coming Attractions?, limited risk of an economic recession keeps us in the bull market camp, notwithstanding near-term risks of fiscal and monetary uncertainties. Read more on the Markets & Economy page at www.schwab.com.

Treasuries rallied, as the yield on the 2-year note decreased 6 basis points to 1.29%, the yield on the 10-year note fell 10 bps to 2.07%, and the 30-year bond rate was 9 bps lower at 2.69%. Risk aversion flared back up in the wake of claims that North Korea detonated a hydrogen bomb over the weekend, weighing on Treasury yields and the U.S. dollar. This continues to accompany lingering global monetary policy, trade and U.S. political uncertainties.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her article, What's the Bigger Risk: Bond Market Bubble or Complacency?, we think bond yields are likely to rise from current levels as the economy continues to improve and the Federal Reserve tightens policy, but we don’t see a bubble in the market. We suggest managing the duration in your bond portfolio to mitigate the risk of rising rates. We also suggest managing your exposure to the higher risk parts of the fixed income markets where yields are low and the risk premium offered versus Treasuries is low. Read more on the Fixed Income page at www.schwab.com, and for analysis of investing styles, see Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Radioactive II: Could the Tide Finally Be Turning for Active vs. Passive?, on the Markets & Economy page. Follow Kathy and Liz Ann on Twitter: @kathyjones and @lizannsonders.

For our latest analysis of the political front, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's newest article, Congress Returns to Face Debt Ceiling, Government Shutdown Deadlines, on the Insights & Ideas page at www.schwab.com.

Europe declines, Asia mixed amid festering geopolitical concerns 

European equity markets finished mostly lower, with the euro and British pound gaining ground on the U.S. dollar, while the global markets remained skittish as tensions with North Korea continued to fester. Amid this backdrop, Schwab's Chief Investment Strategist Liz Ann Sonders offers her article, Twist and Shout: United States Takes on North Korea … Implications for Stocks on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders. Bond yields in the region lost ground, even as China posted favorable services sector data and a report from Markit showed eurozone manufacturing and services sectors continued to expand for August. This comes ahead of this week's monetary policy decision by the ECB. However, a separate report showed eurozone retail sales declined in July. Bucking the trend, Swiss markets ticked higher as today's subdued consumer price inflation data followed yesterday's disappointing Q2 GDP report to appear to ease concerns about the Swiss National Bank normalizing monetary policy. Also, German markets moved higher with automakers getting a boost from positive comments about diesel technology from Chancellor Merkel and yesterday's solid gain in August car registrations, while the aforementioned Markit report showed the nation's business activity grew more than expected.

For a look at global stock investing, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished mixed as sentiment remained cautious after this weekend's claim that North Korea detonated a hydrogen bomb, while the markets digested a report that showed growth in China's key services sector activity accelerated. Japanese equities fell, with the yen extending gains, while those traded in South Korea gave up early gains and dipped, with media reports suggesting North Korea is preparing another intercontinental ballistic missile (ICBM) test. Schwab's Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans. Read more on the International Investing page at www.schwab.com, as well as his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks. Markets in Australia ticked higher, with the Reserve Bank of Australia holding its monetary policy stance steady as expected. Stocks in mainland China and Hong Kong were little changed after the Caixin PMI Services Index increased to 52.7 for August, from 51.5 in July, with a reading above 50 denoting expansion. Finally, Indian equities advanced modestly.

For tomorrow, the international economic calendar will offer GDP from Australia, manufacturing orders from Germany, and retail sales from Italy.

Dow Deviates to Deliver Divergent Close

Charles Schwab: On the Market

Posted: 8/3/2017 4:15 PM ET

Dow Deviates to Deliver Divergent Close

U.S. stocks were mixed with the Dow ticking slightly higher, adding to its recent record-run, while the earnings front delivered another divergent dose of results. Earnings news was highlighted by Tesla's quarterly marks, while Teva Pharmaceuticals missed analyst expectations, reduced its forward guidance and slashed its quarterly dividend. Treasury yields were lower following much slower-than-expected growth in key U.S. services sector activity. The U.S. dollar was nearly unchanged, crude oil prices were lower and gold saw minor gains.

The Dow Jones Industrial Average (DJIA) gained 10 points (0.1%) to 22,026, the S&P 500 Index dipped 5 points (0.2%) to 2,472, and the Nasdaq Composite was 22 points (0.4%) lower at 6,340. In moderate volume, 834 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.56 to $49.03 per barrel and wholesale gasoline was $0.01 lower at $1.63 per gallon. Elsewhere, the Bloomberg gold spot price ticked $1.40 higher to $1,268.05 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 92.75.

Tesla Inc. (TSLA $347) reported a Q2 loss of $2.04 per share, or a loss of $1.33 ex-items, compared to the $1.88 per share shortfall forecasted by FactSet, as revenues grew 3.5% quarter-over-quarter (q/q) to $2.8 billion, and more than double year-over-year (y/y), above the projected $2.5 billion. The company said its Model 3 production is on track to achieve previously announced targets and it expects Model S and Model X deliveries to increase in the second-half of the year versus the first half. Shares rallied.

Aetna Inc. (AET $159) announced Q2 earnings-per-share (EPS) of $3.60, or $3.42 ex-items, versus the estimated $2.37, with revenues declining 2.5% y/y to $15.5 billion, topping the expected $15.2 billion. AET raised its full-year earnings outlook and traded higher.

Yum Brands Inc. (YUM $75) achieved Q2 profits of $0.58 per share, or $0.68 ex-items, compared to the expected $0.61, as revenues declined 3.0% y/y to $1.5 billion, above the forecasted $1.4 billion. Q2 same stores sales rose 2.0% y/y, just above the projected 1.8% gain. Same-store sales at KFC and Pizza Hut both came in slightly above estimates, while its growth in sales at Taco Bell trailed expectations. YUM maintained its full-year guidance. YUM closed lower.

Kellogg Co. (K $70) reported Q2 EPS of $0.80, or $0.97 ex-items, versus the projected $0.92, as revenues declined 2.5% y/y to $3.2 billion, roughly in line with forecasts. K reaffirmed its full-year guidance. Shares finished higher.

Teva Pharmaceuticals Industries Ltd. (TEVA $24) reported a Q2 loss of $5.94 per share, or EPS of $1.02 ex-items, compared to the expected $1.06 per share profit. Revenues rose 13.0% y/y to $5.7 billion, mostly in line with forecasts, primarily due to the inclusion of the Actavis generics business. The company noted lower-than-expected performance of its U.S. generics business and the continued deterioration in Venezuela. TEVA cut its full-year guidance and slashed its quarterly dividend by 75.0% to $0.085 per share. Shares tumbled.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Big Time: An Update on Our U.S. Large Cap Bias, that most secular trends point to large cap outperformance; but there are risks to the story. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Services sector activity growth slows more than expected

The July Institute for Supply Management (ISM) non-Manufacturing Index (chart) declined to 53.9—the lowest since August 2016—from June's unrevised 57.4 level, and compared to the Bloomberg forecast of a dip to 56.9. A reading above 50 denotes expansion. New orders fell 5.4 points month-over-month (m/m) to 55.1, business activity dropped 4.9 points to 55.9, and employment declined 2.2 points to 53.6. Prices rose 3.6 points to 55.7. The ISM said the majority of comments from respondents were mostly positive about business conditions and the state of the economy.

The report suggests optimism may be getting somewhat tempered by the dysfunction in Washington, mixed economic data, and global monetary policy uncertainty. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her 2017 Mid-year US Equity Outlook: Rattle and Hum, the hope around policy did have a positive impact on "soft" economic data, which are survey- and confidence-based measures—they surged post-election but have recently been in retreat. She continues to believe the spread between the soft and hard (actual) economic data will narrow with the soft data continuing to catch down to the hard data, until we get more clarity on pro-growth policies' timing, especially tax reform.

With inflation being an area fostering uncertainty regarding whether the Fed has one more rate hike in it this year, today's ISM report and its manufacturing complement on Tuesday showed growth in prices accelerated, with the latter jumping above 60. This sets up the wage component of tomorrow's key July nonfarm payroll report to likely take center stage again. Compared to June, wages are projected to rise 0.3% after growing 0.2% in the previous report, and be up 2.4% y/y, down from the prior month's 2.5% pace. Job growth is expected to remain steady at 180,000 and the unemployment rate is forecasted to dip from 4.4% back to May's 4.3% rate, which was a 16-year low.

Liz Ann notes in her analysis of the most recent Fed decision, Fed Keeps it on the QT, that the Central Bank pointed to a September start point to balance sheet shrinkage, or quantitative tightening (QT), and we do believe another rate hike later in the year is in the cards. However, next up is the Jackson Hole annual conference, at which Fed Chief Yellen will speak, which could provide an opportunity to further steer the consensus around QT's timing. There is a September timing risk however, given that we could be in the midst of a debt ceiling stand-off, so stay tuned.

Read these articles on the Markets & Economy page at www.schwab.com and for a look at Washington, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's article, Health Care Reform: What Investors Should Know, on the Insights & Ideas page at www.schwab.com. Follow us and Liz Ann on Twitter: @schwabresearch and @lizannsonders.

The final Markit U.S. Services PMI Index was revised to 54.7 in July from the preliminary 54.2 level, which matched June's figures and was expected to remain. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

Weekly initial jobless claims (chart) declined by 5,000 to 240,000 last week, below forecasts of 243,000, with the prior week’s figure being revised higher by 1,000 to 245,000. The four-week moving average decreased by 2,500 to 241,750, while continuing claims rose 3,000 to 1,968,000, north of estimates of 1,958,000.

Factory orders (chart) grew 3.0% m/m in June, matching expectations, while May's figure was positively revised to a 0.3% decrease. June durable goods orders—preliminarily reported last week—were revised to a 6.4% gain from the preliminarily-reported 6.5% increase.

Treasuries were higher, with the yield on the 2-year note declining 2 basis points (bps) to 1.34%, while the yield on the 10-year note dropped 5 bps to 2.22% and the 30-year bond fell 6 bps to 2.80%.

Treasury yields have seen some renewed pressure after a brief rebound, while the U.S. Dollar Index remains near lows not seen since May 2016. Schwab's Chief Fixed Income Strategist Kathy Jones offers a look at the bond markets and the greenback in her articles, Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' on the Fixed Income page at www.schwab.com, and, Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.

Tomorrow's domestic docket will also yield the latest trade balance report, with the deficit forecasted to have narrowed to $44.5 billion in June from the $46.5 billion shortfall in May.

Europe mixed as markets digest data, Asia lower as uncertainties remain

European equities finished mixed, with the markets digesting ramped up earnings season, while the British pound lost solid ground on the U.S. dollar after the Bank of England left its monetary policy stance unchanged and cut its economic growth forecast due to the impact of the looming Brexit. For more see our article, Brexit Begins: What's Next for the U.K? on the Insights & Ideas page at www.schwab.com. In economic news, Markit's Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—slowed due to slight softness in Germany but continued to show expansion in July aided by stronger-than-expected services growth in France. Eurozone retail sales unexpected rose in June. The euro nudged higher versus the greenback and bond yields in the region were mostly lower. The energy sector dipped despite the continued run in crude oil prices during the session. For analysis of the global markets, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, An important benefit to global investors is back after 20 years on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished lower with the global markets grappling with mostly upbeat earnings reports, mixed economic data, and monetary policy uncertainty, while political and geopolitical concerns linger. Japanese equities declined, even as the yen gave back yesterday's gains, while a report showed the nation's services sector activity growth slowed last month. Weakness in basic materials continued to weigh on Australian stocks as the country's trade surplus narrowed more than expected in June. Shares trading in mainland China and Hong Kong retreated from a recent run. Indian stocks fell despite late-yesterday's decision by the Reserve Bank of India to cut rates, and South Korean securities pulled back after recently touching all-time highs in the wake of yesterday's tax reform plan that included tax hikes on corporations and individuals. Schwab's Jeffrey Kleintop CFA, offers his article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com, where you can also find his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks.

A relatively light international economic calendar will offer reports on labor cash earnings from Japan, retail sales from Australia and Italy and factory orders from Germany. In central bank action, the Reserve Bank of Australia will deliver a statement on its monetary policy.

Financial Review

Welcome Back

Sinclair Noe — July 5, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW – 1 = 21,478
SPX + 3 = 2432
NAS + 40 = 6150
RUT – 6 = 1420
10 Y – .01 = 2.33%
OIL – 1.46 = 45.61
GOLD + 3.50 = 1227.70
BITCOIN – 0.36% = 2619.68 USD
ETHEREUM – 2.87% = 266.25

Welcome back. A holiday shortened trading week kicked off today with FOMC minutes and will finish with a G20 meeting and the jobs report on Friday. Today, the Fed released minutes of its Federal Open Market Committee meeting from June 13-14.

We know the Fed raised its fed funds target rate for a second time this year to a range of 1 percent to 1.25 percent, while describing monetary policy as “accommodative” in their statement. They reiterated their support for continued gradual rate increases. Beyond that, the Fed was divided on the timing of when to begin shrinking its massive balance sheet.

Fed officials updated their balance-sheet policy in the gathering, laying out a path of gradual reductions with caps. The central bank wants to start winding down the $4.5 trillion bond portfolio without roiling longer-term interest rates, while gradually raising the policy rate. The minutes indicated that the committee wants to begin the balance-sheet process this year, maybe within a couple of months – without naming an exact date.

The Fed said in June it would runoff maturing principal payments on Treasuries initially at $6 billion per month, increasing by $6 billion every three months over 12 months, until it reaches $30 billion. For agency and mortgage-backed securities debt, the cap starts at $4 billion, and rises by $4 billion every three months until it hits a $20 billion a month.

The minutes said, “several participants endorsed a policy approach” where the labor market would undershoot their estimate of full employment “for a sustained period.” Meanwhile, several other participants “expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation.”

Financial conditions were also debated at the meeting, with some participants arguing that “increased risk tolerance” among investors could be lifting asset prices. A few others expressed concern that “subdued market volatility” could lead to financial stability risks.

The minutes showed Washington political gridlock is also starting to creep into the outlook of the Fed’s business contacts. “Some large firms indicated that they had curtailed their capital spending, in part because of uncertainty about changes in fiscal and other government policies.”

Factory orders sank 0.8% in May following a smaller decline in April. Factory orders were up 4.8 percent from a year ago. Activity is slowing against the backdrop of a moderation in oil prices and declining motor vehicle sales. Motor vehicle manufacturers reported on Monday that auto sales fell in June for a fourth straight month, leading to a further increase in inventories, which could weigh on vehicle production.

Nationally, home prices rose 6.6% compared to a year ago, according to a home price index from data provider CoreLogic. Prices rose 1.2% from April to May. Arizona posted 6.1% price growth over the past year, and 0.8% from April to May. The cost of rent is growing much faster than inflation – and wages.

Overall single-family rents rose 3.1% for the year in May, while rental costs in the affordable single-family rental segment of the market, which includes properties with rents less than 75% of the regional median, grew 4.7%. Wages rose 2.5% in May compared to a year ago.

Two weeks ago, crude oil slipped into a bear market, then it rallied. Today, oil prices fell sharply, ending the longest winning streak this year, as Russia was said to oppose any proposal to deepen OPEC-led production cuts. They will stick with current production limits but they won’t go for additional output cuts.

After the close, the American Petroleum Institute reported Wednesday a much larger-than-expected drop of 5.8 million barrels in U.S. crude supplies for the week ended June 30. Supply data from the Energy Information Administration will be released Thursday morning.

The death of the internal combustion engine might be just down the road. Volvo will become the first major car manufacturer to go all electric, with the Swedish company saying that every new car in its range will have an electric power train available from 2019.

The company said the announcement marks “the historic end” of cars solely powered by petrol or diesel and “places electrification at the core of its future business”. Volvo – which is owned by China’s Geely – will launch five fully electric cars across its range between 2019 and 2021.

Two of these new cars will be in the company’s Polestar high performance sub-brand, which is being revived. The rest of the company’s range will be available with “plug-in hybrid” power trains and 48-volt “mild hybrid” systems, which give an extra “kick” to the acceleration of normally powered cars.

Meanwhile, other countries are pushing forward with legislation to reduce greenhouse gas emissions that will impact car manufacturing: Germany recently mandated that all vehicles sold in the country must have zero emissions by 2030, effectively outlawing sales on solely gas-powered vehicles; Sweden is aiming to have net-zero emissions of greenhouse gases by 2045; and the EU is tightening the restrictions on how much carbon dioxide vehicles can emit by 2021.

By starting the move to a fully electrified catalogue of offerings now, Volvo is ensuring it can continue to sell its vehicles in some of the largest car-buying markets soon.

Volvo’s announcement comes in the same week that Tesla announced its low-cost Model 3 electric car will go sale. The latest Tesla car – priced at around $35,000 – is aimed at bringing electric cars to the mass market, rather than being the preserve of early adopters of technology or those with deep pockets.

Tesla reports deliveries are flat-lining. Tesla reported quarter-by-quarter shipment declines for the second time in the past year. After the market closed on Monday, the company reported more than 22,000 vehicle deliveries in the second quarter. In addition to stoking fear about whether demand has peaked, these figures cast doubt on whether Tesla can pull off a steep production ramp for the cheaper Model 3 sedan.

The Tesla investment thesis hinges on the success of Model 3, and the ability for the company to ramp production, make the car profitably and deliver good initial build quality. Tesla plunged as much as 6.1 percent today to $331, the steepest intraday decline since May 4.

O’Reilly’s stock plunged $41.64, or 18.9%, to suffer the biggest one-day price and percentage decline since it went public in April 1993. Volume ballooned to 12.8 million shares in recent trade, which was nine times the full-day average. The auto parts retailer said second-quarter same-store sales rose 1.7% from a year, well short of its guidance of 3% to 5% growth.

O’Reilly said the disappointing sales results, in the wake of a slowdown during the final two months of the quarter, will have a “consequent impact” on profitability. There seem to be 2 long term trends at play here; first, brick and mortar retailers are struggling almost across the board; second, auto sales have been extremely strong the past 3 years – meaning people have been buying new rather than repairing.

US credit card processor Vantiv agreed to buy Britain’s Worldpay for about $10 billion. Payments companies have become targets for credit card companies and banks seeking to capitalize on a switch from cash transactions to paying by smartphone or other mobile devices.

Tech stocks moved higher today, breaking a 4-day slump. A funny thing happened while we were celebrating the Fourth. A computer glitch sent shares in dozens of US technology companies including Apple, Amazon and Microsoft to the same price, leading some to apparently lose billions in market value.

The bug showed many stocks on the Nasdaq exchange to briefly be reported as $123.47 on Bloomberg, Reuters and Google Finance data. It was triggered after financial information providers wrongly interpreted a Nasdaq data test as live prices, leading to brief pandemonium on trading floors.

Amazon’s shares were shown falling from almost $950, a drop of 87 per cent, Google owner Alphabet’s fell by 86 per cent and Apple fell by 14.3 per cent. Other companies that have share prices well below $123.47 saw them briefly rocket. Microsoft shares jumped almost 80 per cent, giving the company a valuation of more than $1 trillion and gaming company Zynga rose by more than 3,000 per cent.

The glitch occurred in after-hours trading after the Nasdaq had closed early ahead of the July 4 holiday and led several stocks to be halted. The Nasdaq stock exchange says the glitch stemmed from a routine daily data test that was moved up by several hours because trading closed early on July 3.

Erroneous prices apparently based on test data showed up on Bloomberg terminals used by professional traders, as well as on websites like Google used by non-pros. The root of the error can probably be found somewhere along the chain between Nasdaq and a small number of third-party vendors who distribute market data. Perhaps someone failed to heed a notice of the early data test, or didn’t receive it in the first place.

So far, it doesn’t seem like anyone lost much—if any—money, so the main harm is reputational. But it is increasingly a fact of modern life that mundane, simple human errors now have the potential to spiral rapidly and cause problems for people all over the world.

It also reveals the vulnerability of an interconnected world. If someone really wants to do serious harm, a glitch that could not be easily undone might shake financial institutions to their core.

Stocks Mixed Amid Rise in Tech, Fall in Oil

Charles Schwab: On the Market

Posted: 7/5/2017 4:15 PM ET

Stocks Mixed Amid Rise in Tech, Fall in Oil

U.S. equities finished mixed in their return to action from yesterday's Independence Day holiday, as strength in the tech sector was tempered by a decline in energy stocks amid a tumble in crude oil prices on flared-up OPEC production cut uncertainty. Treasuries were modestly higher following a factory orders report and the release of the Fed's June meeting minutes, while appearing to shrug off yesterday's first test of an intercontinental ballistic missile (ICBM) by North Korea. Gold was higher, while the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average (DJIA) lost 1 point to 21,478, the S&P 500 Index gained 5 points (0.2%) to 2,434, while the Nasdaq Composite increased 41 points (0.7%) to 6,151. In moderate volume, 885 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil dropped by $1.94 to $45.13 per barrel and wholesale gasoline lost $0.03 to $1.50 per gallon. Elsewhere, the Bloomberg gold spot price gained $3.14 to $1,226.56 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 96.24.

Vantiv Inc. (VNTV $60) announced a tentative agreement to acquire U.K.-based Worldpay Group PLC. ((WPYGY $15) for about $10.0 billion in cash and stock. The companies said they are still negotiating the final terms of the deal. VNTV traded lower, while WPYGY rallied in U.S. trading.

O'Reilly Automotive Inc. (ORLY $179) tumbled over 18% after warning that its Q2 same-store sales rose at a pace that was below its previous forecast, noting that after exiting Q1 and entering April on an improved sales trend, it faced a more challenging sales environment than it expected for the remainder of the quarter. The auto parts chain said it saw continued headwinds from a second consecutive mild winter and overall weak consumer demand.

Tesla Inc. (TSLA $327) saw marked pressure after announcing Q2 deliveries that came in below the Street's forecasts, citing a severe production shortfall of battery packs that impacted deliveries, which it said was addressed in early June.

Amid the recent volatility in the tech sector that has led the stock markets to record highs recently, Schwab's Chief Investment Strategist Liz Ann Sonders offers her commentary, The Space Between … Tech Today Doesn't Resemble Tech Circa 2000, as well as her latest article, 2017 Mid-year US Equity Outlook: Rattle and Hum. Liz Ann notes that we think the latest pullback in tech is more likely to represent a pause that refreshes some excess optimistic sentiment than it is the start of something nastier. We are maintaining our outperform rating on the tech sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: From the Top Down for more, but as with any fast-growing segment of a portfolio’s holdings, we also remind investors of the power of diversification and periodic rebalancing.

Also, Liz Ann adds that stocks have had a remarkable—and recently drama-free—run over the past eight-plus years. We are likely in a more mature phase, which could be marked by bouts of volatility and/or pullbacks—possible driven by Fed policy. But liquidity remains ample, financial conditions loose and earnings growth healthy; which have underpinned this bull for much of its history. Those are the key things on which to keep an eye as we head into the year's second half. Read these articles on the Markets & Economy page at www.schwab.com and follow us and Liz Ann on Twitter: @schwabresearch and @lizannsonders.

Factory orders drop more than expected, Fed offers minutes

Factory orders (chart) fell 0.8% month-over-month (m/m) in May, versus the Bloomberg expectation of a 0.5% decline, while April's figure was negatively revised to a 0.3% decrease. May durable goods orders—preliminarily reported last week—were unadjusted at the preliminarily-reported 1.1% fall.

At 2:00 p.m. ET, the Federal Reserve released the minutes from its June monetary policy decision, in which it raised its target for the fed funds rate by 25 bps and provided some insight into its plans to reduce the size of its balance sheet. The report showed that the Committee was divided on the timing of the balance sheet program, noting, " Several preferred to announce a start to the process within a couple of months,' but others' emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation." At the June meeting the Fed said it would trim holdings on Treasuries initially at $6 billion per month, increasing by $6 billion every three months over 12 months, until it reaches $30 billion. For agency- and mortgage-backed securities, the cap would begin at $4 billion, and rise by $4 billion every three months until it hits $20 billion a month. The Committee also reiterated its stance for continued gradual rate increases. Schwab's Chief Fixed Income Strategist, Kathy Jones provides additional insight in her article Fed Raises Rates, Sticks With Plans for One More Hike This Year.

As noted in the latest Schwab Market Perspective: Shifting Sentiment?, a more hawkish Fed than the market in terms of the expected trajectory of rate hikes, despite the mixed economic picture along with softer inflation readings, has raised concerns over a possible monetary mistake. We believe there is a strong desire among most Fed members to get rates to a more normal level and to start the process of reducing the balance sheet; but they also remain focused on not making decisions that may harm economic activity. Ongoing Fed policy uncertainty is likely to result in increased bouts of volatility. Read more on the Markets & Economy page at www.schwab.com

This sets the stage for tomorrow's robust economic calendar, which will offer reads on the labor market ahead of Friday's key June nonfarm payroll data in the form of weekly initial jobless claims and ADP's Employment Change report. Also, the critical U.S. services sector will be in focus following the releases of the ISM non-Manufacturing Index and Markit's final Services PMI Index, with both expected to show continued expansion. MBA mortgage applications and the trade balance will round out the day.

Treasuries finished higher with the yield on the 2-year note flat at 1.41%, while the yield on the 10-year note declined 2 basis points (bps) to 2.33% and the 30-year bond rate dipped 1 bp to 2.86%.

Bond yields have rebounded from depressed levels and Schwab's Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. We expect the Federal Reserve to continue to tighten monetary policy and reduce its balance sheet gradually, assuming inflation doesn't slip further. Read Kathy's articles, including how we feel investors should position themselves in this environment on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

Finally, for a look at the political front, which remains a source of market uncertainty, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, on the Insights & Ideas page at www.schwab.com.

Europe mixed on data and geopolitics, Asia mostly higher

European equities finished mixed, with the euro dipping versus the U.S. dollar, while the global markets digested a rise in geopolitical concerns following actions by North Korea. Economic data in the region likely aided sentiment, with Markit's eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—being revised to a faster pace of growth than preliminarily estimated for June. Eurozone retail sales rose in line with forecasts and Markit's U.K. Composite PMI Index slowed but remained in expansion territory for last month. The British pound was little changed versus the greenback and bond yields in the region were mixed. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com, while Jeff and Vice President of Trading and Derivatives, Randy Frederick offer the video, How Do U.S. Equity Market Valuations Compare to Other Developed Markets?, on the Insights & Ideas page at www.schwab.com. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Technology issues rebounded, while oil & gas stocks saw pressure as crude oil prices fell after a recent string of gains, exacerbated by reports that Russia is opposing any changes to the current OPEC-led production cuts.

Stocks in Asia finished mostly to the upside with the U.S. markets set to return to action following yesterday's Independence Day holiday, while shrugging off flared-up geopolitical concerns as North Korea conducted a test of an intercontinental ballistic missile (ICBM) yesterday. For more, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com. Japanese equities gained ground, with the yen paring gains late in the session, and South Korea's Kospi Index also moved to the upside. Mainland Chinese stocks and those traded in Hong Kong advanced on the heels of a report from Caixin that showed the nation's key services sector output slowed but continued to showed growth. Indian securities ticked higher following data showing growth in the country's business activity accelerated, but markets in Australia declined, with oil & gas and healthcare weakness overshadowing strength in basic materials. The move comes in the wake of this week's decision by the Reserve Bank of Australia to leave its monetary policy unchanged. For a look at the global landscape, see Jeffrey Kleintop's, CFA, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com.