Dow Unable to Hold Gains

Charles Schwab: On the Market

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

Dow Unable to Hold Gains

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

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

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

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

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

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

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

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

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

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

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

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

Equities squeak by with gains despite low oil

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

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

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

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

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

Stocks Pop Higher as Earnings Ramp Up

Charles Schwab; On the Market

Posted: 7/22/2016 4:15 PM ET

Stocks Pop Higher as Earnings Ramp Up

U.S. equities finished the regular trading session higher as investors weighed some mixed earnings reports, headlined by upbeat results from Dow member General Electric. In domestic economic news, Markit's preliminary July manufacturing activity read was better than expected. Treasuries were mixed, gold and crude oil prices were lower and the U.S. dollar rallied. Overseas, stocks in Europe were mixed and equities in Asia were mostly lower as global traders hoped for indications of additional stimulus from the European Central Bank and Bank of Japan.

The Dow Jones Industrial Average (DJIA) advanced 54 points (0.3%) to 18,571, the S&P 500 Index added 10 points (0.5%) to 2,175 and the Nasdaq Composite increased 26 points (0.5%) to 5,100. In moderate volume, 741 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil was $0.56 lower at $44.19 per barrel, wholesale gasoline was unchanged at $1.36 per gallon and the Bloomberg gold spot price decreased $7.46 to $1,323.97 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 97.41. Markets were higher for the week, as the DJIA gained 0.3%, the S&P 500 Index increased 0.6% and the Nasdaq Composite advanced 1.4%.

Dow member General Electric Co. (GE $32) reported 2Q earnings-per-share (EPS) ex-items of $0.51, well above the $0.46 FactSet estimate, as revenues rose 3.0% year-over-year (y/y) to $33.5 billion, versus the expected $31.8 billion. Chief Executive Officer (CEO) Jeffrey Immelt said, “The diversity and scale of our portfolio enabled the company to perform well despite a volatile and slow-growth economy,” adding, “We expect strong organic growth in the second half of the year.” Despite the beat, shares were lower.

Fellow Dow component Boeing Co. (BA $133) warned that it expects to report a $2.1 billion after-tax charge in the 2Q on expenses surrounding its 787 Dreamliner, 787-8 jumbo jet and air tanker for the U.S Air Force. The aircraft manufacturer said it will write off two of the flight-test aircraft at a cost of $847 million. Boeing's CEO said, “These are the right, proactive decisions to strengthen our business going forward." BA traded lower.

AT&T Inc. (T $43) registered 2Q EPS ex-items of $0.72, matching the FactSet estimate, with consolidated revenues, including those from its recent acquisition of DIRECTV, growing 23.0% y/y to $40.5 billion, but below the Street's $40.6 billion forecast. A net loss of 49,000 video subscribers pressured results, as declines in the unit continue to mount as customers are dumping traditional TV packages for lower-cost online-only offerings elsewhere. Shares of T gained ground.

Advanced Micro Devices Inc. (AMD $6) posted a 2Q loss ex-items of $0.05 per share, better than the $0.09 per share shortfall forecasted by analysts, on a 9.0% y/y increase in revenues to $1.0 billion, which topped the Street's $951.3 million estimate. The chip maker said it expects the current quarter to see an 18% y/y rise in sales, plus or minus 3%, as well as growth in the subsequent quarter. AMD closed solidly higher.

Honeywell International Inc. (HON $116) announced 2Q profits ex-items of $1.66 per share, topping the forecasted $1.64, as revenues rose 2.0% y/y to $10.0 billion, mostly in line with estimates. However, shares of HON were under pressure, as the conglomerate said it expects 3Q EPS between $1.67-1.72, compared to analysts' forecasts of $1.72.

Chipotle Mexican Grill Inc. (CMG $442) missed analysts' estimates when it reported 2Q EPS of $0.87, compared to the $0.91 FactSet estimate, as sales at the restaurant chain fell 16.8% y/y to $998.4 million, also shy of the forecasted $1.1 billion, as same-store sales tumbled 23.6%, well below the anticipated 20.6% decline. The company's CEO said, "Our entire company is focused on restoring customer trust and re-establishing customer frequency," adding, "There’s no quick solution to improving our sales and bringing our customers’ trust back." Despite the dismal report, shares finished higher.

Capital One Financial Corp. (COF $67) posted 2Q earnings ex-items of $1.76 per share, ten cents short of the FactSet estimate, as revenues were mostly in line with forecasts calling for $6.3 billion. The company's CEO said it remains well positioned to deliver growth in the future, as well as continue to return capital to shareholders. COF traded lower.

U.S. manufacturing posts better-than-expected increase

The preliminary Markit U.S. Manufacturing PMI Index for July improved to 52.9 from June's downwardly revised 51.3 level, and above the forecasted modest rise to 51.5, with a reading above 50 denoting expansion in activity.

The recent string of upbeat domestic data has helped fuel the recent stock market rally that took the Dow and S&P 500 to all-time highs, as discussed by Liz Ann Sonders in her latest article, 19th Nervous Breakout: Stocks Finally Reach New Highs, at www.schwab.com/marketinsight. As well, you can find the latest Schwab Sector Views: Drilling Down on the Energy Sector by Schwab's Director of Market & Sector Analysis, Brad Sorensen, CFA, where Brad argues the case that the correlation that had emerged between oil prices and stock market performance appears to have started to diminish.

Treasuries were mixed with the yield on the 2-year note up 3 basis points (bps) at 0.70%, the yield on the 10-year note 1 bp higher at 1.57%, while the yield on the 30-year bond was down 1 bp at 2.28%. Bond yields have rebounded as of late from record lows on favorable U.S. economic data, as well as eased U.K. Brexit concerns and expectations of a Fed rate hike this year. For analysis see the video from Schwab's Chief Investment Strategist, Liz Ann Sonders and Managing Director of Trading and Derivatives, Randy Frederick, titled Strong Jobs Report: Recession off the Table but Is Rate Hike Back On?, at www.schwab.com/insights. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick. Also, Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis in her recent article titled, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

Europe mixed, Asia lower

European markets finished mixed, as traders digested a plethora of manufacturing activity reports in the region, as well as yesterday's decision from the European Central Bank (ECB) to leave its monetary policy unchanged where it lacked any clues as to if the ECB will become more aggressive in its stimulus measures following the June vote by the U.K. to leave the European Union (EU), known as a Brexit. Manufacturing data in Germany and the Eurozone as a whole continued to show expansion, despite a slight downtick in the readings, and France saw improvement. However, activity out of the U.K. plunged to a level depicting contraction, further fueling concerns of the economy post-Brexit. Amid the backdrop of heightened volatility in the region as the markets grapple with the impact of a Brexit, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers analysis for investors in his article, After the Brexit Vote: What Lies Ahead for Markets?, and gives us Three Reasons Why Now is Not the Time to Retreat from Global Diversification. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

In other economic news, Italy's retail sales came in well ahead of forecasts, while industrial sales in the nation fell well short of expectations. The euro and the British pound were slightly lower versus the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished lower, as hopes of aggressive stimulus measures from the Bank of Japan (BoJ) were tempered following a radio interview with BoJ Governor Kuroda—that was pre-recorded in June—that doused the notion of so-called helicopter money, as well as inaction by the European Central Bank yesterday to offer any hint of further aid. Japanese equities pared a recent rally, as the comments sent the yen sharply higher. For more on Japan's potential increased stimulus measures see Jeffrey Kleintop's, article, What investors need to know about helicopter money, at www.schwab.com/oninternational. The tempered sentiment toward central bank easing overshadowed an increase in Japan's manufacturing activity, with Markit's preliminary Manufacturing PMI Index showing a reading of 49.0 for July, up from 48.1 in June, and closing in on the 50 level that indicates the demarcation point between expansion and contraction in activity.

Chinese stocks declined despite action from the People's Bank of China (PBoC) where it pegged the yuan 3% higher versus the greenback and while the country's leaders dictated some clear differences on how to reform the country's state-owned enterprises (SOEs) raising contradicting viewpoints of whether to reinforce the sector or to trim SOEs down. Elsewhere, securities in Australia and South Korea dipped, while Indian equities bucked the regional trend, finishing higher in a somewhat subdued session.

Stocks see another weekly advance

U.S. equities managed gains for the week, as the Dow & S&P 500 indexes continued to chart record-high territory, though the blue-chip benchmark ended a nine day winning streak on Thursday. Earnings season began to heat up with financial heavyweights including Bank of America Corp. (BAC $14) and Morgan Stanley (MS $29) and Dow components Goldman Sachs Group Inc. (GS $160) and American Express Co. (AXP $64) all releasing quarterly results that bested analysts' bottom-line expectations. Some tech titans including Dow members International Business Machines Corp. (IBM $162), Microsoft Corp. (MSFT $57) and Intel Corp. (INTC $35) also announced quarterly results that topped forecasts.

As record-highs continued for the equity markets as a whole, the energy sector was unable to spark significant gains and lagged for the week. Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, shares in his recent Schwab Sector Views: Drilling Down on the Energy Sector, that with the market shifting its focus to the Brexit vote and its immediate aftermath, the energy sector may finally be taking a backseat in the minds of investors and while it may not seize the market's attention the way it used to, the energy sector remains important. Much of the global economy depends on access to oil, and also its price. And we've seen oil prices move considerably in the past two years. Read the rest of Brad's refined assessment of crude, as well as his views on all sectors at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Fed set to conclude monetary meeting prior to GDP release next week

Next week's robust domestic economic calendar will likely be headlined by Friday's first look (of three) at 2Q GDP, which will follow the mid-week monetary policy decision from the Federal Open Market Committee (FOMC), with no changes expected to its current policy stance, while earnings season will continue to ramp-up. Schwab's experts tackle these topics in the latest Schwab Market Perspective: New Records…Same Skepticism, noting that while there’s a near unanimous opinion that the Federal Open Market Committee (FOMC) will stay put at its meeting next week, market expectations for a rate hike later this year have risen over the past couple of weeks, coming closer to what we have believed was the more realistic possibility. Separately, they also point out that commentary from second quarter earnings season has so far been relatively cautious, although the results have been better than the relatively low expectations so far. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Other reports on next week's U.S. economic calendar include: new home sales, pending home sales, durable goods orders, the S&P/CaseShiller Home Price Index, Markit's preliminary Services PMI Index, consumer confidence, the Kansas City Fed Manufacturing Activity Index, and the final University of Michigan Consumer Sentiment Index.

Major international economic releases for next week include: Japan—trade data, the Leading Index, CPI, retail sales, industrial production, vehicle production, and the Bank of Japan's monetary policy decision. China—industrial profits. Australia—CPI, PPI, export and import prices and private sector credit. Eurozone—consumer confidence, CPI and 2Q GDP. Germany—CPI, retail sales, import prices, GfK consumer confidence and Ifo business climate survey. U.K.—2Q GDP, GfK consumer confidence, Index of Services and consumer credit.

Stocks Hold Gains

Charles Schwab: On the Market

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

Stocks Hold Gains

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

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

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

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

Manufacturing activity picks up steam

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

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

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

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

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

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

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

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

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

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

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

Brexit shock recovery rally puts positive spin on week

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

Short week but long economic docket

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

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

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

Financial Review

Before the Deluge

Sinclair Noe — October 1, 2015

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

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DOW – 12 = 16,272
SPX + 3 = 1923
NAS + 6 = 4627
10 YR YLD – .02 = 2.04%
OIL – .11 = 44.98
GOLD – 1.80 = 1114.50
SILV un = 14.63

Manufacturing grew in September at the slowest pace in more than two years. The Institute for Supply Management said its manufacturing index dropped to 50.2% last month from 51.1% in August, reflecting a stronger dollar and weaker global economy that is hurting U.S. exports of many major American-made goods. That’s the weakest reading since May 2013, although any reading above 50 indicates growth.

The number of people who applied for unemployment benefits rose by 10,000 to 277,000 in the week ended Sept. 26, but initial claims remain extremely low in a sign of steady improvement of the labor market. The average of new claims over the past month, meanwhile, fell by 1,000 to seasonally adjusted 270,500. The level of new claims sank below 300,000 in early March and has remained there for 30 straight weeks, a feat last accomplished in 1973, when the nation’s working population was 40% smaller. Tomorrow morning is the monthly jobs report from the Labor Department.

Construction spending increased 0.7% in August, and gained 13.7% over 12 months. Residential construction rose 1.3%, while nonresidential construction grew 0.3%. Construction of lodging climbed 2.8% and has climbed 41.4% over 12 months.

Not all American homes are rising in value and not all markets are experiencing the recovery evenly. According to a report from Zillow, almost 30% of all homes lost value in August from a year earlier; that’s down from a high of 65% in 2009, although a normal housing market would be closer to 20%. Overall, the median value of homes rose 3.3% year-over-year to $180,800, but appreciated at half the pace of August 2014.

President Obama has signed into law a bill that extends federal funding until December 11 after the Senate and the House yesterday passed the proposal, as expected. Had Congress not approved the measures, the government would have shut down today, the first day of the new fiscal year. Republicans and Democrats now have around ten weeks to formulate a long-term budget, with the parties looking to strike a two-year deal.

Hurricane Joaquin is headed for the East coast, maybe. Where it lands is still uncertain. Joaquin is a Category 3 hurricane with winds of 125 miles per hour and gusts to 155 miles per hour; an increase of the sustained winds to 130 mph would make it a Category 4 storm. Right now it is hitting the Bahamas and within the next 24 hours, it is expected to head north, possibly hitting the Carolinas, or Virginia, or even making land near New England.

The best guesstimates have it headed for New York City. If the hurricane heads for the coast, it will lose some of its punch and slow down to a Category 1 or possibly a tropical depression before landfall. Even if it veers to the northeast and heads out into open waters, it is expected to produce serious flooding. Beyond the wind and the rains, there is a strong possibility of waves approaching 30 feet and storm surge of 8 feet.

Even as the track of the storm is uncertain, the governors of Virginia and New Jersey have already declared a state of emergency.  We all remember Hurricane Sandy but if current projections hold, Joaquin won’t be another Sandy, but nature is unpredictable. Parts of the eastern U.S. from Florida to New Jersey are under flood watches and warnings today, with more than 10 inches of rain already having fallen in some areas this week.

The weather is a staple for the commodity markets. The rain and flooding is expected to be a big problem for cotton farmers in Georgia and the Carolinas. Atlantic hurricanes can be mildly bullish for energy markets as oil and gas platforms could be shut down as a precaution. They could also damage infrastructure, such as refineries and transportation. Traders now expect minimal disruptions to energy markets.

The big three U.S. automakers – GM, Ford, and Fiat Chrysler – reported a jump in September sales as cheap gasoline and ultra-low interest rates drove demand for sport utility vehicles and pickup trucks. Total U.S. auto sales, an early glimpse of consumer spending each month, are expected to have risen about 14% last month.

According to auto industry consultancy Edmunds.com sales got a boost from the calendar, with the entire Labor Day weekend falling in September for the first time since 2012. GM said its total sales in September rose 12%; Ford posted sales gains of 23%; and Fiat Chrysler says September sales were up 14%.

Deere and the United Auto Workers union have reached a tentative agreement to replace the six-year master labor contract that ended at midnight last night. The deal is for another six years and will now go to a vote of the 10,000 Deere manufacturing staff that the UAW represents.

Ratification of a contract between the UAW and Fiat Chrysler appears to be impossible after workers at assembly plants in Ohio and Michigan on Tuesday overwhelming voted against a proposed four-year deal.

Samsung is now accused of Volkswagening its TVs. Yep, that’s the new word for cheating on environmental tests. Independent lab tests show Samsung televisions use less power when they are tested for energy efficiency ratings than during real world use. Sweden’s government has also been looking into TVs from unspecified manufacturers that “clearly recognize” the video used in testing, and which “immediately lower their energy use by adjusting the brightness of the display” in response.

Google and Microsoft have ended a long-running patent spat involving about 20 suits in the U.S. and Germany. Microsoft had alleged that Google’s former Motorola Mobility unit infringed its IP. Google, which held onto most of Motorola’s patents following its sale to Lenovo, alleged that Xbox consoles infringed its patents. Now they’ve made nice with each other, Google and Microsoft plan to cooperate on various patent issues.

The Centre for Economic Policy Research says the Eurozone recession is over. Like the National Bureau of Economic Research in the U.S., the CEPR labels recessions based on a variety of economic indicators and not the informal definition of two consecutive quarters of negative GDP growth. The CEPR said the period from the third quarter of 2011 to the first quarter of 2013 represented the second post-financial crisis recession in the Eurozone. The reason the CEPR feels confident in saying the Eurozone is out of the recession is that the duration of the recovery has made up for its slow speed. However, the Eurozone recovery has been “unusually lackluster” by historical standards.

The third quarter was ugly for stocks, but there were a few winners. More than 3 dozen companies in the S&P 500 posted double digit gains for the quarter. Chipotle, Amazon, and Google posted 20% gains for the quarter. Merger news also pushed some stocks higher, such as Teco, AGL Resource, Cablevision, Chubb, and Molson Coors. Also making the list: Activision Blizzard, Nike, Under Armor, Best Buy, Royal Caribbean, Southwest Airlines, Reynolds American, and Altria.

Merger activity has been strong in 2015. According to data from Thomson Reuters, $3.19 trillion in deals were announced year-to-date, just 2% below 2007 levels. Many of the transactions were worth more than $10 billion, making up 36.5% of the total. In the third quarter there were fewer deals than in any other three-month period this year, yet the dollar volume surpassed $1 trillion. Energy has been the top industry by value, as companies sought strength in consolidation as the price of commodities plummeted. There was also a slew of health care transactions, especially in insurance and pharmaceuticals. Goldman Sachs and Morgan Stanley were the top-ranked financial advisers on these deals.

Bankers like to make big dollar deals; they don’t like to get their hands dirty with smaller loans, but that doesn’t mean they won’t take a cut. For many years the big banks have bankrolled smaller consumer lenders, also known as payday lenders. In the past they were known as loan sharks, and even as the names changed, the terms didn’t; these lenders are still charging outrageous rates, sometimes more than 200%.

But now the Consumer Financial Protection Bureau (CFPB) is starting to tighten regulations on the consumer lenders. The lenders have come under scrutiny for a range of practices that can lead borrowers to believe they are paying far less in interest and fees than they actually are. Now that regulation is getting tighter, the big banks are trying to protect their loans to the subprime lenders; the big change is an amendment that says that if one of the loan sharking companies faces regulatory action that has a material impact on its business, it would constitute a default. And a default would give the big banks the right to seize the lender’s assets, at least in theory; or a pound of flesh if it suits them.

JPMorgan Chase shareholders have won court permission to pursue their securities fraud lawsuit as class action against the bank over the “London Whale” trading scandal, which caused a $6.2 billion loss. Shareholders led by pension funds in Arkansas, Ohio and Oregon alleged that JPMorgan, CEO Jamie Dimon and CFO Douglas Braunstein knowingly hid increased risks at the Chief Investment Office operating in London, including on an April 13, 2012 conference call when Dimon called reports about the synthetic portfolio a “tempest in a teapot.”

It turned out to be a $6.2 billion loss by the London Whale and fallout contributed to even bigger losses for shareholders as market capitalization dropped by $40 billion from April 13 to May 21, 2012. And don’t forget the $1 billion in fines reached in a settlement with regulators that included a rare admission of wrongdoing.

Monday, June 02, 2014 - Clean Power Plan

Financial Review with Sinclair Noe

DOW + 26 = 16,743
SPX + 1 = 1924
NAS – 5 = 4237
10 YR YLD + .07 = 2.53%
OIL - .31 = 102.40
GOLD – 7.80 = 1244.50
SILV - .05 = 18.86

The ISM got it wrong this morning. The Institute for Supply Management reported its May manufacturing index came in at a weaker than expected 53.2, but there was a software problem that didn’t properly reflect season adjustments; the ISM issued a revision; the May index was 56.0; but for some reason, that wasn’t correct, so they issued another revision. The May manufacturing index was 55.4; that’s the number and they’re sticking with it. Embarrassing? Yes.

Meanwhile, stocks and bonds were all over the board. Stocks fell into negative territory early on, but bounced back as revisions were issued. Bonds are hyper sensitive to economic growth, and the yield on the 10 year note moved higher and stayed higher, despite the initial numbers and the revisions. And if you look past the revisions, and you should, because it appears to be nothing more than an honest mistake, caught quick and corrected; the bottom line is a pretty strong number for manufacturing, more or less in line with the idea of a second quarter bounce in the economy.  

The bigger story this week will be the jobs report on Friday. It is widely expected the economy added about 200,000 to 215,000 jobs in May, which would be down from a very strong report of 288,000 net new jobs in April. The unemployment rate is expected to tick up from 6.3% to 6.4% as more people enter the labor force.

We also expect some big economic news out of Europe this week, and we’re likely to see a small announcement instead. You will recall that European Central Bank President Mario Draghi announced back in the summer of 2012 that he would do “whatever it takes” to save the euro. And then he spent the following two years doing nothing. This week he’s expected to actually do something, specifically he’s expected to unveil a package of measures to fight deflation. Analysts expect the ECB to cut both its main interest rate and reduce its deposit rate to below zero, meaning the central bank would charge lenders to hold money with it overnight. Although any reduction will be modest, a negative deposit rate has never been introduced by a major central bank; and the thinking goes, this will force the banks to start lending.

It doesn’t take much to see the flawed logic. Many countries in the Euro periphery are still struggling with Great Depression level unemployment. As long as unemployment remains as high as this, it’s nearly impossible for countries to generate the internal demand necessary for durable growth. The biggest obstacle to a bold move would seem to be Germany, which is enjoying a pretty strong economy, but even there, the inflation rate has dipped down to 0.6%. The ECB seems to think a little fine tuning will right the ship and then a rising tide will lift all boats. Doubtful. 

As expected, the EPA today issued the "Clean Power Plan" proposal, calling it "a commonsense plan to cut carbon pollution… Climate and weather disasters in 2012 cost the American economy more than $100 billion," the agency says in a document accompanying the proposal.

EPA Administrator Gina McCarthy said: "We don't have to choose between a healthy economy and a healthy environment. Our action will sharpen America's competitive edge, spur innovation and create jobs."

The regulations would force power plants to cut carbon dioxide emissions by 30% by 2030. The rules would set guidelines that states could choose how to follow. Under the plan, each state would have its own goal within the overall national pollution reduction effort. That’s an attempt to be politically and practically flexible in implementation. The EPA would set targets for each state for carbon emissions reductions. Then state governments would come up with their own plans for hitting these targets. The proposed regulation in essence gives them four different approaches they could try. They could renovate existing coal-fired plants with newer, more clean-burning technology; they could switch coal plants to natural gas, which produces much less carbon; they could try to persuade residents to be more efficient in their use of electricity; or they could band together with other states in a cap-and-trade network for emission reductions.

In a cap-and-trade network, companies would buy and sell permits allowing them to produce a certain amount of carbon emissions. Clean producers would be the sellers, while dirtier producers would be the buyers.

Almost a third of America's carbon emissions comes from electricity generation. EPA officials concede some of the dirtiest power plants now operating, such as older coal-fired plants, will end up shuttered as the nation shifts its reliance from traditional fossil fuel sources to cleaner alternatives. Coal supplied 37% of US electricity in 2012, compared to 30% from natural gas, 19% from nuclear power plants, 7% from hydropower sources such as dams and 5% from renewable sources such as wind and solar. By 2030, just over 30% of US electricity will come from coal and about the same amount from natural gas, with wind, solar and other alternative sources providing about 9%.

According to the EPA, the proposed new rules would reduce carbon pollution by the same amount as removing two-thirds of all cars and trucks form American roads. It put the cost as high as $8.8 billion a year, but noted health gains such as fewer premature deaths and respiratory diseases along with other benefits would be worth tens of billions of dollars to the US economy. Recent analysis quantifies the benefits in health, air quality and clean water at $63 billion a year. Since 1970, every dollar invested in compliance with Clean Air Act standards has yielded $4 to $8 in economic benefits.

Will this move actually clean up global pollution? Not really. No matter what the US does, global emissions will keep skyrocketing in the near future. This is because most of the rise in emissions is being driven by China. China’s carbon pollution has soared in the last 15 years, and is now about double the US level. The rest of the increase has come from oil-producing countries and from other, more slowly developing Asian nations; but China overshadows all of the other sources.

American per capita emissions, of course, are still more than twice as large as China’s. And the simple fact is that we won’t get far trying to tell China they have to cut emissions if we aren’t willing to cut our own emissions. Of course, if we unilaterally cut our emissions, that doesn’t mean China will be willing to follow our lead. Self-restraint might do nothing more than push down the price of high carbon energy sources, allowing China to burn more for less. What this move really does is position the US as a leader in cleaner energy technology, and even if we can’t export natural gas to China or many other parts of the globe, we could export cleaner energy technology and expertise.

One way to do this is to tax carbon intensive imports; something not included in today’s proposal. The US is still China’s most important export market, so a US carbon-import tax will provide a huge incentive for Chinese companies to reduce emissions.

Another specific not included in today’s proposal would be to implement a carbon tax or equivalent here in the US. This won't cut worldwide emissions enough to make a dent in global warming, but the funds could be used to spur research and development into things like gas, solar, wind and energy efficiency. We should think of carbon taxes mainly as incentives for the private sector to discover all the carbon-cutting technologies, and fund the research that will make green energy cheaper than coal.

Fortunately, renewable energy is up to the challenge of replacing those dirty fuels. In just the last three years, solar panels have gotten 60% cheaper and the price of wind energy has fallen more than 40%. Far from being expensive, clean energy is already beating both coal and natural gas on price in many parts of the country.

Coal and oil are low tech fuels whose time has passed, just as surely as the days of using whale oil to light our lamps, but the transition won’t be easy. The apprehension in coal country to leave this current path is understandable. We would all feel it if we were in their shoes. Outsiders can't ignore the plight of the families and the affected communities. And there will be massive political opposition, especially from the politicians backed by coal and big oil, which is most of the politicians. And most of these new regulations won’t go into effect until 2015, and there will be legal challenges, but the future is changing.