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Schwab Market Update

Stocks Dipping on Earnings and Chinese Concerns

U.S. stocks are lower in early action, as upbeat results from Dow member IBM is being met with disappointing reactions to earnings reports from Dow members American Express and Travelers, along with eBay. Asia finished mostly lower and Europe is mixed, with economic and trade concerns continuing to pressure Chinese stocks. The U.S. dollar continues to rally on the heels of this week's Congressional monetary policy testimony from Federal Reserve Chairman Jerome Powell that highlighted a solid economy. Treasury yields are nudging higher, while crude oil and gold prices are lower. Jobless claims unexpectedly declined and regional manufacturing activity improved more than expected.

As of 8:55 a.m. ET, the September S&P 500 Index future is 10 points below fair value, the DJIA future is 101 points below fair value, and the Nasdaq 100 Index future is 26 points south of fair value. WTI crude oil is decreasing $0.68 to $67.07 per barrel and Brent crude oil is declining $0.60 to $72.30 per barrel. The Bloomberg gold spot price is down $13.37 to $1,214.14 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is up 0.5% to 95.58.

Dow member International Business Machines Corp. (IBM $145) reported Q2 earnings-per-share (EPS) of $2.61, or $3.08 ex-items, versus the $3.04 FactSet estimate, as revenues rose 4.0% year-over-year (y/y) to $20.0 billion, compared to the projected $19.9 billion. IBM reaffirmed its full-year earnings outlook.

Dow component American Express Co. (AXP $103) posted Q2 EPS of $1.84, compared to the forecasted $1.83, with revenues rising 9.0% y/y to $10.0 billion, versus the expected $10.1 billion. AXP reaffirmed its profit outlook, while raising its revenue guidance.

Dow member Travelers Companies Inc. (TRV $130) announced Q2 earnings of $1.92 per share, or $1.81 ex-items related to an increase in catastrophe losses that may be making comparability to the estimated $2.41 unclear. Net written premiums rose 7.0% y/y to $7.1 billion, versus the forecasted $6.9 billion.  

eBay Inc. (EBAY $38) reported Q2 EPS of $0.64, or $0.53 ex-items, compared to the projected $0.51, with revenues increasing 9.0% y/y to $2.6 billion, versus the expected $2.7 billion. The company issued Q3 guidance that missed forecasts, while it raised its full-year profit outlook and lowered its revenue estimate for the year.

Jobless claims unexpectedly dipped, regional manufacturing activity rises more than expected 

Weekly initial jobless claims (chart) declined by 8,000 to 207,000, versus the Bloomberg estimate calling for 220,000, with the prior week's figure revised higher by 1,000 to 215,000. The four-week moving average decreased by 2,750 to 220,500, while continuing claims rose by 8,000 to 1,751,000, north of estimates of 1,729,000. For more on the labor market, check out Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Quality or Quantity: Skills' Deficit, Jobs' Surplus.  

The Philly Fed Manufacturing Index (chart) in July rose more than expected to a level further north of expansion territory (a reading above zero), increasing to 25.7 from 19.9 in June, compared to estimates of an improvement to 21.5.

After the opening bell, the economic calendar will bring the release of the June Index of Leading Economic Indicators (LEI), forecasted to rise 0.4% month-over-month (m/m), after May's 0.2% gain.

Treasuries are dipping and the U.S. dollar continues to grind higher, with the yields on the 2-year and 10-year notes ticking 1 basis point (bp) higher to 2.62% and 2.88%, respectively, while the 30-year bond rate is little changed at 2.99%.

Schwab's Chief Fixed Income Strategist, Kathy Jones offers in her commentary Mid-Year Bond Outlook: Last One Out, Turn Off the Lights, that the yield curve will likely continue to flatten and we expect one to two rate hikes by the Federal Reserve in the second half of the year, but short-term rates will likely rise more than long-term interest rates. Kathy also discusses in her latest article, What Happened to the Bond Bear Market?, that slowing growth outside the U.S. and escalating trade conflicts are calling into question the strength of the global expansion. She adds that while China has taken steps to boost its economy and let the yuan drift lower against the dollar, if the U.S. dollar continues to rally it will mean tighter financial conditions globally. Kathy concludes that Federal Reserve tightening has helped tame expectations for long-term inflation, helping to keep longer-term yields in check.

Europe mixed on earnings, Chinese worries and the continued rally in the U.S. dollar

European equities are mixed in afternoon action, with trade and economic concerns in China that led the Asian markets lower appearing to foster some global skittishness, along with a divergent dose of earnings results. However, the euro and British pound are seeing noticeable pressure as the U.S dollar continues to rally in the wake of Federal Reserve Chairman Jerome Powell's two-day Congressional monetary policy testimony that painted an upbeat economic picture. Bond yields in the region are mixed. In economic news, U.K. retail sales unexpectedly declined in June, while Switzerland's exports for last month rose. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, 2018 Global Mid-Year Outlook: From Sugar High to High Tariffs?, global economic and earnings growth momentum is slowing, but still growing, while pointing out that how the ongoing trade conflicts develop pose a risk to markets the second half of the year. Jeff concludes that prepared investors should consider rebalancing their portfolios back towards a balance in geography, style, and size after many years have seen trends pushed to historical extremes.

The U.K. FTSE 100 Index is up 0.3%, France's CAC-40 Index and Germany's DAX Index are declining 0.4%, Switzerland's Swiss Market Index is rising 0.4%, Italy's FTSE MIB Index is decreasing 0.2% and Spain's IBEX 35 Index is trading 0.3% lower. 

Asia mostly lower as trade concerns fester

Stocks in Asia finished mostly lower, with Chinese stocks continuing to see weakness amid festering trade concerns on heightened trade rhetoric, while recent mixed economic data in the region seemed to have exacerbated conviction. For a look at the global trade picture, check out our video, Tariffs on China: A Look Ahead. China's Shanghai Composite Index declined 0.5%, falling for a fifth-straight session, while the Hong Kong Hang Seng Index traded 0.4% lower. Japan's Nikkei 225 Index dipped 0.1%, with the yen moving higher and as the nation reported softer-than-expected export growth in June. South Korea's Kospi Index decreased 0.3% and India's S&P BSE Sensex 30 Index edged 0.1% lower. However, Australia's S&P/ASX 200 Index advanced 0.3%, amid some strength in industrials and financials, while the nation posted a much larger-than-expected increase in the country's employment for June.

Schwab Center for Financial Research - Market Analysis Group

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