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Schwab Market Update

Stocks Continue Run, Aided by a Late-Day Trade Report Boost

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U.S. stocks extended a recent rally despite a noticeable miss from Morgan Stanley. Equities shrugged off the persisting government shutdown, festering Brexit uncertainty and ongoing China concerns, aided by an upbeat jobless claims report and an unexpected jump in regional manufacturing activity. Stocks got a late-day boost from a Wall Street Journal Report that the U.S. was considering lifting Chinese tariffs to hasten a deal. The boost faded somewhat after Treasury officials told CNBC that no China tariffs recommendations were made. Treasury yields finished mostly higher and the U.S. dollar was little changed, while gold and crude oil prices moved lower.  

The Dow Jones Industrial Average (DJIA) gained 163 points (0.7%) to 24,370, the S&P 500 Index rose 20 points (0.8%) to 2,636, and the Nasdaq Composite advanced 50 points (0.7%) to 7,084. In moderately-heavy volume, 914 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.24 to $52.07 per barrel but wholesale gasoline ticked $0.01 higher to $1.43 per gallon. Elsewhere, the Bloomberg gold spot price declined $1.59 to $1,292.08 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was little changed at 96.07.

Morgan Stanley (MS $43) announced Q4 earnings of $0.80 per share, versus the $0.89 FactSet expectation, as revenues declined 10.0% year-over-year (y/y) to $8.6 billion, below the projected $9.3 billion. The company's revenue from FICC—fixed income, currencies and commodities—came in below expectations, while investment banking sales were above forecasts. Management echoed several other financials that have reported this week, stating that a volatile global market environment impacted revenues. Shares came under solid pressure.  

CSX Corporation (CSX $65) reported Q4 earnings-per-share (EPS) of $1.01, versus the $0.99 estimate, as revenues grew 10.0% y/y to $3.1 billion, roughly in line with expectations. The rail company's revenue per unit—a key industry metric of pricing power—rose 6.7% y/y, topping forecasts, while its coal volumes slowed versus Q3. Its operating ratio (OR)—a measure of efficiency—deteriorated quarter-over-quarter and its intermodal service revenues missed expectations. CSX's 2019 guidance was mixed as a forecast for low single-digit revenue growth appeared to disappoint but its outlook for the OR was projected to hit its target a year earlier than originally forecasted. The company also announced that it had authorized an additional $5.0 billion in share repurchases following the early completion of the existing program. Shares moved lower.

PPG Industries Inc. (PPG $107) posted Q4 EPS of $1.15, compared to the forecasted $1.10. Revenues fell 1.0% y/y to $3.7 billion, generally matching expectations. PPG's Q1 EPS outlook was below the Street's expectations, with the paints, coatings and materials company citing more global uncertainty, the carryover impact from the first-half 2018 cost inflation, significantly unfavorable y/y foreign exchange and modestly lower sales volumes. However, PPG said it remains confident it is well positioned strategically and financially, while noting that it plans to complete its examination of whether to split into two paintmakers by the end of Q2 2019. Shares were higher.

M&T Bank Corporation (MTB $163) announced Q4 earnings of $3.76 per share, versus the expected $3.49, as net interest income gained 8.7% y/y to $1.1 billion, just above forecasts of $1.0 billion. Fee income, loan and deposit growth were all above estimates. MTB traded higher.

Shares of Signet Jewelers Limited (SIG $25) fell sharply after it reported a decrease in holiday sales, while lowering its Q4 and full-year guidance. The company noted larger-than-expected declines in legacy product lines, an intensified competitive promotional environment in December, reduced traffic and higher-than-expected credit costs.  

Jobless claims move lower, regional manufacturing surprisingly jumps

Weekly initial jobless claims (chart) decreased by 3,000 to 213,000, below the Bloomberg estimate of 220,000, with the prior week's figure unrevised at 216,000. The four-week moving average dipped by 1,000 to 220,750, while continuing claims increased by 18,000 to 1,737,000, north of estimates of 1,734,000.

The Philly Fed Manufacturing Index (chart) unexpectedly showed growth (a reading above zero) accelerated, rising to 17.0 from 9.4 in December, compared to estimates of a dip to 9.0.

Treasuries were mostly lower, with the yield on the 2-year note rising 3 basis points (bps) to 2.57% and the yield on the10-year note gaining 2 bps to 2.75%, while the 30-year bond rate was flat at 3.07%.

The economic calendar will close out the week tomorrow with another dose of manufacturing data and a timely read on consumer sentiment. The Fed will deliver its industrial production and capacity utilization report, with production projected to rise 0.2% month-over-month (m/m) in December, after November's solid 0.6% gain, while capacity utilization is expected to remain at 78.5%. The report will be followed by the preliminary January University of Michigan Consumer Sentiment Index, forecasted to drop to 96.8 from December's 98.3 level. Schwab's Chief Investment Strategist Liz Ann Sonders takes a look at the shift in sentiment and the recent bounce in the stock markets after the Christmas Eve tumble in her latest article, Every Rose Has its Thorn: Healthy Rally, but Risks Linger.

Europe mostly lower, Asia mixed on Brexit developments, trade and China uneasiness 

European equities finished mostly lower, weighed down by uncertainty over Brexit after the U.K. government lost its bid to pass an original divorce plan in the House of Commons on Tuesday, but endured a no-confidence vote in Parliament yesterday. Markets seemed to be expecting Westminster to move for an extension of Article 50—pushing back the March 29 Brexit deadline—as the possibility of a general election or a no-deal scenario appeared to fade slightly. Banking stocks came under pressure, giving up some of yesterday's gains, following a warning regarding a challenging Q4 environment out of the French banking sector. European car shares also fell as U.S. tariff worries persisted and the energy sector saw pressure with crude oil prices trimming a recent run. Amid the bounce back in crude oil prices from the sharp drop seen last year, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses the energy sector in his latest, Schwab Sector Views: Drilling Down on Energy. In economic news, a final read of Eurozone December inflation data reaffirmed preliminary estimates prior to the European Central Bank's next policy meeting on January 24. The British pound moved higher and the euro dipped versus the U.S. dollar, while bond yields in the region were mostly higher. 

Stocks in Asia finished mixed, with relatively upbeat sentiment amid the ramped up earnings season in the U.S. being countered by lingering concerns toward China in the wake of recent disappointing data and ahead of the nation's Q4 GDP report due out over the weekend. Also, trade and U.K. Brexit uncertainty continued to fester. Chinese stocks moved lower even as the People's Bank of China injected $83 billion of liquidity into its banking system ahead of a traditionally tight period before the Chinese New Year. Concerns regarding an ongoing investigation into possible Iran sanction violations by China's Huawei Technologies seemed to resurface late in the day, to exacerbate geopolitical/trade worries. Japanese stocks dipped, with the yen gaining some ground on the U.S. dollar and markets still digesting yesterday's disappointing read for core machine orders ahead of tomorrow's December inflation report. However, South Korean, Australian and Indian equity markets gained modest ground. For a look at what might be in store for the global economy in 2019, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his video, 2019 Global Economic Outlook, as well as his latest article, What Could Go Right in 2019?.

Other international reports due out tomorrow that could garner attention include: Japanese industrial production and retail sales out of the U.K.

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Schwab Sector Views: Drilling Down on Energy
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