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Schwab Market Update

U.S. Markets Remain Unnerved Amid Global Uncertainty

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Yesterday's rebound was a fleeting memory, as U.S. equities saw solid declines amid escalated global uneasiness surrounding the economic/currency turmoil in Turkey, soft economic data out of China, and continued pressure on technology stocks. Commodities also sold off, as gold and copper tumbled, and crude oil prices dropped in the wake of an unexpected rise in oil inventories. Treasury yields fell amid the negative sentiment, with mostly upbeat economic reports providing little help, while the U.S. dollar was nearly unchanged.    

The Dow Jones Industrial Average (DJIA) declined 138 points (0.5%) to 25,162, the S&P 500 Index decreased 22 points (0.8%) to 2,818, and the Nasdaq Composite was 97 points (1.2%) lower at 7,774. In moderately-heavy volume, 797 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $2.01 to $65.01 per barrel and wholesale gasoline lost $0.03 to $2.00 per gallon. Elsewhere, the Bloomberg gold spot price plunged $18.48 to $1,175.61 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.69.

Macy's Inc. (M $35) reported Q2 earnings-per-share (EPS) of $0.53, or $0.59 ex-items, versus the $0.50 FactSet estimate, as revenues declined 1.1% year-over-year (y/y) to $5.6 billion, roughly in line with forecasts. Q2 same-store sales rose 0.5% y/y, compared to the projected 0.7% decline. The retailer's gross margin came in a bit shy of expectations, but was higher y/y.  M raised its full-year revenue and EPS outlooks. However, shares fell as the report appeared to garner some scrutiny on the Street as the stock had rallied sharply over the last three months leading up to the report. 

Diamondback Energy Inc. (FANG $118) announced an agreement to acquire Energen Corporation (EGN $75) for $84.95 per share in an all-stock transaction valued at about $9.2 billion, including debt. Under the terms of the deal, EGN stockholders will receive 0.6442 of FANG shares for each share owned. FANG traded solidly lower and EGN gained ground.

Canopy Growth Corporation (CGC $32) jumped after alcohol beverage company Constellation Brands Inc. (STZ $208) announced that it will increase its stake to about 38% by investing $4.0 billion in the diversified Canadian cannabis company. STZ traded decisively lower.

Tencent Holdings Ltd. (TCEHY $41) weighed on the Chinese markets and pressured the technology sector after the company posted an unexpected decline in profits and disappointing revenue growth, which followed yesterday's announcement that it pulled a video game from one of its platforms amid regulatory restructuring efforts in China.

Retail sales top forecasts, headlining a busy economic docket

Advance retail sales (chart) for July rose 0.5% month-over-month (m/m), above the Bloomberg forecast of a 0.1% gain, while June's figure was downwardly revised to a 0.2% rise. Last month's sales ex-autos were up 0.6% m/m, versus expectations calling for a 0.3% rise and the negatively-revised 0.2% gain seen in June. Sales ex-autos and gas rose 0.6% m/m, compared to estimates of a 0.4% gain and June's downwardly-revised 0.2% increase. The control group, a figure used to calculate GDP, grew 0.5%, compared to projections of a 0.4% gain and June's negatively- revised 0.1% dip.

The Empire Manufacturing Index showed output from the New York region unexpectedly accelerated further into expansion territory (a reading above zero) for August. The index rose to 25.6 from July's unrevised 22.6 level, with forecasts calling for a dip to 20.0.

Preliminary Q2 nonfarm productivity (chart) rose 2.9% on an annualized basis, versus expectations of a 2.4% gain, following the downwardly- revised 0.3% increase seen in Q1. Unit labor costs declined 0.9%, versus the forecast calling for a flat reading. Unit labor costs were revised upward to a gain of 3.4% in Q1.

The Federal Reserve's industrial production report (chart) showed a 0.1% m/m uptick in July, compared to estimates of a 0.3% gain, but June's 0.6% rise was revised to a 1.0% increase. Manufacturing output rose slightly, offset by declines for mining and utilities production. Capacity utilization held steady at the prior month's upwardly-revised 78.1% rate, and versus forecasts of 78.2. Capacity utilization is 1.7 percentage points below its long-run average.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month dipped to 67 from July's unrevised 68 level, in line with forecasts. However, a reading of 50 separates good and poor conditions. The NAHB said builders continue to report strong demand for new housing, fueled by steady job and income growth along with rising household formations, but they are increasingly focused on growing affordability concerns, stemming from rising construction costs, shortages of skilled labor and a dearth of buildable lots.

The MBA Mortgage Application Index declined 2.0% last week, following the prior week's 3.0% decrease. The fall came as a flat reading for the Refinance Index was met with a 3.3% drop in the Purchase Index. The average 30-year mortgage rate decreased 3 basis points (bps) to at 4.81%.

Business inventories (chart) ticked 0.1% higher m/m in June, matching forecasts, and following May's downwardly-revised 0.3% gain. 

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Second Hand News: Facing a Second Derivative Economic Inflection Point?, U.S. economic growth is strong; but it’s time to look at the signs we may be facing a "second derivative" change, or inflection point in growth. Liz Ann adds that complacency abounds—about growth, volatility, inflation and trade, while pointing out that when it comes to the relationship between economic fundamentals and stock market behavior, "better or worse matters more than good or bad."

Treasuries were higher, as the yields on the 2-year and 10-year notes, along with the 30-year bond, fell 3 bps to 2.61%, 2.86% and 3.03%, respectively. Schwab's Chief Fixed Income Strategist, Kathy Jones offers a look at bond investing in her latest article, Are Your Bond Holdings Too Short?. The markets continue to grapple with a solid economic/earnings foundation, relatively calm Fed tightening concerns, the escalated economic/currency crisis in Turkey, as well as continued softness in data and the stock markets in China.

More housing data will grace tomorrow's economic calendar in the form of the July housing starts and building permits report, with starts forecasted to have increased 7.4% m/m to an annual pace of 1,260,000 and permits to have risen 1.4% m/m to an annual pace of 1,310,000 following surprising declines in both figures for June, as well as weekly initial jobless claims, with economists projecting a slight uptick to a level of 215,000. The Philly Fed Manufacturing Activity Index will round out the day's docket.

Europe and Asia stumble on Chinese weakness, Turkish concerns

European equities finished broadly lower, led by a drop in materials issues, with China continuing to fall following a flood of disappointing economic reports and earnings results out of the tech sector that appear to be keeping the global markets on edge. Energy stocks also saw solid pressure as crude oil prices fell in the wake of an unexpected jump in oil inventories in the U.S. The festering Turkish economic/currency crisis added to the market skittishness, along with the extended gain in the U.S. dollar during the session that pressured the euro and British pound.  Bond yields in the region finished mixed. In economic news, U.K. inflation statistics came in mixed for July. With caution resurfacing in the global markets, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Five Global Investing Risks to Watch, in which he notes that a global recession would be a big risk for stocks, and while the global economic cycle is aging, we don’t foresee a global recession taking place in 2018—although that risk may rise in 2019. Jeff reminds us that having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome is a key to successful investing. Markets in Italy were closed for a holiday.

Stocks in Asia finished mostly to the downside, despite the solid rebound in the U.S. yesterday that came as the Turkish lira recovered somewhat. However, the economic/currency crisis in Turkey remained a source of skittishness and Chinese markets continued to slide. Stocks in mainland China and Hong Kong fell sharply, with the yuan weakening in the wake of this week's flood of disappointing economic data, as well as pressure coming from the technology sector. Japanese equities declined amid the weakness in the tech sector as well, even as the yen lost some ground. However, Australian securities overcame early losses and finished higher, aided by strength in healthcare, technology and consumer staples issues. Markets in South Korea and India were closed for holidays.

With the markets remaining wobbly, Schwab's 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.

Tomorrow's international economic calendar will yield trade data from Japan, labor statistics from Australia, building permits from Germany, as well as trade figures from the U.K. and the Eurozone.

©2018 Charles Schwab & Co., Inc., Member SIPC. All rights reserved.

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