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Stocks Slump Following Recent Rally

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U.S. stocks faded in late afternoon trading before closing the day in the red. This comes after last week’s sharp rally that had taken the Nasdaq back to record high territory and the S&P 500 on a grind closer to positive figures for the year. The global markets seemed to reassess the run as new COVID-19 cases continue to climb, data out of the Eurozone was softer than expected and uncertainty continued regarding China's new security law on Hong Kong. Treasury yields were mostly lower as bonds prices rose and the U.S. dollar gained ground, while a read on demand for U.S. labor in May surprisingly rose. Crude oil prices were little changed and gold turned higher. Novavax jumped after being awarded $1.6 billion from the government biotech program dubbed Operation Warp Speed, Sunrun agreed to acquire Vivint Solar, and United Airlines fell amid pressure on travel-related issues and a report from CNBC about potential layoffs. Europe finished lower and Asia closed mixed.   

The Dow Jones Industrial Average fell 397 points (1.5%) to 25,890, the S&P 500 Index decreased 34 points (1.1%) to 3,145 and the Nasdaq Composite declined 90 points (0.9%) to 10,344. In moderately-heavy volume, 961 million shares were traded on the NYSE and 4.3 billion shares changed hands on the NASDAQ. WTI crude was little changed at $40.62 per barrel and wholesale gasoline increased $0.03 to $1.27 per gallon. Elsewhere, the Bloomberg gold spot price gained $12.15 to $1,796.83 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.3% at 96.98.

Novavax Inc. (NVAX $104) jumped over 30% after the company announced it has been selected to participate in Operation Warp Speed (OWS), a U.S. government program that aims to begin delivering millions of doses of a safe, effective vaccine for COVID-19 in 2021. Under the terms of OWS, the late-stage biotechnology company developing vaccines for serious infectious diseases has been awarded $1.6 billion by the federal government to complete late-stage clinical development, including a pivotal Phase 3 trial, establish large-scale manufacturing and deliver 100 million doses of its COVID-19 candidate, as early as late 2020.

Sunrun Inc. (RUN $26), a provider of residential solar, battery storage and energy services, announced an agreement to acquire Vivint Solar Inc. (VSLR $15) in an all-stock transaction, representing an enterprise value of $3.2 billion. Under the terms of the deal VSLR common stock will be exchanged for 0.55 shares of RUN, representing a combined enterprise value of $9.2 billion based on yesterday's closing price of RUN's shares. VSLR stockholders are expected to own about 36% and RUN stockholders are expected to own approximately 64% of the combined company. Shares of both companies were sharply higher.

United Airlines Holdings Inc. (UAL $33) fell amid pressure on travel-related issues amid the lingering uncertainty regarding the rise in new cases and exacerbated by a report from CNBC's Phil LeBeau that the airline may send thousands of employees "warn" notices regarding potential layoffs come October 1.

Prior to today, stocks had rallied despite rising new COVID-19 cases, notably in the world's largest economy of the U.S. Global economic data has suggested that reopenings from the pandemic's severe disruption has fostered a recovery in activity, while the backdrop of the massive monetary and fiscal stimulus measures remains a key source of support, along with progress from the Health Care sector on finding a treatment/vaccine for the virus.

Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers his latest article, Making Sense Of The Market (And Where We Can't), discussing how investors are often most uncomfortable when it seems that the stock market isn't making any sense whether it's heading up or down, noting that in these uncertain times, it may be comforting to know that the markets are making some sense. Jeff points out that we are able to make some sense of global earnings and stock market performance in addition to the pace and success of re-openings and relative stock market performance across countries.  

Moreover, Schwab's Chief Fixed Income Strategist Kathy Jones discusses the impact of the flood of monetary and fiscal support in her commentary, Stimulus = Inflation? Why It May Be Different This Time, and Jeffrey Kleintop addresses in the article, What's the Future Payback for the Stimulus?.  

For commentary from our experts amid the wild market swings, follow the Schwab Center for Financial Research (SCFR) on Twitter at @SchwabResearch, and visit www.schwab.com/volatility to see all the content Schwab offers on the unparalleled market action.

Treasury yields dipped, job openings unexpectedly rebounded in May 

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, surprisingly rose to 5.4 million jobs available to be filled in May, from April's downwardly-revised 5.0 million figure and compared to forecasts calling for a drop to 4.5 million. The report showed the hiring rate rose to 4.9% from April's 3.1% rate and separations fell to 3.1% from 7.6%.

Treasuries were mostly higher as the stock markets paused from the recent rally and following the positive employment data, as the yield on the 2-year note was flat at 0.16%, the yield on the 10-year note ticked 4 basis points (bps) lower to 0.64%, and the 30-year bond rate decreased 7 bps to 1.37%.

Moreover, Schwab's Kathy Jones offers her 2020 Mid-Year Outlook: Fixed Income, noting how interest rates are likely to stay low as markets try to bridge the economic gap to the new normal.

Tomorrow’s economic calendar in the U.S. is again on the lighter side, starting with the MBA Mortgage Applications release for the week ended July 3. The afternoon will see the release of May’s Consumer Credit report, forecasted to show that consumer borrowing for May decreased $15.0 billion following April’s $68.8 billion decline.

Europe trims recent run on data and lowered economic forecast while Asia closes mixed

European equities pared the strong gains that had been seen in Q3, as the markets digested some lackluster economic data in the region, a lowered economic forecast from the European Commission, and the continued rise in new cases of COVID-19 out of the U.S. German industrial production came in well below expectations for May and the European Commission slashed its Eurozone economic forecast a full percentage point from its previous outlook to an 8.7% contraction. The euro was lower versus the U.S. dollar, though the British pound traded higher and bond yields in the region were mixed. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Pause: Stocks' June Consolidation Continues, that she has been highlighting the warp speed nature of this crisis—with a "full" market cycle having been condensed into a few months. She adds that the wild swings have emboldened some investors and traders; while leaving others in a state of confusion. Liz Ann adds that we've been recommending that investors remain at their long-term strategic equity allocations; but "react" to the larger swings by considering rebalancing more frequently. This allows portfolios to "stay in gear" by trimming into strength and adding into weakness; vs. trying to time short-term peaks and troughs (which is always extremely difficult).

The U.K. FTSE 100 Index dropped 1.5%, France's CAC-40 Index decreased 0.7%, Germany's DAX Index declined 0.9%, Spain's IBEX 35 Index fell 1.4%, Switzerland's Swiss Market Index was down 0.4%, and Italy's FTSE MIB Index dipped 0.1%.

Stocks in Asia finished mixed on the heels of yesterday's rally, with the markets appearing to reassess the decisive climb as of late, that has been fueled by optimism economic activity may be recovering, while monitoring the accompanying rise in new cases that has been prevalent in the U.S. Schwab's Jeffrey Kleintop, CFA, discusses in his commentary, What Will The Recovery Look Like?, that this recession is the result of a shock, not the natural end result of a slow build-up of excesses. Jeff adds that this may mean the recession and bear market could be deeper, but also that the duration may be shorter. Japan's Nikkei 225 Index declined 0.4%, with the yen gaining some ground during the session even as labor earnings and household spending data for May fell more than expected. South Korea's Kospi Index fell 1.1%, and the Hang Seng Index dropped 1.4% amid festering uncertainty regarding the ultimate impact of China's recently instituted national security law on Hong Kong. Australia's S&P/ASX 200 Index finished little changed after the Reserve Bank of Australia left its monetary policy stance unchanged. However, China's Shanghai Composite Index advanced 0.4%, extending a recent surge, and India's S&P BSE Sensex 30 Index gained 0.5%.

The international calendar tomorrow will offer loan data from Japan and China and retail sales numbers from Brazil.

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