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Schwab Market Update

Markets Obtain Fresh Records on Deal to Reopen Gov’t

U.S equities notched new record highs, boosted by a Senate vote to reopen the government after a three-day shutdown, as well as a slew of M&A announcements. Treasury yields retreated slightly from a recent rally to multi-year highs and the U.S. dollar added to its drop as of late to multi-year lows. Meanwhile, crude oil and gold prices saw modest gains.

The Dow Jones Industrial Average (DJIA) rose 143 points (0.6%) to 26,215, the S&P 500 Index gained 23 points (0.8%) to 2,833, and the Nasdaq Composite jumped 72 points (1.0%) to 7,408. In moderate volume, 855 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil advanced $0.26 to $63.57 per barrel and wholesale gasoline added $0.02 to $1.88 per gallon. Elsewhere, the Bloomberg gold spot price gained $2.99 to $1,334.83 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.2% to 90.40.

Sanofi (SNY $43) announced an agreement to acquire U.S.-based hemophilia therapy company Bioverativ Inc. (BIVV $104) for $105 per share in cash, representing an equity value of about $11.6 billion. Shares of BIVV surged over 60%, while SNY finished lower.

Celgene Corp. (CELG $101) announced an agreement to acquire the rest of Juno Therapeutics (JUNO $86) that it does not already own for $87 per share in cash, or a total transaction value of approximately $9.0 billion. CELG closed slightly higher and JUNO rallied over 25%.

American International Group Inc. (AIG $61) reported an agreement to acquire Validus Holdings Ltd. (VR $67) for $68 per share in cash, for an aggregate transaction price of about $5.6 billion. AIG declined and VR jumped over 40%.

Shares of Sanmina-SCI Corp. (SANM $27) fell more than 20% after the electronics manufacturing services solutions company warned that its Q1 results will be below expectations, while it issued Q2 guidance that was also south of estimates. The company said its results were driven by slower than expected new program ramps and an unfavorable program mix. 

Yields dipping from multi-year highs, pressure on dollar continues ahead of data and amid politics

Treasuries finished slightly higher, with the economic calendar void of any major releases today. The yield on the 2-year note was flat at 2.07%, while the yields on the 10-year note and the 30-year bond dipped 1 basis point (bp) to 2.65% and 2.92%, respectively.

Treasury yields remain at multi-year highs and the U.S. Dollar Index at multi-year lows, with the markets grappling with synchronized global economic growth, flared-up political uncertainty as the U.S. government remains shut down for a third day, and world monetary policy appearing to be heading toward the path to normalization.

Amid this backdrop, Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, Monetary Tightening and Inflation Could Wake the Bond Bears, the Federal Reserve’s program to shrink its balance sheet will likely push bond yields higher as the market will need to absorb more supply, while stronger economic growth globally, a tight labor market and tax cuts point to a potential pickup in inflation in 2018. She adds that markets appear complacent, while with rates low, the yield curve relatively flat and credit spreads very narrow, fixed income markets aren’t priced for higher inflation or volatility. Kathy concludes that returns in fixed income are likely to be driven by the income generated rather than price appreciation.

The Senate secured enough votes to pass a three-week funding bill and allow the government to reopen, with a House vote expected to follow with the same result. The stock markets are back at all-time highs despite the flared-up political uncertainty, and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his commentary, Congress Scrambling to Avert Government Shutdown, historically, government shutdowns have not produced significant market volatility, but the situation adds a potential element of uncertainty to the market’s booming start to 2018. Michael adds that investors would be smart to keep an eye on the issue, but not let the day-to-day political news trigger any over-reactive changes to portfolios.

This sets the stage for a robust economic calendar this week, courtesy of December existing and new home sales reports, as well as preliminary durable goods orders and the Leading Index for last month, and the preliminary Markit business activity reports for January. The week will culminate with Friday's first look (of three) at Q4 GDP, which is expected to decelerate to a 3.0% annualized pace of growth. However, with only a small fraction of S&P 500 companies having reported thus far, earnings season is poised to kick into a higher gear this week and likely dominate the attention. However, the docket will start slowly, with only the Richmond Fed Manufacturing Activity Index slated for release tomorrow, with economists anticipating a slight downtick in the reading to 19 for January from the 20 posted the month prior, but well above the level of zero that separates expansion from contraction in activity. 

As noted in the latest Schwab Market Perspective: Party Like it's 2017!, this year seems unlikely to be a repeat of 2017 as volatility should pick up and the possibility of a larger pullback than what we saw last year has grown. Investor sentiment—often a contrarian indicator—is extended, which could mean that disappointments or surprises could be met with greater selling than we’ve seen in the recent past. We still believe that the bull has room to run as domestic economic strength is improving and global economies look better than they have in some time, so investors should stay disciplined, diversified and invested.

Europe higher, Asia mixed as political front takes center stage

European equities finished mostly higher, even as the euro rose versus the U.S. dollar, ahead of this week’s monetary policy decision from the European Central Bank. The British pound also gained ground on the greenback to hamstring the U.K. markets, while bond yields in the region are mixed. The political front garnered the heaviest attention as the U.S. government faced a vote today on a short-term spending bill as the shutdown entered its third day, while German coalition government talks appear to be progressing. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, and Vice President of Trading and Derivatives Randy Frederick also offer guidance for investors amid the political environment in the video, Political Risk: How Should Investors Respond?. Also, Jeffrey Kleintop, CFA, points out the Five Global Risks for Investors in 2018: geopolitics, chasing returns, private investment boom, return of inflation, and natural disasters, adding 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.

Stocks in Asia finished mixed as the U.S. government shutdown continued to garner attention, while this week’s monetary policy decision from the Bank of Japan (BoJ) headlines a host of key economic data set to be released in the region. The U.S. political uncertainty and pending data appear to have the markets a bit cautious after the strong global rally and Schwab's Chief Investment Strategist Liz Ann Sonders and Randy Frederick discuss the question in the video, How Much Longer Could the Bull Market Last?, talking about some of the data that Liz Ann watches to help gauge when this momentum might begin to slow down a little bit. Stocks in Japan finished flat with the yen little changed versus the U.S. dollar, mainland Chinese equities and those traded in Hong Kong advanced, while financials weighed on Australia’s markets, and technology stocks pressured South Korean securities.

In addition to the Bank of Japan monetary policy decision, tomorrow's international economic calendar will yield the island nation's All-Industry Index, while reports across the pond will include the Zew Economic Sentiment Survey from Germany and consumer sentiment from the Eurozone.

Schwab Center for Financial Research - Market Analysis Group

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