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Schwab Market Update

Stocks Trade Mostly Higher as Energy Sector Powers Gains

U.S. stocks closed the regular trading session mostly higher with the energy sector rallying amid a surge in crude oil prices following an agreement to modestly increase production among OPEC and non-OPEC members. Tech stocks underperformed as trade concerns persisted and open source solutions company Red Hat issued Q2 guidance that was below the Street's expectations. Treasury yields were mostly flat, gold ticked higher and the U.S. dollar trimmed a recent run, while Markit's business activity reports showed growth slowed but remained in expansion territory.

The Dow Jones Industrial Average (DJIA) increased 119 points (0.5%) to 24,581, the S&P 500 Index advanced 5 points (0.2%) to 2,755, and the Nasdaq Composite dipped 20 points (0.3%) to 7,693. In very heavy volume, due to the rebalancing of FTSE Russell's U.S. indexes, 2.2 billion shares were traded on the NYSE and 3.4 billion shares changed hands on the Nasdaq. WTI crude oil surged $3.04 to $68.58 per barrel and wholesale gasoline was up $0.06 at $2.07 per gallon. Elsewhere, the Bloomberg gold spot price traded $2.96 higher to $1,270.15 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 94.53. Markets were lower for the week, as the DJIA fell 2.0%, the S&P 500 Index was 0.9% lower and the Nasdaq Composite declined 0.7%.

BlackBerry Limited (BB $11) reported a fiscal Q1 loss of $0.11 per share, or earnings-per-share (EPS) ex-items of $0.03, versus the FactSet estimate of a breakeven quarter, with revenues declining 9.4% year-over-year (y/y) to $213 million, above the projected $208 million. The company said it is off to a good start to fiscal 2019.. However, shares traded lower as the company's enterprise software revenue for Q1, a key unit the company relies on, missed analysts' forecasts. BB said it expects software and services billings growth in the current year to be in the double-digits.  

Red Hat Inc. (RHT $142) posted Q1 EPS of $0.59, or $0.72 ex-items, compared to the projected $0.68, as revenues grew 20.0% y/y to $814 million, north of the forecasted $808 million. The open source solutions company's subscription revenue and billings came in a bit shy of expectations. RHT issued Q2 guidance that was below the Street's expectations, while its full-year revenue outlook was lowered, due to "headwinds that have developed in foreign exchange rates."  Separately, the company authorized a $1.0 billion share repurchase program. Shares fell.  

For a look at the tech sector, check out Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Why the Tech Sector Isn't Big Enough, where he notes that the information technology sector now makes up more than a quarter of the overall market—but given its place in our economy, it may not be big enough. Brad concludes that despite the already solid gains for tech stocks, we believe there is potentially still more outperformance to come.

CarMax Inc. (KMX $80) rallied after the car dealer topped Q1 earnings and revenue expectations, while its same-store sales came in stronger than expected.

June business activity slows but shows continued growth

The preliminary Markit U.S. Manufacturing PMI Index showed expansion in output slowed more than expected, falling to 54.6 in June from May's 56.4 figure, and compared to the Bloomberg estimate calling for a 56.1 figure. The preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector slowed slightly this month, dipping to 56.5 from May's 56.8 figure, matching forecasts. However, readings above 50 for both indexes denote expansion.

Treasuries were nearly unchanged, with the yield on the 2-year note ticking 1 basis point (bp) higher to 2.55%, while the yields on the 10-year note and the 30-year bond were flat at 2.90% and 3.04%, respectively.

The U.S. dollar trimmed a recent run, while the Dow was able to snap a string of losses. Escalated global trade concerns have been at the heart of the recent market moves as discussed in our article, Trade Tensions Heat Up: What Does It Mean for Investors?. Also, the markets are grappling with global monetary policy that looks to be tilting toward the tightening side, and the synchronized global growth story that has come into question given the softness seen in Europe and the uneasiness regarding the potential impact on emerging markets of the persistent rise in the U.S. dollar. Meanwhile, crude oil prices rallied following today's conclusion of an OPEC meeting, with members and their non-OPEC partners agreeing to increase production, but reports suggested the rise may not be enough to tamp down oil prices that have rallied as of late. However, the domestic economy remains on solid footing and Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Debt Song: It's Not a Pretty Tune, expected stronger economic growth is a good thing, but it’s also bringing tighter monetary policy, which has implications for servicing the rising burden of debt.

Europe mostly higher, Asia mixed

European equities finished mostly higher, with energy stocks leading the way as crude oil prices rose solidly amid reports OPEC and non-OPEC members reached a production increase agreement following today's meeting. However, headlines suggested the potential increase may not be enough to stem the recent rally in crude oil prices. Banking stocks were also higher, with Italian banks rebounding from yesterday's drop that came amid the lingering political uncertainty, aided by comments from an Italian lawmaker that appeared to cool concerns that the government is looking to leave the single currency union. Automakers remained hamstrung by the festering global trade concerns, weighing on the German markets, as U.S. President Donald Trump threatened tariffs on EU automakers. U.K. Brexit concerns were also in focus. Economic data in the region was relatively upbeat, headlined by Markit's Eurozone Composite PMI Index—a gauge of business activity in the both the manufacturing and services sectors—that showed growth unexpectedly accelerated. The euro and British pound were higher on the data and as the U.S. dollar trimmed a run as of late, while bond yields in the region finished mixed. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Are Stocks Taking a GAP Year?, that gains in the global stock market have taken time off this year to consider GAP concerns: growth, agreements, and policy, but the gap year for global markets may not last a full year if the growth and trade concerns become temporary and fiscal policy stimulus moderates monetary policy tightening.

Stocks in Asia finished mixed amid the continued global trade uneasiness that has hampered global equities and the markets remained cautious ahead of today's expected OPEC meeting decision on production increases. However, Chinese stocks found some support from news that brokers must seek government approval before liquidating shares pledged as collateral for loans, per Bloomberg. Also, a reprieve from the recent rally in the U.S. dollar likely helped emerging markets recover. Schwab's Jeffrey Kleintop offers notes in his latest article, Emerging Market Stocks: From Front-Runner To Dark Horse?, how emerging market stocks appear to have gone from front-runner to dark horse in the minds of investors. Yet, he also makes the case that the current environment may be most similar to those which generated outperformance by emerging markets in the past. Shares trading in mainland China and in Hong Kong gained ground, while equities in South Korea and India also finished higher. Australian securities dipped and Japanese stocks fell amid the festering trade uneasiness and as the yen resumed an upward move, with Japan reporting that May consumer price inflation came in a bit hotter than expected y/y for the headline rate.

Stocks lower on the week as trade tensions remain escalated

Stocks finished lower on the week, with global trade uneasiness festering after President Donald Trump offered more tariff threats against China after the two nations traded tariff jabs in the week prior and China vowed retaliation. Signs of tightening financial conditions also likely weighed on conviction, with the Fed remaining on a gradual rate hike path and the European Central Bank signaling it is close to getting on the path to policy normalization last week, which was followed by this week's hawkish takeaway from the Bank of England's monetary policy decision. Treasury yields continued to be choppy, with the 10-year note remaining below the 3.00% mark, while the U.S. dollar dipped late in the week after a recent run that has added to volatility, notably in the emerging markets. Most major sectors finished lower, though the energy sector moved higher after the OPEC meeting delivered a production increase that appeared to fail to calm concerns in the wake of the recent surge in crude oil prices. Earnings results from the tech sector were mixed, with Oracle Corp. (ORCL $44) offering a disappointing outlook and Micron Technology Inc. (MU $57) topping expectations. M&A activity continued to ramp up, headlined by Dow member Walt Disney Co. (DIS $106) sweetening its bid for assets of Twenty-First Century Fox Inc. (FOXA $49), trying to trump a separate proposal made by Comcast Corp. (CMCSA $34) last week. 

As noted in the latest Schwab Market Perspective: Searching for Balance, domestic stocks have been able to climb a wall of worry and remain near the top of their recent range despite the ramping up of trade rhetoric. U.S. economic growth appears to be accelerating, while the Federal Reserve reiterated that it has no desire to derail growth at this time. Trade concerns are ramping up; and although the major global players look able to withstand at least some trade stress, the margin for error is narrowing.

Next week, the economic calendar will be robust, courtesy of releases of new home sales, Consumer Confidence, preliminary durable goods orders, the final look (of three) at Q1 GDP, personal income and spending, the Chicago Purchasing Managers Index, and the final University of Michigan Consumer Sentiment Index

International reports due out next week that deserve a mention include: China—industrial profits. Japan—retail sales and industrial production. Eurozone—economic/consumer confidence and consumer price inflation, as well as German business confidence, retail sales and employment change. U.K.—Q1 GDP.      

Schwab Center for Financial Research - Market Analysis Group

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Schwab Market Perspective: Searching for Balance
Schwab Market Perspective: Rough Waters for Summer?

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