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Market Update

Schwab clients get the latest in-depth U.S. market news as well as analysis and commentary from respected sources, both proprietary and third party.

Posted: 10/20/2017 1:15 PM EDT

Stocks Closing Out Week Positively

U.S. equities are adding to weekly gains as last night's passing of the Senate's budget resolution is sparking some relative tax reform optimism. Treasury yields and the U.S. dollar are rallying on the optimism, along with Fed leadership speculation and a surprising rise in existing home sales. The markets are shrugging off Dow member General Electric's severe earnings miss. Gold is falling and crude oil is dipping. Europe gained ground.

At 12:51 p.m. ET, the Dow Jones Industrial Average and the Nasdaq Composite are up 0.5%, while the S&P 500 Index is gaining 0.4%. WTI crude oil is dipping $0.08 at $51.43 per barrel and Brent crude oil is edging $0.04 lower to $57.19 per barrel, while wholesale gasoline is up $0.01 at $1.66 per gallon. The Bloomberg gold spot price is trading $10.08 lower to $1,280.04 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is advancing 0.4% to 93.70.

Dow member General Electric Co. (GE $23) reported Q3 earnings-per-share (EPS) of $0.22, or $0.29 ex-items, well below the $0.49 FactSet estimate, as revenues grew 14.4% year-over-year (y/y) to $33.5 billion, above the projected $32.5 billion. The company called the quarter challenging as solid earnings performance in a majority of its businesses was offset by a decline in power performance in a difficult market. GE lowered its full-year EPS outlook. Shares are lower Shares are lower but have pared heavy losses.

Dow component Procter & Gamble Co. (PG $88) posted fiscal Q1 EPS of $1.06, or $1.09 ex-items, versus the $1.08 expectation, with revenues rising 1.0% y/y to $16.7 billion, roughly in line with forecasts. The company's gross margin missed expectations. The company said it saw organic sales growth in a decelerating global market and against a relatively strong base period. PG reaffirmed its full-year guidance. Shares are seeing pressure.

Honeywell International Inc. (HON $145) announced Q3 earnings of $1.75 per share, matching estimates, as revenues increased 3.0% y/y to $10.1 billion, compared to the expected $10.0 billion. HON reaffirmed its full-year profit outlook, but its Q4 earnings guidance missed forecasts. Shares are ticking higher.

Home sales surprisingly rise, tax reform and Fed speculation boost yields and dollar

Existing-home sales in September rose 0.7% month-over-month (m/m) to a 5.39 million annual rate, compared to the Bloomberg forecast of a 5.30 million pace, and versus August's unrevised 5.35 million rate. Sales of single-family homes grew m/m but were below year ago levels, while purchases of multi-family structures fell and remain lower y/y. The median existing-home price was up 4.2% y/y at $245,100. Unsold inventory came in at a 4.2-months pace at the current sales rate, down from the 4.5 months rate a year ago. Inventory of homes for sale rose, but are down 6.4% y/y, falling for 28 consecutive months. Sales were flat m/m in the Northeast and slipped in the South, while rising in the Midwest and West. Existing home sales are based on contract closings instead of signings and account for the majority of the housing sales market.

The National Association of Realtors (NAR) noted temporary, but notable declines in Texas and Florida due to the hurricanes, as discussed by Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, in his latest article, Fires, Hurricanes, and Earthquakes: What Disasters Mean For Markets. The NAR added that home sales in recent months remain at their lowest level of the year and are unable to break through, despite considerable buyer interest in most parts of the country as supply issues and fast-rising prices continue to stifle sales growth. If supply and price pressures ease, the housing market could get a boost, amplified by that fact that the report said nearly two-thirds of renters currently believe now is a good time to buy a home. This is one pillar buoying Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, outperform rating on the financial sector noted in his latest, Schwab Sector Views: Sustainable Energy?.

Treasuries are falling, with the yield on the 2-year note rising 4 basis points (bps) to 1.57%, while the yields on the 10-year note and the 30-year bond are gaining 6 bps to 2.38% and 2.89%, respectively.

Treasury yields and the U.S. dollar are rising amid speculation on who the next Fed Chief will be and as the Senate passed its budget resolution late last night to nudge tax reform down the lengthy path to fruition.

Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis of the potential leadership changes and balance sheet reduction at the Fed in her article, Understanding the Federal Reserve's Shrinking Balance Sheet, and the video with Vice President of Trading and Derivatives, Randy Frederick, Should a Change in Fed Leadership Matter to Investors?. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses the likely elongated journey off tax reform in the article, Tax Reform Framework Released, But The Road Ahead Is Long.

Check out these articles and video on the Market Commentary page at www.schwab.com and follow Kathy, Randy and Schwab on Twitter: @kathyjones, @randyafrederick and @schwabresearch.

Europe higher as financials gain and politics remain in focus

European equity markets tilted to the upside, with financials leading to the upside, bolstered by a gain in bond yields in the region. The euro traded lower versus the U.S. dollar, which got a boost from relative optimism regarding tax reform after the Senate passed its budget resolution. Volvo AB (VLVLY $20) rallied after the Swedish truckmaker posted upbeat quarterly earnings results. The British pound was higher versus the greenback as the European Union's summit in Brussels continued as Brexit negotiations remained in a deadlock but headlines suggested talks could be getting closer to moving to the next phase. However, Spanish political uneasiness lingered on the heels of yesterday's announcement that Spain was moving to suspend Catalonia's autonomy after it missed a deadline to renounce its independence push.

For analysis of Brexit and Spanish political concerns, see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond?, and our article, Brexit Begins: What's Next for the U.K?, on the Market Commentary page at www.schwab.com.

The U.K. FTSE 100 Index, Germany's DAX Index and Switzerland's Swiss Market Index finished flat, while France's CAC-40 Index ticked 0.1% higher, Spain's IBEX 35 Index was up 0.3%, and Italy's FTSE MIB Index rose 1.0%.

Schwab Center for Financial Research - Market Analysis Group

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