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Market Update

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Posted: 6/18/2018 4:15 PM EDT

Stocks Trade Mostly Lower to Begin Week

U.S. stocks traded mostly lower to begin the week with global equities finding broad based pressure as investors continued to contemplate lingering Sino-American trade concerns. Crude oil prices traded higher ahead of an OPEC meeting later this week, Treasury yields and the U.S. dollar were nearly unchanged and gold dipped. In economic developments, homebuilder sentiment slipped this month, kicking-off a week that will be heavy on housing data, while equity news included some M&A action in the energy sector.

The Dow Jones Industrial Average (DJIA) declined 103 points (0.4%) to 24,988, the S&P 500 Index lost 6 points (0.2%) to 2,774, and the Nasdaq Composite added 1 point to 7,747. In moderate volume, 859 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil traded $0.73 higher to $65.79 per barrel and wholesale gasoline was up $0.03 at $2.05 per gallon. Elsewhere, the Bloomberg gold spot price ticked $0.42 lower at $1,278.52 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.79.

Baytex Energy Corp. (BTE $3) and Raging River Exploration Inc. (RRENF $4) announced an agreement to merge, creating a North American oil producer with an enterprise value of about $5.0 billion. The combined company will operate under the Baytex name. Shares of both companies traded solidly lower.

PTC Therapeutics Inc. (PTCT $48) rallied after the company announced upbeat results from a trial of its treatment for babies with Type 1 Spinal Muscular Atrophy.

Homebuilder sentiment slips but remains solidly in positive territory

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month declined to 68 from May's unrevised 70 level, where the Bloomberg forecast called for it to remain. However, a reading of 50 separates good and poor conditions. The NAHB said builders are optimistic about housing market conditions as consumer demand continues to grow. However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability.

Today's report kicked-off the economic week that will be loaded with housing data, as the May housing starts and building permits report will follow tomorrow as the sole release from the economic calendar, with starts expected to have increased 1.9% m/m and permits forecasted to have declined 1.0% m/m. The housing data will culminate with Wednesday's release of May existing home sales. Additional reports that will likely garner some attention later in the week include the Leading Index for May and preliminary Markit business activity reports for June.

Treasuries were flat, with the yields on the 2-year and 10-year notes, as well as the 30-year bond rate all nearly unchanged at 2.55%, 2.92% and 3.05%, respectively.

Treasury yields and the U.S. dollar were relatively quiet, while the stock markets slipped amid festering trade concerns between China and the U.S. after both traded tariff announcements last week. Political uncertainty in Europe also lingered and crude oil prices were in focus ahead of an expected OPEC meeting this week that could result in a production announcement. Finally, the global markets continued to assess last week's Fed rate hike and possible timeline for the European Central Bank (ECB) to begin to unwind its stimulus measures.

As noted in the latest Schwab Market Perspective: Rough Waters for Summer?, U.S. stocks have been trending higher, but endured some rough water over the past few weeks. Although bumpy, major U.S. indexes have moved to the top of the recent range and the secular bull market should stay intact. The U.S. economy is in good shape and likely able to withstand some of the brewing storms. Bouts of volatility are unlikely to diminish Fed tightening expectations. 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. For analysis of the impact of the Fed's tightening campaign, check out our article, Fed Rate Hike: What Does It Mean for Your Portfolio?

Europe and Asia mostly lower as global markets slide on trade worries

European equities finished broadly lower, with trade concerns hamstringing the global markets, which were exacerbated by the U.S. and China trading tariff announcements last week, while the energy sector garnered attention ahead of this week's OPEC meeting. Political uncertainty in the region also lingered, likely draining conviction, with Germany grappling with a standoff regarding immigration. The euro was little changed versus the U.S. dollar with ECB President Mario Draghi expected to speak this evening and later this week following last week's monetary policy meeting that gave us a look at the possible timing of the central bank's start to getting on the path to monetary policy normalization. The British pound lost some ground on the greenback, while bond yields in the region were mostly lower. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest 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.

Stocks in Asia finished lower with the global markets remaining on edge as last week's announced tariffs from the U.S. and China toward one another escalated trade concerns, while the markets also focused on the energy sector as an OPEC meeting later this week looms. Japanese equities fell, with the yen moving higher and data showing the nation's trade deficit narrowed by a smaller amount than expected for May. However, volume was lighter than usual as markets in China and Hong Kong were closed for holidays. Australian securities bucked the trend, ticking higher amid some weakness in the Australian dollar and strength seen in the financial sector, which offset losses for materials and energy issues. Indian stocks declined and South Korean shares led to the downside as the tech sector saw some pressure. Schwab's Jeffrey Kleintop offers commentary of these markets in his recent article, Emerging Market Stocks: From Front-Runner To Dark Horse?, noting 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.

Tomorrow's international economic docket will be relatively light and include Q1 house prices from Australia, import and export data from South Korea and the current account and construction output from the Eurozone.

Schwab Center for Financial Research - Market Analysis Group

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