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Market Update

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Posted: 4/23/2018 4:15 PM EDT

Stocks Marginally Lower in Volatile Session

In choppy trading, U.S. equities finished with modest losses, as focus on the run in Treasury yields, which has taken the rate on the 10-year Treasury note very near the 3.00% mark for the first time in over four years, appears to be fraying investors' nerves. A busy week on the economic and earnings fronts got rolling, with Hasbro posting softer-than-expected results, while existing home sales and business activity reports topped forecasts. The U.S. dollar added to its recent run, crude oil prices were higher, and gold was lower.

The Dow Jones Industrial Average (DJIA) declined 14 points (0.1%) to 24,449, the S&P 500 Index was nearly unchanged at 2,670, and the Nasdaq Composite moved 18 points (0.3%) lower to 7,129. In moderate volume, 730 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.24 to $68.64 per barrel and wholesale gasoline was $0.03 higher at $2.13 per gallon. Elsewhere, the Bloomberg gold spot price tumbled $11.64 to $1,324.72 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.7% at 90.93.

Hasbro Inc. (HAS $86) reported a Q1 loss of $0.90 per share, or earnings-per-share (EPS) of $0.10 ex-items, versus the FactSet estimate calling for EPS of $0.33, as revenues declined 16.0% year-over-year (y/y) to $716 million, below the forecasted $816 million. The toy company said its results were negatively impacted by the liquidation of Toys "R" Us in the U.S. and U.K., along with uncertainty in its other operations, as well as retail inventory overhang, primarily in Europe. Shares overcame an early drop and finished higher.

CenterPoint Energy Inc. (CNP $26) announced an agreement to acquire Vectren Corp. (VVC $70), for $72.00 per share in cash, which VVC stockholders will receive for each share owned. The combined company is expected to have electric and natural gas delivery operations in eight states, with an enterprise value of $27 billion. Shares of CNP fell, while VVC gained solid ground.

Kimberly-Clark Corp. (KMB $99) was lower in choppy action after the household product company's profit margins missed expectations, overshadowing its Q1 EPS and revenue performance that topped forecasts and its guidance that had midpoints north of estimates.

Shares of Alcoa Corp. (AA $52) fell sharply after the U.S. Treasury extended a wind-down period for Russian aluminum producer United Co. Rusal PLC, the top supplier of the metal outside China, per Bloomberg, and opened the door for possible sanctions relief for the company.

Housing and manufacturing reports top forecasts

Existing-home sales in March rose 1.1% month-over-month (m/m) to a 5.60 million annual rate, compared to the Bloomberg forecast of a 5.55 million pace, and versus February's unrevised 5.54 million rate. Sales of single-family homes ticked 0.6% higher m/m, but were 1.0% lower than year-ago levels, while purchases of multi-family structures grew 5.2%, but the y/y pace remained lower. The median existing-home price was up 5.8% y/y at $250,400, marking the 73rd straight month of gains. Unsold inventory came in at a 3.6-months pace at the current sales rate, down from 3.8 months a year ago. Inventory of homes for sale climbed 5.7% m/m but was still 7.2% lower y/y. Sales declined in the South and the West, while the Midwest and Northeast saw solid gains. Existing home sales account for the majority of the housing sales market.

Lawrence Yun, Chief Economist at the National Association of Realtors (NAR) that releases the report, said a reversal from weather-impacted declines seen in February helped overall sales activity. However, Yun added that " The unwelcoming news is that while the healthy economy is generating sustained interest in buying a home this spring, sales are lagging year ago levels because supply is woefully low and home prices keep climbing above what some would-be buyers can afford." This was the second-straight monthly gain, but existing home sales are based on contract closings instead of signings and the recent grind higher in interest rates will likely have an impact on affordability going forward, which already remains under pressure.

More housing data will don tomorrow's economic calendar, beginning with the S&P CoreLogic Case-Shiller Home Price Index, with economists expecting prices in the 20-city composite to have increased 6.35% y/y during February and 0.68% m/m on a seasonally-adjusted basis, as well as new home sales, forecasted to have posted a 1.9% m/m increase for March to a pace of 630,000 units. Consumer Confidence is also on tap, expected to tick lower during April to a reading of 126.0 from the 127.7 registered last month, and the Richmond Fed Manufacturing Activity Index will round out the docket.

The preliminary Markit U.S. Manufacturing PMI Index showed expansion in output surprisingly accelerated, rising to 56.5 in April from March's 55.6 figure, versus estimates of a dip to 55.2. The preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector increased more than expected this month to 54.4 from March's 54.0 figure, and versus forecasts calling for a slight rise to 54.1. Readings above 50 for both indexes denote expansion.

Treasuries were lower, as the yields on the 2-year and 10-year notes rose 3 basis points (bps) to 2.48% and 2.98%, respectively, while the 30-year bond rate ticked 1 bp higher to 3.14%. Schwab's Chief Fixed Income Strategist, Kathy Jones addresses the question of Treasury Bond Yields: How High is High?, in her latest article, while our commentary, Late in the Cycle: Market Volatility in Context, dives deeper into this market environment.

Treasury yields have seen an accelerated upside move as of late, with the 10-year note flirting with 3.00% for the first time since early 2014, while the yield curve continues to flatten, an issue addressed by Schwab's Chief investment Strategist Liz Ann Sonders in her latest article, Don't Fear the Yield Curve Reaper, noting that although ample headlines have warned about imminent threats of an inversion and subsequent recession, history shows long lag times and healthy stock market performance. Liz Ann adds that she finds herself siding with the more benign views expressed by Fed officials about the flattening of the yield curve. However, a Fed which is likely to raise rates three-to-four times this year coupled with now-tightening financial conditions and the flattening of the yield curve are likely to keep volatility elevated. Meanwhile, the U.S dollar has recently moved higher, and the stock markets stumbled late last week after a rally that took them to near positive territory for the year, with concerns about tighter financial conditions and resurfacing inflation expectations countering a solid start to earnings season and a continued strong economic backdrop. Liz Ann Sonders has cautioned investors for some time about this in her article, Gettin' Tighter: Financial Conditions' Effect on Stocks, noting that volatility is likely to remain high this year and investment discipline remains essential.

Europe mostly higher on data, Asia mostly lower amid lingering concerns

European equities finished mostly higher, with the euro and British pound falling to lend some support as the U.S. dollar continued to grind higher, while the technology sector appeared to get a reprieve from a recent bout of softness. The markets digested some mixed economic data in the region, and festering tightening of financial conditions in the U.S. added to the choppiness in the markets, which is likely to persist as earnings season heats up and the European Central Bank is expected to announce its monetary policy decision later this week. Markit's preliminary April eurozone business activity reports showed growth in the services sector unexpectedly accelerated, but expansion for the manufacturing sector decelerated more than expected. Bond yields in the region were mostly higher. Economic data in Europe has seen a soft patch, adding to the festering volatility and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers his article, From Overheating to Underwhelming: Is the Economy Hurting Stocks, while also discussing When Will the High Volatility End?, in his latest commentary, noting that April may bring a halt to the decline in stocks, but heightened volatility may not be going away. Jeff stresses that staying invested with a diversified portfolio may be the best way to “master” investing in the coming years.

Stocks in Asia finished mostly lower, with the tightening financial conditions in the U.S. and persistent uneasiness toward the technology sector weighing on the markets, with earnings season heating up and some key central bank meetings in Japan and Europe later this week looming. Japanese equities declined, though losses were likely held in check as the yen extended a recent downward move. Stocks in mainland China and Hong Kong declined, and those traded in South Korea edged lower. However, some strength in the financial sector helped markets in Australia and India to finish higher. With the global markets remaining on edge and volatility likely to persist, Vice President and Alternative Beta and Asset Allocation Strategist for the Schwab Center for Financial Research, Anthony Davidow discusses 4 Ways to Play Defense.

Tomorrow's international economic calendar will be fairly light, offering CPI from Australia, business sentiment from France, and the Ifo Business Survey from Germany.

Schwab Center for Financial Research - Market Analysis Group

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