Schwab Market Update | May 17, 2021

Schwab Market Update

Stocks Down as Choppiness Looks Likely to Continue

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U.S. stocks are trading lower in early action with volatility looking likely to continue after last week's wild ride that came as the markets grappled with the global monetary policy implications of signs of rising inflation pressures. However, optimism of robust economic and earnings growth this year persists as COVID-19 restrictions ease amid ramped-up vaccine rollouts on both sides of the pond, which helped the markets battle back late last week. M&A news is dominating the equity headlines ahead of some key earnings reports this week from some major retail players, with AT&T and Discovery announcing an agreement to create a standalone global entertainment company. New York manufacturing activity showed growth remained solid but slowed slightly, kicking off the economic week that will be headlined by a host of global manufacturing and services reports. Treasuries are dipping to modestly lift yields, and the U.S. dollar continues to struggle to regain its footing after giving back Q1's rally as of late. Gold is higher and crude oil prices are trading lower. Asia finished mixed with Indian and Chinese stocks rising after some data, while Europe is lower as another likely choppy week begins.

As of 8:31 a.m. ET, the June S&P 500 Index future is 18 points below fair value, the DJIA future is 145 points below fair value, and the Nasdaq 100 Index future is 81 points south of fair value. WTI crude oil is decreasing $0.48 to $64.89 per barrel and Brent crude oil is declining $0.40 to $68.31 per barrel. The Bloomberg gold spot price is advancing $2.99 at $1,846.42 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is little changed at 90.35.

In M&A news, AT&T Inc. (T $32) and Discovery Inc. (DISCA $36) announced that the two companies have reached an agreement to combine T's WarnerMedia division with DISCA's international entertainment and sports businesses to create a standalone global entertainment company. Under the terms of the deal, which is structured as an all-stock, Reverse Morris Trust transaction, AT&T would receive $43 billion in a combination of cash, debt securities, and WarnerMedia's retention of certain debt, and AT&T shareholders would receive stock representing 71% of the new company. Discovery shareholders would own 29% of the new company. Both boards of the two companies have approved the transaction.

This week, although earnings season is mostly in the rearview mirror, the season will culminate in typical fashion with the retail sector putting on the finishing touches, headlined by tomorrow's reports from Dow members Walmart Inc. (WMT $140) and Home Depot Inc. (HD $324).

For more on our view on the market volatility as of late check out our Market Insights page on www.schwab.com, where you can also find our latest Schwab Sector Views: Upgrading Energy, for analysis of our upgrade of the Energy sector to outperform, joining our continued outperform ratings for the Financials and Health Care sectors. You can also follow us on Twitter at @SchwabResearch.

New York manufacturing activity remains solid to kick off the week

The Empire Manufacturing Index, a measure of activity in the New York region, dipped to 24.3 in May from 26.3 in April, and above the Bloomberg consensus forecast of a decline to 23.9. A reading above zero denotes growth. Growth in employment slowed slightly, while new orders accelerated and prices paid jumped to a record high.

Later this morning, the economic calendar will bring May NAHB Housing Market Index, with the gauge of homebuilder sentiment projected to remain at April's 83 level, with a reading of 50 separating good and poor conditions.

Treasuries are mostly dipping, with the yield on the 2-year note flat at 0.15%, while the yields on the 10-year note and the 30-year bond are ticking 1 basis point higher to 1.64% and 2.35%, respectively.

Rising inflation concerns, exacerbated by last week's hotter-than-expected inflation data, fostered some volatility in the markets and Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, Is 1970s-Style Inflation Coming Back?, that although we expect higher prices over the next few years, a return to that level of inflation is unlikely.

Also, Schwab's Managing Director and Fixed Income Strategist Collin Martin, CFA, along with Senior Fixed Income Research Analyst, Christina Shaffer, note how the pace of inflation—from below 2% to greater than 4%—has a big impact on the performance of various asset classes in their article, Rising Inflation: What It Means for TIPS and Other Investments.

The economic calendar this week is also likely to remain in focus, with today's homebuilder sentiment report kicking off a host of housing reports that will include April existing home sales and housing starts and building permits releases. May reads on manufacturing activity began with today's New York report and will be followed by a look at activity in Philadelphia, which could garner some attention, along with Markit's May Manufacturing and Services PMIs, the April Leading Index and initial jobless claims for the week ended May 15. Given the skittishness surrounding inflation, this week's host of Fedspeak and the minutes from the Fed's April policy meeting could also potentially move the markets. 

As noted in our latest Schwab Market Perspective: Will the Economy Overheat?, a boom in spending has stirred fears of economic overheating, which has coincided with a surge in commodity prices and a lift in traditional inflation metrics. Europe’s economy is finally turning the corner, leaving its double-dip recession behind. Meanwhile, interest rates have been in a holding pattern over the past month despite inflation fears, suggesting the bond market has already discounted much of the rebound in the economy since last year.

Europe lower as a new week begins

European equities are trading lower in afternoon action, following last week's volatile week that saw the markets battle back late from an early week selloff as the markets wrestle with rising inflation and interest rate concerns, along with continued optimism of strong 2021 earnings and economic growth globally. The optimism comes as COVID-19 restrictions in the U.S. and Europe have been eased somewhat as vaccine rollouts remain in high gear. A busy week of economic data looms, headlined by global May manufacturing and services sector reports, while over the weekend, India posted a sharp year-over-year surge in exports for April and China reported that its retail sales and industrial production remained solidly higher compared to a year ago but the pace slowed slightly more than expected. Industrials, Financials, Energy and Information Technology issues are lower, while the Communications Services is rising, likely bolstered by the M&A announcement out of the sector in the U.S. 

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Is Stagflation Back?, noting how the constraint on global growth this year has evolved from the supply of vaccines to the supply of nearly everything else. Jeff adds that the shortage of supplies indicates risk of economic weakness coupled with rising prices. Yet, he points out that these forces of stagflation may be offset through prompting central banks to continue stimulus, lawmakers to rollout additional fiscal stimulus in the U.S. and Europe, and business leaders to invest in a wave of capital spending, accompanied by a sharp rebound in output by the service sector. The euro is little changed versus the U.S. dollar and the British pound is dipping versus the greenback. Bond yields in the Eurozone and the U.K. are trading higher.

The U.K. FTSE 100 Index is down 0.6%, France's CAC-40 Index and Spain's IBEX 35 Index are declining 0.5%, Germany's DAX Index is decreasing 0.3%, while Italy's FTSE MIB Index and Switzerland's Swiss Market Index are dipping 0.1%.

Asia mixed following data and as markets remain focused on inflation

Stocks in Asia finished mixed following last week's wild ride that saw decisive drawdowns being followed by sharp rebounds as the markets grapple with optimism of robust global economic activity and potential monetary policy implications of signs of rising inflation pressures. Schwab's Chief Investment Strategist Liz Ann Sonders addresses in her commentary the question of Will Rising Federal Debt Slow Economic Growth?, and Schwab's Jeffrey Kleintop offers his article, Stimulus Payback: 2023. The markets digested some economic data in the region, ahead of this week's key reports on global manufacturing and services data for May. Today's economic calendar saw late Friday's surge in April exports out of India being accompanied by industrial production and retail sales reports out of China that showed both remained strong year-over-year in April but the pace slowed more than expected. China's Shanghai Composite advanced 0.8% and the Hong Kong Hang Seng Index gained 0.6%. Australia's S&P/ASX 200 Index ticked 0.1% higher and India's S&P BSE Sensex 30 Index rallied 1.7%. However, Japan's Nikkei 225 Index declined 0.9%, with the yen firming a bit, and South Korea's Kospi Index decreased 0.6%.

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