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Market Update

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Posted: 6/18/2019 4:15 PM EDT

Stocks Jump on Trade Progress Hopes

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U.S. equities finished solidly in the green, as early gains amid increased hopes of a more dovish Fed at the conclusion of its two-day meeting were further fueled from a tweet from President Trump that he will meet with Chinese President Xi at next week's G-20 summit. Global policy stimulus also got a shot in the arm after European Central Bank (ECB) President Mario Draghi surprised the markets by hinting that further rate reductions may be necessary if the outlook for economic growth didn’t materialize, and as policy decisions from the Bank of England and the Bank of Japan are to come on Thursday. Treasury yields were mixed and the U.S. dollar ticked higher, while crude oil prices recovered from a recent tumble, and gold added to a current rally.

The Dow Jones Industrial Average (DJIA) jumped 353 points (1.4%) to 26,466, the S&P 500 Index gained 28 points (1.0%) to 2,918, and the Nasdaq Composite advanced 109 points (1.4%) to 7,954. In moderate volume, 772 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.97 to $53.90 per barrel and wholesale gasoline was up $0.03 at $1.72 per gallon. Elsewhere, the Bloomberg gold spot price added $6.76 to $1,346.42 per ounce, and the Dollar Index— a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 97.63.

Facebook Inc. (FB $188) was in focus after the social media company announced a new digital currency called “Libra”, which is expected to launch in the first half of 2020. Shares were modestly lower.

Tempur Sealy International Inc. (TPX $70) was higher after the company announced a supply agreement with Mattress Firm Inc. and an expansion of its long-term supply agreement with Big Lots Inc. (BIG $30).

As we head to the second half of the year, Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, offers his latest Schwab Sector Views: 9.5 Thoughts for the Second Half, noting that the first half of 2019 was characterized by a couple of major reversals, with defensive and cyclical sectors taking turns leading the market. He adds that uncertainty about trade policy and interest rates seems set to continue, but those aren't the only issues that may affect second-half performance. Brad concludes that we'd like to make a more substantial sector call, and believe we will in the second half, but for now our Sector Views remain relatively neutral.

Housing construction activity modestly tops expectations

Housing starts (chart) for May declined 0.9% month-over-month (m/m) to an annual pace of 1,269,000 units, above the Bloomberg forecast of 1,239,000 units. April starts were revised higher to an annual pace of 1,281,000. Construction on single-unit structures were down m/m and y/y, but activity on multi-unit buildings were up solidly m/m and versus last year. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, rose 0.3% m/m to an annual rate of 1,294,000, versus expectations of a 1,292,000 pace, and compared to April's downwardly-revised 1,290,000 rate. Single unit authorizations were up m/m but down y/y, while permits for multi-unit structures fell m/m and were up compared to last year.

Treasuries were mixed, as the yield on the 2-year note rose 2 basis points (bps) to 1.87%, while the yields on the 10-year note and 30-year bond fell 2 basis points to 2.06% and 2.55%, respectively. For a look at the bond markets in the wake of the recent drop in yields, check out Schwab's Chief Fixed Income Strategist Kathy Jones' Fixed Income Mid-Year Outlook: "Lower for Longer" is Back.

As noted in our latest Schwab Market Perspective: Dangers Rising…or Potential Opportunity Emerging?, the mixed economic picture has kept the Federal Reserve in a holding pattern since January; although Fed Chair Jerome Powell sounded a dovish tone in a recent speech, noting that the Fed is monitoring the escalation in trade tensions and will act "as appropriate" to sustain the economic expansion. The market is now pricing in close to a 90% chance of two rate cuts by the end of the year, the Fed has not corroborated the market’s extremely dovish view in its recent commentary. At some point the market or the Fed will be forced to adjust their respective views; with the process of convergence possibly adding to volatility in the stock market.

While tomorrow’s economic calendar is light in size, its weight of importance is likely the greatest, as the early morning report on MBA Mortgage Applications will be followed by the afternoon release of the Federal Open Market Committee’s monetary policy decision after the conclusion of its two-day gathering. Updated economic projections and the Fed’s so-called “dot plot” will also likely be of great interest, as well as Chairman Jerome Powell’s press conference to follow.

Europe and Asia higher ahead of Fed decision and after dovish ECB comments

European equities finished with widespread gains, with the markets awaiting tomorrow's monetary policy decision from the Fed in the U.S., which will be followed by policy announcements from the Bank of England (BoE) and Bank of Japan. However, the biggest lift to the markets appeared to come from dovish comments from ECB President Mario Draghi. The head of the ECB said in a speech today that additional stimulus will be needed in the absence of any improvement in the outlook for growth and inflation, citing rate cuts as an option. The euro was lower versus the U.S. dollar and bond yields in the region fell. Moreover, Germany reported that investor confidence in the nation's economic outlook dropped decisively more than what had been anticipated for June, while Eurozone consumer price inflation remained subdued for May. The British pound was nearly unchanged ahead of the BoE's decision this week and as the region's battle for the next prime minister continues. The advance in the markets accelerated on comments from U.S. President Donald Trump that he had a "very good" phone call with Chinese President Xi and they will be having an extended meeting next week at the G-20 in Japan. With volatility likely remaining for some time, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers some analysis for investors navigating the choppy global market environment in his commentary, Diversification: Finally Back After 20 Years. He points out that the lower correlation between the world's stock markets enhances the potential risk-reducing benefits of diversification.

Stocks in Asia finished mostly higher, with the global markets awaiting a host of monetary policy decisions, which will begin with tomorrow's announcement out of the U.S., and continue with Thursday's decisions from the U.K. and Japan. Also, the G-20 summit in Japan at the end of the month continues to be highly anticipated, with uncertainty lingering regarding if the U.S. and China will resume talks as tensions remain elevated. For a look at the trade front, Schwab's Jeffrey Kleintop, CFA, offers his latest commentary, U.S. Imports From China Plunge As Other Emerging Markets Fill The Gap. Stocks in mainland China ticked higher, with a read on new home prices for May continuing to climb, while those traded in Hong Kong advanced, as optimism of further stimulus measures helped combat ongoing political turmoil after the nation suspended a controversial extradition bill amid protests in the region. Australian securities increased, with the minutes from the Reserve Bank of Australia's monetary policy meeting earlier this month that delivered a rate cut suggesting another reduction could be on the horizon. Markets in South Korea and India also moved higher. However, stocks in Japan fell, with the yen gaining noticeable ground late in the session as the global markets digest the plethora of monetary policy headlines and upcoming decisions.

Tomorrow’s international economic calendar will hold the trade balance from Japan, PPI from Germany, CPI, PPI and the Retail Price Index from the U.K., as well as construction output from the Eurozone.

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