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Posted: 10/18/2019 4:15 PM EDT

Global Markets Falter as Brexit Vote Looms

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Tomorrow will bring a crucial vote in U.K. parliament that will determine the fate of the current agreement between the U.K. and European Union (EU) to bring an end the U.K.’s 46-year participation in the EU. Markets seems less than thrilled about the vote, with most of Europe, Asia and the U.S. modestly selling off. However, a late rally in the U.K. pushed stocks into the green. U.S. Economic data did little to lift spirits with leading economic indicators (LEI) falling in September. The Treasury curve steepened as the weak reading from LEIs reinforce the market’s expectation that the Fed will need to cut rates further. Consequently, the dollar is lower as reduced carry, a measure of short-term interest rate differentials, seems to be outweighing the currency’s safe-haven status. Earnings continued to pile in; American Express beat estimates, but seemed to spook investors with news from its corporate credit card portfolio. Coca-Cola posted results mostly in-line with expectations, but raised it full year guidance. Crude oil and gold were lower.

The Dow Jones Industrial Average (DJIA) fell 256 points (1.0%) to 26,770, the S&P 500 Index declined 12 points (0.4%) to 2,986 and the Nasdaq Composite decreased 67 points (0.8%) to 8,089. In moderate volume, 860 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil moved $0.15 lower to $53.78 per barrel and wholesale gasoline was flat at $1.62 per gallon. Elsewhere, the Bloomberg gold spot price declined $4.20 to $1,494.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies— fell 0.3% to 97.27. Markets were mixed for the week, as the DJIA lost 0.2%, the S&P 500 Index gained 0.6% and the Nasdaq Composite increased 0.4%.

Dow member American Express Company(AXP $117) reported Q3 earnings-per-share (EPS) of $2.08, compared to the $2.03 FactSet estimate. Revenues rose 8% year-over-year (y/y) to $11.0 billion, above the consensus estimate of $10.9 billion. The credit card issuer said more people are using cards to pay their bills and purchase larger-ticket items. However, the company noted a drop in corporate spending. AXP also said it sees current-quarter revenue growth of 8%-10%, compared to a consensus estimate of 8.9%. Shares were lower.

Fellow Dow component Coca-Cola Company (KO $55) posted a Q3 profit of $0.56 per share, in line with the FactSet estimate, as revenues grew 8.3% y/y to $9.5 billion, above the average analyst estimate of $9.4 billion. The company's Chief Executive Officer James Quincey said in a statement, “Our performance gives us confidence that our strategies are taking hold with our consumers, customers and system.” Looking ahead, the soft drink maker said it now expects full-year organic revenue growth—excluding currency fluctuations, acquisitions and divestitures—to be at least 5%, from its previous forecast of up to 5% growth. The company also raised its full-year guidance for operating income. KO posted a modest increase.

Leading indicators dip

The Conference Board's Index of Leading Economic Indicators (LEI) (chart) for September dipped 0.1% month-over-month (m/m) versus the Bloomberg projection of a flat reading and compared to August's negatively-revised reading of a 0.2% m/m decline. Weakness in the manufacturing sector and the yield curve were offset by positive contributions from the credit, stock prices and jobless claims components of the index.

The report completes the week's docket that has been fairly light. As such, Q3 earnings season has grabbed the lion's share of attention, while global events have also acquired increased focus, particularly on the U.S.-China trade front and any Brexit developments. Investors may eye this weekend's vote in Parliament to accept the deal cobbled together by U.K. and European Union (EU) negotiators.

The Treasury curve steepened with the yield on the 2-year note down 3 basis points (bps) to 1.57%, the 10-year yield flat at 1.74% and the 30-year yield up 1 bp to 2.25%. Yields remain historically low and very sensitive to economic data. Additionally, yields are constrained by a massive amount of negative yielding debt internationally. As such, Schwab's Chief Fixed Income Strategist Kathy Jones offers her commentary, Could Negative Bond Yields Come to America?, while the Schwab Center for Financial Research discusses, Market Volatility: What Investors Should Know.

Europe finished mostly lower ahead of Brexit Vote

European equities were mostly lower on the day with investors cautious ahead of tomorrow's vote in Parliament on the proposed Brexit deal. Negotiators for the U.K. and the European Union (EU) came to terms yesterday as the October 31 deadline quickly approached, but the agreement requires parliamentary approval. U.K. Prime Minister Boris Johnson has called it "a great new Brexit deal." However there are some doubts that the accord will be approved by U.K. lawmakers in Parliament, as a key government ally, the Northern Irish Democratic Unionist Party, has said it still cannot support the measure. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his commentary Q&A on Brexit: The Options and Implications for Investors, how we see five main options for Brexit in the coming months; three result in a near-term resolution while two options result in a further delay or "no deal" Brexit. Automobile manufacturers were underwater and provided additional pressure following a warning of lower revenues and operating margins from French carmaker Renault SA (RNLSY $11), which is down around 6% on U.S. exchanges. The euro and the British pound were higher versus the U.S. dollar as bond yields in the region rose.

Stocks in Asia finished lower following disappointing economic data out of China. Q3 GDP in the Asian nation slowed to 6.0% y/y from the 6.2% in Q2, marking is slowest pace of growth since the early 1990s. Year-to-date, output grew at a 6.2% rate, placing it at the lower end of the government's target of a range of 6.0%-6.5%. On the other hand, industrial production in China rebounded to 5.8% y/y from August's 4.4% rate and ahead of forecasts. Retail sales came in line with expectations. China's Shanghai Composite Index fell on the day. The Hong Kong Hang Seng Index was lower as well. Japan's Nikkei 225 Index was able to muster a slight gain bolster by some weakness in the yen, which came after core consumer price inflation slowed to its weakest read since April 2017. India's S&P BSE Sensex 30 Index was up on the day. South Korea's Kospi Index and Australia's S&P/ASX 200 Index were lower. With volatility continuing in the global stock markets and as recession concerns persist, Schwab's Jeffrey Kleintop, CFA, discusses in his latest commentary, Are Stocks Priced for Perfection or Recession, examining price-to-earnings ratios and why they offer some reasons for concern.

Markets able to notch weekly gains amid flurry of earnings and global events

U.S. stocks were mixed amid heightened volatility and trepidation following a myriad of global events. News of a tentative "Phase-1" trade deal between the U.S. and China offered some cautious optimism, but further headlines of China's request for more talks before inking the deal tempered the enthusiasm. News later in the week of a possible breakthrough in Brexit negotiations gave the markets a leg up. However, U.K. Prime Minister Boris Johnson may run into some opposition from certain parties, particularly the Northern Irish Democratic Unionist Party, which has said it still cannot support the measure, making Saturday's vote of ratification too close to call at this point. Q3 earnings season unofficially kicked off, courtesy of a slew of results from the banking sector, with Dow members JPMorgan Chase (JPM $121), Goldman Sachs Group Inc. (GS $207), as well as Bank of America Inc. (BAC $30) and Bank of New York Mellon (BK $45) posting mostly upbeat results, while shares of Netflix Inc. (NFLX $279) jumped following its release.

Economic data was mixed for the week and seemed to be overshadowed by the trade and Brexit headlines. Homebuilder sentiment rose to its highest level since February 2018, retail sales dipped, falling well short of forecasts for a gain, housing construction declined and regional manufacturing reports diverged, while the Leading Index weakened in September. After being closed Monday in observance of the Columbus Day holiday, Treasury yields pared last week's surge and crude oil prices posted a modest weekly gain, while the U.S. dollar fell and gold posted a slight rise. Most sectors advanced, led by health care and communication services, while the defensively-natured energy and utilities notched weekly losses. As noted in the Schwab Center for Financial Research's latest, Schwab Sector Views: Don't Buy Expensive Just Because It's Defensive, recession concerns have some investors eyeing defensive stalwarts, but some of the classic defensive sectors currently come at a high price.

Next week, Q3 earnings season will kick into a higher gear, while the economic calendarwill once more be less robust. Housing will again be in focus, with the releases of existing home sales joining new home sales and MBA Mortgage Applications. Durable goods orders are also on tap, as well as the final read of the University of Michigan's Consumer Sentiment Index for October. In central bank action, the European Central Bank will offer its monetary policy rate decision that may garner heightened scrutiny following the outcome of Saturday's Brexit vote.

As noted in our latest Schwab Market Perspective: Déjà vu, stocks continue to face pressure and volatility has resurfaced; as trade tensions have heated up yet again, and mixed economic data has fueled investor hesitation. Although September's jobs report posted a new low in the unemployment rate, some weaknesses are appearing in key leading indicators in the labor market. Global equities have failed to make gains in the past 20 months, but positive earnings growth in the coming quarters may provide a boost for prices.

International economic reports due out next week that deserve a mention include: Australia—trade data. China—housing figures. Japan—trade data, the All Industry Index, and the Leading Index. Eurozone—consumer confidence and the European Central Bank's monetary policy decision, along with German PPI, as well as the Gfk Consumer Confidence and IFO Business Climate surveys. U.K.—public sector net borrowing. As well the preliminary Markit Manufacturing and Services PMIs from across the globe are slated for release.

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