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Market Update

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Posted: 11/19/2018 4:15 PM EST

Stocks Remain Hampered by Tech, Brexit and Trade

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U.S. stocks extended last week's drop to kick off the holiday-shortened week. The tech sector continued to be scrutinized against the backdrop of festering trade uncertainty and reverberations of Dow member Apple's most recent earnings report and ensuing iPhone demand worries. Flared-up turmoil at Nissan and Renault also appeared to contribute to uneasy sentiment on both sides of the pond, along with a disappointing read on U.S. homebuilder sentiment. Treasury yields and the U.S. dollar were down, while gold was little changed and WTI crude oil prices nudged higher.

The Dow Jones Industrial Average (DJIA) fell 396 points (1.6%) to 25,017, the S&P 500 Index dropped 46 points (1.7%) to 2,691, and the Nasdaq Composite tumbled 219 points (3.0%) to 7,028. In heavy volume, 909 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.52 to $57.20 per barrel and wholesale gasoline was unchanged at $1.58 per gallon. Elsewhere, the Bloomberg gold spot price traded $0.26 higher at $1,223.63 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—decreased 0.3% to 96.21.

PG&E Corporation's(PCG $23) shares were lower after reporting a second power-line failure on the morning that California's Camp Fire began. The company had previously released guidance of an "electrical incident" just before the fire and that it could face significant liability beyond its insurance coverage if its equipment is found to be the cause.

Colfax Corporation (CFX $24) announced an agreement to acquire DJO Global for $3.15 billion in cash, with Colfax stating expectations of $800 million in future tax benefits from the transaction. Management said the deal is expected to deliver adjusted EPS accretion in the first full year after closing. CFX shares fell.

Cimarex Energy Co. (XEC $88) reported an agreement to acquire Resolute Energy Corporation (REN $35) for $35 per share in cash and stock, for an aggregate transaction price of about $1.6 billion. XEC declined and REN jumped over 10%.

Homebuilder sentiment falls to over two-year low

The National Association of Home Builders (NAHB) Housing Market Index

Housing Market Index showed homebuilder sentiment this month fell more than expected from October's unrevised 68 level to 60, its lowest level in more than two years, versus the Bloomberg forecast of a dip to 67. A reading of 50 separates good and poor conditions. The NAHB said that builders continue to see signs of consumer demand for new homes but that customers are taking a pause due to concerns over rising interest rates and home prices. As a result, builders have adopted a more cautious approach to market conditions.

This week will be holiday shortened but will bring a fully-loaded economic docket with tomorrow's housing starts and building permits report continuing the housing theme. Starts are projected to rise 1.8% month-over-month (m/m) for October to an annual rate of 1,225,000 units, while permits are forecasted to dip 0.8% m/m to an annual pace of 1,260,000 units. Earnings seasonwill head toward the finish line, with the retail sector remaining in focus. Please note that U.S. stock and bond markets will be closed on Thursday and will close early on Friday in observance of the Thanksgiving holiday.

Treasuries were mostly higher, with the yield on the 2-year note falling 2 basis points (bps) to 2.78% and the yield on the 10-year note dipping 1 bp to 3.05%, while the 30-year bond rate was little changed at 3.31%. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, Where Will Long-Term Interest Rates Settle?, that as we approach the end of rate increases for this economic cycle, it's becoming increasingly tempting to start to add duration to portfolios. Not so fast, she adds, concluding that until we see spreads between short- and long-term debts widen again, we suggest sticking with short- and intermediate-term debt.

Global markets mixed on trade, tech, Brexit and Nissan's Chairman investigation

European equities finished lower amid a drop in the U.S. markets as the technology sector remained under pressure, while the most recent Brexit divorce agreement seemed to affect market sentiment. Prime Minister Theresa May's political future remained in question. May told Sky News that a change in leadership would only delay Brexit or even stop it and later said that a Brexit transition could last until 2022, keeping Brexit doubt alive in the wake of last week's Brexit proposal agreement, which was seen as controversial and fostered a series of political resignations and sharp losses for the British pound. The auto sector was in focus, with shares of Renault SA (RNLSY $14) falling on the heels of the announcement from Nissan Motor Co Ltd (NSANY $17) that its Chairman, Carlos Ghosn, who is also CEO and chair of the aforementioned French automaker, was under investigation for allegedly violating Japanese financial laws. The British pound and euro were higher, while bond yields in the region were mixed, with the economic calendar in the region dormant.

Asian markets traded mostly higher, showing some resiliency in the face of trade tensions continuing to garner investor concerns, and the unfolding turmoil for Nissan. The competitive atmosphere between the U.S. and China was in focus at the Asia-Pacific Cooperation (APEC) summit in Papua New Guinea over the weekend, with the Wall Street Journal noting that the summit failed to end with a final communique for the first time in its history. Chinese markets moved higher despite U.S. and Chinese leaders listing differences between their two respective countries. Japanese equities advanced, with the yen flat and trade balance data showing exports rose to reverse a September decline, but missed economist's expectations. Energy issues led a broad-based decline in Australia as the recent tumble in crude oil prices likely remained a tender spot for the markets. South Korean and Indian equities also shrugged off the aforementioned host of headwinds that included the lingering scrutiny of the tech sector and festering Brexit uncertainty. Amid the persistent global growth concerns, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his article, Should You Invest In The Only Country Planning Stimulus in 2019?

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