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Markets Start the Week Higher


Wiljor
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Posted: 10/20/14 4:15 PM ET

Markets Start the Week Higher

Despite an empty economic calendar and light news on the earnings front, the U.S. equity markets finished the first trading day of the week in the green. Strength in consumer and material stocks gave the markets a boost, but a sharp profit miss from IBM tempered gains in the Dow. Elsewhere, Treasuries ended modestly higher, gold prices were up, but crude oil prices and the U.S. dollar were lower. In other equity news, Hasbro slightly beat the Street's expectations, while Canadian Pacific Railway confirmed exploratory merger talks with CSX Corp have come to an end.

The Dow Jones Industrial Average (DJIA) gained 19 points (0.1%) to 16,400, the S&P 500 Index was 17 points (0.9%) higher at 1,904 and the Nasdaq Composite gained 58 points (1.4%) to 4,316. In moderate volume, 739 million shares were traded on the NYSE, and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.15 to $81.91 per barrel, wholesale gasoline was $0.03 lower at $2.20 per gallon, while and the Bloomberg gold spot price increased $5.70 to $1,244.70 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 84.93.

Dow member International Business Machines Corp. (IBM $169) reported 3Q earnings ex-items of $3.68 per share, below the $4.32 consensus estimate of analysts surveyed by FactSet, with revenues declining 4.0% year-over-year (y/y) to $22.4 billion, versus the $23.4 billion that the Street had projected. The company said, "We are disappointed in our performance. The company's global services and software segments saw y/y revenue declines, while its hardware revenues dropped solidly compared to the same period a year ago. IBM noted, "We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry." The company cut its profit forecast for next year, acknowledging that it will not meet its goal that it had held for five years of $20.00 per share. IBM said it will provide updated guidance in January. Separately, IBM announced that it has agreed to transfer its global commercial semiconductor technology business to privately-held semiconductor maker Globalfoundries Inc. Under the terms of the deal, IBM will pay Globalfoundries $1.5 billion to take the unprofitable unit off its hands. IBM traded solidly lower.

Hasbro Inc. (HAS $57) posted 3Q profits ex-items of $1.46 per share, one penny above the Street's forecasts, as revenues rose 7.3% y/y to $1.5 billion, roughly inline with analysts' expectations. The toymaker's revenues were bolstered by a solid rise in its boys category, while its games and girls units were also higher y/y. However, HAS' preschool segment revenues declined y/y. HAS finished solidly higher.

CSX Corp. (CSX $34) came under pressure after Canadian Pacific Railway (CP $196) confirmed that exploratory merger talks between the rail companies have ended. CP also traded lower.

Economic calendar quiet today as earnings season ramps up

Treasuries finished modestly higher, while the U.S. economic calendar offered no major releases today, as the yield on the 2-year note declined 4 basis points to 0.34%, while the yields on the 10-year note and the 30-year bond ticked 1 bp lower to 2.19% and 2.96%, respectively.

This week's domestic economic calendar will be highlighted by key reports on the housing sector, beginning with tomorrow's release of September existing home sales, expected to rise 1.0% month-over-month (m/m) to an annual rate of 5.1 million units, after falling 1.8% in August. Housing data has shown some relative improvement as of late, with housing starts last month growing more than expected and MBA's Mortgage Applications Index posting two-straight solid weekly increases. Moreover, the recent pullback in interest rates and Fed rate hike expectations that are possibly being pushed out due to the heightened global growth concerns and subdued inflation forecasts, may help provide a boost to housing activity and ultimately the all-important consumer.

However, 3Q earnings season may take the lion's share of the market's attention, with heightened scrutiny on whether multi-national corporate earnings are beginning to be impacted by the global weakness, notably in Europe. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his latest article, How Earnings Season Is Like Homecoming For Investors, that in the next few weeks, investors may be renewing their focus on the traditional measure of value: earnings. Market sectors with significant foreign sales exposure and high earnings growth estimates—such as energy, materials, industrials and information technology—are likely to be most affected by weakness overseas. A leading indicator—the Eurozone Purchasing Managers Index of Manufacturers—suggests European companies are more likely to see flat earnings than meet the double-digit growth expectations of analysts in the third quarter. Read more at www.schwab.com/marketinsight.

Europe comes under pressure, Asia mixed

The European equity markets saw some pressure, with some lackluster earnings reports in the region dampening already skittish sentiment. Meanwhile, in economic news, German producer prices came in flat month-over-month in September, matching expectations, and were down 1.0% y/y. Elsewhere, Italian industrial orders rose much more than expected in August. Further east, stocks in Asia finished higher on the heels of Friday's strong rebound in the U.S., with Japanese markets leading the way, as the yen lost some ground and optimism rose that the government will boost its domestic stock holdings of the nation's Government Pension Investment Fund (GPIF). The Nikkei newspaper noted that the nation plans to increase the GPIF's stock allocation to about 25% from 12%, per Bloomberg. Meanwhile Japanese sentiment may have received a boost from a Financial Times report that suggested Prime Minister Abe hinted at delaying a second increase in the nation's consumption tax if it appeared that the rate hike would inflict too much damage to the economy. Elsewhere, India's S&P BSE Sensex 30 Index advanced on support from strong gains in the energy sector after the government removed diesel price controls, while traders reacted favorable to state election polls, which showed Prime Minister Modi's party gained ground in the upper house of parliament, where it is in a minority, per Bloomberg.

Tomorrow's international economic calendar will be dominated by a number of reports out of China, as the Asian nation is slated to release 3Q GDP, retail sales and fixed asset investment. Other reports on the docket include: Japan's All-Industry Index, and public sector net borrowing from the U.K.

Schwab Center for Financial Research - Market Analysis Group

©2014 Charles Schwab & Co., Inc., Member SIPC. All rights reserved.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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