Rally Continuing as Stocks Return from Holiday Weekend

 

 

U.S. stocks are extending last week's solid advance coming off a long holiday weekend, with the global markets appearing to be buoyed by recent economic data suggesting a recovery in activity, and supported by the foundation of the massive monetary and fiscal policy relief measures. Equity markets in China and Hong Kong surged to lay the groundwork, while M&A is in focus, with Uber Technologies agreeing to acquire Postmates for nearly $2.7 billion and Berkshire Hathaway purchasing substantially all of Dominion Energy's gas transmission and storage segment assets for roughly $4.0 billion, excluding debt. Treasury yields are rising as bond prices slide, and the U.S. dollar is seeing pressure, ahead of key reads on U.S. services sector activity. Crude oil prices are mixed and gold is gaining ground. Asia finished mostly higher and Europe is trading to the upside despite some mixed economic data.

  

As of 8:57 a.m. ET, the September S&P 500 Index future is 49 points above fair value, the DJIA future is 436 points above fair value, and the Nasdaq 100 Index future is 156 points north of fair value. WTI crude oil is moving $0.02 lower to $40.63 per barrel and Brent crude oil is increasing $0.45 to $43.25 per barrel. The Bloomberg gold spot price is advancing $11.05 to $1,783.05 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is falling 0.5% to 96.69.

 

Uber Technologies Inc. (UBER $31) is in focus after the company announced an agreement to acquire food delivery company Postmates Inc. for $2.65 billion in an all-stock transaction. UBER said the deal brings together its global rides and eats platform with Postmates' delivery business in the U.S. UBER added that, "Postmates is highly complementary to Uber Eats, with differentiated geographic focus areas and customer demographics, and Postmates’ strong relationships with small- and medium-sized restaurants, particularly local favorites that draw customers to the Postmates brand. Additionally, Postmates has been an early pioneer of "delivery-as-a-service," which complements Uber's growing efforts in the delivery of groceries, essentials, and other goods." 

 

Dominion Energy Inc. (D $83) announced that it has reached an agreement to sell substantially all of its gas transmission and storage segment assets to an affiliate of Berkshire Hathaway Inc. (BRK/B $179) in a transaction valued at about $9.7 billion, including the assumption of $5.7 billion of existing indebtedness. D also announced the cancellation of the Atlantic Coast Pipeline with Duke Energy Corporation (DUK $82), due to ongoing delays and increasing cost uncertainty which threaten the economic viability of the project. 

 

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Pause: Stocks' June Consolidation Continues, that she has been highlighting the warp speed nature of this crisis—with a "full" market cycle having been condensed into a few months. She adds that the wild swings have emboldened some investors and traders; while leaving others in a state of confusion. Liz Ann adds that we've been recommending that investors remain at their long-term strategic equity allocations; but "react" to the larger swings by considering rebalancing more frequently. This allows portfolios to "stay in gear" by trimming into strength and adding into weakness; vs. trying to time short-term peaks and troughs (which is always extremely difficult).

 

For commentary from our experts amid the wild market swings, follow the Schwab Center for Financial Research (SCFR) on Twitter at @SchwabResearch, and visit www.schwab.com/volatility to see all the content Schwab offers on the unparalleled market action.

 

Treasury yields rising as stocks extend rally ahead of June services sector reports 

 

Treasuries are lower as the stock markets add to the recent rally that has come amid global economic data, amplified by another dose of positive U.S. employment data last week, which has suggested continued recovery in economic activity. Also, the markets remain buoyed by the backdrop of the continued pledge by the Federal Reserve to maintain, or potentially expand, its unprecedented liquidity measures for as long as it takes to get the economy back to its objectives of full employment and price stability. The yield on the 2-year note is ticking 1 basis point (bp) higher to 0.16%, the yield on the 10-year note is gaining 3 bps to 0.70%, and the 30-year bond rate is rising 4 bps to 1.46%.

 

Schwab's Chief Fixed Income Strategist Kathy Jones offers her 2020 Mid-Year Outlook: Fixed Income, noting how interest rates are likely to stay low as markets try to bridge the economic gap to the new normal. Also, Kathy discusses the impact of the flood of monetary and fiscal support in her commentary, Stimulus = Inflation? Why It May Be Different This Time, while Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, addresses in the article, What's the Future Payback for the Stimulus?

 

economic calendarLater this morning, the  will bring June reads on the key services sector, with the Institute for Supply Management(ISM) Non-manufacturing Index forecasted to improve to 50.7 from the 45.4 posted in May, as well as Markit's Services PMI Index, with economists projecting a final reading for last month to be revised to 46.9 from the preliminary figure of 46.7, and above May's 37.5 level. Readings of 50 for both indexes are the demarcation point between expansion and contraction. 

 

This week will return to normal trading hours, but the economic docket will be a bit lighter than usual, with today's services sector activity data being followed by the May Job Openings and Labor Turnover Survey (JOLTS) report, initial jobless claims for the week ended July 4th, and the Producer Price Index for last month. 

 

As noted in our latest Schwab Market Perspective: Mixed Signals, ongoing volatility underscores the precariousness of the recent rally. Even as the S&P 500 index rallied to recoup much of the losses made since its March 23rd low, we have cautioned that a second wave of coronavirus cases could upend investor confidence, raising the prospect of a fresh round of social-distancing restrictions or layoffs. We suggest investors resist the urge to react to daily market movements, make sure your portfolio is appropriately diversified, and make sure your portfolio is consistent with your goals, risk tolerance, and preferences.

 

Europe higher on mixed data and rally in China and Hong Kong 

 

European equities are trading higher in afternoon action, with the U.S. markets returning to action following a long holiday weekend in positive fashion, while stock markets in China and Hong Kong surged to kick off the week. The markets also digested some mixed economic data in the region, with German factory orders rebounding solidly in May but at a slower pace than expected, but May Eurozone retail sales rebounded much more than expected. Moreover, Eurozone investor confidence came in well below estimates for July. The euro and British pound are trading lower versus the U.S. dollar, and bond yields in the region are mixed. The markets continue to shrug off the persistent rise in new COVID-19 cases, particularly out of the world's largest economy of the U.S., and Schwab's Jeffrey Kleintop offers his commentary, What A COVID-19 Second Wave Means For Investors, noting that a second wave of global COVID-19 is getting a lot of media attention, but the appearance of a global second wave of cases is primarily driven by the different timing of first waves across countries—rather than second waves within countries. Jeff adds that the falling trend in deaths may be the more important factor to watch since the trend in stocks and earnings expectations are more closely aligned with deaths than cases. He concludes that a second wave of deaths could lead to a second wave of declines for the economy, corporate earnings and the stock market.

 

The U.K. FTSE 100 Index, Germany's DAX Index and Italy's FTSE MIB Index are up 1.7%, France's CAC-40 Index is advancing 1.5%, Spain's IBEX 35 Index is jumping 2.1%, and Switzerland's Swiss Market Index is increasing 0.8%. 

 

Asia mostly higher as Chinese stocks rally 

 

Stocks in Asia finished mostly higher to kick off the week, with equities in China and Hong Kong rallying to lead the way, bolstered by state media commentary promoting participation of retail investors amid the disruption of the global pandemic. Also, recent economic data, notably global manufacturing and services sector reports and last week's second month of solid U.S. employment figures, appeared to help foster the upward move for the markets, along with the backdrop of the flood of monetary and fiscal policy relief efforts. China's Shanghai Composite Index surged 5.7% and the Hong Kong Hang Seng Index jumped 3.8%. Japan's Nikkei 225 Index rallied 1.8%, with the yen showing some short-lived weakness late in the session, South Korea's Kospi Index gained 1.7%, and India's S&P BSE Sensex 30 Index advanced 1.3%. However, Australia's S&P/ASX 200 Index declined 0.7%, as some modest strength in technology issues was more than offset by weakness in all the other major sectors, led by industrials and health care.

 

Schwab's Jeffrey Kleintop offers his 2020 Mid-Year Outlook: Global Stocks and Economy, noting that in our 2020 Global Market Outlook, we cited many indicators pointing to heightened risk of a recession; now we highlight increasing signs of a recovery from one. However, Jeff adds that investor caution may still be warranted as stocks have priced in a recovery during the second quarter, leaving the potential for the pace or success of the recovery to disappoint. He concludes that new cycles usually come with new market leadership, and new market leadership by sector, style and geography could emerge in the second half of the year, catching some investors by surprise.

 

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