Schwab Market Update
Dealmaking and Data Foster Strong Start to August
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U.S. stocks advanced solidly in the first session of the month, courtesy of a plethora of M&A headlines and as the ISM Manufacturing Index's stronger-than-expected July read highlighted a host of upbeat global reports. The markets shrugged off festering uncertainty regarding an expected next wave of fiscal support and the recent flare up in global new cases of COVID-19. Marathon Petroleum sold its Speedway gas stations to 7-Eleven for $21.0 billion in cash, ADT surged on a partnership with Google, and Dow member Microsoft confirmed talks to acquire TikTok's U.S. operations. Treasury yields rose as bond prices slipped on the favorable manufacturing reports, which kicked off a week that will culminate with Friday's nonfarm payroll figures. The U.S. dollar rebounded from a recent drop, gold modestly extended a record run, and crude oil prices were higher. Europe traded to the upside and Asia finished mixed.
The Dow Jones Industrial Average rose 236 points (0.9%) to 26,664, the S&P 500 Index increased 23 points (0.7%) to 3,295, and the Nasdaq Composite gained 158 points (1.5%) to 10,903. In moderate volume, 872 million shares were traded on the NYSE and 4.1 billion shares changed hands on the NASDAQ. WTI crude advanced $0.74 to $41.01 per barrel and wholesale gasoline rose $0.04 to $1.21 per gallon. Elsewhere, the Bloomberg gold spot price rose $0.79 to $1,976.65 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.2% higher to 93.52.
Marathon Petroleum Corporation (MPC $39) announced an agreement to sell its Speedway gas stations to 7-Eleven, a wholly owned, indirect subsidiary of Japan's Seven & I Holdings Co. Ltd. (SVNDF $29) for $21.0 billion in cash. The announcement came ahead of today's earnings report from MPC, which posted a smaller-than-expected Q2 loss but a sharp drop in revenues compared to the prior year. Shares of MPC gained ground.
ADT Inc. (ADT $13) surged nearly 60% after announcing a partnership with Google, owned by Alphabet Inc. (GOOGL $1,483), in which Google will invest $450 million to acquire a 6.6% ownership stake in the security and home solutions company. The companies said the deal is aimed at creating a leading smart home security offering. Each company will commit $150 million for co-marketing, product development, technology and employee training. GOOGL traded lower.
Dow member Microsoft Corporation (MSFT $217) confirmed that it is in discussions to explore the purchase of TikTok in the U.S. MSFT said following a conversation between its Chief Executive Officer Satya Nadella and President Donald Trump, it is prepared to continue talks to explore a purchase of TikTok in the U.S. from parent ByteDance. MSFT added that it fully appreciates the importance of addressing the President's concerns and it is committed to acquiring TikTok subject to a complete security review and providing proper economic benefits in the U.S. MSFT said it will move quickly to pursue discussions with TikTok in a matter of weeks and in any event completing these talks no later than September 15th. The two companies have provided notice of their intent to explore a preliminary proposal that would involve a purchase of the TikTok service in the United States, Canada, Australia, and New Zealand and would result in Microsoft owning and operating TikTok in these markets. MSFT traded nicely higher.
Earnings season is set to roll on this week and the markets remain focused on if a new fiscal relief package can be agreed upon between U.S. lawmakers as some key unemployment benefits aimed at supporting economic activity amid the severe disruption of the COVID-19 pandemic have expired.
Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Running on Faith: Are Stocks Discounting Too Powerful an Earnings Recovery?, earnings have so far bested an extremely low bar, but stocks may be discounting too swift a recovery; while concentration remains a risk. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, Stock Market Reaction to Expiring COVID-19 Programs, how if not extended or replaced, the fading support for the unemployed raises the risk of weakening economic momentum, turning the V-shaped recovery into a W.
For timely commentary, you can follow the experts from the Schwab Center for Financial Research (SCFR) on Twitter at @SchwabResearch, and you can visit to find more analysis and strategies on the current market environment.
ISM manufacturing report shows July output stronger than expected to kick off economic week
The July Institute for Supply Management (ISM) Manufacturing Index (chart) showed a larger-than-expected rise, moving further into expansion territory (a reading above 50). The index rose to 54.2 from June's unrevised 52.6 level, and versus the Bloomberg forecast of 53.6. The index hit the highest level since March 2019 as new orders and production both showed growth accelerated solidly, and new export orders moved back above the key 50 mark. Employment improved but continued to depict contraction and prices increased 1.9 points to 53.2. The ISM said in July manufacturing continued its recovery after the disruption caused by the coronavirus (COVID-19) pandemic and panel sentiment was generally optimistic, continuing a trend from June.
The final July Markit U.S. Manufacturing PMI Index was unexpectedly revised lower to 50.9 from the preliminary level of 51.3, where it was forecasted to remain, but above June's 49.8 level. A reading above 50 denotes expansion. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently, while it surveys a wider range of companies.
Construction spending (chart) surprisingly fell 0.7% month-over-month (m/m) in June, versus projections of a 1.0% gain, and following May's upwardly-revised 1.7% drop. Residential spending fell 1.4% m/m and non-residential spending dipped 0.2%.
Treasuries were mostly lower to begin the week, with the yield on the 2-year note little changed at 0.11%, while the yield on the 10-year note gained 2 basis points (bps) to 0.55% and the 30-year bond rate rose 3 bps to 1.23%. Treasury yields rebounded from recently renewed pressure that has been exacerbated by last week's continued dovish tone from the Fed as it left its monetary policy stance unchanged as discussed by Schwab's Liz Ann Sonders in her article, Policy of Truth: Fed Holds Rates Steady Amid Somber Outlook.
Today's data commences the economic week that will see ISM and Markit deliver its July reads on services sector activity, which will be accompanied the June trade balance. However, data on the employment front is likely to carry the most weight as the markets look to see if the economic recovery will persist, with ADP delivering its private sector payroll figures for July and jobless claims for the week ended August 1st hitting the tape. However, the headlining report will likely be Friday's nonfarm Labor Report, expected to show roughly 1.5 million jobs were added to payrolls in July. For commentary on how long the resiliency in the stock markets can last, see our latest installment of the Schwab Market Perspective: Watching the Shape of the Recovery.
Tomorrow, the lone report on the U.S. economic calendar will be the release of factory orders, projected to rise 5.0% m/m in June, after May's 8.0% increase, and durable goods orders are forecasted to be unrevised at the preliminary estimate of a 7.3% gain.
Europe higher, Asia mixed as manufacturing data suggests growth, uncertainties persist
European equities traded higher, with the euro trimming a recent rally versus the U.S. dollar, while Eurozone and U.K. manufacturing reports showed growth in the sector for last month, joining global reports out of the sector that suggest a broad recovery. Bond yields in the region were mixed and the British pound also lost ground on the greenback ahead of this week's monetary policy decision from the Bank of England. Schwab's Chief Fixed Income Strategist Kathy Jones offers her latest article, U.S. Dollar Outlook: What Could a Weaker Dollar Mean for Your Portfolio?, noting how the U.S. dollar has been showing signs of weakening, a trend that may underscore the importance of global diversification. Stocks shrugged off the uncertainty regarding the size and timing of the expected next wave of U.S. fiscal stimulus measures, and continued focus on the recent flare-up in new COVID-19 cases globally.
The U.K. FTSE 100 Index was up 2.3%, France's CAC-40 Index increased 1.9%, Germany's DAX Index rallied 2.7%, Italy's FTSE MIB Index advanced 1.5%, Spain's IBEX 35 Index gained 1.4%, and Switzerland's Swiss Market Index traded 2.2% higher.
Stocks in Asia finished mixed to commence a new month, with stronger-than-expected reports on Chinese and Japanese manufacturing output in July continuing to paint a recovery picture, while uncertainty remained regarding a next installment of fiscal relief measures out of the U.S. Also, conviction may have been stymied by simmering U.S.-China tensions and a rebound in the U.S. dollar from a recent drop that has supported some emerging market stocks. Schwab's Kathy Jones and Senior Fixed Income Analyst Christina Shaffer discuss Are Emerging-Market Bonds Worth the Risk?. Japan's Nikkei 225 Index rallied 2.2%, with the yen paring a recent gain, while China's Shanghai Composite Index advanced 1.8%. However, the Hong Kong Hang Seng Index declined 0.6% and Australia's S&P/ASX 200 Index finished flat. South Korea's Kospi Index ticked 0.1% higher and India's S&P BSE Sensex 30 Index fell 1.8% amid the rebound in the greenback and ahead of this week's monetary policy decision from the Reserve Bank of India.
Tomorrow's international economic calendar is poised to deliver the Reserve Bank of Australia's monetary policy decision and the country's trade figures for June, while the Eurozone is expected to release its June wholesale price inflation statistics.
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