The preliminary look at third-quarter U.S. GDP came in better than expected. The news sent the dollar and bond market lower while fueling gains for stocks and commodities. Crude oil is up 3.5% and back above $80.00 a barrel. Gold futures have risen $17 to $1,047.50 an ounce. The stock market was short-term oversold and this news has produced a very widespread bounce here in the states and in Europe. Meanwhile weekly jobless claims improved but under expectations.
Asian stocks continued to sell-off. The whole region is seeing a sharp correction and major indices are breaking key levels of support. The Japanese NIKKEI index lost 1.8% today closing under the 10,000 level. The NIKKEI is down about 4% in the last few days hitting new three-week lows. The Chinese Shanghai index lost 2.3% and broke the 3,000 level. The Shanghai is off about 5% in just three days. The Hong Kong Hang Seng is getting hammered the hardest. Today's 2.2% decline was fueled by big volume and pushed the four-day correction to almost -6%. Tomorrow (Oct. 30th) China will launch its first NASDAQ-style exchange, the ChiNext market, which will open trading with 28 listed stocks.
European markets were bouncing on the U.S. GDP news. Stocks were just drifting sideways until the report came out and when the news hit they surged higher. Banking and resource stocks led the rally. The English FTSE gained 1.1%. The French CAC-40 rose 1.3%. The German DAX rallied 1.66%.
The big story today is the preliminary look at third-quarter GDP. Massive government stimulus, a first-time homebuyer tax credit, and the cash-for-clunkers program all played a role in ending the worst U.S. recession since the 1930s. Most analysts see today's positive GDP report as the end of the recession, a recession that had lasted for four quarters. However, the recession's end isn't official until the National Bureau of Economic Research in Massachusetts declares it is dead.
Economists were expecting the U.S. economy to move from -0.7% growth in the second quarter to +3.2 to +3.3% growth in the third quarter. Yesterday Goldman Sachs came out with their opinion that third-quarter GDP would only be +2.7%. Everyone was surprised when the GDP numbers came in at +3.5%, the fastest pace in two years. Powering this big jump was a 7.9% surge in federal government spending. The cheaper dollar also played a role. A falling dollar makes U.S. goods less expensive overseas and exports climbed more than 21%. This was the biggest jump in exports since 1996. Another positive sign was a 1.1% increase in business spending.
Many economists and analysts are still worried that the recovery may not be very stable. The National Association for Business Economics is predicting that growth will slow down to +2.4% in the fourth quarter and hover around +2.5% in the first quarter of 2010. The primary concern is unemployment, which is still at 26-year highs. Speaking of unemployment the weekly jobless claims were released this morning. The Labor Department said claims fell by 1,000 to 530,000 last week. Expectations were for a drop to 521,000. Meanwhile the number of workers receiving continuing claims fell 148,000 to 5.8 million. This was a lot lower than expected. While falling claims is normally a good sign it could be the opposite with workers falling off the list as their unemployment benefits expire.
Investors were watching the bond markets today. There was an auction of 7-year notes early this afternoon. The auction was a success. However, the real story was the Federal Reserve. Today was the last day of the Fed's Treasury bond purchase program. The Federal Reserve has spent $300 billion over the last several months buying bonds in an effort to keep interest rates low. This has been a major boon for the struggling housing market. Now that the program is complete it will be interesting to see how interest rates move from here. Currently the yield on the 10-year note has risen to 3.49%.
At the moment the stock market is in a widespread bounce. Not one sector index is in negative territory. While the bounce certainly has bullish potential the talking heads on TV seem to be a little too joyful to me. The stock market was down sharply over the last several days. We were oversold and at or under significant support levels. I don't think it's wise to be cheering so much for an oversold bounce. The rebound in the NASDAQ and the Russell 2000 is still inside yesterday's trading range, creating an inside day. That doesn't communicate confidence by investors. The S&P 500 is doing a good job of leading stocks higher with a 2% rally and a move back above its trendline and its 50-dma. If the S&P 500 can close above 1100 then maybe we'll have something to cheer about. I am concerned the index might roll over under the 1080 or 1100 level.
Let's take a quick look at charts for the major averages:
Chart of the S&P 500:
Chart of the NASDAQ:
Chart of the Dow Industrials:
Chart of the Russell 2000 index:
Chart of the U.S. dollar ETF (UUP):
A quick look for movers on the OptionInvestor.com play list reveals that DIG, the oil sector ETF, is up 4.2% after hitting our entry point yesterday. Shares of LIFE are seeing a big bounce. A failed rally under $50 could be a new entry point for puts. NTES is seeing a big bounce too. I might be inclined to exit early any puts on NTES.