Did Markets Make Bad News Good?
Bad news was good on Wednesday and stocks continued to advance in the face of a surprising cut to the third estimate of first-quarter GDP.
With only two business days left in the second quarter, first-quarter GDP is now ancient history. The unexpected slash from 2.4 percent annualized GDP expansion to 1.8 percent resulted from the fact that Personal Consumption Expenditures (PCE or consumer spending) increased by only 2.6 percent, compared with the previous estimate of 3.4 percent growth.
The Dow Jones Industrial Average (NYSEARCA:DIA) gained 149 points to finish Wednesday’s trading session at 14,910 for a 1.02-percent advance. The S&P 500 (NYSEARCA:SPY) climbed 0.96 percent to close at 1,603. In other major markets, oil (NYSEARCA:USO) advanced 0.18 percent to close at $33.80.
On London’s ICE Futures Europe Exchange, July futures for Brent crude oil advanced by 46 cents (0.45 percent) to $101.72/bbl. (NYSEARCA:BNO).
August Gold Futures declined by $49.90 (3.91 percent) to $1,225.20 per ounce (NYSEARCA:GLD). Transports continued uphill on Wednesday, with the Dow Jones Transportation Average (NYSEARCA:IYT) climbing 0.70 percent.
In Japan, stocks weakened as the yen strengthened to 97.5 per dollar just before Wednesday’s closing bell in Tokyo. The yen had weakened to 98.24 earlier in the session. As the yen strengthened, the Nikkei Stock Average was forced to sacrifice an earlier gain of over 1.5 percent. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (NYSEARCA:FXY). The Nikkei 225 Stock Average fell 1.04 percent on the day to 12,834 (NYSEARCA:EWJ).
Stocks continued to advance in China after the People’s Bank of China announced on Tuesday that it will loosen its monetary policy to resolve the liquidity squeeze which escalated interbank lending rates in the nation.
In Shanghai, stocks lost some ground as the financial sector felt pressure due to questions as to whether smaller banks will benefit from the PBOC’s new plans. The Shanghai Composite Index declined 0.41 percent to close at 1,951 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index skyrocketed 2.43 percent to 20,338 as bargain hunters caused a short squeeze (NYSEARCA:EWH).
In Europe, stocks made wild gains after European Central Bank President Mario Draghi assured the French National Assembly on Wednesday that ECB monetary policy will remain accommodative for the foreseeable future. While speaking at another event in Paris, ECB Board member Joerg Asmussen also made it clear that there is no “taper” planned for the Eurozone (NYSEARCA:VGK). Because nothing sparks a European stock rally as well as the “Draghi put”, Wednesday’s remarks sent the major European stock indices soaring.
The Euro STOXX 50 Index finished Wednesday’s trading session with a 2.34 percent surge to 2,602 — remaining below its 200-day moving average of 2,633. Its Relative Strength Index is 41.24 (NYSEARCA:FEZ).
Technical indicators reveal that the S&P 500 remains a tad below its 50-day moving average of 1,619 after closing at 1,603. Bears are anticipating a further decline to the 200-day moving average of 1508. Its Relative Strength Index rose from 41.55 to 45.93. The MACD remains below the signal line and has crossed far below the zero line to negative 9, suggesting the likelihood of a decline.
For the day, all sectors were in positive territory, while the healthcare sector took the lead with a gain of 1.44 percent. The materials sector was the laggard, advancing only 0.47 percent.
Consumer Discretionary (NYSEARCA:XLY): +1.25 percent
Technology (NYSEARCA:XLK): +0.59 percent
Industrials (NYSEARCA:XLI): +0.99 percent
Materials (NYSEARCA:XLB): +0.47 percent
Energy (NYSEARCA:XLE): +0.62 percent
Financials (NYSEARCA:XLF): +1.02 percent
Utilities (NYSEARCA:XLU): +1.27 percent
Health Care (NYSEARCA:XLV): +1.44 percent
Consumer Staples (NYSEARCA:XLP): +1.04 percent
Bottom line: The bulls left first quarter’s disappointments in the dust on Wednesday as the rally resulting from Tuesday’s five better-than-expected economic reports extended to a second day. Markets are bouncing back from oversold levels and now face resistance just ahead.
John Nyaradi is the author of The ETF Investing Premium Newsletter.