Stocks rise despite weak economic news, bond yields drop

U. S. stocks were higher again on Thursday despite mounting evidence of a slowing global economy.

After the European Union announced weaker than expected GDP growth in the euro zone in the second quarter, Walmart reduced its earnings guidance for the year and unemployment claims rose more than expected, to 311,000 last week from 290,000 the prior week. But that didn’t deter stocks from opening higher and rising the rest of the day, with all three major indexes closing with 0.4% gains. Rising volume beat falling volume by about a 60-40 ratio in the broader market, while all 10 S&P sectors rose except for energy stocks, as oil prices continue to drop. Twenty-three of the 30 Dow stocks rose, including the aforementioned WMT, which gained 0.5% despite reporting lower store traffic for the seventh straight quarter.

European stocks were mostly higher despite reports showing a continuing weakening of the euro zone economy. The EU’s statistics office said GDP growth in the currency area was unchanged in the second quarter after rising a weak 0.2% in the first. Germany’s economy shrank 0.2%, its first contraction since 2012; Italy fell by the same amount, pushing it into recession; while France was unchanged; the three countries account for about two-thirds of the zone’s total GDP. The news fed speculation that the European Central Bank would be forced to take more drastic stimulus measures, boosting both stocks and bonds. The Stoxx Europe 600 rose 0.3%, as did the main German and French stock indexes.

U. S. government bond prices were higher, sending yields to their lowest levels in over a year, while oil prices were lower again. In the U.S., the price of the 10-year Treasury note rose 7/32 to reduce its yield two basis points to 2.40%, its lowest closing rate since June 2013. The government completed the third leg of its monthly debt sales, selling 30-year bonds at a rate of 3.125%, their lowest rate at auction since May of last year. Permanent investors bought 70% of the issue, which was oversubscribed by 2.6 times, the second highest figure this year. The price of WTI crude dropped more than 2% to about $95.50, its lowest level since January. Since hitting its 2014 high of more than $107 on June 20, WTI has dropped more than 11%. Brent crude fell to near $102 a barrel, its lowest price in over a year.

In Europe, investors continued to push yields on sovereign bonds to new record lows. The yield on the 10-year German bund fell one basis point to close at 1.02% although it briefly dipped below 1% during the session, according to Bloomberg. Yields on comparable Italian and Spanish bonds dropped by seven and nine bps, respectively.

Asian equity markets were mixed. Both Japan’s Nikkei 225 and India’s Sensex rose 0.7% but stocks in China were lower. The Shanghai composite fell 0.7% while Hong Kong’s Hang Seng index fell about half that.

Reports/dates/facts/links worth paying attention to over the next week:

  1. August 15: Industrial production (July); producer price index (July); University of Michigan consumer sentiment index (August); New York Fed Empire State manufacturing survey (August).
  2. August 18: National Association of Home Builders housing market index (August).
  3. August 19: Housing starts (July); consumer price index (July).
  4. August 20: Minutes of the Federal Reserve’s July 30 monetary policy meeting are released.
  5. August 21: Weekly unemployment claims; existing home sales (July); leading indicators (July); Philadelphia Fed survey (August).
  6. The Atlanta Fed’s new GDP forecasting model: GDPNow

Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

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