Friday, 31 October 2008

US economy shrinks, stocks gain

The US economy contracted in the third quarter. MarketWatch reports:

The U.S. economy contracted at a 0.3% annualized rate in the third quarter, as consumer spending declined at the fastest rate in 28 years, the Commerce Department estimated Thursday...

The drop was close to economists' expectations that the economy would shrink at a 0.5% annual rate.

Still, investors were able to shrug off the news. Again from MarketWatch:

U.S. stocks rallied Thursday, pushing the Dow Jones Industrial Average back above the 9,000 level, after the government said the economy shrank less than forecast in the third quarter.

The rampant market volatility continued. After rising 270 points, the Dow Jones Industrial Average gave much of it back, only to then pick up steam again as the afternoon progressed to close 189.73 points ahead, or 2.1%, to 9,180.69.

Some of the biggest moves of the day, however, had occurred earlier in Asia. From Bloomberg:

Asian stocks, bonds and currencies surged after China, Taiwan and the U.S. cut interest rates to boost bank lending and economic growth. The MSCI Asia Pacific Index headed for a record three-day gain.

South Korea's Kospi index climbed a record 12 percent, led by Samsung Electronics Co. and Posco, after the U.S. Federal Reserve agreed to provide the nation with $30 billion in a currency swap. The won surged the most in 11 years...

Japan's Nikkei 225 Stock Average climbed 10 percent to 9,029.76 as Softbank Corp. gained by its daily limit.

Hong Kong's Hang Seng Index jumped 13 percent, led by Ping An Insurance (Group) Co. after China lowered its one-year lending rate. The measure is on course for its biggest three-day advance since April 1973.

Gains in European stocks were relatively muted, the DJ Stoxx 600 rising by just 1.2 percent. It didn't help that business and consumer confidence in the euro area fell to a 15-year low in October.

Credit markets continued to improve on Thursday at the expense of Treasuries. Bloomberg reports:

Treasuries dropped, pushing 10-year yields to the highest in two weeks, amid concern U.S. efforts to unfreeze credit markets and prop up the financial system will swell sales of government debt...

The yield on the benchmark 10-year note climbed 11 basis points, or 0.11 percentage point, to 3.97 percent at 4:56 p.m. in New York...

The two-year note's yield gained 2 basis points to 1.56 percent...

Banks' cost of borrowing dollars overnight fell to a record low, according to the British Bankers' Association. The London interbank offered rate, or Libor, that banks charge each other for overnight loans in dollars tumbled 41 basis points to 0.73 percent, 27 basis points below the Fed's target rate.

Yields indicate banks are more willing to lend than they were almost three weeks ago. The difference between what they and the Treasury pay to borrow money for three months, the so- called TED spread, narrowed to 2.82 percentage points from a high of 4.64 percent Oct. 10.

Corporate borrowing in the U.S. commercial paper market soared the most on record, the first gain in seven weeks, after the Fed began buying the debt directly from issuers this week. The amount of corporate IOUs outstanding rose by $100.5 billion, or 6.9 percent, to a seasonally adjusted $1.55 trillion for the week ended Oct. 29, according to Fed data.

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