(CEP News)
• S&P 500 Loses 1.30%
• Canada’s TSX Gains For Eighth Straight Day
• Weaker U.S. Dollar Boosts Gold and Silver
• Oil Rallies to Three-Month High, Natural Gas Gains 14%
• Commodity Currencies Poised to Gain From Dollar Slump

Financials Stall Equity Rally

U.S. equity markets opened to the upside on Thursday, but turned lower following a round of profit-taking in financial stocks.

The S&P 500 closed down 10 points, or 1.3%, to 784. The Dow fell 86 points, or 1.1%, to 7400 and the Nasdaq declined 8 points, or 0.5%, to 1483.

Financial stocks led the market lower in a dramatic intraday turnaround. Shares of Citigroup opened 23% higher to cap a two-week 250% rally, but a round of profit-taking sent shares down more than 15% on the day.

Market watchers say it’s no surprise that financial stocks are under pressure because of the huge recent gains. The XLF, an ETF that tracks financials, has gained 50% since March 9.

Weighing on financials was a downgrade of Prudential, the second largest U.S. life insurer. Moody’s cut its rating by two notches to Baa2 and said its outlook is negative. Shares of the company fell nearly 25%.

Canadian Stocks Higher for Eighth Consecutive Day

A commodity rally fueled the eighth consecutive day of gains in the Canadian stock market.

The S&P/TSX Composite Index added 61 points, or 0.7%, to close at 8690.

The gain in Canadian stocks came despite a decline in the U.S., where the main indexes were down about 1%. Canadian commodity producers were the leaders, with oil, natural gas and gold companies making strong gains.

The Federal Reserve’s announcement that it will buy $1.15 trillion in government debt and mortgage-backed securities led to widespread concern about U.S. dollar devaluation. The U.S. dollar has fallen three cents against the Canadian dollar since the Fed’s decision and more than six cents against the euro.

As U.S. investors seek to divest themselves of dollar-denominated assets, they are looking to commodities. On Thursday, oil gained over 5%, natural gas rose 10% and gold gained 1.8%.

Andrew Pyle, investment adviser at Scotia McLeod, said commodities are also benefiting from speculation that stimulus efforts will reinvigorate economic growth.

“Bernanke and the gang are likely to see more success from this policy action than from several of the past year’s rate cuts because this time the stimulus is being pumped in as the economy stabilizes,” Pyle said.

Weaker U.S. Dollar Boosts Gold and Silver

Gold prices extended their gains Thursday as the U.S. dollar continued to tumble lower.

Gold, along with all commodities, appears to be benefiting from Wednesday’s FOMC decision to implement major quantitative easing measures. The Fed announced that it would expand its balance sheet by almost $1.2 trillion, which includes purchasing $300 billion in longer-term Treasuries.

Gold prices sold off modestly in overnight trading, but prices held around $930 an ounce and quickly recovered just ahead of the North American trading session. Renewed pressure on the U.S. dollar at 8 a.m. EDT helped push gold prices to session highs. On the session, gold was up 17.43 to $959.43 per troy ounce.

In the last two days, CBOT spot prices have climbed over $75 dollars and commodity strategists are looking for further gains as investors move into gold as a hedge against inflation.

Along with gold prices, silver has also done extremely well. Although the precious metal didn’t receive much of a boost following the FOMC announcement on Wednesday, it ended Thursday higher by 13%.

Mike Glaser, futures broker at LaSalle Futures, said he is expecting all commodities to be underpriced as the U.S. dollar index eventually falls close to 70.0.

“I think with all this money the U.S. government is printing, inflation is going to be the main concern going forward,” he said.

Glaser said he would need to see gold close above $966 an ounce to signal a retest of $1,000.

The Fed’s move toward spending more money has forced Dennis Gartman, author of the Gartman letter, back into the gold market. In his letter Thursday morning, he pointed out that he was on the sidelines during the last three weeks, but is now looking to have long gold positions for the “foreseeable future.”

“The Fed has signaled that it shall err openly and consistently upon the side of inflation rather than deflation,” he said in his letter.

Although investor interest is back on the rise, after two weeks of sharp declines, the fundamental outlook still looks weak.

Commodity strategists at Barclays Capital said the high prices are hurting demand in the jewelry sector. Imports to India are expected to be down sharply from previous years.

The strategists pointed out as well that exports from European jewelry manufacturers dropped 8.3% in 2008.

Oil Prices Hit Three-Month High as U.S. Dollar Weakens

Oil prices climbed above a three-month high and natural gas futures surged the most in 29 months to lead a massive commodity rally on Thursday.

Fears of inflation, U.S. dollar devaluation and an unexpected decline in inventories sparked the rally. Most recently, the April natural gas contract had gained 53 cents, or 14.1%, to $4.21 per million British thermal units. West Texas Intermediate crude hit a session high of $52.25 before pulling back to $51.61 per ounce.

Commodity markets continue to digest the FOMC statement released on Wednesday, which revealed that the Fed would expand its balance sheet. That announcement caused a sharp sell-off in the U.S. dollar.

The natural gas gains followed a U.S. report that showed natural gas inventories falling more than expected last week. Underground storage declined 30 billion cubic feet compared to the 24 bcf consensus estimate.

Lisa Zembrodt, natural gas analyst at Summit Energy, said that while the inventory report was modestly bullish, the rally was primarily an opportunity for natural gas to restore its historical relationship with oil.

“Over the last two weeks oil and other commodities have been cooking but in gas, nothing,” she said.

Thursday’s rally marks an incredible intraday turnaround. Early in the session, gas prices fell to a six-year low of $3.67 and then, after the report, spiked to as high as $4.42 — the highest level since Feb. 13.

Although the weaker greenback will support commodity markets, Thomas Bentz, senior energy analyst at BNP Paribas, said the fundamental outlook remains weak, which could keep oil prices anchored around the $50-a-barrel level.

“Yesterday’s DOE [Department of Energy] report shows that we still have high inventories,” Bentz said. “But we have broken through a key resistance level and you have to respect that.”

Commodity Currencies Gain Against USD

A weak U.S. dollar helped to boost commodity prices and was providing some support for interrelated currencies on Thursday, but currency strategists are not expecting this move to last in the long term.

The U.S. dollar remains under considerable pressure as currency markets continue to digest the quantitative easing measures announced by the FOMC on Wednesday. The sell off started yesterday afternoon after the Fed revealed it would expand its balance sheet by almost $1.2 trillion.

Commodity strategists view the weakness in the greenback as an inflationary pressure and are expecting commodities to benefit from hedge investment. According to some strategists, gold and silver are expected to do well as the ultimate hedge against inflation.

Commodities are higher across the board, with silver and natural gas leading the way. They each traded up 13% on the day. Meanwhile, gold was up 8% on the day, crude oil was up 7% and wheat was up 5%.

The higher commodity prices have strengthen related currencies. Indeed, of the G10 currencies, the commodity-linked Norwegian krone and New Zealand dollar were the two top performers of the day against the U.S. dollar. The Canadian dollar was the worst performer against the greenback of the G10 group.

Although commodity strategists see the weakness in the greenback as inflationary, some currency strategists are skeptical.

“I think a lot of the U.S. dollar selling is overblown right now,” said Brian Dolan, chief currency strategist from Gain Capital Group. “This strikes me as a short-term knee jerk reaction,” he said.

Although commodity currencies could be the top performers against the greenback in the short term, the major gains could be limited, said Dolan. He thinks the rally in the Aussie dollar and loonie are about 80% done, with the Kiwi having slightly more potential to move higher.

Dolan pointed out the U.S. dollar will continue to do well because the economic outlook for other countries remains equally bleak. As an example, he pointed out that the euro zone economy still remains under considerable pressure and it could be only a matter of time before the European Central Bank embarks on quantitative easing measures like those of the Fed and the Bank of England.

“I think it is just a question of when we see the U.S. dollar reach equilibrium with other currencies,” he said.

In the short term, Dolan said AUD/USD and NZD/USD could rally as high as $0.72 in the short term, and USD/CAD could reach C$1.20.

Meg Browne, senior currency strategist from Brown Brothers Harriman, said the Fed isn’t as concerned about inflation as it is about economic growth.

The actions taken by the Fed yesterday could cause the U.S. economy to be the first to emerge from the global recession, and that would attract investors back to the greenback, she added

“I think this move puts the Fed ahead of the curve and we could see the economic recovery sooner than most other countries,” she said. “At the moment, good news is hurting the U.S. dollar, but that will start to change.”

Looking at the short term, Browne said she expects the Kiwi and Aussie dollars to continue to outperform the loonie because Canada is still being dragged down economically by the bleak situation in the U.S.

Browne also pointed out that Aussie dollar and Kiwi will benefit from the steps China is taking to stimulate its economy.

“I think what we are going to see in the second half of the year is currency market focus on the growth differentials, and it looks like the U.S. will have the strongest growth,” said Browne.

Most recently, the Canadian dollar was up 0.0045 to 0.8067 against the U.S. dollar (1.2399 USD/CAD) and down 0.89 to 76.27 against the yen.

The U.S. dollar was down 1.69 to 94.54 against the yen and the Dollar Index was down 1.466 to 83.129.

The euro was up 0.0189 to 1.3664 against the U.S. dollar, up 0.0134 to 1.6939 against the Canadian dollar, down 0.0020 to 0.9425 against the pound sterling and was lower by 0.51 to 129.17 against the yen.

The pound sterling was up 0.0225 to 1.4496 against the U.S. dollar and up 0.0174 to 1.7972 against the Canadian dollar.

Treasuries Down After FOMC Rally

U.S. Treasuries failed to build on the large gains made Wednesday following quantitative easing announcements from the Federal Reserve.

U.S. two-year yields were up 4.0 bps to 0.85%, with five-year yields up 6.5 bps to 1.63%, 10-year yields up 6.2 bps to 2.60% and 30-year yields up 9.0 bps to 3.62%. The Eurodollar September 09 contract was down 4.0 ticks to 98.79. The yield curve was steeper, with the 10/2-year spread up 2.1 bps to 174.14 bps.

“Trading flows subsided dramatically today,” said William O’Donnell, fixed income strategist at UBS. “Investors appear to be heading in droves for the sidelines for a “re-group” after the investment rules have been dramatically changed, yet again.”

Elsewhere in the sovereign debt market, yields on two-year Canadian government bonds were up 3.2 bps to 1.00%, with five-year yields up 0.5 bps to 1.72%, 10-year yields down 0.8 bps to 2.70% and 30-year yields up 2.0 bps to 3.56%. The September 09 BAX contract was down 2.0 ticks to 99.48.

In Germany, returns on two-year German bonds were down 1.0 bps to 1.39%, with five-year yields down 10.3 bps to 2.28%, 10-year yields down 17.6 bps to 3.04% and 30-year yields down 11.5 bps to 3.93%.

Yields on UK two-year bonds were down 7.0 bps to 1.39%, with five-year yields down 4.4 bps to 2.26%, 10-year yields down 7.9 bps to 3.03% and 30-year yields down 0.5 bps to 4.10%.

All data taken at 4:37 p.m. EDT.

By Adam Button, abutton@economicnews.ca, edited by Ernest Hoffman, ehoffman@economicnews.ca

CEP Newswires - CEP News © 2009. All Rights Reserved. www.economicnews.ca

The Copying, Broadcast, Republication or Redistribution of CEP News Content is Expressly Prohibited Without the Prior Written Consent of CEP News.

A copy of CEP News disclaimer can be found at http://www.economicnews.ca/cepnews/wire/disclaimer.

Posted in Categories: Australia, Canada, Commodities, Economy, Eurozone, Forex, Japan, New Zealand, Releases, Stocks, UK, USA.

Subscribe by RSS Subscribe by Email  Email This Post To A Friend