(CEP News)
• Stocks Rally on Report U.S. Government Considering Mortgage Payment Subsidy
• Long-dated Treasuries Sell off After Weak Bond Auction
• Gold Continues Rise, Oil Falls to $34 per Barrel
• Japanese Yen Faces Hurdles from G7 Meeting, GDP Data

S&P 500 Erases 3% Decline in Final Hour of Trading

(CEP News) - Equity markets stormed back from deeply negative territory on Thursday after a report suggested the U.S. government is considering a plan to subsidize mortgage payments.

The Obama administration is working on a plan that would use government funds to help people make their mortgage payments, according to a Reuters report.

The S&P 500 was at a session low of 808 when the news was first reported at 3 p.m. EST; it closed up 1.5 points at 835. The Dow Jones industrial average closed down 7 points at 7933 and the Nasdaq closed up 11 points at 1542. In Canada, the TSX was up 47 points, or 0.5%, to 8785.

The story, which quotes “sources familiar with the plan,” says it would be aimed at homeowners who qualify through a standardized appraisal based on affordability. The key will be finding a set of standards that can quickly be applied to all mortgages.

Earlier in the session, negative sentiment gained traction as U.S. lawmakers continued to squabble over the $789.5 billion stimulus deal.

Increasing debates along party lines suggest tension and gridlock in the months ahead, Michael Woolfolk, senior currency strategist at the Bank of New York Mellon.

“We can’t have partisanship at this stage. We need a great level of co-operation. That’s the only way we’re going to avoid a depression,” Woolfolk said.

The turnaround in the Dow came after it hit a low of 7694 — the lowest level since Nov. 22, 2008.

Also weighing on markets was a report that showed an unexpected jump in U.S. retail sales.

Sales increased 1.0%, marking the first rise in seven months. Economists were expecting a 0.8% contraction. Retail sales excluding autos grew 0.9% in the month against expectations for a 0.4% decline, according to advance estimates released from the Department of Commerce.

“The consumer is still backed into a corner and the January numbers do not materially change this. Looking ahead, consumer spending will continue to be a drag on growth for the next few quarters,” said Charmaine Buskas, economist at TD Securities.

Long-dated Treasuries Sell off After Weak Bond Auction

(CEP News) - Long-dated Treasury yields pushed yields higher after a soft 30-year auction and suggestions that the Fed may not want to buy government debt.

U.S. two-year yields were down 0.8 bps to 0.91%, with five-year yields up 1.0 bps to 1.76%, 10-year yields up 2.7 bps to 2.78% and 30-year yields up 7.3 bps to 3.52%.

The latest sell-off comes after the auction of $14 billion in 30-year Treasury notes drew a yield of 3.540%, much softer than the ‘when issued’ yield of 3.508%.

The buying pressure earlier came from a report in the Wall Street Journal saying that “the Fed has tiptoed away from a proposal to buy long-term government bonds.” The report also said that the idea “is still on the table,” but there are worries it would swell the balance sheet to unmanageable levels.

David Ader, U.S. government bond strategist at RBS Greenwich Capital, said he is giving little credibility to the Journal report because it was buried deep in a story on the fourth page.

“If this was a leak of value it would not be on A4,” he said.

Supporting the Treasury market are comments from the China Banking Regulatory Commission. The commission said U.S. Treasuries are the “only option” for the country to buy. There had been speculation that China might temper its buying of U.S. debt because of the Obama administration’s suggestions that China was manipulating its currency.

Elsewhere, sovereign fixed income was higher. Yields on two-year Canadian government bonds were down 2.1 bps to 1.15%, with five-year yields down 3.8 bps to 2.09%, 10-year yields down 3.3 bps to 2.91% and 30-year yields down 4.2 bps to 3.65%. The September 09 BAX contract was up 3.0 ticks to 99.34.

Returns on two-year German notes were down 5.7 bps to 1.30%, with five-year yields down 8.4 bps to 2.20%, 10-year yields down 10.6 bps to 3.08% and 30-year yields down 8.1 bps to 3.72%.

Yields on UK two-year notes were down 12.6 bps to 1.21%, with five-year yields down 14.5 bps to 2.43%, 10-year yields down 13.5 bps to 3.48% and 30-year yields down 9.0 bps to 4.08%.

Gold Breaks $950 as Investors Search for Safe Havens

Gold was the hot commodity on Thursday as prices broke through a key resistance at $950 per ounce. Fear is helping to boost the precious metal as other commodities remain under pressure, strategists say.

Comex gold prices hit a session high of $952 an ounce. Strategists have been waiting for prices to break through as they continue to target the $1,000 level. CBOT spot prices closed up $3.20 to $947.30 per ounce.

“Gold is on autopilot to $1000,” said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon.

Mike Glaser, futures broker at LaSalle Futures, said that with gold breaking through $950, the next resistance level could be $990. He added that the outlook looks very bullish and said the fact that banks are buying large amounts of gold could help the longer term trend.

The Comex delivery report for February shows that JPMorgan and Goldman Sachs took 68% of the gold delivery for that month, Glaser noted. This is compared to 7.5% the two banks took in December 2008.

Analysts from Barclays Capital are also bullish on gold as it continues to move higher. They added the “safe-haven” buying as global economic growth continues to falter.

WTI crude oil was down $1.36 to $34.58 on Thursday. It was the lowest close in the lifetime of the March contract and lowest level in the front month contract since the Jan. 15 low of 33.22 in the now-expired February contract.

Other commodities were also generally lower, led by nickel, natural gas and wheat. The 19-commodity CRB index was down 0.73% to 214.54.

Japanese Yen Faces Hurdles at G7 Meeting

The Japanese yen has shown some modest stability in the last few weeks, but strategists say that could come to an end as some major events could add volatility to currency markets.

USD/YEN has traded in a fairly stable range with support at 87.12 and resistance at 92.42 in recent weeks. On Thursday, the U.S. dollar was up 0.56 to 90.97 against the yen.

The first hurdle for the yen will come on Friday, when G7 members meet in Rome, Italy, economists say. An ongoing deterioration of the global economy is likely to put regulation, fiscal stimulus packages and protectionism on the top the Group of Seven’s agenda for the two-day meeting.

The second hurdle comes on Sunday when markets will receive Japanese fourth-quarter GDP. Annualized growth is expected to fall 11.7%.

According to some strategists, there are expectations that the G7 will talk about currencies and raise concerns about a strong yen. However, UBS FX strategist Geoffrey Yu said he’s not expecting the members to talk down the currency.

He added that 85 JPY is a strong support level for the USD/JPY and that it doesn’t appear the market is ready to break through that barrier. Until the pair does, he said it is probably too early to look at currency intervention.

“I don’t think the Japanese government will want to set a bad precedent by devaluing their currency. Once they start, then China could devalue theirs and it could just grow,” he said. “I just don’t think we are at those levels yet.”

Sacha Tihanyi, currency strategist from Scotia Capital, said there’s some risk that the yen could lose ground over the weekend. He said the two crosses he would pay the most attention to are the USD/JPY and CAD/JPY. He added, though, that the G7 ministers might stay away from commenting on specific currencies to try to keep volatility to a minimum.

Although the yen has room fall lower, Yu said he is not expecting to see a lot of short positions, especially ahead of the GDP numbers. If bad enough, that could create a rise in negative sentiment, supporting safe havens like the yen and U.S. dollar, Yu said.

“There is a very real risk that the GDP data helps to beef up the yen as investors continue to move away from the carry trade,” he said.

On Thursday, the overriding theme in foreign exchange was risk aversion.

The Canadian dollar was down 0.0030 to 0.8043 against the U.S. dollar (1.2433 USD/CAD) and up 0.20 to 73.17 against the yen.

The euro was down 0.0040 to 1.2867 against the U.S. dollar, up 0.0018 to 1.5999 against the Canadian dollar, up 0.0052 to 0.9016 against the pound sterling and was higher by 0.39 to 117.06 against the yen.

The pound sterling was down 0.0126 to 1.4269 against the U.S. dollar and down 0.0093 to 1.7739 against the Canadian dollar.

All data taken at 4:55 p.m. EST.

By Adam Button, abutton@economicnews.ca

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