(CEP News)
• Financials Pulling Down Stock Markets
• Treasuries Slump as China Says U.S. Debt Not Only Option
• Canadian Dollar Shifts Alongside Stock Sentiment

Equity Markets Down 0.6%

A huge loss at a UK bank and an unexpected drop in a key consumer sentiment survey kicked off a slide in stocks on Friday.

Equity market futures were close to flat until the Lloyds Banking Group detailed a USD$12.3 billion loss at HBOS.

Shares of the company fell 21.6% and the worries spilled over to other financial companies. Financial shares in the S&P 500 are down 3.1%.

Stock markets extended their losses when the preliminary survey of consumer sentiment from Reuters and the University of Michigan fell to its lowest level since November and fourth lowest level on record.

The Dow Jones industrial average was most recently down 61 points to 7872, the S&P 500 down 6 points to 830 and the Nasdaq down 3 points to 1538. In Canada, S&P/TSX composite index is down 64 points to 8715.

European stock markets closed with the Euro Stoxx 50 up 5 points to 1966, the UK FTSE 100 down 13 points to 4190 and the German DAX up 6 points to 4413.

On the week, the Stoxx 50 fell 3.9%, the FTSE 100 was down 2.4% and the DAX lost 5%.

U.S. 30-Year Yields Rise for Second Day

The selloff at the long end of the U.S. Treasury curve is continuing on Friday after Chinese officials said buying U.S. government bonds isn’t the only option for its massive currency reserves.

U.S. 30-year yields are up 12.5 basis points to 3.64%. In the past two sessions, long bond yields have risen 22 basis points. Since the beginning of the year, they have risen nearly a full percentage point.

China Banking Regulatory Commission deputy head Luo Ping told the China News Service that reserves could be invested in gold or the debt of other countries. On Thursday, there were reports of China taking large positions in Canadian government bonds.

The comments from Luo reverse a statement from a day earlier when he was quoted as saying there was only “one option” for investing reserves.

He was also quoted as saying that if the U.S. issues too much debt, Treasury holders will suffer losses.

Treasury market watchers credit increased debt issuance for the recent sell off in Treasuries. In the past week, the U.S. Treasury Department held record-sized auctions for debt maturing in 3-years, 10-years and 30-years. The $14 billion 30-year debt sale attracted a lower prices than markets were expecting.

The U.S. Treasury market will close at 2 p.m. EST on Friday and remain closed on Monday because of the President’s Day holiday.

Most recently, U.S. two-year yields were up 2.4 bps to 0.93%, with five-year yields up 7.0 bps to 1.83%, 10-year yields up 7.1 bps to 2.85%.

Elsewhere, yields on two-year Canadian government bonds are up 4.9 bps to 1.20%, with five-year yields up 2.2 bps to 2.11%, 10-year yields up 2.7 bps to 2.93% and 30-year yields up 0.6 bps to 3.66%. The September 09 BAX contract is down 5.0 ticks to 99.29.

Returns on two-year German notes are down 0.6 bps to 1.30%, with five-year yields up 1.3 bps to 2.22%, 10-year yields up 1.8 bps to 3.10% and 30-year yields down 2.0 bps to 3.70%.

Yields on UK two-year bonds are up 11.7 bps to 1.33%, with five-year yields up 10.8 bps to 2.54%, 10-year yields up 8.1 bps to 3.56% and 30-year yields up 4.7 bps to 4.13%.

Canadian Dollar Wavers Alongside Broader Sentiment

A late afternoon rally in equities on Thursday helped the Canadian dollar remain within its current channel against the U.S. dollar. The USD/CAD continues to have trouble holding gains above 1.25.

U.S. equities remain the main theme for risk aversion and are dominating currency markets. Strategists said they expect any rally in U.S. stocks to hurt the greenback, and for a sell-off to support it. According to strategists, the late afternoon rally on Thursday was a result of news that the U.S. government is working on a plan to help mortgage holders.

USD/CAD lost over 2 cents in overnight trading, dropping from yesterday’s highs of 1.2531 CAD to today’s session lows of 1.2282 CAD. The pair is stuck in the middle of today’s range and is down modestly 0.20 cents to 1.2417.

Friday’s data has not had much impact on today’s movements. U.S. consumer sentiment moved lower than expected in February, with two thirds of those surveyed forecasting the economic downturn to last five more years. According to a preliminary report from Reuters and the University of Michigan, the headline consumer sentiment index fell to 56.2 from a final reading of 61.2 in January, despite expectations by a survey of economists for a decline to a 60.2 level.

With little long-term direction, strategists are mixed as to further moves in the USD/CAD. Jacqui Douglas, currency strategist at TD Securities, said she is looking for the loonie to continue to hold gains, and favours selling rallies in the pair.

“(WE) think USD/CAD gains towards the upper end of the recent trading range will be difficult to sustain; the Canadian economy is clearly slowing but we think the USD remains somewhat over valued fundamentally given its relatively weaker fiscal position,” she said.

Sacha Tihanyi, currency strategist at Scotia Capital, said he is expecting the recent Canadian buying to be short-term momentum.

“We remain of the opinion that in a perfectly functioning world where everything is decided by economic fundamentals, that USDCAD should be trading somewhere north of 1.25,” he said. “However it would be foolish to not recognize that, yet again, fundamentals take a back seat to risk driven flows and the gyration of market sentiment between a thirst for risk or safety.”

Currency strategists will also be paying attention to the G7 meeting in Rome. They will be interested to see if the members address currency markets in their statement, which is expected to be released sometime between Friday and Saturday.

Elsewhere in foreign exchange, the U.S. dollar is up 0.88 to 91.82 against the yen and the Dollar Index is down 0.619 to 85.928.

The euro is up 0.0042 to 1.2904 against the U.S. dollar, up 0.0018 to 1.6017 against the Canadian dollar, down 0.0063 to 0.8953 against the pound sterling and is higher by 1.53 to 118.48 against the yen.

The pound sterling is up 0.0143 to 1.4411 against the U.S. dollar and up 0.0135 to 1.7883 against the Canadian dollar.

WTI crude oil is up $2.20 to $36.18. The front month gold contract at the Chicago Board of Trade is down $9.60 to $939.90 per ounce.

All data taken at 12:36 p.m. EST.

By Adam Button, abutton@economicnews.ca

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Posted in Categories: Australia, Canada, Economy, Eurozone, Japan, Releases, Stocks, UK, USA.

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