Midday Market Recap: Stocks Seeking Direction, Canadian Dollar Hits 4-Year Low

(CEP News)
• S&P 500 up 0.5%
• USD/CAD Rises to 1.3064
• Sterling Tumbles as Lloyds Nationalized

Equity Markets Searching For Footing

Stocks continued to confound market watchers as they waver in the face of overseas financial troubles and slumping economic growth.

Most recently, the Dow Jones industrial average was down 26 points to 6601, the S&P 500 was flat at 683 and the Nasdaq down 9 points to 1285.

Equity futures earlier pointed declines of as much as 2% after UK bank Lloyds agreed to cede control of the company to the government in exchange for 260 billion pounds under the guarantee program.

The World Bank also released a troubling report, saying 2009 is likely to produce the first economic contraction since World War II.

There were also reports that troubled U.S. insurance company American International Group was seeking another bailout, and a warning that if the government abandons the company it may cause a “catastrophic” collapse.

The Japanese Nikkei closed down 87 points to 7086 — the lowest close in 26 years.

Investors were buoyed by a $41.1 billion pharmaceutical merger between Merck and Schering-Plough. Warren Buffett also appeared on CNBC and told viewers that he does not expect the economy to recover as quickly as it collapsed, but he said it is still a good time to buy stocks.

Market watchers said sentiment was also boosted by General Electric, whose shares are up more than 5%. The company will issue debt under the Treasury’s temporary loan guarantee program.

Oil companies are among the top gainers with West Texas Intermediate crude is up $2.07, or 4.7%, to $47.67.

In Canada, the S&P/TSX composite index is up 25 points to 7616.

Canadian Dollar Hits Five-Year Low Following Soft Data and Weaker Stocks

The Canadian dollar continues to lose ground and is trading at five-year lows against the U.S. dollar as domestic data remains weak and North American equities lose more ground.

The sell-off in the Canadian dollar started following a weaker-than-expected Canadian housing starts report. The pace of new housing starts in Canada fell for the sixth straight month, posting a 12.3% monthly slowdown and a nearly 46% drop from a year ago, the Canada Mortgage and Housing Corporation (CMHC) reported on Monday.

The weaker data has helped push USD/CAD through the October 2008 highs of 1.3017 CAD. USD/CAD hit a session high at 1.3064 CAD. The Canadian dollar later pared its losses and was most recently down 0.0061 to 0.7705 against the U.S. dollar (1.2975 USD/CAD) and down 0.08 to 76.30 against the yen.

Currency strategists are now wondering how high the cross could go. Most are now looking for the new resistance point at 1.3500 CAD.

“We are in unchartered territory so it is very possible we could see those big-figure moves,” said Sacha Tihanyi, currency strategist at TD Securities.

Although a target of 1.35 CAD is possible, Tihanyi said there are some signs that the cross could run out of steam before that. He said he is looking at an initial resistance point at 1.3330 CAD. But the broader gains will be determined by U.S. equity markets, he added.

Shaun Osborne, currency strategist at TD Securities, said the move through 1.30 has been “in the card for a while.”

Although he doesn’t think the Canadian dollar should be this weak, he said it is hard to ignore the trend. He added Friday’s Canadian employment report poses the most risk to the Canadian dollar. With the market expecting another weak report, he said there is a good possibility that 1.30 will hold as the new support level.

“It looks like USD/CAD could have more room to run on the upside,” he said

Sterling Dragged Lower across the Board as Financial Problems Grow

Concerns over the banking sector and the global economy are helping to put major pressure on sterling.

Among G-10 currencies, sterling is the worst performer against the U.S. dollar. Following the open of the North American trading session, cable hit a session low at 1.3743.

Currency strategists said concerns over the financial sector are primarily responsible for the pound’s underperformance. UK bank Lloyds has agreed to give over control of Britain’s largest mortgage provider to the government in exchange for 260 billion pounds under the guarantee program. According to some media reports, the government could raise its stake in Lloyds to 77% from 43%.

Most recently, the pound sterling was down 0.0284 to 1.3808 against the U.S. dollar and down 0.0228 to 1.7914 against the Canadian dollar.

The euro continues to make gains against sterling, with the cross trading at one-month highs above 0.91 GBP.

Technical strategists from Citigroup are watching EUR/GBP closely. They pointed out that since Jan. 30, 0.90 GBP has been a major resistance point. A close above 0.91 could point to more short-term strength for the euro.

Nicole Elliott, strategist from Mizuho said she is relatively neutral on EUR/GBP and sees gains capped at around 0.9200 GBP.

Treasury Yields Rise

U.S. two-year yields are up 3.2 bps to 0.98%, with five-year yields up 4.0 bps to 1.92%, 10-year yields up 4.0 bps to 2.91% and 30-year yields up 4.5 bps to 3.60%. The Eurodollar September 09 contract is down 13.0 ticks to 98.41. The yield curve is steeper, with the 10/2-year spread up 1.0 bps to 193.25 bps.

Yields on two-year Canadian government bonds are flat at 0.96%, with five-year yields up 1.8 bps to 1.87%, 10-year yields flat at 2.94% and 30-year yields up 1.7 bps to 3.63%. The September 09 BAX contract is down 2.0 ticks to 99.51.

In Germany, returns on two-year German bonds are up 8.9 bps to 1.27%, with five-year yields up 6.9 bps to 2.13%, 10-year yields up 1.6 bps to 2.94% and 30-year yields down 0.7 bps to 3.68%.

Yields on UK two-year bonds are up 8.3 bps to 1.35%, with five-year yields up 10.4 bps to 2.20%, 10-year yields up 6.6 bps to 3.13% and 30-year yields up 8.9 bps to 4.04%.

All data taken at 12:41 a.m. EST.

By Adam Button, abutton@economicnews.ca

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