(CEP News)
• S&P 500 Gains 0.2%
• Oil Falls Nearly $3
• Gold Gains $8
• Treasury Yields Fall on Short Covering
• Currency Markets Looking For Common Ground at G20

Stock Market Edge Higher

The huge rally that propelled the major averages to their best day in four months on Tuesday continued early in the session on Wednesday, but concerns about a slowing worldwide economy put a damper on the rally.

The S&P 500 closed up 2 points, or 0.2%, to 721. The Dow Jones industrial average gained 4 points to close at 6930 and the Nasdaq was up 13 points to 1372. In Canada, the TSX got a lift from gold, potash and financials to close up 132 points, or 1.7%, to 8013.

Stocks attempted a push higher late in the session but the rally sputtered and stocks slid back to nearly unchanged.

Export data from China contributed to the slide. Economists were expecting a 1% contraction in the nation’s February exports, but instead they collapsed 25.7%. The decline decimated the Chinese trade surplus, as it fell to $4.84 billion from $39.11 billion.

Beaten-down financial companies continued to support markets. Citigroup climbed 6.2%. The company sparked the huge rally on Tuesday after a leaked memo said it earned $19 billion in the first two months of the year.

Similar comments from JPMorgan CEO Jamie Dimon helped financial companies on Wednesday. Dimon told CNBC his company was profitable in January and February but didn’t say if this included markdowns.

In Europe, the Stoxx 50 closed flat at 1703, the UK FTSE 100 closed down 21 points to 3694 and the German DAX finished the day up 27 points to 3914.

Oil Lower on OPEC Speculation and Chinese Imports

Oil was lower for a second day on Wednesday on signs of slowing demand and growing speculation that some OPEC members are reluctant to lower production.

Most recently, the front month WTI crude contract was down $2.95 to $42.76 per barrel.

“For weeks many members of OPEC have been signaling the market that another OPEC production cut was in the bag, a free throw, a slam dunk. But in what could turn out to be the biggest upset this March, a production cut could be rejected by the OPEC cartel,” wrote Phil Flynn, energy analyst at Alaron Futures.

Saudi Arabia has told its customers that it will keep supplies steady in April, according to a report from Reuters. Earlier in the week, Saudi-owned newspaper Al-Hayat said the Kingdom wants a higher level of compliance with the existing target before discussing more cutbacks.

OPEC members have been relatively compliant with the three production cuts announced since September. Recent surveys suggest about 85% of the quota has been met.

Still, overproduction has resulted in a gap estimated at 800,000 barrels per day between quotas and actual supply. Saudi Arabia has adhered to its quotas, but other member nations have not, and some analysts suggest there could be fractures in the cartel. Those comments were echoed by Qatar energy minister Abdullah Al-Attiyah on Wednesday.

“If OPEC is going to cut back on production it will not be the Saudis that will be doing the cutting,” Flynn said.

In the Bloomberg survey conducted last week, 31 of 41 analysts said OPEC will lower quotas. Most of the analysts expect a production cut of about one million barrels per day.

A decline in Chinese crude imports in February also weighed on energy markets. China is the world’s second-largest consumer of oil, but figures released Wednesday showed a surprise 15% decline in February oil imports.

Energy market bulls continue to note that the contango between oil contracts has narrowed considerably. The April contract, which expires next week, is trading at a $1.55 discount to the May contract. Strategists believe the spread appears when the market becomes oversupplied and companies have difficulty storing crude. The spread has closed since hitting a record $8 in December, suggesting the situation is improving.

Gold Prices Showing Signs of Recovery

Gold prices are showing some signs of recovery after a massive selloff earlier in the week, with some strategists saying investors could be ready to take another run at $1,000 per ounce.

Overnight, the price of gold hit a session low of $892.65, but the market found strong support and started trending higher throughout the North American trading session. CBOT spot prices are showing modest gains, trading at $906.

Mike Glaser, futures broker at LaSalle Futures, said he is seeing mixed technical signals in the precious metal. Prices have moved above the 50-day moving average but are trading below the 10-day and 20-day averages.

“The bears are still firmly in place,” he said. “I think we would need to see a close above $942 to see momentum come back into the markets.”

Glaser added he is expecting to see gold prices continue to hover around the $900 in the short term.

Aaron Fennell, commodities futures broker at MF Global, said today’s rally in gold could mean investors are ready to take another run at $1,000 an ounce.

He pointed out there is still a lot of uncertainty in stock markets and in that environment investors will continue to look for “safe havens.”

Although some traders are looking for further weakness in prices, perhaps falling to $850, Fennell said the safe play right now would be to jump into markets.

“I think there are a lot of investors who are afraid to miss the boat on the next run to $1,000. It’s better to jump in now than risk waiting to save an extra $50,” he said. “I think the safe play would be to jump in now, but make sure you have enough cushion in case prices do fall.”

Treasury Market Makes Mid-Session U-Turn

An unexpectedly soft Treasury auction was cast aside by market participants and Treasury yields tumbled late on Wednesday.

Demand in an $18 billion, U.S. 10-year note reopening auction was slightly lower than market participants were anticipating, and the notes sold with a yield of 3.043%, slightly lower than the 3.028% ‘when issued’ bid, which represents the expected yield.

Treasuries initially sold off on the soft auction but tepid stock markets and the inability to break key technical levels sparked a short-covering rally.

Josh Stiles, fixed income strategist at IDEA Global, said the turnaround in stocks and decent 10-year reopening squeezed shorts in the Treasury futures market.

“It’s very much trading with an eye on what equity markets are doing,” he said.

Chart watchers noted that the 2009 high of 3.05% has become a powerful resistance level for 10-year yields. They failed in a third attempt to break above that level on Wednesday.

“We’ve emphasized the importance of the technicals in the current environment and offer Wednesday as a prime example — the 3.05%-3.07% zone in the 10-year held well as motivation to sell the market eased this close to a two-week supply vacation,” said David Ader, fixed income strategist at RBS Greenwich Capital.

After the break failed, yields tumbled. On the session, U.S. two-year yields were down 2.4 bps to 1.00%, with five-year yields down 7.3 bps to 1.93%, 10-year yields down 11.8 bps to 2.89% and 30-year yields down 8.2 bps to 3.64%. The Eurodollar September 09 contract was up 6.0 ticks to 98.53. The yield curve was flatter, with the 10/2-year spread down 9.5 bps to 187.97 bps.

On Thursday, the Treasury will sell $11 billion in 30-year notes.

Elsewhere, yields on two-year Canadian government bonds were flat at 0.98%, with five-year yields down 4.4 bps to 1.88%, 10-year yields down 8.0 bps to 2.91% and 30-year yields down 4.4 bps to 3.66%. The September 09 BAX contract was down 4.0 ticks to 99.45.

In Germany, returns on two-year German bonds were up 5.1 bps to 1.37%, with five-year yields up 6.1 bps to 2.27%, 10-year yields up 7.0 bps to 3.07% and 30-year yields up 7.2 bps to 3.81%.

Yields on UK two-year bonds were up 5.8 bps to 1.39%, with five-year yields down 1.8 bps to 2.15%, 10-year yields down 2.1 bps to 3.09% and 30-year yields down 6.5 bps to 4.02%.

Currency Markets Want to See Common Ground at G20

The preliminary meeting of finance ministers and central bankers of the G20 industrialized nations will be critical as the U.S. and Europe struggle to find common ground on how to best deal with the economic crisis, market strategists say.

Members of the G20 will meet this weekend in West Sussex England to discuss the agenda for the official April 2 meeting. There is already talk that the U.S. government and Europe could struggle to reach an agreement on how to deal with the growing global economic crisis.

U.S. President Barrack Obama and U.S. Secretary Treasurer Timothy Geithner have said they would like to pursue the possibility of a global stimulus plan as well as developing financial reforms.

However, European officials are reluctant to increase their budgets to include stimulus spending. On Tuesday night, euro group President Jean-Claude Junker said appeals from the U.S. government for more global stimulus funding is not to the liking of the group’s 16 European finance ministers.

Currency strategists have said that if the two sides are not able to come together this weekend, it could lead to a rise in risk aversion. They say a lack of common ground will cause equities to sell off and boost safe-haven currencies such as the U.S. dollar.

Win Thin, currency strategist from Brown Brothers Harriman, said the lack of any unifying plan will highlight the growing risks to the economy. In this environment, he said he is expecting the U.S. dollar to continue to pressure the euro and sterling.

Simon Derrick, senior currency strategist from Bank of New York Mellon, said it makes sense that the U.S. government is trying to reach out to European countries to promote more global stimulus spending.

“If you are going to get the most bang for your buck and insure against disruptive capital flows is to have a co-ordinated approach to fiscal policy,” he said.

However, it is difficult for the U.S. and Europe to come to any agreement because of countries like Germany and France, he added. Both have raised concerns about what effect increased spending would have on the euro and the euro zone.

“Who is going to pay for stimulus? It’s not going to be Spain. It’s going to be France and Germany,” he said.

Stephen Gallo, head of market analysis at Schneider Foreign Exchange, said he’s expecting to see a stalemate between the U.S. and the European Union.

He added that he agrees with the reluctance of European countries to increase their fiscal deficits to combat the economic weakness. So far, there isn’t much evidence that the money the U.S. government has pumped into its economy is working, Gallo said.

“What is being proposed by the U.S. and the UK is what got us into this mess in the first place,” he said. “Governments are struggling with their old debt and now you want to give them new debt.”

On Wednesday, the Canadian dollar was down 0.0033 to 0.7780 against the U.S. dollar (1.2851 USD/CAD) and down 1.43 to 75.68 against the yen.

The U.S. dollar was down 1.41 to 97.26 against the yen and the Dollar Index was down 1.059 to 87.868.

The euro was up 0.0166 to 1.2849 against the U.S. dollar, up 0.0288 to 1.6511 against the Canadian dollar, up 0.0027 to 0.9251 against the pound sterling and was lower by 0.20 to 124.94 against the yen.

The pound sterling was up 0.0134 to 1.3887 against the U.S. dollar and up 0.0250 to 1.7846 against the Canadian dollar.

All data taken at 4:34 p.m. EDT.

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

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

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