(CEP News)
• S&P 500 Gains 4.1%
• Swiss National Bank Rocks FX Markets With Vow to Intervene
• Strong Equities Drag Down U.S. Dollar
• Treasuries Rally After Strongest Bond Auction Since 2006
• Oil Climbs More Than 10%

General Electric and Retail Sales Lead Stocks to Third Straight Gain

Equity markets looked like they were going to turn lower on Thursday following two days of gains, but unexpectedly strong U.S. retail sales data, a stable ratings outlook for General Electric and continued optimism about bank earnings sparked another rally.

The Dow Jones industrial average closed up 240 points to 7170, the S&P 500 up 29 points, or 4.1%, to 751 and the Nasdaq gained 54 points to 1426. In Canada, the S&P/TSX composite index closed up 271 points, or 3.4%, to 8282.

It was the first three-day gain for equities since early February.

Equity market futures had been pointing to losses of more than 1%, but U.S. retail sales data prompted a recovery. Market watchers focus on the category that excludes autos; it increased 0.7% in February — much better than expectations for a 0.1% decline. January figures were also revised higher.

Andrew Pyle, wealth adviser at Scotia McLeod, said the second surprise rise in U.S. retail sales is definitely positive news for the economy. Barring any major revision or a mammoth drop in March, Pyle said it looks like consumption will be a positive boost for first-quarter GDP.

“This will definitely show Q4 as the trough of this recession. If housing activity even just stabilizes this half, this would represent a sea change in attitudes for those who keep saying this is the worst thing since the Depression,” he said.

General Electric also contributed to the stock rally even though the company lost its AAA-rating. Standard and Poor’s cut the industrial giant’s long-term credit rating to AA+ due to losses at the company’s credit arm, but shares of General Electric gained more than 12% because S&P gave the company a stable outlook, suggesting there won’t be further downgrades in the next six months. The ratings agency also praised S&P’s business prospects and leadership.

Negative sentiment had been building overnight after U.S. mortgage agency Freddie Mac reported a $23.9 billion loss in the fourth quarter. The company requested $30.8 billion from the government and said the value of its liabilities exceeds its assets.

Also weighing on sentiment was a Wall Street Journal story suggesting that insurers could receive the next big U.S. government bailout. A key index of life insurance stocks has fallen 59% since the beginning of the year.

In Europe, the Stoxx 50 closed up 13 points to 1715, the UK FTSE 100 was up 20 points to 3714 and the German DAX fell 33 points to 3947.

In Asia, the Japanese Nikkei closed down 178 points to 7198 despite an unexpected upward revision to fourth-quarter GDP, which was raised to -3.2% from -3.3%. In Shanghai, the Hang Seng Index closed up 71 points to 12002.

Swiss National Bank Currency Intervention Roils Currency Markets

Switzerland’s central bank rocked the foreign exchange market and sent the franc to its steepest ever loss against the euro after it said it will buy foreign currencies in order to prevent negative inflation.

The euro and U.S. dollar both surged to 3% gains against the franc.

The Swiss National Bank said it “will increase liquidity substantially by engaging in additional repo operations, buying Swiss franc bonds issued by private sector borrowers and purchasing foreign currency on the foreign exchange markets.”

Traders said the central bank followed up on its promise and the franc immediately fell four cents against the euro.

The effects spilled over to other currency crosses on worries that there will be a race for broad currency devaluations, according to Geoffrey Yu, currency strategist at UBS.

“I think we could see Japan come out and say that they didn’t start this but now they are going to jump on board. I think we are going to see very erratic currency markets in the next few days,” Yu said.

The U.S. dollar was up 0.45 to 97.73 against the yen while the euro was higher by 1.28 to 126.15 against the yen.

U.S. Dollar Weakens Against Most Currencies

The U.S. dollar started out strong, but is ending the day weaker across the board as equities close in positive territory for the third straight day.

While currency markets reacted to the central bank news, they shrugged off better-than-expected U.S. retail sales and another increase in U.S. weekly jobless claims.

The currency intervention from the Swiss National Bank mostly supported the euro, and it also initially pushed the U.S. dollar higher. The U.S. dollar index rose almost a full percentage point on the initial reaction.

But the dollar was able to hold most of its gains throughout the day because of the strength in equity markets. The Dollar Index was down 0.208 to 87.660 after hitting as high as 88.545.

Currency strategists said the U.S. dollar initially made broad gains because some investors felt nervous about the aggressive action from the SNB, which caused a flight to safety.

“At this point I think the U.S. dollar is acting as a default currency,” said Stephen Gallo, head of market analysis at Schneider FX. “Bottom line is that quantitative measures aren’t good for currency markets.”

Currency strategists will continue to watch equity markets to determine short-term direction for the U.S. dollar. There is a lot of doubt that equities will continue to make gains, and any signs of risk aversion will continue to support the U.S. dollar.

On Friday, markets will receive U.S. trade balance data and Reuters/University of Michigan consumer sentiment results. Economists expect that the U.S. trade deficit will narrow to $38 billion in January, following December’s deficit of $39.9 billion.

Economists expect that consumer sentiment will continue to remain weak, falling to a level of 55.0 in March, following February’s reading of 56.3.

Elsewhere in foreign exchange, The Canadian dollar was up 0.0044 to 0.7824 against the U.S. dollar (1.2780 USD/CAD) and up 0.77 to 76.47 against the yen.

The euro was up 0.0072 to 1.2908 against the U.S. dollar, down 0.0004 to 1.6494 against the Canadian dollar and up 0.0007 to 0.9261 against the pound sterling.

The pound sterling was up 0.0066 to 1.3940 against the U.S. dollar but down 0.0014 to 1.7815 against the Canadian dollar.

Treasuries Rally After Strongest Bond Auction Since 2006

Treasury yields tumbled on Thursday after the strongest U.S. bond auction in more than three years. The decline was tempered by another powerful stock market rally, leaving yields only modestly lower.

The fixed income market was relatively quiet until an $11 billion, 30-year auction. Before the results were released, the bonds were trading at 3.69% in the ‘when issued’ market.

The auction was extremely strong, however, as it sold at a yield of 3.64%. The five basis point ’stop through’ was the largest since the long-bond was reintroduced in February 2006.

There was considerable speculation about a weak auction because of the early-week rally in Treasuries and the strength in stock markets. The strong auction left the leveraged market on the wrong side of the trade and 30-year futures rose a full point to 127-00.

“Here we stand in a period of unprecedented Treasury supply, yet we get one of the best 30-year auctions in history - so much for duration takedown or inflation concerns,” said George Goncalves, chief Treasury, TIPS and Agency strategist at Morgan Stanley.

Goncalves said there was little in the auction details to temper the market’s enthusiasm. The indirect interest of 46% was the highest since the bond’s reintroduction and the bid-to-cover ratio of 2.40 was the strongest since May 2008.

Goncalves said the enthusiasm to own long-dated U.S. government debt may be due to speculation the Federal Reserve will engage in quantitative easing. Under such a program, the Fed would buy bonds in order to lower yields. Lower yields would help to drive down mortgage and corporate borrowing rates.

The Bank of England recently announced quantitative easing plans, sending 30-year gilt yields more than 50 basis points lower.

On Thursday, the Swiss National Bank became the second major central bank to engage in quantitative easing. Officials said they will buy Swiss franc bonds issued by the private sector in an effort to devalue their currency. As a result, 30-year Swiss government bond yields fell to 2.43% from 2.61%.

“Many have recently suggested that with the advent of now two central banks in official quantitative easing and buying bonds, that has put the Fed back on the radar for potentially doing the same,” Goncalves said.

In January, the Federal Reserve indicated a willingness to engage in quantitative easing. “The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” the Jan. 28 FOMC statement said.

In recent speeches, Fed Chairman Ben Bernanke has made no mention of buying Treasury securities. The next FOMC decision is March 18 and Goncalves said yields could rise if the Committee backs away from the threat.

“With the FOMC meeting around the corner, any clarification to the contrary on the Fed’s wait-and-see approach to buy U.S. Treasuries could create for a snap-back in yields,” he said.

On the session, U.S. two-year yields were down 0.8 bps to 1.00%, with five-year yields down 5.0 bps to 1.89% and 10-year yields down 5.3 bps to 2.85% . The Eurodollar September 09 contract was up 4.0 ticks to 98.56. The yield curve was flatter, with the 10/2-year spread down 4.4 bps to 184.66 bps.

Yields on two-year Canadian government bonds were up 0.8 bps to 1.00%, with five-year yields up 2.9 bps to 1.91%, 10-year yields flat at 2.92% and 30-year yields down 2.9 bps to 3.63%. The September 09 BAX contract was down 1.0 tick to 99.45.

In Germany, returns on two-year German bonds were down 6.8 bps to 1.30%, with five-year yields down 8.9 bps to 2.18%, 10-year yields down 6.3 bps to 3.01% and 30-year yields down 1.9 bps to 3.79%.

Yields on UK two-year bonds were down 1.9 bps to 1.37%, with five-year yields down 2.8 bps to 2.12%, 10-year yields down 14.1 bps to 2.95% and 30-year yields down 10.7 bps to 3.91%.

Crude Oil Moves Higher on Risk Appetite and Supply Issues

Rising positive sentiment and the possibility of more production cuts from OPEC helped to boost oil prices by more than 10% on Thursday.

The shift in momentum is a stark contrast from Wednesday, when oil prices fell 7.8% on the day. On the session, WTI crude oil was up $4.41 to $46.74 per barrel.

Overnight, officials from Russia announced that the country supports production cuts from OPEC and could also follow through with its own cuts. The oil cartel will be meeting on Sunday in Vienna, Austria.

Oil also received a boost from rising risk appetite after a stronger-than-expected U.S. retail sales report. Sales excluding autos rose 0.7%. The consensus estimate prior to the release was a 0.1% decrease.

Finally, strategists are saying that oil prices are benefiting from the rally in gold after the Swiss National Bank cut interest rates and announced that it is buying currencies to weaken the Swiss franc.

“The Swiss franc was seen as a safe haven currency but after today investors are leaving, and it appears some of those flows are going into the commodity market,” said Phil Flynn, energy analyst from Alaron. “Gold, wheat and oil prices are up on the day.”

Although the outlook for oil on Thursday was positive, Flynn said there is still a lot of uncertainty in markets, and by Friday prices could be under pressure again.

He added he does see a strong possibility that prices reach $50 per barrel, but he said he doesn’t think it has enough momentum to push higher.

“There is so much demand destruction out there, and it will take a while to turn that around,” he said. “The market is trying to decide if oil belongs at these prices and only time will tell.”

Rob Gigiel, futures broker at MF Global, said he is not convinced that the momentum will last much longer. He also sees resistance holding at $50, and recommends that investors and traders start looking at taking profits.

“Fifty dollars is in reach and what people are gunning for,” he said. “I just think that if it hits $50 the gains will be fleeting.”

The front month gold contract at the Chicago Board of Trade was up $17.60 to $927.10 per ounce.

All data taken at 4:55 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, Switzerland, UK, USA.

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