(CEP News) -
• S&P 500 Rises 1.8%
• Oil Rises to $46 per Barrel
• Canadian Dollar Lagging Against Greenback
• U.S. 30-Year Yields Rise to Three-Month High

Stocks Extend Gains on IMF Funding and Treasury Plans

Stocks have extended the rally to a fifth straight session on Monday after the G20 pledged to significantly increase IMF funding and the U.S. Treasury indicated it will soon overhaul the financial regulatory system.

Most recently, the Dow Jones industrial average was up 120 points to 7344 and the S&P 500 was up 14 points to 771. Tech stocks are lagging, with the Nasdaq up 3 points to 1434. In Canada, the S&P/TSX composite index was higher by 210 points to 8513.

Top financial officials from the world’s 20 largest economies failed to reach a U.S.-led consensus on stimulus spending, but found common ground on increasing contributions to the IMF.

“All that could be agreed was a rather vacuous statement to the effect that everyone would do what they could,” said Matthew Strauss, senior currency strategist at RBC Capital Markets.

Strauss said the only clear positives from the meeting were pledges to fight protectionism and commitments to increasing IMF reserves. Officials hinted that funding for the IMF could be doubled to $500 billion. The extra cash would help stabilize emerging economies battered by high borrowing costs.

“We agreed on the urgent need to increase IMF resources very substantially,” the G20 communiqué said.

In an interview with CBS’s 60 Minutes on Sunday, Bernanke said the recession will likely end this year. He criticized the bailout of AIG, but said the “biggest risk” to a recovery is a failure of the “political will” to support the banking system.

“Saturday’s G20 statement and Fed Chairman Bernanke’s 60 minutes appearance appear to have boosted spirits,” said Benjamin Reitzes, economist at BMO Capital Markets.

Bank stocks are among the strongest on Monday, with Bank of America up 9.7% and Wells Fargo higher by 3.1%. The rise comes after a Wall Street Journal story suggested U.S. Treasury Secretary Timothy Geithner will outline proposals to revamp financial system oversight. The changes are expected to include more powers for the Federal Reserve and higher capital standards for banks.

The rise in North American stocks comes after an early rally in Japan. The Nikkei closed up 1.8% after a report suggested the Bank of Japan may boost bank capital reserves by purchasing subordinated debt.

Banking news also helped share prices in Europe. Shares of UK bank Barclays rose 14% after it confirmed it has held discussions about selling its iShares unit for up to US$7 billion.

Most recently, the Stoxx 50 closed up 54 points to 1785, the UK FTSE 100 closed up 110 points to 3864 and the German DAX closed up 91 points to 4045.

Oil Rebounds After OPEC Says Could Take ‘Drastic’ Measures if Prices Remain Low

Oil initially fell by more than $2 after OPEC left production quotas unchanged, but later rebounded when Secretary-General Abdullah al-Badri said OPEC members could make a “drastic decision” if prices remain low in May.

Most recently, WTI crude oil was higher by 1.10 cents to $47.34 per barrel. Crude fell as low as $43.60 shortly after trading opened on Sunday.

Badri told Reuters Television that oil prices in the $40 to $50 range were too low to attract investment.

“We really cannot go too long” with prices at these levels, he said.

On Sunday, OPEC decided to aim for stricter compliance with current quotas rather than cutting production. Since September, OPEC has lowered quotas by 4.2 million barrels per day. It noted that according to secondary sources, compliance with those production levels has been 79%.

On Monday, Badri said that compliance of 93% would be a success.

“Anything above 93, 94 to 95%, that is a success figure,” he said in a separate interview. “Technically, there is no such thing as 100% compliance. This has to do with wells, it has to do with pipelines, it has to do with separators, to do with tanks.”

Grim News Causes Canadian Dollar to Lag Against Greenback

The Canadian dollar is one of the laggards on Monday following a weekend of disappointing news. OPEC’s decision not to cut production, a grim outlook from the Bank of Canada and weaker-than-expected data are some of the reasons behind the loonie’s weakness.

The Canadian dollar is the second worst performer against the U.S. dollar among the G10 nation currencies. The only currency that is weaker than the loonie is the Japanese yen.

It has been a relatively volatile session for USD/CAD. In the Asian session, the cross hit session highs at 1.2789 CAD. Rising risk appetite caused a steady sell-off in the cross, which hit session lows at 1.2638 CAD just ahead of the North American session. The sell-off picked up speed following the open and USD/CAD is now relatively flat at 1.2687 CAD.

The negative sentiment started on Saturday at the G20 meeting when Bank of Canada Governor Mark Carney hinted at weaker domestic growth.

“Many of the downside risks we identified in our last Monetary Policy Report Update are now materializing,” he told reporters after the G20 meetings in England.

The second drag on the loonie was on Sunday when OPEC did not announce any new production cuts. OPEC members expressed concern about the worldwide economy and said it would leave production quotas unchanged at 28.845 million barrels per day. Oil prices fell lower at the open in the Asian session and remain under pressure hovering at $45 a barrel.

Finally the data in Canada remains weak. Capacity utilization by Canadian industries fell in the fourth quarter to its lowest level on record to 74.1%, Statistics Canada reported Monday. Economists had been expecting capacity utilization to drop to 75% following the 78.1% rate recorded in January, which was revised up from an initially-reported 77.4%.

David Watt, senior currency strategist at RBC Capital markets, said the data released over the weekend has created a defensive tone for the Canadian dollar. Although he is still bullish on USD/CAD, he is not expecting it to break through 1.30.

“On Friday we had extremely bad Canadian data, and we could reach 1.30,” he said. “We’ve had four runs at that level. If we can’t break it on bad data I think that means we aren’t going to break for a while.”

Elsewhere in foreign exchange, The U.S. dollar is up 0.21 to 98.23 against the yen and the Dollar Index is down 0.605 to 86.823.

The euro is up 0.0085 to 1.3013 against the U.S. dollar, up 0.0086 to 1.6528 against the Canadian dollar, down 0.0008 to 0.9228 against the pound sterling and is higher by 1.10 to 127.81 against the yen.

The pound sterling is up 0.0103 to 1.4101 against the U.S. dollar and up 0.0102 to 1.7910 against the Canadian dollar.

The front month gold contract at the Chicago Board of Trade is down $7.60 to $922.40 per ounce.

U.S. 30-Year Bond Yield Rises to Three-Month High

Fixed income securities are selling off on Monday as traders seek greater risk in equity markets. The slump pushed U.S. 30-year yields to their highest level since Nov. 25, 2008.

U.S. two-year yields are up 4.1 bps to 1.00%, with five-year yields up 4.6 bps to 1.91%, 10-year yields up 6.8 bps to 2.96% and 30-year yields up 10.5 bps to 3.78%. The Eurodollar September 09 contract is up 1.0 tick to 98.58. The yield curve is steeper, with the 10/2-year spread up 2.7 bps to 195.89 bps.

Yields on two-year Canadian government bonds are up 3.3 bps to 1.00%, with five-year yields up 2.2 bps to 1.90%, 10-year yields up 5.2 bps to 2.92% and 30-year yields up 5.2 bps to 3.65%. The September 09 BAX contract is down 1.0 tick to 99.41.

In Germany, returns on two-year German bonds are up 2.7 bps to 1.36%, with five-year yields up 6.2 bps to 2.30%, 10-year yields up 9.2 bps to 3.15% and 30-year yields up 8.2 bps to 4.00%.

Yields on UK two-year bonds are up 8.2 bps to 1.47%, with five-year yields up 8.2 bps to 2.23%, 10-year yields up 8.5 bps to 3.03% and 30-year yields up 9.1 bps to 4.03%.

All data taken at 12:38 p.m. EDT.

By Adam Button, abutton@economicnews.ca, edited by Sarah Sussman, ssussman@economicnews.ca

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

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