(CEP News)
• S&P 500 Down 0.9%
• Canada’s TSX up 1.4%
• Weaker U.S. Dollar Boosts Gold and Silver
• Oil Rallies to Three-Month High

S&P 500 Down

U.S. equity markets opened to the upside on Thursday, but have turned lower following a round of profit-taking in financial stocks.

The Dow Jones industrial average was most recently down 85 points to 7401, the S&P 500 was down 8 points to 787 and the Nasdaq was down 8 points to 1484.

Financial stocks are leading the market lower in a dramatic intraday turnaround. Shares of Citigroup opened 23% higher to cap a two-week 250% rally, but a round of profit-taking sent shares down more than 10% on the day.

Market watchers say it is no surprise that financial stocks are under pressure because of the huge recent gains. The XLF, an ETF that tracks financials, has gained 50% since March 9.

Canadian Stocks Higher for Eighth Consecutive Day

A commodity rally is fuelling the eighth consecutive day of gains in the Canadian stock market.

The S&P/TSX index was most recently up 122 points, or 1.4%, to 8751.

The gain in Canadian stocks comes despite a decline in the U.S., where the main indexes are down 1%. Canadian commodity producers are the leaders, with oil, natural gas and gold companies making strong gains.

The Federal Reserve’s announcement that it will buy $1.15 trillion in government debt and mortgage-backed securities led to widespread concern about U.S. dollar devaluation. The U.S. dollar has fallen four cents against the Canadian dollar since the Fed’s decision and more than seven cents against the euro.

With U.S. investors seeking to divest dollar-denominated assets, they are looking to commodities. On Thursday, oil has gained 5%, natural gas has risen 10% and gold has gained 1.3%.

Andrew Pyle, investment adviser at Scotia McLeod, said commodities are also benefiting from speculation that stimulus efforts will reinvigorate economic growth.

“Bernanke and the gang are likely to see more success from this policy action than from several of the past year’s rate cuts because this time the stimulus is being pumped in as the economy stabilizes,” Pyle said.

Weaker U.S. Dollar Boosts Gold and Silver

Gold prices are extending their gains Thursday as the U.S. dollar continues to tumble lower.

Gold, along with all commodities, appears to be benefiting from the FOMC decision to implement major quantitative easing measures on Wednesday. The Fed announced that it would expand its balance sheet by almost $1.2 trillion, which includes purchasing $300 billion in longer-term Treasuries.

Gold prices sold off modestly in overnight trading, but prices held around $930 an ounce and sharply recovered just ahead of the North American trading session. Renewed pressure on the U.S. dollar at 8 a.m. EDT helped to push gold prices to session highs. Gold is trading just below $960.

In the last two days, CBOT spot prices have climbed over $75 dollars and commodity strategists are looking for further gains, as investors move into gold as a hedge against inflation.

Along with gold prices, silver has also done extremely well. Although the precious metal didn’t receive much of a boost following the FOMC announcement and ended the day around $12 an ounce, it has outperformed gold on Thursday. CBOT silver futures started rallying during the European session and have been on a steady rise, jumping over 8% during the trading day.

Mike Glaser, futures broker at LaSalle Futures, said he is expecting all commodities to be underpriced as the U.S. dollar index eventually falls close to 70.0.

“I think with all this money the U.S. government is printing, inflation is going to be the main concern going forward,” he said.

Glaser said he would need to see a close above $966 an ounce to signal a retest of $1,000.

The Fed’s move toward spending more money has forced Dennis Gartman, author of the Gartman letter, back into the gold market. In his letter Thursday morning, he pointed out that he was on the sidelines during the last three weeks, but is now looking to have long gold positions for the “foreseeable future.”

“The Fed has signaled that it shall err openly and consistently upon the side of inflation rather than deflation,” he said in his letter.

Although investor interest is back on the rise, after two weeks of sharp declines, the fundamental outlook still looks weak.

Commodity strategists from Barclays Capital said the high prices are hurting demand in the jewelry sector. Imports to India are expected to be down sharply from previous years.

The strategists pointed out as well that exports from European jewelry manufacturers dropped 8.3% in 2008.

Oil Prices Hit Three-Month High as U.S. Dollar Weakens

Oil prices are trading above a three-month high as positive equity markets and a weaker greenback help to bolster prices.

Trading was relatively quiet overnight as prices remained close to $49 a barrel. Thursday’s rally started just ahead of the North American opening bell, with West Texas Intermediate (WTI) crude hitting a session high of $52.25. Prices have retraced some of these gains, trading at around the $50.50 level.

Commodity markets continue to digest the FOMC statement released on Wednesday, which revealed that the Fed would expand its balance sheet. That announcement caused a sharp sell-off in the U.S. dollar.

Although the weaker greenback will support commodity markets, Thomas Bentz, senior energy analyst at BNP Paribas, said the fundamental outlook remains weak, which could keep oil prices anchored around the $50-a-barrel level.

“Yesterday’s DOE [Department of Energy] report shows that we still have high inventories,” Bentz said. “But we have broken through a key resistance level and you have to respect that.”

He added that the key will now be to see if support can hold at $50 a barrel. If the initial support doesn’t hold, prices could trade back in the range they have been stuck in since mid-December 2008.

Most recently, WTI crude oil was up $2.66 to $50.80.

In foreign exchange, the Canadian dollar is up 0.0071 to 0.8088 against the U.S. dollar (1.2366 USD/CAD) and down 1.20 to 75.96 against the yen.

The U.S. dollar is down 2.30 to 93.93 against the yen and the Dollar Index is down 1.702 to 82.893.

The euro is up 0.0224 to 1.3698 against the U.S. dollar, up 0.0133 to 1.6938 against the Canadian dollar, down 0.0035 to 0.9410 against the pound sterling and is lower by 1.01 to 128.67 against the yen.

The pound sterling is up 0.0287 to 1.4558 against the U.S. dollar and up 0.0205 to 1.8002 against the Canadian dollar.

In fixed income, U.S. two-year yields are up 2.4 bps to 0.83%, with five-year yields up 1.6 bps to 1.58%, 10-year yields flat at 2.53% and 30-year yields up 3.4 bps to 3.57%. The Eurodollar September 09 contract is down 0.5 ticks to 98.83. The yield curve is flatter, with the 10/2-year spread down 2.0 bps to 170.03 bps.

Yields on two-year Canadian government bonds are up 3.1 bps to 0.99%, with five-year yields down 0.9 bps to 1.70%, 10-year yields down 2.4 bps to 2.68% and 30-year yields up 1.4 bps to 3.55%. The September 09 BAX contract is down 2.0 ticks to 99.48.

In Germany, returns on two-year German bonds are down 1.4 bps to 1.39%, with five-year yields down 11.4 bps to 2.26%, 10-year yields down 18.3 bps to 3.04% and 30-year yields down 12.2 bps to 3.92%.

Yields on UK two-year bonds are down 8.4 bps to 1.38%, with five-year yields down 5.5 bps to 2.25%, 10-year yields down 8.7 bps to 3.03% and 30-year yields down 0.6 bps to 4.10%.

All data taken at 12:43 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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