(CEP News)
• S&P 500 Down 2%
• Gold Falls $13 to $926
• Pound Sterling up Nearly 2 Cents
• T-Bond Yields Fall 6 Basis Points

Late-Day Decline Sends Stocks Lower

Stocks were treading water throughout most of the North American equity session, but worries about banks and a round of profit-taking led to a 2% decline.

Financial stocks were among the hardest-hit following huge recent gains relating to the Fed’s efforts to drive lending rates down and the Treasury’s plan to purge toxic assets. Financial shares in the S&P 500 fell 6.5% on Tuesday, but are still up nearly 20% in March.

The Dow Jones industrial average closed down 116 points, or 1.4%, to 7660, the S&P 500 closed down 17 points, or 2%, to 806 and the Nasdaq closed down 39 points, or 2.4%, to 1517.

The losses follow a 7% gain on Monday.

“As tends to happen after waves of euphoria flow through markets, the next day is spent engaged in sober second thought,” said David Watt, senior currency strategist at RBC Capital Markets.

Colin Cieszynski, market analyst at CMC Markets, said the stock market losses might have been greater except for some strong economic figures. U.S. home prices unexpectedly climbed and manufacturing showed some signs of life.

“Today’s economic data continues to support recent gains and suggest that economic conditions may not be as bad as had been feared,” Cieszynski said.

The U.S. Federal Housing Finance Agency said house prices unexpectedly advanced in January. The report showed a 1.7% month-over-month increase in house prices in the States, compared to the consensus for a 0.9% contraction.

Also, the Federal Reserve Bank of Richmond said manufacturing activity in the Mid-Atlantic states picked up in March. The headline manufacturing index surged to a reading of -20 in March, beating economists’ expectations for a -51 reading.

Market watchers also followed testimony from Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner on the AIG bonus issue. They called for reforms of the U.S. financial system in testimony and Bernanke said bonus payments were “highly inappropriate.”

Gold Declines on Improved Risk Appetite

Gold Prices were under pressure on Tuesday in a broad commodity slump.

Gold found strong resistance just below $945 per ounce in overnight trading. The precious metal has been in a significant downtrend since the start of the European session and fell as low as $917.84. Prices later recovered some of their earlier losses but on the session, it was down $13 to $926 per ounce.

The modest drop in equities has not provided any support for the precious metals complex. The index was down 3.07% on the day. Silver led the way down, falling 3.35%, while gold was down 2.79% on the day.

According to some commodity strategists, Monday’s massive rally in equities was helping to change some of the recent market sentiment.

“People seem to have a more positive tone following the recent rally in equities and there could be some capitulation in the recent negative sentiment regarding the economy,” said Aaron Fennell, commodities future broker at MF Global.

Fennell added that that positive sentiment could continue to hurt gold price in the short term but warned prices could find some strong support at $900.

“I think right now gold bulls are just sitting back waiting for a better price to jump back in,” he said. “There is still a lot of fear out there and whether it is rational or not is not the question. The fact that there is fear will continue to drive prices higher.”

Commodity strategists from Jyske Bank said they are relatively neutral on gold in the short term as the recent Fed quantitative easing measures have helped reduce some of the market nervousness.

Hussein Allidina, vice president at Morgan Stanley, said despite the improvement in risk appetite in the last few days he is still bullish on gold and expects to see prices average $1,000 this year.

“I hold to the view that we’re not through the woods yet — and continue to be a buyer of gold,” he said.

WTI crude oil was down $0.25 to $53.55.

Pound Sterling Rises on Inflation Concerns

The pound sterling was the top G10 currency on Tuesday as markets reacted to inflation concerns.

Cable climbed near a two-month high, hitting 1.4780 USD. The rally started early with the cross jumping 1.25 cents during the Asian session. Most recently, GBP/USD was up 0.0102 to 1.4681.

Markets reacted to the much higher-than-expected February inflation report. Annualized UK CPI growth surprised to the upside at 3.2%, which forces Bank of England Governor Mervyn King to write an explanatory letter to the UK Treasury.

The currency could also be finding some support from testimony delivered by BOE Governor Mervyn King to the House of Commons Treasury Select Committee. He said that while the pound’s depreciation poses an upside inflation risk, he does not expect the falling currency to put inflation above target levels.

Elsewhere in foreign exchange, the Canadian dollar was down 0.0057 to 0.8118 against the U.S. dollar (1.2319 USD/CAD) and up 0.06 to 79.35 against the yen.

The declines come after Statistics Canada reported the number of Canadians receiving employment insurance continued to surge in January. There are now more than 560,400 Canadians receiving employment insurance, up 22.8% compared to the low reached in February 2008.

The U.S. dollar was up 0.80 to 97.74 against the yen and the Dollar Index was up 0.455 to 83.858.

The euro was down 0.0178 to 1.3455 against the U.S. dollar, down 0.0087 to 1.6575 against the Canadian dollar, down 0.0181 to 0.9176 against the pound sterling and was lower by 0.66 to 131.51 against the yen.

U.S. Treasury Bonds Surge After Fed Announces Purchases

An unexpected move by the U.S. Federal Reserve to buy long bonds left investors reeling and sent yields drastically lower.

The Fed announced last week that it will implement quantitative easing through the purchase of $300 billion of Treasury securities. Shortly after the announcement, a Treasury spokesperson said the purchases would focus on maturities from 2-years to 10-years.

On Tuesday, however, the Fed released a tentative purchases scheduled, which included Treasuries maturing from Aug. 2026 to Feb. 2039. The market was caught off guard and 30-year yields fell to 3.60% from 3.75% in minutes. At the same time, 30-year futures climbed a point-and-a-half.

The Fed’s purchases will begin on March 25 for maturities from Feb. 2016 through Feb. 2019. On March 27, it will buy maturates from March 2011 through April 2012; On March 30, the long-bond purchase will take place; On April 1, maturities from May 2012 through Aug. 2013 will be targeted; On April 2, maturities from Sept. 2013 to Feb 2016 will be bought.

The Fed said it will issue a tentative purchase schedule every two weeks, beginning April 1.

Although the long end of the curve was roiled by the announcement, the rest of the curve also reacted and yields pared their gains.

Also pressuring yields was the unexpectedly strong demand in a record-tying $40 billion, U.S. two-year auction. The notes sold with a yield of 0.949% compared to the 0.969% ‘when issued’ bid.

On the session, U.S. two-year yields were up 1.6 bps to 0.91%, with five-year yields up 3.6 bps to 1.72%, 10-year yields up 4.0 bps to 2.69% and 30-year yields down 5.1 bps to 3.64%. The Eurodollar September 09 contract was down 1.5 ticks to 98.78. The yield curve was steeper, with the 10/2-year spread up 2.6 bps to 178.47 bps.

Elsewhere, yields on two-year Canadian government bonds were up 5.7 bps to 1.09%, with five-year yields up 10.3 bps to 1.87%, 10-year yields up 11.1 bps to 2.88% and 30-year yields up 5.1 bps to 3.66%. The September 09 BAX contract was down 3.0 ticks to 99.43.

In Germany, returns on two-year German bonds were up 6.3 bps to 1.40%, with five-year yields up 10.9 bps to 2.36%, 10-year yields up 13.0 bps to 3.15% and 30-year yields up 13.2 bps to 4.02%.

Yields on UK two-year bonds were down 5.5 bps to 1.27%, with five-year yields up 16.5 bps to 2.48%, 10-year yields up 19.6 bps to 3.33% and 30-year yields up 14.2 bps to 4.26%.

All data taken at 4:06 p.m. EDT.

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

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

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