(CEP News)
• S&P 500 Gains 4 Points
• USD/CAD up 0.0089
• Gold Falls, Oil Gains

Stocks Fail to Find Direction

Stocks made small gains on Friday after better-than-expected data on consumer sentiment and solid earnings from Citigroup and General Electric.

The Dow Jones industrial average closed up 6 points to 8131, the S&P 500 up 4 points to 870 and the Nasdaq up 3 points to 1673. In Canada, the S&P/TSX composite index closed up 94 points to 9438.

On the week, the S&P 500 gained 1.5% for its sixth consecutive weekly gain.

Coming into the week, market watchers were concerned about corporate earnings, especially from banks. But JPMorgan Chase & Co., Citigroup and others earned more than expected, leading to speculation that the unprecedented stimulus measures are beginning to have an effect.

Some analysts say stocks are due for a pullback. “One sector to be careful about is the same one that has generated most of the euphoria in stocks this past week-financials,” said Andrew Pyle, investment advisor at Scotia McLeod. “The magnitude of the upswing in many stocks looks a little excessive given the underlying fundamentals.

On Friday, economic data was also better than expected. The leading measure of U.S. consumer sentiment from Reuters and the University of Michigan increased to 61.9 from 57.3 in March; expectations were for a rise to 58.5.

Corporate earnings also continued to surprise. General Electric earned 26 cents per share, beating expectations for 21 cents. Citigroup announced a loss per share of 18 cents in the first quarter of 2009, versus an expected loss of 34 cents per share.

Midway through the session stocks came under some pressure after General Motors CEO Fritz Henderson accused Chrysler of slowing down talks with the UAW by failing to reach an agreement with the union. He said his current restructuring plan is contingent on the bond holders accepting equity for debt, and a deal with the auto union.

European stock markets closed in positive territory with the Stoxx 50 up 24 points to 1996, the UK FTSE 100 up 40 points to 4093 and the German DAX up 67 points to 4677.

Gold Prices End the Week Near Recent Support Levels

Gold prices are testing weekly lows as market sentiment continues to improve Friday.

U.S. equity markets closed flat on the day Friday afternoon. However, the Dow Jones Industrial Average posted a positive close for the sixth straight week. Meanwhile, gold prices are trading near their April 6 lows and hovering just above support at $865 per ounce.

Commodity strategists said part of the decline in gold prices is due to the lack of investor interest, and the declines could become more pronounced as investors continue to unwind their positions.

They pointed out that on Thursday SPDR, the largest physically-backed ETF, recorded its first outflow since April 3 and its largest outflow since October 2008.

“In our view, further net redemptions pose the largest downside risk to prices given that the rally at the start of year was led by the tremendous strength in investment demand,” they said.

Mike Glaser, futures broker at LaSalle Futures, said the recent strength in the U.S. dollar is also weighing on gold prices.

Jimmy Tintle, futures broker at Transworld Futurs.com, said on a technical level a close below $875 is a very bearish sign for the short-term. With gold closing the week below that level, he said it could lead to a test of $825.

Oil Prices Unable to Hold Gains Despite Improving Market Sentiment

Oil prices are unable to hold gains above $51 a barrel. They are, however, showing gains for the third straight day.

Overnight moves in WTI crude were fairly muted, but volatility started to rise ahead of the North American open. Prices shot higher on the opening, topping out at $51.40 per barrel. The gains were short-lived as prices moved around the $50.50 level.

A second rally started in the late afternoon, but highs were capped just above $51. Oil is once again being dragged lower and is hovering in positive territory around the low $50 area.

According to some market strategists, the expiration of the May futures contract might have added to the volatility later in the afternoon.

U.S. data had little impact on oil markets despite a stronger-than-expected reading in the Reuters/University of Michigan consumer sentiment index. The advanced report showed that positive sentiment hit a level of 61.9, higher than the consensus forecast of 58.5 and up from March’s final print of 57.3.

According to commodity strategists at Barclays Capital, Friday’s report could highlight the possibility that oil prices could take a run higher in the short term.

However, strategists at Saxo Bank are convinced that the rally in oil prices is overdone and due for a correction. They said they are expecting prices to struggle to hit recent highs of $53 and that they are more likely to reach the bottom of the range at $45.

“Buyers are looking for demand to improve taking its cue from the improved sentiment in stock markets,” they said in a report to clients. “We still worry that the recent gains have been built more on sentiment than solid foundation as fundamentals still don’t show any strength.”

Higher Canadian Inflation Does Not Provide Much Support for Canadian Dollar

Rising Canadian inflation did not providing much support for the Canadian dollar on Friday as it came under modest pressure against the greenback.

Although the U.S. dollar is up on the day against the loonie, the cross has struggled to make gains through most of the session. USD/CAD has been unable to hold gains past 1.2150 CAD. Through most of the session the cross has bounced between support at 1.2065 CAD and resistance at 1.2158 CAD.

Most recently, USD/CAD was up 0.0089 to 1.2160.

Currency markets ignored stronger than-expected core Canadian inflation. The Bank of Canada’s core Consumer Price Index (CPI) rose 0.3% in March, more than the 0.2% rise expected by economists and following the 0.5% gain in February, Statistics Canada reported. The annualized rate also moved higher, rising 2.0% in March, higher than the 1.9% consensus forecast.

Although core inflation is stronger than expected, according to economic strategists, the Bank of Canada will still have room to act aggressively to support the faltering economy.

On April 21, the Bank of Canada will hold its monetary policy meeting. Dawn Desjardins, assistant chief economist from RBC Capital Markets, said she is expecting the central bank to release some information on a program that would help them inject liquidity in the financial system.

“Though the platforms will be announced, the Bank may well refrain from implementing their plan immediately as they assess whether the recent “green shoots” of stability in markets and some parts of the economy will grow as a healthy dose of fiscal stimulus is applied,” she said.

Although the Canadian dollar is losing ground, the loonie remains at the top of its recent channel. USD/CAD has been on a strong downward trend since April 13. The sell-off came to a halt after the loonie hit a three-month high Thursday morning.

Tyson Wright, senior currency trader at Custom House, said he is expecting to see some consolation in USD/CAD after the recent sharp sell-off. He added he will be watching for a break above 1.22 CAD to confirm that the recent sell-off is finished.

“I think the Canadian dollar has gone as far as it can go for now. I think we will see some profit taking ahead of the Bank of Canada rate decision. At this time I would prefer to buy U.S. dollars on any dips,” he said. “I don’t think the 1.2050 (CAD) level offers strong resistance but we could see some consolidation there before we move higher.”

Matt Perrier, currency analyst from BMO Capital Markets said some of the technical charts show USD/CAD is oversold and there may be further gains in the short term. He added he is expecting 1.2190 and 1.2218 to offer near-term resistance.

“Only a break and close below yesterday 1.1982 lows would negate corrective bounce scenario and suggest we [could] see a move towards 1.1750,” he said.

Elsewhere in foreign exchange, the U.S. dollar was down 0.03 to 99.25 against the yen and the Dollar Index was up 0.754 to 85.981.

The euro was down 0.0162 to 1.3024 against the U.S. dollar, down 0.0083 to 1.5836 against the Canadian dollar, down 0.0025 to 0.8808 against the pound sterling and was lower by 1.65 to 129.26 against the yen.

The pound sterling was down 0.0142 to 1.4785 against the U.S. dollar and down 0.0039 to 1.7978 against the Canadian dollar.

Treasury Yields Rise

U.S. two-year yields were up 6.5 bps to 0.96%, with five-year yields up 12.3 bps to 1.89%, 10-year yields up 11.3 bps to 2.94% and 30-year yields up 7.9 bps to 3.79%. The Eurodollar September 09 contract was down 6.5 ticks to 98.86. The yield curve was steeper, with the 10/2-year spread up 4.9 bps to 197.77 bps.

Yields on two-year Canadian government bonds were up 4.3 bps to 1.17%, with five-year yields up 6.5 bps to 1.97%, 10-year yields up 6.3 bps to 3.02% and 30-year yields up 5.0 bps to 3.75%. The September 09 BAX contract was down 3.0 ticks to 99.43.

In Germany, returns on two-year German bonds were up 9.8 bps to 1.47%, with five-year yields up 11.2 bps to 2.45%, 10-year yields up 9.5 bps to 3.27% and 30-year yields up 4.7 bps to 4.07%.

Yields on UK two-year bonds were up 10.7 bps to 1.43%, with five-year yields up 11.1 bps to 2.53%, 10-year yields up 11.9 bps to 3.36% and 30-year yields up 12.2 bps to 4.50%.

All data taken at 4:08 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, Economy, Eurozone, Japan, Releases, Stocks, UK, USA.

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