Published: Wed, 18 Mar 2009 15:14:56 +0100

Morning Market Recap: Stocks Lower, U.S. Dollar Under Pressure

(CEP News) - Equity markets and the U.S. dollar are lower ahead of Wednesday's FOMC interest rate decision. Treasuries are rallying after the Bank of Japan increased its sovereign debt purchases.

The Dow Jones industrial average was most recently down 88 points to 7308, the S&P 500 was down 7 points to 771 and the Nasdaq was down 4 points to 1458.

The Nasdaq is outperforming the Dow and S&P, in large part due to a report suggesting IBM is in talks to buy Sun Microsystems. The story suggests Sun shareholders could receive a premium of more than 100%. Shares are up more than 65%.

U.S. equity markets have made gains in five of the past six sessions and market watchers suggest a correction is overdue. Gartman Letter author Dennis Gartman said the trend in stock markets is still lower.

"The S&P, the Dow Industrials and the Nasdaq all are coming to levels of strong resistance," he wrote on Wednesday.

In Canada, the S&P/TSX composite index is down 170 points to 8390. Energy companies and Research in Motion are pulling down the index.

Overseas stocks first turned lower after UK February unemployment jumped by a record 138,400 to bring the claimant count rate to 4.3%. Expectations had been for a gain of 84,800 and an unemployment rate of 4.0%.

Europe's Stoxx 50 was most recently down 24 points to 1748, the UK FTSE 100 was down 63 points to 3794 and the German DAX was down 11 points to 3977.

The broad sell-off in the U.S. dollar is the currency market pricing in dovish comments from the Fed at today's FOMC meeting, according to Boris Schlossberg, director of currency research at GFT.

The sell-off picked up momentum following the U.S. CPI report. Although the data showed stronger-than-expected inflation in February, Schlossberg said he is not expecting that trend to continue. He pointed out that the rise in core was led by an increase in auto sales.

"GM and Toyota announced they will be slashing prices so nobody believes today's increase will last. The data, although stronger than expected, still shows that the Fed has room to do quantitative easing measures," he said.

The Canadian dollar is up 0.0023 to 0.7901 against the U.S. dollar (1.2656 USD/CAD) and down 0.04 to 77.59 against the yen.

The U.S. dollar is down 0.39 to 98.20 against the yen and the Dollar Index is down 0.575 to 86.358.

The euro is up 0.0114 to 1.3130 against the U.S. dollar, up 0.0087 to 1.6619 against the Canadian dollar, up 0.0123 to 0.9395 against the pound sterling and is higher by 0.60 to 128.94 against the yen.

The pound sterling is down 0.0061 to 1.3976 against the U.S. dollar and down 0.0139 to 1.7688 against the Canadian dollar.

The Treasury market is higher on Wednesday after the Bank of Japan said it plans to increase its monthly purchases of government bonds to ¥1.8 trillion from the ¥1.4 trillion previously announced. BOJ Governor Masaaki Shirakawa said he sees limited room to buy more government bonds.

U.S. two-year yields are down 4.9 bps to 0.98%, with five-year yields down 6.3 bps to 1.91%, 10-year yields down 6.3 bps to 2.94% and 30-year yields down 7.9 bps to 3.75%. The Eurodollar September 09 contract is up 6.0 ticks to 98.64. The yield curve is flatter, with the 10/2-year spread down 1.6 bps to 195.92 bps.

Yields on two-year Canadian government bonds are down 1.5 bps to 1.00%, with five-year yields down 1.3 bps to 1.90%, 10-year yields down 0.6 bps to 2.92% and 30-year yields down 1.3 bps to 3.63%. The September 09 BAX contract is up 3.0 ticks to 99.47.

In Germany, returns on two-year German bonds are down 1.2 bps to 1.40%, with five-year yields up 1.1 bps to 2.37%, 10-year yields up 2.4 bps to 3.22% and 30-year yields down 2.3 bps to 4.04%.

Yields on UK two-year bonds are down 1.8 bps to 1.45%, with five-year yields down 2.4 bps to 2.22%, 10-year yields up 1.2 bps to 3.08% and 30-year yields flat at 4.07%.

All data taken at 9:54 a.m. EDT.

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