Published: Tue, 24 Mar 2009 14:50:46 +0100

Morning Market Recap: Stocks Pullback, Sterling Jumps, Oil Down

(CEP News) - Stock markets are on the defensive after a powerful rally led to the largest one-day gain since October. The pound sterling is the top performing currency and oil is lower after three days of gains.

Most recently, the Dow Jones industrial average was down 76 points to 7700, the S&P 500 was down 11 points to 812 and the Nasdaq was down 20 points to 1536. In Canada, the S&P/TSX composite index was down 189 points to 8770.

The losses come after 7% gains on Monday.

"With very little economic or corporate news overnight, however, it appears that a retreat would more likely be due to normal profit-taking after yesterday's big rally than any new negativity," said Colin Cieszynski, market analyst at CMC Markets Canada.

European stock markets are mixed, with the Stoxx 50 flat at 1830, the UK FTSE 100 down 44 points to 3908 and the German DAX up 5 points to 4181.

In Asia, the Japanese Nikkei closed up 273 points to 8488 and the Hang Seng Index gained 463 points to 13910.

The pound sterling is the top G10 currency as markets react to inflation concerns.

Cable is trading near a two-month high, having hit 1.4780 USD. The rally started early with the cross jumping 1.25 cents during the Asian session. Most recently, GBP/USD was up 0.0104 to 1.4677.

Markets are reacting to the much higher-than-expected February CPI report. Annualized UK CPI growth surprised to the upside at 3.2%, which forced 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 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 is down 0.0030 to 0.8155 against the U.S. dollar (1.2265 USD/CAD) and up 0.87 to 80.16 against the yen.

The U.S. dollar is up 1.37 to 98.32 against the yen and the Dollar Index is up 0.562 to 83.965.

The euro is down 0.0125 to 1.3508 against the U.S. dollar, down 0.0093 to 1.6568 against the Canadian dollar, down 0.0138 to 0.9218 against the pound sterling and is higher by 0.63 to 132.80 against the yen.

The energy market is pulling back after the first three-day rally of 2009. Most recently, oil was down $1.03 to $52.77.

"What started as an inflation fear-based rally in oil turned into a rally of frenzied economic optimism," says Phil Flynn, oil analyst at Alaron. "Oil is bullish but the surge means we are ahead of ourselves. Position traders be patient and avoid the temptation to chase the market."

The front month gold contract at the Chicago Board of Trade was down $15.50 to $923.20 per ounce.

In fixed income, U.S. two-year yields are up 0.8 bps to 0.90%, with five-year yields up 1.0 bp to 1.69%, 10-year yields up 3.8 bps to 2.69% and 30-year yields up 5.5 bps to 3.75%. The Eurodollar September 09 contract is down 1.5 ticks to 98.78. The yield curve is steeper, with the 10/2-year spread up 2.9 bps to 178.75 bps.

Yields on two-year Canadian government bonds are up 2.2 bps to 1.06%, with five-year yields up 2.3 bps to 1.79%, 10-year yields up 3.6 bps to 2.80% and 30-year yields up 3.5 bps to 3.65%. The September 09 BAX contract is down 2.0 ticks to 99.44.

In Germany, returns on two-year German bonds are up 3.6 bps to 1.37%, with five-year yields up 8.0 bps to 2.33%, 10-year yields up 8.8 bps to 3.11% and 30-year yields up 10.8 bps to 4.00%.

Yields on UK two-year bonds are down 1.8 bps to 1.31%, with five-year yields up 12.2 bps to 2.44%, 10-year yields up 17.0 bps to 3.31% and 30-year yields up 11.5 bps to 4.23%.

All data taken at 9:41 a.m. EDT.

By Adam Button, abutton@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca