Published: Wed, 25 Mar 2009 18:05:03 +0100

Midday Market Recap: Stocks Higher on Economic Data, U.S. Dollar Volatile

(CEP News) • S&P 500 up 1.3% • Geithner Whipsaws U.S. Dollar • Oil Falls $1 to $52.96 • UK Auction Fails

Demand for big-ticket items in the U.S. unexpectedly snapped a four-month losing streak in February and helped renew the upward momentum in equity markets.

The stock market gains came after the U.S. Department of Commerce reported that durable goods orders excluding transportation increased 3.9% despite forecasts for a 2.0% decline.

The Dow Jones industrial average was most recently up 120 points to 7780, the S&P 500 up 10 points to 816 and the Nasdaq up 16 points to 1532. In Canada, the S&P/TSX composite index was up 73 points to 8923.

The enthusiasm for the durable goods report was tempered by downward revisions to January's figures, which were revised to a 5.9% drop from a 2.5% decline. Ian Shepherdson, chief U.S. economist at HFE, said the downward revision to January's report eliminates most of the gain in February.

"The first rise in orders since September is welcome but it is much less impressive than it looks at first sight and it cannot possibly last," he said.

Later, however, another sign of stabilization in the housing market renewed bullish enthusiasm. The U.S. Department of Commerce reported that new home sales rose to an annualized pace of 337k, a 4.7% increase from January. Economists were expecting a 2.9% fall to 300k.

In the past week, reports on housings starts and existing home sales also exceeded expectations.

"Alongside other recent housing indicators, this report is another faint but nonetheless encouraging sign that the economic slide may be moderating," said economists from Nomura Securities

European stock markets closed with the Stoxx 50 up 6 points to 1838, the UK FTSE 100 down 11 points to 3900 and the German DAX up 36 points to 4223.

Asian markets closed lower, with the Japanese Nikkei falling 8 points to 8480 and the Hang Seng Index down 288 points to 13622.

Confusion Whips Through Foreign Exchange Market After Geithner Comments

A report that the U.S. Treasury Secretary was "open" to rethinking the U.S.-dollar-based global reserve currency system sent the U.S. dollar into a tailspin on Wednesday, but the moves were wiped out when the comment was revealed to be out of context.

Traders were frustrated by Geither's ambiguity and inability to deliver a clear message. The U.S. dollar fell by more than a cent against the euro and pound sterling when the comment was initially reported but quickly pared most of its losses.

Geithner was asked to respond to Zhou Xiaochuan, the governor of the People's Bank of China, who wrote an essay last week suggesting a shift to a basket of major currencies instead of the U.S. dollar. Zhou said it might make sense to use the IMF's special drawing rights (SDR), which includes the dollar, euro, pound sterling and yen.

Markets are sensitive to comments from China because it's the largest holder of U.S. Treasuries. Investors are also worried that growing U.S. deficits and quantitative easing will undermine the U.S. dollar.

Geithner said he hadn't read the proposal but that any suggestion from Zhou "deserves consideration".

"As I understand his proposal, it's a proposal designed to increase the use of the IMF's special drawing rights. And we're actually quite open to that suggestion," he said.

The comment was somewhat ambiguous because he could be saying he is in favour of reforming the currency reserve system but he was more likely saying expanding the SDR was up for discussion.

Reuters released a headline that leaned toward the former said: "Geithner says 'quite open' to China's suggestion of moving toward SDR-linked currency system."

The comment from Geithner would have flown directly in the face of U.S. President Barack Obama who rejected China's call in a televised address on Tuesday. He defended the dollar as "extraordinarily strong" and said that he doesn't believe there is a need for a global currency.

Traders blamed Geithner for making a comment that could be easily misunderstood.

"It was clumsy and mishandled," said David Watt, senior currency strategist at RBC Capital Markets. "The initial interpretation was not necessarily correct but on the other hand, Geithner's comment was wholly poorly advised ... He should be able to see a minefield and avoid it."

Geithner has been praised for his work behind the scenes but has struggled with the limelight. Watt said the Treasury Secretary, who is responsible for the dollar, should never have admitted not reading a widely-discussed essay.

"You look incompetent. He's got a few issues now where the market is wondering what he's thinking," Watt said.

Geithner was later asked to clarify his earlier remarks.

"I think the dollar remains the world's dominant reserve currency," Geithner said. "As a country, we will do what's necessary to make sure we're sustaining confidence in our financial markets."

The clarification led currency market participants to cover U.S. dollar shorts but it remains lower against the euro.

Watt said the market is unconvinced that the U.S. dollar will remain the dominant reserve currency.

"It's not something that's going to happen right away, it will take months or years but it would be significant," he said.

Most recently, the Canadian dollar was up 0.0033 to 0.8149 against the U.S. dollar (1.2273 USD/CAD) and up 0.24 to 79.68 against the yen.

The U.S. dollar was down 0.06 to 97.80 against the yen and the Dollar Index was down 0.039 to 83.819.

The euro is up 0.0071 to 1.3539 against the U.S. dollar, up 0.0023 to 1.6616 against the Canadian dollar, up 0.0125 to 0.9297 against the pound sterling and was higher by 0.61 to 132.42 against the yen.

The pound sterling was down 0.0115 to 1.4566 against the U.S. dollar and down 0.0214 to 1.7873 against the Canadian dollar.

Rising Supply in Crude Oil Has little Impact on Prices

Another build in crude oil supplies is not having much impact on oil prices as they hover around strong support levels.

Crude oil inventories increased 3302k compared to the +1100k consensus, the U.S. Energy Information Administration (EIA) said in a report Thursday morning.

Gasoline supplies decreased 1144k compared to the -650k consensus estimate. The data was for the reference week March 20. Distillate supply figures added to bullish enthusiasm for the energy complex. The EIA said distillate supplies declined by 1584k compared to expectations of a 100k drawdown.

Ahead of the report, WTI crude oil was trading at session lows of $51.85 a barrel. Following the data, prices jumped to session highs of $53.54. Most recently, oil was down $1.06 to $52.93 per barrel.

Alaron energy analyst Phil Flynn said he is not surprised that a rise in crude inventories had little impact on oil prices. He pointed out that stocks are at record highs.

"It's no surprise that we have a flood of oil," he said. "Bearish reports don't matter because if prices fall investors expect the Fed to print more money and that will support prices."

Although inflation concerns that the Fed is expanding its balance sheet too much are helping to boost oil, Flynn added that there is also a growing optimism that can be seen in equity and commodity markets.

"If the actions the government is taking help the economy pick up then I think the oversupply in oil could very quickly turn into an undersupply," he said.

Colin Cieszynski, market analyst at CMC Markets Canada, agrees that positive market sentiment is helping to support oil prices.

UK Auction Failure Triggers Worries About Sovereign Debt

Foreign exchange markets were roiled by a 40-year UK gilt auction that failed to attract enough bids. It was the first failed debt sale in the UK since 2002.

"It would be wrong to read anything into the results of one auction event, which depends on the gilt on offer, demand and market conditions on the day," a UK Treasury spokesman said. "Demand for gilts clearly remains strong and the small shortfall in funding today can be made good in future auctions."

Yields on the long end of the curve rose 5 basis points after the results and the pound sterling fell as much as one cent.

Yields on UK two-year bonds are down 1.7 bps to 1.25%, with five-year yields down 5.5 bps to 2.43%, 10-year yields down 4.8 bps to 3.29% and 30-year yields down 1.1 bps to 4.25%.

Elsewhere, U.S. two-year yields are up 3.9 bps to 0.95%, with five-year yields up 3.6 bps to 1.76%, 10-year yields up 3.1 bps to 2.73% and 30-year yields up 4.9 bps to 3.69%. The Eurodollar September 09 contract is down 1.5 ticks to 98.77. The yield curve is steeper, with the 10/2-year spread up 3.6 bps to 182.67 bps.

Yields on two-year Canadian government bonds are up 9.9 bps to 1.20%, with five-year yields up 4.5 bps to 1.92%, 10-year yields up 4.8 bps to 2.94% and 30-year yields up 2.6 bps to 3.71%. The September 09 BAX contract is up 1.0 tick to 99.44.

In Germany, returns on two-year German bonds are flat at 1.40%, with five-year yields up 0.7 bps to 2.36%, 10-year yields down 1.2 bps to 3.14% and 30-year yields up 2.6 bps to 4.05%.

All data taken at 12:51 p.m. EDT.

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

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