Published: Thu, 23 Apr 2009 22:59:43 +0200

Closing Market Recap: Stocks Gain, Canadian Dollar Rises, Treasuries Flat

• S&P 500 up 1% • Treasury Yields Flat • Canadian Dollar Rallies • Gold Jumps Above $900

A late-day rally, spurred by financials, led to a rise in stocks on Thursday even as housing and employment data deteriorated.

The Dow Jones industrial average closed up 70 points to 7957, the S&P 500 up 8 points to 852 and the Nasdaq up 6 points to 1652.

Early in the session, stocks were pushed lower by economic data.

U.S. existing home sales in March dropped more than forecast by 3.0% against a surprise 4.9% surge in February. Dimitry Fleming, an economist at ING, said Thursday's report weakens any notion that the housing market is stabilizing.

"Prospects for an immediate recovery remain depressed as fears of surging unemployment and further price declines continue to push away buyers from the market," he said.

Jobs data also weighed on stocks. Initial claims for employment benefits rose to 640k and continuing claims rose to a new high of 6.137 million.

"This is another weak report, and provides further evidence that the U.S. labor market continues to feel the punch from the slowing economic environment," said Ian Pollick, an economist at TD Securities.

But later in the session, earnings put an upbeat tone into trading. Apple earned $1.33 per share in its second quarter versus an expected $1.08 cents per share. Similarly, eBay earned 39 cents compared to the 34 cents expected. Oil producer ConocoPhillips also said profits were more robust than expected. Shares of the companies were up 3.2%, 12.4% and 4.9% respectively.

Late in the session, auto stocks came to the forefront after the New York Times reported that Obama's auto task force has reached an agreement for Chrysler to file for bankruptcy as early as next week.

Some of the largest gains came in banking. The financial sector of the S&P 500 gained 4.5% on the day. On Friday, the U.S. government will release its stress test methodology.

European stock markets closed with the Stoxx 50 down 13 points to 1934, the UK FTSE 100 down 12 points to 4018 and the German DAX down 56 points to 4538.

In Canada, retail sales excluding autos rose 0.6% compared to the previous month, Statistics Canada said. Economists had been expecting a 0.2% rise. The S&P/TSX composite index closed up 134 points to 9413.

Weak Housing Data Helps Boost Gold Prices

Negative market sentiment helped to boost gold prices through strong resistance levels Thursday.

U.S. equity markets gapped lower following a positive open, which helped to drive gold prices above $900 per ounce. After the technical breakdown, gold ignored a rebound in stocks. Among the 19 commodities in the CRB index, precious metals are the top performer on the day.

Although gold performed extremely well, silver is the top performing commodity, and is up almost 4% on the day.

The U.S. dollar was modestly weaker across the board, which strategists said could also be helping commodity prices.

The precious metal gained $12.10 to $904.60 per ounce after rising as high as $910.

Mike Glaser, futures broker from LaSalle Futures, said he is not surprised by the sharp move higher. He said there were a lot of stop losses around the $900 area and a break through $902 forced a lot of investors to short cover their positions.

"I am a buyer of gold if price can stay over $902," he said. "I think we could see a move to $920 or $925 overnight. That is what the technicals are showing me."

Also, commodity strategists from Saxo Bank released a report this morning saying they are looking to buy gold on a break above $896 and they have a target of $912.

Treasuries Locked in by Coupon Supply and Fed Demand

Supply and Fed buying battled to a deadlock on Thursday, leaving Treasury yields relatively unchanged.

The Treasury Department said it will sell $129 billion in debt next week, including $101 billion in coupon notes. The sales begin Monday and include $40 billion in two-year notes, $35 billion in five-year notes and $26 billion in seven-year notes. The remaining $28 billion is for a six-month bill sale.

The size of the coupon sales was roughly in line with expectations, but it was more heavily weighted toward the longer maturities than expected, contributing to a steeper yield curve.

"Thursday's price action was choppy and skewed to steepening weakness for most of the day, in no small measure on the back of the Fed's stronger-than-expected buying," said Ian Lyngen, fixed income strategist RBS Greenwich Capital.

U.S. two-year yields were down 2.4 bps to 0.93%, with five-year yields down 1.3 bps to 1.88%, 10-year yields down 1.5 bps to 2.92% and 30-year yields flat at 3.80%. The Eurodollar September 09 contract was up 3.5 ticks to 98.88. The yield curve was steeper, with the 10/2-year spread up 1.1 bps to 199.14 bps.

The Federal Reserve has embarked on a $300 billion quantitative easing effort in order to keep borrowing rates from rising. As part of that effort, the Federal Reserve Bank of New York bought $7 billion of notes maturing in three to four years on Thursday.

A strong 5-year TIPS auction also helped to push yields lower.

Yields on two-year Canadian government notes were down 1.5 bps to 0.99%, with five-year yields up 5.4 bps to 1.95%, 10-year yields up 8.1 bps to 3.02% and 30-year yields up 3.0 bps to 3.76%. The September 09 BAX contract was up 2.0 ticks to 99.60.

In Germany, returns on two-year German notes were down 1.8 bps to 1.44%, with five-year yields up 1.1 bps to 2.44%, 10-year yields up 1.3 bps to 3.22% and 30-year yields down 2.7 bps to 3.97%.

Yields on UK two-year notes were down 14.4 bps to 1.29%, with five-year yields down 2.6 bps to 2.51%, 10-year yields up 7.2 bps to 3.52% and 30-year yields up 2.0 bps to 4.42%.

Canadian Dollar Shoots Higher Following BOC's QE Framework

The Canadian dollar made major gains following the release of the Bank of Canada's Monetary Policy Report.

The U.S. dollar was down 0.0165 to 1.2233 against the Canadian dollar.

The report was relatively in line with the growth forecasts and statements the bank released on Tuesday after it cut rates to 0.25%. The main highlight of the report was a framework for quantitative easing.

According to some strategists, the framework lacked any concrete plans, which is supporting the Canadian dollar. Following the release of the report, Bank of Canada Governor Mark Carney said in a press conference that the bank is not firmly committed to using the quantitative easing tools.

"There was a lot of buildup for nothing," RBC Capital Markets senior currency strategist David Watt said.

USD/CAD dropped over a full cent after the release, hitting a session low of 1.2238 CAD. The cross managed to recover some of its losses, but remains near the bottom of its recent range, trading below 1.23 CAD.

Shaun Osborne, chief currency strategist at TD Securities, said he is not surprised that the quantitative easing framework lacked any major details. He said market expectations were out of line with what the Bank of Canada was signaling.

"I think the market was expecting the bank of Canada would rush out and buy bonds after releasing the framework," he said. "We weren't expecting the bank to rush into this plan. Unless things get much worse the bank won't use quantitative easing measures."

Osborne said there is room for USD/CAD to go higher in the short term, but that any move to 1.25/1.24 CAD is generally seen as a selling opportunity.

Sacha Tihanyi, currency strategist at Scotia Bank, said that although the framework lacked any major details, the quantitative easing issue could weigh on the Canadian dollar.

He said his bias is for USD/CAD to trade closer to 1.18 CAD, but that traders will be hesitant.

Watt said his bias is still for a weaker Canadian dollar. He said he expects the economy to continue to weaken, which could put more pressure on the loonie, adding that the current optimism is based on a "false bottom."

Elsewhere in foreign exchange, the U.S. dollar was down 0.15 to 97.88 against the yen and the Dollar Index was down 0.807 to 85.517.

The euro was up 0.0148 to 1.3154 against the U.S. dollar, down 0.0034 to 1.6092 against the Canadian dollar, down 0.0045 to 0.8929 against the pound sterling and was higher by 1.27 to 128.74 against the yen.

The pound sterling was up 0.0240 to 1.4732 against the U.S. dollar and up 0.0053 to 1.8021 against the Canadian dollar.

WTI crude oil was up $0.84 to $49.69.

All data taken at 4:09 p.m. EDT.

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

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