Published: Tue, 17 Feb 2009 16:20:19 +0100

Mid-Morning Market Recap: Fear Ruling Markets as Equities Down Across the Board

(CEP News) - U.S. equities are falling sharply as fear rises and U.S. economic data continues to disappoint.

The rise in risk aversion started in the Asian session, when Moody's released a report warning that Western European banks face downgrades due to significant exposure to financial problems in Eastern Europe.

"A widespread deterioration in the economic health of core markets in Eastern Europe is exerting negative rating pressure on subsidiaries and eventually may also lead to a weakening of the parent bank's ratings," the report said.

The news caused a selloff in Asian equities and the fear sentiment continued to grow following the open of the North American trading session.

Toronto's S&P/TSX composite index is down 197 points to 8481, the Dow Jones industrial average is down 264 points to 7586, the S&P 500 is down 31 points to 796 and the Nasdaq is down 55 points to 1480.

European stock markets are also lower, with the Eurostoxx down 46 points to 1894, the UK FTSE 100 down 110 points to 4025 and the German DAX down 143 points to 4224.

Asian markets were lower, with the Japanese Nikkei closing down 105 points to 7646 and the Hang Seng Index down 510 points to 12945.

U.S. data has not helped support equity markets with data continuing to disappoint. The New York Fed's Empire State Manufacturing survey declined to -34.65 from the previous month's -22.20 level. The result was worse than the consensus forecast of a -23.75 reading.

The exodus from equity markets is helping to boost U.S. Treasuries, with the 2/10 yield curve showing some signs of flattening and 10-year notes out-performing two-year notes.

North American fixed income markets are up with yields on U.S. 10-year Treasury notes down 19.9 bps to 2.69% and Canadian 10-year CGBs down 9.9 bps to 2.84%.

U.S. two-year yields are down 8.1 bps to 0.87%, with five-year yields down 16.6 bps to 1.70%, 10-year yields down 19.9 bps to 2.69% and 30-year yields down 15.7 bps to 3.51%. The Eurodollar September 09 contract is up 3.0 ticks to 98.66. The yield curve is flatter, with the 10/2-year spread down 11.9 bps to 181.27 bps.

The Canadian 10-year note is yielding 14.82 bps more than the U.S. 10-year note.

Yields on two-year Canadian government bonds are down 5.4 bps to 1.15%, with five-year yields down 9.8 bps to 2.01%, 10-year yields down 9.9 bps to 2.84% and 30-year yields down 7.6 bps to 3.60%. The September 09 BAX contract is up 2.0 ticks to 99.32.

In Germany, returns on two-year German bonds are down 6.2 bps to 1.17%, with five-year yields down 7.0 bps to 2.07%, 10-year yields down 6.1 bps to 2.98% and 30-year yields down 2.9 bps to 3.61%. The Short Sterling September 09 contract is down 4.5 ticks to 98.44.

Yields on UK two-year bonds are flat at 1.36%, with five-year yields down 1.9 bps to 2.52%, 10-year yields down 6.2 bps to 3.43% and 30-year yields down 6.1 bps to 4.05%. The Euribor September 09 contract is up 4.0 ticks to 98.43.

The U.S. dollar is also benefiting from the growing fear in markets. The U.S. dollar index hit two-month highs and is the top performer among the G10 currencies. The Japanese yen is also benefiting from the "safe haven" bid.

The Canadian dollar broke through key support levels overnight and strategists are expecting the weakening trend to continue.

"CAD finally weakened through the 1.2500 level in USDCAD and we look at 1.3000 as the next key resistance for that pair," said strategists at Saxo Bank.

The Canadian dollar is down 0.0204 to 0.7918 against the U.S. dollar (1.2630 USD/CAD) and down 0.95 to 72.89 against the yen.

The U.S. dollar is up 0.31 to 92.05 against the yen and the Dollar Index is up 0.875 to 87.535.

The euro is down 0.0178 to 1.2625 against the U.S. dollar, up 0.0034 to 1.5945 against the Canadian dollar, down 0.0104 to 0.8851 against the pound sterling and is lower by 1.24 to 116.21 against the yen.

The pound sterling is down 0.0036 to 1.4263 against the U.S. dollar and up 0.0243 to 1.8009 against the Canadian dollar.

All data taken at 10:16 a.m. EST

By Neils Christensen, neilsc@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca