Closing Market Recap: Crude and GSE Worries Drive Markets

Market Updates | Written by CEP News | Jul 11 08 21:44 GMT |
(CEP News) - Swings in financial stocks overshadowed economic data on Friday. Press reports that Fannie Mae and Freddie Mac might require rescue from the U.S. government dominated trade - even overshadowing a new record high in oil and a surprising Canadian jobs report.

Fannie Mae and Freddie Mac closed down 45% and 47% on the week. The two U.S. government-sponsored companies own or guarantee about half of the $12 trillion U.S. mortgage industry.

There were conflicting reports about whether the Federal Reserve would allow Fannie and Freddie to borrow from the discount window. Equity markets bounced off their lows when a newswire initially reported that Fed Chairman Ben Bernanke said the government-sponsored enterprises could use the discount window. After most markets closed, except foreign exchange, Federal Reserve spokesperson Michelle Smith told reporters there have been no official discussions with Fannie and Freddie about the discount window. That sent the U.S. dollar toward session lows.

The Dow Jones industrial average closed down 128 points to 11101 and the S&P 500 closed down 14 points to 1239. On the week, the Dow lost 1.9% while the S&P 500 fell 1.7%.

Financial companies with ties to the U.S. housing industry were also punished. Lehman Brothers, the fourth-largest investment bank in the U.S., fell nearly 40% during the week.

The Canadian banking industry also took a hit. The S&P/TSX Capped Financials Index fell to its lowest level since the March 17 collapse of Bear Stearns.

In the broader market, shares lost ground for the fifth straight week. Since closing at a record high on June 18, the Toronto Stock Exchange has declined by 9%. On Friday, Toronto's S&P/TSX composite index closed down 35 points to 13709.

Canadian markets were once again boosted by commodity markets as oil showed its resilience, rallying to a record high $147.27. It was an extremely volatile week for crude as prices fell nearly $10 to begin the week, which prompted a number of analysts to say a major price correction was imminent. However, continued tensions between Iran and Israel and an unexpected U.S. supply drop later pushed up prices.

WTI crude oil closed up $3.43 to $145.08. The front month gold contract at the Chicago Board of Trade was up $18.50 to $960.40 per ounce.

In currency markets, the loonie came under pressure after a Statistics Canada report showed the economy shed 5,000 jobs in June and the unemployment rate ticked up to 6.2%.

"The Canadian economy has lost full-time jobs for two months in a row. That's not the job creation that sustains economic growth," said Adam Fazio, currency strategist at CIBC World Markets.

Nonetheless, the loonie closed up 0.0010 to 0.9906 against the U.S. dollar (1.0094 USD/CAD) and gained 0.0089 on the week. The Canadian dollar remains well within its three-cent range on either side of parity, and Fazio doesn't see a near-term catalyst for a breakout.

"It's like a spring that coils tighter and tighter but when it goes, look out," Fazio said.

The U.S. dollar was under broad pressure on speculation the U.S. government will be forced to guarantee $5 trillion in Fannie Mae and Freddie Mac obligations.

The U.S. dollar was down 0.8100 to 106.2700 against the yen and the Dollar Index was down 0.570 to 71.923. During the Friday session, the Dollar Index fell to its lowest since April 23.

The euro was up 0.0149 to 1.5937 against the U.S. dollar, up 0.0161 to 1.6085 against the Canadian dollar, up 0.0032 to 0.8013 against the pound sterling and was higher by 0.37 to 169.42 against the yen.

The pound sterling was up 0.0107 to 1.9887 against the U.S. dollar and up 0.0126 to 2.0074 against the Canadian dollar.

U.S. fixed income also sold off on worries Fannie and Freddie debt could increase the supply of outstanding U.S. government debt. The decline in Canadian employment helped the CGB market withstand the sell off.

U.S. two-year yields are up 19.4 bps to 2.60%, with five-year yields up 20.4 bps to 3.28%, 10-year yields up 16.2 bps to 3.96% and 30-year yields up 12.6 bps to 4.54%. The Eurodollar September 08 contract is down 2.0 ticks to 97.07. The yield curve is flatter, with the 10/2-year spread down 3.3 bps to 136.13 bps.

Yields on two-year Canadian government bonds are up 2.3 bps to 3.18%, with five-year yields up 3.3 bps to 3.41%, 10-year yields up 3.0 bps to 3.78% and 30-year yields up 2.8 bps to 4.09%. The Canadian 10-year note is yielding 18.16 bps less than the U.S. 10-year note.

In Germany, returns on two-year German bonds are up 1.5 bps to 4.41%, with five-year yields up 4.0 bps to 4.43%, 10-year yields up 2.8 bps to 4.43% and 30-year yields up 1.6 bps to 4.74%.

Yields on UK two-year bonds are up 1.5 bps to 4.88%, with five-year yields up 1.9 bps to 4.86%, 10-year yields up 2.5 bps to 4.89% and 30-year yields up 2.6 bps to 4.57%.

The week starts out quietly as there are no notable economic data points on Monday. Traders will be looking for weekend news on Fannie Mae and Freddie Mac before turning their focus to Bernanke's semi-annual testimony to U.S. lawmakers. Canada's central bankers will meet on Tuesday to decide what to do with the 3.00% overnight target rate. Economists see virtually no chance the bank will change rates, and futures markets are pricing the hold as a certainty.

All data taken at 5:10 p.m. EDT.

By Adam Button, abutton@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, ngirgis@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it

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