Closing Market Recap: Fixed Income Tumbles After Financials Rebound

Market Updates | Written by CEP News | Jul 18 08 21:40 GMT |
(CEP News) - Renewed confidence in the U.S. economy and financial sector sparked a modest rally in U.S. stocks and a Treasury selloff on Friday. Meanwhile, Canadian equities closed the week on a positive note and the loonie flirted with parity.

For the most part, markets were relatively unchanged on Friday after a tumultuous week. The exception was in fixed income where prices fell and yields shot higher.

U.S. two-year yields were up 14.7 bps to 2.63%, with five-year yields up 14.1 bps to 3.41%, 10-year yields up 9.2 bps to 4.08% and 30-year yields up 4.0 bps to 4.65%. The Eurodollar September 08 contract was down 4.0 ticks to 97.08. The yield curve was flatter, with the 10/2-year spread down 5.9 bps to 144.49 bps.

William O'Donnell, fixed income strategist at UBS, said better-than-expected earnings from Citigroup and momentum selling were hurting the bond market.

"One of the problems we have is that technical conditions are pretty poor," O'Donnell said. "We had a rally since the middle of June and we're seeing a bit of a giveback after a bounce in some of the financials."

Citigroup reported a second-quarter net loss of $2.5 billion, or 54 cents a share. But analysts had expected a loss of about $3.7 billion.

Shares of Citigroup closed 7.4% higher while the ETF that tracks the U.S. financial sector was up 1.6%. Further support came from the embattled shares of U.S. mortgage guarantors Fannie Mae and Freddie Mac, which gained 22.6% and 10.5% respectively.

The rally in financials offset a technology selloff, pushing stocks into positive territory. Toronto's S&P/TSX composite index closed up 56 points to 13,516, the Dow Jones industrial average up 50 points to 11,497, the S&P 500 unchanged at 1,261 and the Nasdaq down 30 points to 2,283.

European stock markets closed in positive territory with the Eurostoxx up 49 points to 2,836, the UK FTSE 100 up 90 points to 5,376 and the German DAX up 111 points to 6,383.

Crude oil prices were relatively stable on Friday but on the week were down $18 at $128.88 per barrel.

Commodity trader Dennis Gartman pointed to changes in consumer and corporate habits as the reasons for the commodity decline. He said prices could fall to $100 "rather easily."

"What has taken place to send crude so violently lower over the course of the past week: demand destruction plainly and simply," Gartman wrote in his newsletter.

On Friday, WTI crude oil was down $0.41 to $128.88.

The fall in energy prices had little effect on the Canadian dollar. It outperformed every G10 currency except the Australian dollar and pound sterling in the past week.

"The fact that CAD outperformed as crude oil headed to its largest one-week decline in three-and-a-half years would appear to underscore that this correlation remains broken for now," wrote Scotia Capital currency strategists Steve Malyon and Sacha Tihanyi in a note to clients.

On Friday, the Canadian dollar was unchanged 0.9943 against the U.S. dollar (1.0058 USD/CAD) and up 0.70 to 106.35 against the yen.

The U.S. dollar was up 0.69 to 106.96 against the yen and the Dollar Index was down 0.069 to 72.173.

The euro was down 0.0016 to 1.5848 against the U.S. dollar, down 0.0016 to 1.5938 against the Canadian dollar, up 0.0012 to 0.7928 against the pound sterling and was higher by 0.92 to 169.48 against the yen.

The pound sterling was down 0.0050 to 1.9990 against the U.S. dollar and down 0.0052 to 2.0104 against the Canadian dollar.

Elsewhere in fixed income, yields on two-year Canadian government bonds were up 7.0 bps to 3.19%, with five-year yields up 4.5 bps to 3.41%, 10-year yields up 2.8 bps to 3.81% and 30-year yields up 0.6 bps to 4.15%. The Canadian 10-year note was yielding 27.78 bps less than the U.S. 10-year note.

In Germany, returns on two-year German bonds were up 16.0 bps to 4.54%, with five-year yields up 15.8 bps to 4.60%, 10-year yields up 12.8 bps to 4.57% and 30-year yields up 9.6 bps to 4.86%.

Yields on UK two-year bonds were up 13.9 bps to 5.11%, with five-year yields up 14.4 bps to 5.06%, 10-year yields up 14.0 bps to 5.04% and 30-year yields up 9.8 bps to 4.68%.

Looking to the week ahead, the health of the Canadian consumer and rising inflation will be in focus.

On Tuesday, Statistics Canada will release the May retail sales report. Economists believe the domestic economy continues to chug along and spending will rise 0.5% from April.

On Wednesday, inflation will be the focus with the June report on the Consumer Price Index. Over the past year, inflation has become a global problem that Canada has dodged mostly because of the rapid rise of the loonie. Canada has had some of the lowest inflation rates in the world, but that could be changing. In the previous report on CPI, prices rose from 1.7% to 2.2%. Economists expect the trend to continue and the year-over-year CPI to hit 2.9%, marking the highest level since 2005.

Still, Canada remains a relatively low inflation country. Euro zone inflation is at 4.0% while U.S. consumer prices have increased 5% in the past year.

All data taken at 4:58 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 Cristina Markham, cmarkham@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it

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