Closing Market Recap: Treasuries Sell Off; Loonie Declines and TSX Rallies

Market Updates | Written by CEP News | Jul 25 08 21:13 GMT |
(CEP News) - A trio of better-than-expected U.S. economic data points on Friday boosted confidence and helped reverse Thursday's downtrodden sentiment. Treasuries sold off while U.S. equities are struggling to make gains. In Canada, the loonie fell nearly a half cent but resource stocks led the TSX higher.

U.S. two-year yields were up 9.7 bps to 2.70%, with five-year yields up 11.4 bps to 3.43%, 10-year yields up 9.8 bps to 4.09% and 30-year yields up 8.3 bps to 4.68%.

"The key drivers for the sell-off in North American bond markets earlier today were the surprisingly strong U.S. durable goods orders report and the better than expected print on U.S. new homes sales for June, though the surge in U.S. home foreclosures in Q2 rained somewhat on the parade," wrote Millan Mulraine, economics strategist at TD Securities

The biggest surprise in the U.S. came from the June report on orders for durable goods. Orders for big ticket items were expected to decline 0.3% but climbed 0.8% instead. Excluding the volatile automotive component, orders were up 2.0% against the -0.2% consensus estimate.

Also in June, new home sales were better than forecast, rising from a 17-year low. Sentiment also climbed, as the Reuters/University of Michigan survey for July was revised nearly 5 points higher to 61.2.

There was also a downside surprise as U.S. home foreclosures increased 14% in the second quarter, according to a report issued by RealtyTrac.

According to TradeWeb, U.S. Treasury volume was only about 60% of normal.

In Canada, the federal government announced a $500 million deficit for April and May. Yet Canada's fixed income market still outperformed, despite the possibility of increased debt issuance.

Yields on two-year Canadian government bonds were up 1.4 bps to 3.15%, with five-year yields up 3.7 bps to 3.42%, 10-year yields up 4.6 bps to 3.84% and 30-year yields up 2.8 bps to 4.16%. The Canadian 10-year note is yielding 25.5 bps less than the U.S. 10-year note.

At the Montreal Exchange, 3-month bankers' acceptance futures saw better-than-normal volume as 34,283 contract changed hands. The most active contract was for December where the yield moved up 3 basis points to 3.20%. Futures on the 10-year Government of Canada note traded at average volume with prices falling to 0.41 to 117.31.

While fixed income markets seemed to be surveying the broader economy, equities were reflecting the housing market, according to Larry Levin, president of Secrets of Traders.com.

"The housing woes are indeed the main problem of the equity markets. Because housing prices are going down, banks and investment banks are stuck with hundreds of billions of dollars worth of bad loans. Because the housing prices are dropping, non-stop spending Americans have run out of what they thought was free money," Levin said.

U.S. equities hit session highs shortly after the report on home sales but the optimism was washed away when Standard & Poor's placed Fannie Mae and Freddie Mac subordinated debt and preferred shares on creditwatch for a possible downgrade.

"Both firms face weak earnings due to rising credit expenses. The creditwatch listing on the subordinated debt, preferred stock, and risk-to-the-government ratings underscores the expected higher stress on capital and earnings these firms face during the next several quarters," said S&P credit analysts in a report.

The Dow Jones industrial average closed up 21 points to 11,371, the S&P 500 up 5 points to 1,258 and the Nasdaq up 30 points to 2,311.

Sentiment was much better in Canada where resource stocks rebounded even as crude oil fell to a seven-week low. The oil price decline came after the Organization of Petroleum Exporting Countries increased output by 200,000 barrels a day in July, according to estimates from PetroLogistics Ltd.

Toronto's S&P/TSX composite index closed up 173 points to 13,379. WTI crude oil closed down $2.23 to $123.26.

Although crude prices fell, technical analysts said the ability of the market to hold above $122 per barrel could pave the way for a rebound.

"But just how much can we draw from a drop in crude that still leaves it higher than at any point in history prior to May? Not much," wrote CIBC economist Avery Shenfeld in a note to clients.

In currency markets, the Canadian dollar spent much of the session unchanged but sold off following the deficit announcement from the federal government.

The loonie was down 0.0041 to 0.9813 against the U.S. dollar (1.0189 USD/CAD) and up 0.09 to 105.85 against the yen. On the week, the Canadian dollar fell 0.0127, or 1.3% USD.

The U.S. dollar was up 0.53 to 107.86 against the yen but the Dollar Index was down 0.077 to 72.856.

The euro was up 0.0026 to 1.5703 against the U.S. dollar, up 0.0090 to 1.6000 against the Canadian dollar, down 0.0006 to 0.7886 against the pound sterling and was higher by 1.09 to 169.37 against the yen.

The pound sterling finished the week up 0.0044 to 1.9913 against the U.S. dollar and up 0.0129 to 2.0292 against the Canadian dollar.

The front month gold contract at the Chicago Board of Trade is up $7.90 to $929.70 per ounce.

Overseas, European stock markets closed in negative territory with the Eurostoxx down 3 points to 2,857, the UK FTSE 100 down 10 points to 5353 and the German DAX down 4 points to 6,437.

In Germany, returns on two-year German bonds are down 0.9 bps to 4.42%, with five-year yields up 1.9 bps to 4.53%, 10-year yields up 3.7 bps to 4.60% and 30-year yields up 4.5 bps to 4.87%.

Yields on UK two-year bonds are up 1.5 bps to 4.98%, with five-year yields up 0.9 bps to 4.95%, 10-year yields up 1.7 bps to 4.99% and 30-year yields up 1.7 bps to 4.62%.

In the week ahead, the focus will be on the United States. Advance GDP figures for the second quarter will be released Thursday and are expected to show the economy grew by a healthy rate of 2%. But economist warn that figure has been inflated by government rebate cheques. Afterwards the focus will turn to employment figures on Friday that are expected to show the U.S. unemployment rate rising to 5.6% from 5.5%.

All data taken at 4:39 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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