Closing Market Recap: Equities and Fixed Income Diverge; Oil Rebounds

Market Updates | Written by CEP News | Aug 13 08 21:35 GMT |
(CEP News) - U.S. equity markets fell for the second day in a row on Wednesday, but interest rate markets didn't follow, in what was a departure from the past week when they moved in lock-step.

Equity markets in Canada and the United States took their cues from commodities. WTI crude oil rallied $2.99 to $116.00 per barrel on the biggest U.S. weekly gasoline supply drawdown in more than 10 years. Gold was also up $16.60 to $831.30. This pulled down U.S. stock markets, but helped the TSX to its best session this month.

Toronto's S&P/TSX composite index closed up 210 points to 13377, the Dow Jones industrial average closed down 110 points to 11533, the S&P 500 closed down 4 points to 1286 and the Nasdaq closed down 2 points to 2429.

Aside from the stock market decline, market participants noted a seemingly solid stream of bond bullish news, including speculation about brokerage writedowns, strong demand for the $50 billion TAF auction and slightly weaker-than-expected U.S. retail sales.

But Treasury traders said a number of factors pushed up yields:

- Technical resistance was a common refrain. Two-year futures, 10-year futures and Eurodollar contracts all opened the session at the top of their four-month ranges and were unable to make a break on low volumes.

- There was an increase in corporate supply, including a pending $3.5 billion issue from Fannie Mae, and mumblings about rate-lock selling.

- WTI crude oil rallied $2.99 to $116.00 per barrel on the biggest U.S. weekly gasoline supply drawdown in more than 10 years. Other commodities were also higher and the rise reignited inflation worries ahead of Thursday's consumer price index report.

- Equity markets rebounded in the afternoon, mitigating the flight-to-quality. After falling as low as 1274, the S&P 500 closed down 4 points to 1286.

- Traders commented on large sales out of Asia. This coincided with an afternoon rally in USD/JPY -- a seemingly contradictory move.

- Business inventories for June were up 0.7%, better than the 0.5% expected and the highest in five months. This follows a string of strong second- quarter figures that economists say will result in upward revisions to Q2 GDP, perhaps to 2.8% from the previously reported 1.9%.

U.S. two-year yields were up 4.9 bps to 2.47%, with five-year yields up 5.8 bps to 3.20%, 10-year yields up 3.6 bps to 3.93% and 30-year yields up 2.6 bps to 4.56%. The Eurodollar March 09 contract was down 4.0 ticks to 96.94. The yield curve was flatter, with the 10/2-year spread down 1.7 bps to 145.94 bps.

Yields on two-year Canadian government bonds were up 4.1 bps to 2.78%, with five-year yields up 3.5 bps to 3.13%, 10-year yields up 1.5 bps to 3.61% and 30-year yields flat at 4.03%. The December 08 BAX contract was down 3.0 ticks to 97.18.

Overseas, the pound sterling was hammered and UK fixed income markets rallied following the release of the Bank of England's Inflation Report. The BOE downgraded its growth forecast and upwardly revised inflation.

The pound was marginally higher ahead of the report, but tumbled swiftly following the release -- from 1.9001 to 1.8696 USD -- the lowest since Oct. 2006.

A multitude of strategists initiated short GBP positions, including RBC's David Watt, who said "the BOE's inflation report highlighted a clear concern with the growth outlook most notably with the potential performance of the domestic economy ¥ There is much greater scope for the BoE to cut rates given the concern over the medium prospects for the UK economy."

Yields on UK two-year bonds were down 16.6 bps to 4.50%, with five-year yields down 14.3 bps to 4.45%, 10-year yields down 3.1 bps to 4.60% and 30-year yields up 2.7 bps to 4.43%.

In Germany, returns on two-year German bonds were down 3.5 bps to 4.01%, with five-year yields down 4.4 bps to 4.01%, 10-year yields down 2.4 bps to 4.21% and 30-year yields flat at 4.63%.

The Canadian dollar was up 0.0010 to 0.9411 against the U.S. dollar (1.0627 USD/CAD) and up 0.29 to 102.99 against the yen.

The U.S. dollar was up 0.22 to 109.45 against the yen and the Dollar Index was up 0.099 to 76.251.

The euro was down 0.0002 to 1.4923 against the U.S. dollar, up 0.0018 to 1.5858 against the Canadian dollar, up 0.0116 to 0.7982 against the pound sterling and was higher by 0.25 to 163.31 against the yen.

All data taken at 5:24 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 Sarah Sussman, ssussman@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it

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