Closing Market Recap: Equities Slump and Fixed Income Rallies

Market Updates | Written by CEP News | Aug 07 08 20:45 GMT |
(CEP News) - Worries about the financial sector and speculation that central banks will not raise rates led to an equity selloff and fixed income rally on Thursday. The U.S. dollar also continued its impressive recent rally as it gained against the euro, Canadian dollar and pound sterling.

Toronto's S&P/TSX composite index closed down 68 points to 13385, the Dow Jones industrial average closed down 225 points to 11431, the S&P 500 closed down 23 points to 1266 and the Nasdaq finished the day down 23 points to 2356.

U.S. two-year yields were down 13.8 bps to 2.43%, with five-year yields down 17.1 bps to 3.15%, 10-year yields down 13.2 bps to 3.92% and 30-year yields down 14.3 bps to 4.55%. The Eurodollar March 09 contract was up 12.5 ticks to 96.97.

Traders and strategists offered a variety of reasons for the equity selloff and Treasury rally:

- Central bankers in Europe and the UK opted to leave interest rates unchanged. And in the press conference following the ECB decision, President Jean-Claude Trichet said policy-makers have "no bias" on interest rates while adding that the second and third quarter of the year will be "particularly weak."

- There was a troubling report on first-time jobless claims released from the U.S. Department of Labor. Claims jumped above the 425k consensus to a six-year high of 455k.

- An auction of $10 billion 30-year Treasury bonds drew a high yield of 4.609% versus a 4.640% yield at the time of the announcement.

- U.S. chain store sales rose only 2.6% year-over-year in July, compared to a 4.2% increase in June, according to a report released by the International Council of Shopping Centers.

- Financial worries surrounded American International Group, or AIG, whose shares were down 17%. The company announced a worse-than-expected $5.36 billion loss, its third straight multi-billion dollar quarterly loss.

- Investors were scared by Fannie Mae, which will be reporting quarterly results Friday. Shares of Fannie and Freddie were down 15% and 12% respectively.

- Oil prices rebounded with WTI crude up $1.44 to $120.02 on pipeline worries in Turkey.

- In Canada, building permits issued in June were down 5.3% against the -1.0% consensus.

On the positive side, U.S. pending home sales were up 5.3% in June. Economists were expecting a 1.0% decline following a 4.9% decline a day ago.

Michael Herring, fixed income strategist at BMO Capital Markets, said worries about the worldwide economy are overblown, but that low interest rates and financial sector problems are likely to remain.

"There's a gap at global banks between how much they've written down and how much capital they've raised. I think we're seeing less of an appetite from investors to help raise capital," Herring said.

Derivatives traders were aggressively pricing out rate increases with the chance of a Fed hike by the end of the year at 36% compared to 55% a day ago. In Canada, BAX contracts rallied on very high volume. The Sept. contract was up 4 ticks to 96.895 and the Dec. contract was up 10 ticks to 97.190.

Eric Lascelles, fixed income strategist at TD Securities, said those figures suggest a 10% chance of a cut at the upcoming meeting and a nearly 100% probability of two cuts by the end of the year.

Markets are "telling us the Bank of Canada is going to cut quite aggressively and I have to say that I disagree strongly," Lascelles said.

Yields on two-year Canadian government bonds were down 8.9 bps to 2.77%, with five-year yields down 8.1 bps to 3.12%, 10-year yields down 5.6 bps to 3.65% and 30-year yields down 4.4 bps to 4.07%. The December 08 BAX contract was up 9.0 ticks to 97.18. The Canadian 10-year note was yielding 27.21 bps less than the U.S. 10-year note.

In Germany, returns on two-year German bonds were down 15.3 bps to 4.09%, with five-year yields down 16.4 bps to 4.09%, 10-year yields down 7.8 bps to 4.26% and 30-year yields down 1.2 bps to 4.66%.

Yields on UK two-year bonds were down 6.8 bps to 4.64%, with five-year yields down 7.3 bps to 4.61%, 10-year yields down 6.3 bps to 4.68% and 30-year yields down 4.0 bps to 4.45%.

The Canadian dollar was down 0.0038 to 0.9495 against the U.S. dollar (1.0530 USD/CAD) and down 0.72 to 103.95 against the yen.

The U.S. dollar was down 0.33 to 109.46 against the yen and the Dollar Index was up 0.292 to 74.536.

The euro was down 0.0096 to 1.5313 against the U.S. dollar, down 0.0041 to 1.6125 against the Canadian dollar, down 0.0029 to 0.7881 against the pound sterling and was lower by 1.55 to 167.60 against the yen.

The pound sterling was down 0.0050 to 1.9429 against the U.S. dollar and up 0.0026 to 2.0461 against the Canadian dollar.

The front month gold contract at the Chicago Board of Trade was down $2.80 to $880.10 per ounce.

All data taken at 4:17 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 Stephen Huebl, shuebl@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it

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