Closing Market Recap: Equity Markets Sag and Treasury Yields Fall

Market Updates | Written by CEP News | Jul 31 08 21:52 GMT |

(CEP News) - Growth figures in the United States and Canada were weaker than expected, U.S. jobless claims shot higher, inflationary concerns reemerged and the former head of the Federal Reserve cast doubt on the financial system. The avalanche of worrisome data sparked large declines in equities and bond yields. "We've had a few days of quiet, then all of the sudden, we get economic data on both sides of the border telling us the same story," said Levente Mady, bond strategist at MF Global Canada. "We've had a number of people saying Canada is going to be more isolated from the U.S. but that doesn't look like the case." Yields on U.S. 10-year Treasury notes were down 9.8 bps to 3.95% and down 11.9 bps to 3.70% on 10-year Canadian Government Bonds. The Dow Jones industrial average fell 206 points to 11378 and the S&P TSX Composite Index closed down 90 points to 13593. Traders were pointing to a number of reasons for the drop in stocks and yields: 1- The advance U.S. GDP report came in lower than expected in the second quarter of 2008, rising by 1.9% against expectations of 2.3% growth, according to the Bureau of Economic Analysis. At the same time, the fourth quarter of last year was revised to -0.2% from +0.6%. 2- Canada's GDP fell 0.1% in May. Economists had been looking for a 0.2% increase following the previous month's +0.4% reading. 3- Initial claims for unemployment benefits in the United States climbed to 448,000 in the week ending July 26 - the highest since April 2003. 4- Though the Chicago Purchasing Managers' Index bounced into growth mode in July following five months of slowdown, it was largely due to an inventory build. The employment component declined. 5- Former Federal Chairman Alan Greenspan warned against the Federal Reserve becoming involved in overseeing the financial system and called Fannie Mae and Freddie Mac "a major accident waiting to happen." 6- U.S. Treasury Secretary Henry Paulson said the "housing correction, credit market turmoil, and high energy prices remain a considerable drag on the economy - and the effects of this drag can be seen in the soft job market." 7- End of the month index-extension buying in Treasuries and asset-mix reallocation. Yields on two-year Canadian government bonds were down 12.2 bps to 2.95%, with five-year yields down 13.6 bps to 3.24%, 10-year yields down 11.9 bps to 3.70% and 30-year yields down 7.3 bps to 4.10%. The December 08 BAX contract was up 10.0 ticks to 97.00. The Canadian 10-year note was yielding 24.42 bps less than the U.S. 10-year note. In Germany, returns on two-year German bonds were down 5.5 bps to 4.26%, with five-year yields down 7.6 bps to 4.27%, 10-year yields down 6.0 bps to 4.36% and 30-year yields down 4.6 bps to 4.65%. Yields on UK two-year bonds were down 2.6 bps to 4.80%, with five-year yields down 3.0 bps to 4.78%, 10-year yields down 4.1 bps to 4.81% and 30-year yields down 0.6 bps to 4.52%. Toronto's S&P/TSX composite index closed down 90 points to 13593, the Dow Jones industrial average was down 206 points to 11378, the S&P 500 finished the day down 17 points to 1267 and the Nasdaq closed down 4 points to 2326. European stock markets closed in mixed territory with the Eurostoxx down 1 point to 2881, the UK FTSE 100 down 9 points to 5412 and the German DAX up 19 points to 6480. The Canadian dollar was up 0.0012 to 0.9770 against the U.S. dollar (1.0235 USD/CAD) and up 0.06 to 105.37 against the yen. The U.S. dollar was down 0.06 to 107.86 against the yen and the Dollar Index was down 0.127 to 73.195. The euro was down 0.0002 to 1.5602 against the U.S. dollar, down 0.0021 to 1.5968 against the Canadian dollar, unchanged 0.7864 against the pound sterling and was lower by 0.12 to 168.26 against the yen. The pound sterling was down 0.0004 to 1.9838 against the U.S. dollar and down 0.0029 to 2.0303 against the Canadian dollar. WTI crude oil was down $2.69 to $124.08. The front month gold contract at the Chicago Board of Trade was up $10.20 to $922.40 per ounce. The day ahead features the U.S. report on nonfarm payrolls. The consensus estimate is for a decline of 75k jobs and for the unemployment rate to move up one tick to 5.6%. "The USD is equally sensitive to a higher or lower NFP tomorrow," said Dustin Reid, currency analyst from ABN Amro. "I think a worse than expected NFP print tomorrow will send USD materially lower. That said, the whisper numbers are indeed already lower for NFP tomorrow so an upside surprise will be taken positively - although likely only for a short time," he said. "I think there is still some skepticism in the quality of the NFP data and a stronger than expected print might not prove convincing given the claims numbers now moving well above 400k, which, typically, have been associated with periods of economic stagnation." All data taken at 5:30 a.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 CEP Newswires - CEP News © 2008. All Rights Reserved. www.economicnews.ca The Copying, Broadcast, Republication or Redistribution of CEP News Content is Expressly Prohibited Without the Prior Written Consent of CEP News. 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