Closing Market Recap: Treasuries Rally, Equities Slide and USD Declines

Market Updates | Written by CEP News | Aug 12 08 20:50 GMT |
(CEP News) - Markets took their cue from the embattled financial sector on Tuesday and worries continue to hurt bank and brokerage stocks and boost fixed income. The recent U.S. dollar rally stalled out against the Canadian dollar after trade balance figures were released.

Despite an overall bounce in U.S. equity markets, financial stocks remain under pressure. On Tuesday, Lehman Brothers fell to an August low. Fannie Mae and Freddie Mac fell to their lowest since July 16.

Standard and Poor's downgraded Morgan Stanley's long-term debt late on Monday and Wachovia downwardly revised its second-quarter results. JPMorgan Chase was also down after it reported a $1.5 billion loss in a regulatory filing.

Toronto's S&P/TSX composite index closed down 36 points to 13167, the Dow Jones industrial average closed down 140 points to 11642, the S&P 500 closed down 16 points to 1290 and the Nasdaq closed down 9 points to 2431.

European stock markets closed in negative territory with the Eurostoxx down 7 points to 2955, the UK FTSE 100 down 7 points to 5535 and the German DAX down 24 points to 6586.

Fixed income rallied on diminished expectations for rate hikes in the United States. Hopes were cooled by comments from Minneapolis Federal Reserve President Gary Stern (voter). He took a less hawkish tone than he did a few weeks ago, saying the Fed should be "patient" instead of pushing for immediate rate hikes.

Dallas Fed President Fisher (voter) also dampened economic optimism, saying "I expect that in the second half of this year we will broach zero growth."

Overall, strategists said the Treasury market had little to latch on to. One said flows were "anemic" and another said the Canadian market was "mired in the summer doldrums."

U.S. two-year yields were down 11.5 bps to 2.42%, with five-year yields down 11.6 bps to 3.14%, 10-year yields down 9.1 bps to 3.90% and 30-year yields down 6.6 bps to 4.54%. The Eurodollar March 09 contract was up 14.5 ticks to 97.00. The yield curve was steeper, with the 10/2-year spread up 2.6 bps to 147.72 bps.

Yields on two-year Canadian government bonds were down 1.5 bps to 2.74%, with five-year yields down 2.5 bps to 3.09%, 10-year yields down 3.2 bps to 3.60% and 30-year yields down 2.0 bps to 4.03%. The December 08 BAX contract was up 1.0 tick to 97.22.

In Germany, returns on two-year German bonds were down 5.5 bps to 4.05%, with five-year yields down 5.2 bps to 4.05%, 10-year yields down 4.3 bps to 4.23% and 30-year yields down 4.5 bps to 4.64%.

Yields on UK two-year bonds were down 8.8 bps to 4.67%, with five-year yields down 8.2 bps to 4.59%, 10-year yields down 7.7 bps to 4.64% and 30-year yields down 4.9 bps to 4.40%.

The chief economic data of the day were Canadian and U.S. trade figures, which were released simultaneously at 8:30 a.m. EDT and sent the loonie higher.

The Canadian trade surplus was in line with economists' estimates at $5.8 billion in June, but traders said markets were priced for a disappointing Canadian figure.

In the U.S., the trade deficit improved in June. The Census Bureau's report said it was -$56.8 billion, compared to the -$62.0 billion balance expected by economists. It was the second smallest monthly deficit of the year.

"For the Canadian dollar it was probably more of a relief rally. A lot of people were really worried it was going to be worse than expected," said George Davis, chief FX technical analyst at RBC Capital Markets.

Strategists say the U.S. dollar may continue to slip as it consolidates its recent gains.

"We continue to believe that the EUR/USD sell-off - and the USD rebound - has come too far and too fast, with corrective price action very likely in the weeks ahead," wrote strategists from Bank of America in a client note.

The Canadian dollar was up 0.0059 to 0.9403 against the U.S. dollar (1.0633 USD/CAD) and down 0.15 to 102.78 against the yen.

The U.S. dollar was down 0.75 to 109.32 against the yen and the Dollar Index was up 0.015 to 76.140.

The euro was up 0.0011 to 1.4921 against the U.S. dollar, down 0.0075 to 1.5866 against the Canadian dollar, up 0.0066 to 0.7868 against the pound sterling and was lower by 0.99 to 163.12 against the yen.

The pound sterling was down 0.0146 to 1.8965 against the U.S. dollar and down 0.0266 to 2.0168 against the Canadian dollar.

The day ahead features U.S. advance retail sales data for July. The consensus estimate is for a 0.1% monthly decline in total sales but a 0.5% increase excluding autos.

Mark Frey, vice-president of FX trading at Custom House said weaker retail sales could provide some short term risk to the U.S. dollar.

"We could see a little retracement of the dollar -- nothing to get too excited about but a consolidation of where we have been over the last couple of days. I think the markets could be ahead of the Fed and itself. There is no question the rest of the world is still slowing and it makes it difficult to believe the Fed is going to take rates higher. Once the market realizes that expectations will come back down," he said.

All data taken at 4:35 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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