Midday Market Recap: Stocks Down, Gold Slumps, USD Makes Gains

• S&P 500 Down 2% • Gold Falls $24 • Treasuries Flat • USD/CAD Climbs 0.0121

Stocks Fall on Financial Sector Worries

Renewed concern about the health of the U.S. financial sector put markets in a sour mood on Monday with U.S. stocks down nearly 2%.

The Dow Jones industrial average was most recently down 141 points to 7876, the S&P 500 was down 18 points to 824 and the Nasdaq was down 39 points to 1583. In Canada, the S&P/TSX composite index was down 136 points to 8930.

"As has tended to be the case with rallies over the past year, when the market has moved a fair amount higher, doubt starts to creep in," said David Jones, chief market strategist at IG Index. "There is always the worry that this is just another bear market rally - and no one wants to be left holding the baby when the market turns."

Market watchers say financial worries were generated by an analyst report from Calyon's Mike Mayo. The former Deutsche Bank analyst recently moved to Calyon and released his initial ratings on 11 U.S. banks. All of them were started with sell or underperform ratings and he said that, on average, banks have only marked down loans to 98 cents on the dollar.

Also weighing on stocks were comments from U.S. Treasury Secretary Timothy Geithner, who said bank executives could be replaced in an interview on CBS's "Face the Nation."

"When in the future -- or I would say if in the future -- banks need exceptional assistance in order to get through this, then we'll make sure that assistance comes with conditions, not just to protect the taxpayer, but to make sure this is the kind of restructuring necessary for them to emerge stronger."

The financial sector of the S&P 500 is down more than 3%.

Comments by billionaire investor George Soros also added to the negative tone. He told Reuters the "banking system as a whole is basically insolvent."

Shares of Sun Microsystems are down 24% to $6.49 after merger talks with IBM broke down.

Mary Ann Bartels, technical market analyst at Bank of America/Merrill Lynch, said the four-week 22% rally in U.S. stocks has generated overbought readings that traditionally lead to a limited pullback.

"The consensus view is for the S&P 500 to correct part of this rally and test possibly 750-740. Consensus is often wrong, so the 'pain trade' is likely for a more modest correction or side-ways trading that eventually launches the market to new recovery highs," Bartels said.

European stock markets closed with the Stoxx 50 down 14 points to 1882, the UK FTSE 100 down 36 points to 3994 and the German DAX down 35 points to 4350.

Gold Prices Down Despite Drop in Equity Markets

Gold prices are moving lower as most commodity prices trade in negative territory on Monday afternoon.

Spot gold prices have been on a sharp decline since the start of the Asian trading session. Prices suffered further losses at the North American open and fell to session lows of $865.49 an ounce. Gold remains near its daily lows, trading down $21.72 to $871.43 per ounce.

Gold is not the only commodity under pressure. The CRB index of 19 commodities is down 1.6% on the day.

Aaron Fennell, commodities futures broker at MF Global Canada, said he is not surprised that the decline in equities is not providing much direction for gold. The sell-off is attributable not to a rise in risk aversion, but a consolidation move following a 4-week rally, he said.

"I think some investors are taking some profits in equity markets but they aren't going into gold," he said.

Fennell said the stronger U.S. dollar could be providing some momentum for the sell-off in gold. The U.S. dollar index is up almost 1% on the day. Fennell noted that the U.S. dollar will have to weaken if gold moves higher.

"Gold is the ultimate hedge to U.S. dollar weakness and I am still confident that is what will happen," he said. "It is just a question of when the U.S. dollar falls. I think at some point economic fundamentals will come back into play and in that environment the U.S. dollar does not look very strong."

Mike Glaser, futures broker at LaSalle Futures, said gold prices still look bullish in the long term, but he has a different short-term prediction. Eight hundred and eighty dollars represented a major support level and prices below that level could result in further losses, Glaser said.

"I have a price target of $850," he said. "I think investors are not ready to get back into gold right now."

Treasuries Flat After U.S. Raises 3-Year Auction Size

Increasing U.S. debt supply and a rise in risk aversion have led to a stalemate in the Treasury market on Monday.

U.S. two-year yields are down 1.6 bps to 0.93%, with five-year yields up 1.0 bps to 1.86%, 10-year yields up 1.1 bps to 2.90% and 30-year yields up 1.0 bps to 3.70%.

"We have a holiday-shortened, data-light week up ahead and this allows supply jitters to once again take center stage in the Treasury market," said Chris Ahrens, strategist at UBS. "We'd guess that Treasury rates will continue to grind higher toward supports in the coming days."

Ahrens sees support 1.06% for two-years, 2.00% for five-years, 3.00% for 10-years and 3.80% for 30-years.

Market watchers say volumes have been good, but the market lacks a strong direction. A more than 2% slump in equity markets is leading to a bid for safe haven assets, but growing supply remains a concern after the Treasury Department announced auction sizes for later this week. The U.S. will sell $35 billion in three-year notes on April 8, $1 billion more than the previous sale. The Treasury will also reopen $18 billion in 10-year notes on April 9, the same size as the previous auction.

The Federal Reserve was also active in the Treasury market, buying $2.53 billion in maturities from 08/15/2019 - 02/15/2026. About half the purchases were in on-the-run 10-years.

Elsewhere, yields on two-year Canadian government notes are up 0.9 bps to 1.15%, with five-year yields up 1.2 bps to 1.90%, 10-year yields up 4.4 bps to 2.98% and 30-year yields up 4.3 bps to 3.71%. The September 09 BAX contract is up 2.0 ticks to 99.46.

In Germany, returns on two-year German notes are flat at 1.51%, with five-year yields down 0.7 bps to 2.47%, 10-year yields flat at 3.22% and 30-year yields up 2.0 bps to 4.06%.

Yields on UK two-year notes are up 8.3 bps to 1.49%, with five-year yields up 4.5 bps to 2.61%, 10-year yields up 2.0 bps to 3.44% and 30-year yields flat at 4.33%.

Grim Canadian Data Could Add to Canadian Dollar Weakness

Weaker Canadian data could be having a slight impact on the Canadian dollar as equity momentum dominates currency markets.

A drop in equities is causing a rally in the U.S. dollar across the board. Positive market sentiment caused a modest sell-off in USD/CAD in the Asian session. However, the sentiment dissipated just before the North American open and the cross is up 0.0136 to 1.2433.

The Canadian dollar continues to be one of the worst performers against the U.S. dollar. Only the Swedish krona and Norwegian krone are lower than the loonie among the G10 currencies.

Dismal Canadian data could have added to the sell-off following a massive fall in building starts and more weakness in the manufacturing sector. Building permits plunged 15.9% month-over-month to $3.7 billion, following the downwardly revised 6.0% decline in January, Statistics Canada reported on Monday. Economists expected a 4.0% decline.

In more bad data, Canada's Ivey purchasing managers' index unexpectedly fell to 43.2 in March. Economists had expected a reading of 47.0 following February's 45.2 level.

According to some currency strategists, USD/CAD continues to bounce around in a broad range. Support continues to hold around the 1.22 CAD level.

Currency strategists from RBC Capital Markets said they would need to see a close below 1.2231 CAD to shift the bullish sentiment against the U.S. dollar. However, they said that if USD/CAD does close below that level, it could lead to a test of 1.2030 CAD.

Sacha Tihanyi, currency strategist at Scotia Capital, said there are many negative factors impacting the Canadian dollar and that if equities remain stable through most of the week, there could be a prolonged sell-off in the loonie.

Tihanyi said he would look for gains to be capped around 1.2750 CAD.

"I would probably recommend buying Canadian dollars at that level. I think it represents good value," He said.

Elsewhere in foreign exchange, the U.S. dollar is up 0.40 to 100.71 against the yen and the Dollar Index is up 0.686 to 84.851.

The euro is down 0.0120 to 1.3364 against the U.S. dollar, up 0.0035 to 1.6619 against the Canadian dollar, up 0.0020 to 0.9108 against the pound sterling and is lower by 0.67 to 134.59 against the yen.

The pound sterling is down 0.0169 to 1.4673 against the U.S. dollar and down 0.0006 to 1.8245 against the Canadian dollar.

All data taken at 12:39 p.m. EDT.

By Adam Button, abutton@economicnews.ca, edited by Sarah Sussman, ssussman@economicnews.ca

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