Morning Market Recap: Banking Worries Pressure Stocks

(CEP News) - Renewed concern about the health of the U.S. financial sector put markets in a sour mood on Monday with stocks down more than 1%, commodities slumping and the U.S. dollar making gains.

The Dow Jones industrial average was most recently down 100 points to 7918, the S&P 500 was down 13 points to 829 and the Nasdaq was down 33 points to 1589. In Canada, the S&P/TSX composite index was down 117 points to 8948.

"When markets have a good overbought reading, it historically is followed more by a consolidation or limited pullback," said Mary Ann Bartels, technical market analyst at Bank of America/Merrill Lynch. "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."

Market watchers say financial worries are weighing on stocks after some worrisome comments by U.S. Treasury Secretary Timothy Geithner in an interview on CBS's "Face the Nation" on Sunday.

"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."

Geithner said bank boards could be reshuffled and executives could be replaced.

Some of the weakness in stocks is being generated by an analyst report from Calyon's Mike Mayo. Mayo formerly worked at Deutsche Bank but recently moved to Calyon and has begun rating banks. He released his initial rankings of 11 U.S. banks all with sell, underperform or underweight ratings. He said that banks have only marked down loans to 98 cents, on average.

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

European stock markets are also lower, with the Stoxx 50 down 27 points to 1869, the UK FTSE 100 down 49 points to 3981 and the German DAX down 63 points to 4322.

Earlier in the session, sentiment was positive. The Japanese Nikkei hit a three-month high and closed up 108 points to 8858 and the Hang Seng Index closed up 452 points to 14998.

Commodity markets are lower, with WTI oil down $1.76 to $50.75 and gold down $19.50 to $878.40 per ounce.

In foreign exchange, the Canadian dollar is lagging following an unexpectedly sharp drop in building permits. Statistics Canada reported that permits plunged 15.9% month-over-month in February, against the downwardly revised 6.0% decline in January. Economists expected a 4.0% decline.

The Canadian dollar is down 0.0060 to 0.8068 against the U.S. dollar (1.2397 USD/CAD) and down 0.43 to 81.17 against the yen.

The U.S. dollar is up 0.30 to 100.61 against the yen and the Dollar Index is up 0.230 to 84.395.

The euro is down 0.0039 to 1.3445 against the U.S. dollar, up 0.0080 to 1.6665 against the Canadian dollar, down 0.0022 to 0.9066 against the pound sterling and is lower by 0.01 to 135.25 against the yen.

The pound sterling is down 0.0017 to 1.4825 against the U.S. dollar and up 0.0134 to 1.8384 against the Canadian dollar.

In fixed income, U.S. two-year yields are up 0.8 bps to 0.95%, with five-year yields up 0.7 bps to 1.86%, 10-year yields down 0.6 bps to 2.88% and 30-year yields down 1.2 bps to 3.68%. The Eurodollar September 09 contract is up 1.0 tick to 98.84. The yield curve is flatter, with the 10/2-year spread down 1.0 bps to 192.69 bps.

Yields on two-year Canadian government bonds are flat at 1.14%, with five-year yields down 1.0 bps to 1.87%, 10-year yields up 1.0 bps to 2.94% and 30-year yields up 0.7 bps to 3.67%. The September 09 BAX contract is up 3.0 ticks to 99.47.

In Germany, returns on two-year German notes are down 0.6 bps to 1.50%, with five-year yields down 2.2 bps to 2.45%, 10-year yields down 2.5 bps to 3.20% and 30-year yields flat at 4.04%.

Yields on UK two-year notes are down 0.9 bps to 1.39%, with five-year yields down 3.1 bps to 2.53%, 10-year yields down 4.0 bps to 3.38% and 30-year yields down 7.9 bps to 4.26%.

All data taken at 9:49 a.m. EDT.

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

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