Closing Market Recap: Stocks and Oil Fall, Gold Rebounds

(CEP News) • S&P 500 Down 1.9% • Gold Climbs 1.2% • Canadian Dollar and Yen Outperform • Oil Falls Below 5% • TIPS Slide After Soft Auction

Stocks Fall on Profit Worries

Investors sold stocks Tuesday in anticipation of lower corporate earnings, sending U.S. stocks down more than 2%.

"Earnings might bolster recent signs that the gloom is lifting. Or they might suggest that Corporate America is struggling under the weight of the economic downturn and that the fallout will be a lengthy process. I hope for the former, but I fear the latter and its impact on US consumer spending and thus global growth," said David Watt, senior currency strategist at RBC Capital Markets.

The focus on profits came ahead of first quarter earnings from Alcoa. After the close, the aluminum giant announced a loss of 59 cents per share, slightly more than the 55-cent Reuters estimate.

North American economic data was extremely light today, so investors focused on comments from famous market watchers like George Soros and Marc Faber. Both said stocks were heading lower in the near term.

Moody's also released data showing that the number of corporate defaults in the U.S. during March reached the highest level for a single month since the Depression.

A late-day effort to pare stock market losses evaporated in the final minutes of trading and the S&P 500 closed down 20 points, or 2.4%, to 816 -- one point above the session low. The Dow fell 186 points to 7790 and the Nasdaq declined 45 points to 1562. In Canada, the S&P/TSX outperformed U.S. stocks for most of the session, but later faltered and closed down 191 points to 8824.

Reports that General Motors was ramping up plans for bankruptcy sent shares of the company down 12% to $1.99.

"A GM bankruptcy would not be a surprise even if it still has the power to be depressing," said David Ader, head of U.S. government bond strategy at RBS Greenwich Capital.

Financials were resilient, however, as Citigroup and Bank of America posted small gains.

Some of the pessimism began in overseas markets. In Europe, euro zone GDP fell 1.6% in the first quarter, slightly worse than the 1.5% estimate of economists, and the largest decline in more than 13 years.

The Stoxx 50 closed down 9 points to 1872, the UK FTSE 100 down 63 points to 3931 and the German DAX down 27 points to 4323.

In Australia, the Reserve Bank of Australia lowered interest rates to a 49-year low as it anticipates the country will enter its first recession since 1991. New Zealand business sentiment also fell to a 35-year low.

Gold Prices Rebound as Equities Slide

Another drop in equity markets boosted gold prices on Tuesday as the risk aversion/appetite tug-of-war plagues commodity markets.

Gold was on a strong uptrend through most of the session, and despite some volatility ahead of the North American open price remain near the top of today's range trading at $882 an ounce.

The 19 commodity CRB Index shows that the precious metal complex is one of the top performers of the day. Precious metals are up 1.08%.

Bleak news from the International Monetary Fund (IMF) and concerns over corporate first-quarter earnings are causing a risk in negative market sentiment, according to market strategists.

Kenneth Norquay, chief investment strategist from Castlemoore Inc., said in the long term gold remains in a strong uptrend but he is expecting to see continued short-term volatility.

Looking at the short-term, he said gold appears to be in a modest downtrend but prices could find some support at the $850 level.

As gold bounces in a channel, Norquay said he is sitting on the sidelines and will wait for a better buying opportunity. He said he would be interested in buying gold at either $700 or $1,000.

Commodity strategists from Barclays Capital said they are finally seeing some signs that could be positive for gold prices. They pointed out that there are reports that small amounts of gold imports are flowing back into India.

"Manufacturers are buying gold in preparation for a pick-up in retail sales. In our view, lower prices combined with a key festival falling in late April should support further buying interest and in turn cushion prices in the near term," they said.

Japanese Yen and Canadian Dollar Make Gains in Foreign Currency Markets

The yen and Canadian dollar were the top performing G10 currencies on Tuesday.

The yen gained as stocks slid and risk aversion increased, while market watchers say the Canadian dollar is benefiting from deal flows.

The Canadian dollar was up 0.0005 to 0.8083 against the U.S. dollar (1.2372 USD/CAD) and the U.S. dollar was down 0.57 to 100.42 against the yen.

George Androulidakis, director of FX trading at the National Bank of Canada, said fixing flows helped to boost the loonie against the greenback. Although USD/CAD is under modest pressure, Androulidakis said the trend at the moment is relatively neutral, however he is biased towards a stronger U.S. dollar.

"Employment and trade data will be released later this week and I don't think this is the time you want to go long Canadian dollar," he said.

Worrisome news from the International Monetary Fund (IMF) is weighing on the euro as investors move back into the safety of the U.S. dollar. The IMF said global toxic debt could rise to US$4 trillion. The news caused the greenback to make broad gains, and dragged the euro below strong support levels.

The euro was down 0.0148 to 1.3269 against the U.S. dollar, down 0.0194 to 1.6420 against the Canadian dollar, down 0.0075 to 0.9009 against the pound sterling and was lower by 2.20 to 133.29 against the yen.

The pound sterling was down 0.0039 to 1.4731 against the U.S. dollar and down 0.0065 to 1.8224 against the Canadian dollar.

Oil Falls Below $49

Oil prices broken strong support on Tuesday levels as negative sentiment roils financial markets.

Dreary news from the International Monetary Fund (IMF) and a sharp drop in equity markets caused investors to flee from oil markets and into safe havens like gold and the U.S. dollar.

Oil has been on a strong downtrend through most of the European and North American trading session. WTI crude prices are down over 3% on the day as prices hover around $49 per barrel.

The IMF released a report saying global toxic debt could rise to $4 trillion U.S.

Commodity strategists from Barclays Capital said they are expecting prices to continue to "gyrate" around the $50 level in the short term. However, they added the medium term trend points to higher prices.

Although prices remain volatile they are expecting prices in the front month and back months to start to come together.

"The current contango in the oil market is unsustainable as an equilibrium, and the curve must flatten and the wide spreads in both crude types must come in over time," they said.

Commodity strategists from Desjardins are not as optimistic that prices will continue to rise. They said demand remains the top concern for oil prices and they are not expecting an economic recovery until 2010.

"However, the cyclical low of US$30.80/barrel may well not be tested again. Prices could instead fluctuate around US$45 over the next few months," they said.

TIPS Auction Tails

Inflation-protected securities slumped while nominals benefited from a round of risk aversion in the U.S. Treasury market on Tuesday.

U.S. two-year yields were down 3.2 bps to 0.91%, with five-year yields down 3.3 bps to 1.85%, 10-year yields down 2.6 bps to 2.90% and 30-year yields down 1.3 bps to 3.71%.

Yields on the 10-year TIPS are higher by 7 basis points to 1.54%. Rates have moved up after the U.S. sold 9-year, 9-month TIPS for 1.589%, about 2.4 basis points higher than market participants were expecting.

Elsewhere, yields on two-year Canadian government notes were down 2.4 bps to 1.12%, with five-year yields down 4.1 bps to 1.87%, 10-year yields down 4.3 bps to 2.94% and 30-year yields down 4.5 bps to 3.67%. The September 09 BAX contract was up 4.0 ticks to 99.48.

In Germany, returns on two-year German notes were down 4.7 bps to 1.46%, with five-year yields down 2.4 bps to 2.44%, 10-year yields flat at 3.22% and 30-year yields up 1.8 bps to 4.07%.

Yields on UK two-year notes were down 2.4 bps to 1.46%, with five-year yields up 0.9 bps to 2.61%, 10-year yields flat at 3.44% and 30-year yields up 1.8 bps to 4.35%.

All data taken at 4:58 p.m. EDT.

By Adam Button, abutton@economicnews.ca, edited by Ernest Hoffman, ehoffman@economicnews.ca

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