Closing Market Recap: Banking Analysts Square Off, Financials Suffer, Gold Falls

• S&P 500 Down 0.8% • Gold Falls $26 • Treasury Curve Steepens • USD/CAD Climbs 84 pips

Stocks Pare Losses Late in Session

A pair of heavyweight bank analysts squared off Monday, sparking renewed fears about the financial sector and sending stocks modestly lower.

The Dow Jones industrial average closed down 42 points to 7976, the S&P 500 down 7 points to 835 and the Nasdaq down 15 points to 1607. The financial sector of the S&P 500 was down nearly 3%.

In Canada, the S&P/TSX composite index closed down 49 points to 9016.

"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."

Economic data and news was light to begin the holiday-shortened trading week, so investors focused on comments from two analysts who became famous for predicting the downfall of some of the world's biggest banks.

Early worries were generated by a report from Calyon's Mike Mayo. The former Deutsche Bank analyst released his initial ratings on 11 U.S. banks. All of them were started with sell or underperform ratings.

According to Mayo, on average, banks have only marked down loans to 98 cents on the dollar. He said that mortgage-related losses are about halfway to their peak, while credit-card and consumer losses are only a third of the way to their expected highest levels.

Mayo's report weighed on financials, and the S&P 500 fell by as much as 2.4% to a session low of 823.

Later, however, Oppenheimer analyst Meredith Whitney shed some positive light on financials. Whitney has been relentlessly bearish on banks and first recommended selling Citigroup shares when they were trading near $40. In an interview with CNBC on Monday, she recommended cutting short exposure to banks ahead of earnings because they have made 'a little bit of money' in the first quarter. She also said that some banks could benefit from changes to mark-to-market accounting. She did note, however, that some banks might fail the government's stress testing.

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

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 were lower as most commodity prices traded in negative territory on Monday.

Spot gold saw a sharp decline at 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. Late Monday, gold remains near its daily lows, trading down $24.10 to $869.05 per ounce.

Gold is not the only commodity under pressure. Oil was down $1.35 to $51.16 per barrel and the CRB index of 19 commodities was down 1.9% 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 was up 0.5% 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. $880 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 led to a small rise in longer-dated yields on the Treasury market Monday.

"It was one of the increasing number of trading days that offered nothing to refine or guide our strategic perspective," said David Ader, U.S. government bond strategist at RBS Greenwich Capital.

U.S. two-year yields were flat at 0.95%, with five-year yields up 4.6 bps to 1.90%, 10-year yields up 5.0 bps to 2.94% and 30-year yields up 4.0 bps to 3.73%.

"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 were good, but the market lacked a strong direction. A slump in equity markets lead 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 were flat at 1.15%, with five-year yields up 3.0 bps to 1.91%, 10-year yields up 6.3 bps to 2.99% and 30-year yields up 4.7 bps to 3.71%. The September 09 BAX contract was flat at 99.44.

In Germany, returns on two-year German notes were flat at 1.50%, with five-year yields down 1.2 bps to 2.46%, 10-year yields flat at 3.22% and 30-year yields up 1.7 bps to 4.06%.

Yields on UK two-year notes were up 7.9 bps to 1.48%, with five-year yields up 4.3 bps to 2.60%, 10-year yields up 1.8 bps to 3.44% and 30-year yields down 0.6 bps to 4.33%.

Grim Canadian Data Could Add to Canadian Dollar Weakness

Strategists say 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 continued through the trading session. Most recently, the Canadian dollar was down 0.0056 to 0.8073 (1.2388 USD/CAD).

The Canadian dollar continues to be one of the worst performers against the U.S. dollar. Only the Swedish krona was lower than the loonie among 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.

Also, 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 was up 0.71 to 101.03 against the yen and the Dollar Index was up 0.406 to 84.571.

The euro was down 0.0077 to 1.3407 against the U.S. dollar, up 0.0026 to 1.6610 against the Canadian dollar, up 0.0009 to 0.9097 against the pound sterling and was higher by 0.21 to 135.47 against the yen.

The pound sterling was down 0.0104 to 1.4738 against the U.S. dollar and up 0.0007 to 1.8257 against the Canadian dollar.

All data taken at 4:08 p.m. EDT.

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

CEP Newswires - CEP News © 2009. 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.

A copy of CEP News disclaimer can be found at http://www.economicnews.ca/cepnews/wire/disclaimer.