Closing Market Recap: Stocks Rally to Three-Month High

(CEP News) • S&P 500 Up 3.8% • Canadian Dollar Gains 0.75 Cents • Oil Gains, Gold Slips • Treasury Yields Rise 2-8 Bps

Stocks Rally After Wells Fargo Guidance Higher

U.S. stocks climbed for the fifth consecutive week to close at the highest levels since early January after a forecast for record earnings from Wells Fargo.

The S&P 500 closed at its highest levels of the session, gaining nearly 4% after Wells Fargo said in the morning that it expects to earn a record $3 billion in the first quarter, more than double what the street was expecting.

Wells Fargo is seen as the healthiest of the large U.S. banks and shares of the company were up more than 30%. S&P 500 futures jumped 10 points immediately after the announcement and the index closed up 31 points, or 3.8%, to 857 -- the highest close in two months.

In a press release, the company said it expects to report net income of approximately $0.55 per share. Analysts were expecting earnings of $0.23 per share.

"Business momentum in the quarter reflected strength in our traditional banking businesses, strong capital markets activities, and exceptionally strong mortgage banking results," said Chief Financial Officer Howard Atkins in a statement.

The Dow Jones industrial average finished the day up 246, or 3.1%, to 8083 and the Nasdaq up 62 points, or 3.9%, to 1653. In Canada, the TSX gained 204 points, or 2.3%, to 9173.

It was the fifth straight week of gains in U.S. equity markets as the S&P 500 closed up 1.5%, the Dow gained 0.8% and the Nasdaq up 1.9%. In Canada, the TSX closed up 1.2%.

European stock markets closed with the Stoxx 50 up 41 points to 1918, the UK FTSE 100 up 58 points to 3984 and the German DAX up 133 points to 4491.

Commodities Rally Alongside Equities

Oil and industrial metals led commodity markets higher on Thursday while gold and grains lagged.

The CBR index, a measure of 19 major commodities, was up almost 2% on the day. So far today, oil has been the best performer in the index, with WTI crude gaining $2.80 to end the week at $52.18 per barrel.

One of the worst performers in commodities has been gold, which fell $5.70 to $880.20 per ounce.

Currency strategists from Barclays Capital said they are expecting to see oil prices to remain around the $50 mark.

"Our current price forecast deck involves a fairly conservative view of the timing of the price implications of the trend towards market tightening," they said.

Looking at gold prices, Mike Glaser, futures broker at LaSalle Futures, said gold appears to be range-bound as investors remain caught between risk aversion and risk appetite.

He added he is not expecting gold to put forth a substantial rally until investment interest picks up once again.

Euro Weakens on Quantitative Easing Suggestion

The euro remained under pressure after European Central Bank President Jean-Claude Trichet said the central bank will start to look at non-conventional measures to bolster the euro zone economy.

"We are completely in the non-conventional environment already," Trichet told French broadcaster TV5 Monde.

The euro was the worst-performing major currency on Friday. During the Asian session, EUR/USD hit session lows at 1.3232 USD. However, the cross managed to recover during the European session, hitting session highs at 1.3336 USD. Despite a rally in North American stocks, the euro finished the session down 0.0120 to 1.3161.

Geoffrey Yu, currency strategist from UBS, said he was not surprised that the euro was weaker despite the positive sentiment.

He said traders were taking profits after the strong recovery in the European session. Heading into the first-quarter earnings season, there is still a lot of uncertainty in currency markets that will limit any major rallies in the euro, he added.

Currency strategists from Brown Brothers Harriman are expecting to see the euro test resistance at 1.33 USD in the short term.

"The euro is already overextended on the downside and the very short-term momentum indicators are pointing up," they said.

Canadian Dollar Surges Despite Weak Employment Report

Weaker-than-expected Canadian employment numbers did not slow a rally in the Canadian dollar on Thursday as oil made strong gains.

Positive market sentiment appears to be driving currency markets, which is benefiting not only the Canadian dollar but most of the commodity and high-yield currencies. Among the G10 currencies, the Canadian dollar and Australian dollar are the top performers.

USD/CAD was on a modest downtrend throughout most of the session. The selloff picked up steam following the Canadian employment report. In March, the Canadian economy lost more than 61,000 jobs and the unemployment rate rose to 8.0%, according to Statistics Canada. Economists were expecting a decline of 50,000 jobs.

On the session, USD/CAD was down 0.0121 to 1.2242 (1.2242 USD/CAD).

Positive Canadian trade balance data had a negligible impact on the cross. Against most expectations, Canada recorded a small surplus of C$0.1 billion. Economists had forecast the deficit to hold steady at -C$1.2 billion following a -C$1.2 billion deficit in January. The previous months' deficit was initially reported as -C$1.0 billion.

Boris Schlossberg, director of currency research at GFT, said he is expecting the cross to continue to bounce within its range. He said the fundamental data on both sides of the border remain extremely weak and won't provide much direction.

He said he will be watching oil prices to determine future direction for the Canadian dollar.

"I think if oil trades over $55 a barrel, then we will see USD/CAD trade around 1.20 (CAD) and if oil falls below $40 a barrel then I think we head back up to 1.25 (CAD)."

Most recently, WTI crude oil was up $2.77 to $52.15.

Elsewhere in foreign exchange, the pound sterling was down 0.0049 to 1.4668 against the U.S. dollar and down 0.0237 to 1.7958 against the Canadian dollar.

The U.S. dollar was up 0.63 to 100.40 against the yen and the Dollar Index was up 0.425 to 85.786.

U.S. 10-Year Auction Sells With Weak Bid

Impending supply and a holiday-thinned market led to a weaker-than-expected 10-year U.S. auction on Thursday.

Demand in an $18 billion reopening of 9-year, 10-month notes was weaker than market participants were anticipating, and the notes sold with a yield of 2.950%.

The yield was slightly lower than the 2.931% 'when issued' bid, which represents the expected yield.

The 2.950% yield was tendered to 33.44% of bidders and the bid-to-cover ratio was 2.49. At the previous five-year auction on Mar. 11, the yield was 3.04% and the bid-to-cover ratio was 2.14. The average bid-to-cover ratio in the past eight auctions has been 2.38.

The median discount rate was 2.879% and the low yield was 2.55%. Non-competitives took $20,452,900. Primary dealers took $12,873,024,000, with direct bidders receiving $770,000,000 of competitives and indirect bidders taking $4,236,580,800.

The indirect allotment of 23.7% was relatively in line with the 20.2% average in recent auctions.

On the spot market, benchmark U.S. 10-year yields initially rose two basis points after the auction. On the session, they were higher by 6.5 basis points to 2.92%.

U.S. two-year yields were up 2.4 bps to 0.95%, with five-year yields up 5.7 bps to 1.89% and 30-year yields up 8.3 bps to 3.75%.

Yields on two-year Canadian government notes were up 3.0 bps to 1.13%, with five-year yields up 4.2 bps to 1.87%, 10-year yields up 4.0 bps to 2.94% and 30-year yields up 1.9 bps to 3.65%. The September 09 BAX contract was down 2.0 ticks to 99.47.

In Germany, returns on two-year German notes were down 4.4 bps to 1.38%, with five-year yields down 0.9 bps to 2.42%, 10-year yields up 4.3 bps to 3.26% and 30-year yields up 2.2 bps to 4.08%.

Yields on UK two-year notes were down 2.2 bps to 1.36%, with five-year yields down 5.7 bps to 2.46%, 10-year yields down 6.6 bps to 3.29% and 30-year yields down 2.1 bps to 4.31%.

All data taken at 4:50 p.m. EDT.

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

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