Midday Market Recap: Stocks Touch Two-Month High

(CEP News) * S&P 500 up 2.6% * Euro Down 1.3 Cents * Canadian Dollar Rises Half Cent * Treasury Yields up 1-4 Basis Points

Stocks Rally After Wells Fargo Guides Higher

U.S. stocks are nearly 3% higher after Wells Fargo said 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 are up more than 20%. S&P 500 futures jumped 10 points immediately after the announcement and the index is up 22 points, or 2.7%, to 847. Earlier, the S&P 500 hit a two-month high of 850.

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.

Unexpectedly strong results from Wachovia contributed to about 40% of combined revenue.

"Wachovia's outstanding franchise has proven to be everything we thought it would be when we announced this acquisition, and the financial contribution from Wachovia exceeded our expectations in the first quarter," said Chief Executive Officer John Stumpf.

The Dow Jones industrial average is up 186 points to 8023, and the Nasdaq up 48 points to 1639. In Canada, the S&P/TSX composite index is up 142 points to 9111,

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.

Euro Weaker Against U.S. Dollar Despite Strong Equity Open

The euro remains 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.

Among G10 currencies, the euro is one of the worst performers against the U.S. dollar, but there has been a lot of volatility in the cross in overnight trading. During the Asia 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.

Following a positive North American open, the euro is trading near the bottom the day's range, down 0.0123 to 1.3158.

With no major data released in Europe, currency strategists are expecting the euro to take its direction from market sentiment through the rest of the session.

The euro is not benefiting from the stronger equity prices. Geoffrey Yu, currency strategist from UBS, said he is not surprised that the euro is weaker despite the positive sentiment.

He pointed out that a lot of traders are taking their 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 Taking Little Direction from Weak Employment Report

Weaker-than-expected Canadian employment numbers are not having much impact on the Canadian dollar on Thursday.

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 is one of the top performers against the greenback.

USD/CAD has been on a modest downtrend through most of the session. The selloff picked up steam following the Canadian employment report. In March, the Canadian economy shed 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.

Most recently, the Canadian dollar is up 0.0056 to 0.8145 against the U.S. dollar (1.2277 USD/CAD) and up 1.07 to 81.77 against the yen.

Positive Canadian trade balance data is also having negligent 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.

However, Matthew Strauss, senior currency strategist from RBC Capital Markets, said the report was relatively in line with the market consensus.

Strauss said the most important data contributing to positive market sentiment this morning is news from Wells Fargo.

With USD/CAD trading near the bottom of its range, Strauss said there could be limited gains later in the afternoon. He said traders could be reluctant to put on short U.S. dollar positions ahead of the Easter long weekend.

"I think 1.2225 (CAD) is going to be an important support level today. I think if we can't break below that by the European close then I think there is a risk the cross moves higher."

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 board 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)."

WTI crude oil is up $1.75 to $51.13. The front month gold contract at the Chicago Board of Trade is down $3.30 to $882.50 per ounce.

Elsewhere in foreign exchange, the pound sterling is down 0.0089 to 1.4628 against the U.S. dollar and down 0.0236 to 1.7959 against the Canadian dollar.

The U.S. dollar is up 0.62 to 100.38 against the yen and the Dollar Index is up 0.434 to 85.795.

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 are higher by 4.6 basis points to 2.91%.

Most recently, U.S. two-year yields are up 0.8 bps to 0.93%, with five-year yields up 2.3 bps to 1.85% and 30-year yields up 4.4 bps to 3.71%.

Yields on two-year Canadian government notes are up 2.9 bps to 1.12%, with five-year yields up 2.8 bps to 1.86%, 10-year yields up 2.1 bps to 2.92% and 30-year yields flat at 3.63%. The September 09 BAX contract is down 1.0 tick to 99.48.

In Germany, returns on two-year German notes are down 5.8 bps to 1.37%, with five-year yields down 2.4 bps to 2.41%, 10-year yields up 1.5 bps to 3.23% and 30-year yields down 1.2 bps to 4.05%.

Yields on UK two-year notes are down 4.0 bps to 1.35%, with five-year yields down 5.6 bps to 2.46%, 10-year yields down 6.5 bps to 3.29% and 30-year yields down 2.7 bps to 4.31%.

All data taken at 12:42 p.m. EDT.

By Adam Button, abutton@economicnews.ca, edited by Megan Ainscow, mainscow@economicnews.ca

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