Stocks Fall on Stress Test and Automaker Worries

Stocks spent most of the session in positive territory but renewed worries about the financial and automotive sectors led to a late-day sell-off.

The S&P 500 hit a session high of 861 as the final hour of trading began, but rumours and speculation about bank stress test results pushed the index to a 0.8% loss, closing at 844.

The financial sector of the S&P 500 index fell 3.8%, all of it in the final 30 minutes of trading. Speculation about poor results from the banking stress tests contributed to the sell-off.

The Dow Jones industrial average fell 83 points, or 1%, to 7887. The Nasdaq, meanwhile, gained 2 points to 1646. In Canada, natural gas stocks rallied and the S&P/TSX composite index gained 29 points to 9276.

Michael Herring, market strategist at BMO Capital Markets, said he believes the March 6 lows in stock markets will hold, but that the recent 30% rally in stocks is overdone.

"I think the market has got a bit ahead of itself. We probably have another six months of bad headlines," he said.

He said the S&P 500 could fall as low as 740 before a sustained bull market emerges.

Stocks came under pressure earlier in the session after General Motors CFO Ray Young told the Wall Street Journal that General Motors will not make a $1.0 billion debt payment due June 1. He said the company wants debt-holders to accept equity or it will head to bankruptcy court.

Also weighing on stocks Wednesday was an unexpected drop in Morgan Stanley earnings, which ended the run of strong results from the financial sector and led to a decline in stocks. The investment bank lost 57 cents per share compared to the loss of 8 cents per share analysts were expecting. Revenue fell to $3.04 billion compared to the $5.01 billion expected. Morgan also cut its quarterly dividend by 81% to five cents per share, in order to save the company $1 billion a year.

Worries about personal defaults also remain at the forefront after Capital One Financial - a company that specializes in consumer loans - said it lost 39 cents per share in the first quarter compared to the 4 cents expected.

Growing optimism about a bottom in the U.S. housing market helped to support stocks after the Federal Housing Finance Agency said U.S. house prices increased 0.7% in February compared to the 0.7% decline expected. The large improvement was somewhat mitigated by a downward revision to January's figures, but stocks embraced the positive aspects.

"Overall, it's a supportive read for housing, but we remain suspicious of the data at this point in the cycle - anecdotes and other reads are mixed on the prospects of stabilization of the housing market," said Ian Lyngen, fixed income strategist at RBS Greenwich Capital.

European stock markets closed in positive territory with the Stoxx 50 up 14 points to 1947, the UK FTSE 100 up 43 points to 4031 and the German DAX up 93 points to 4594.

Treasuries Slide on Supply Concerns

Treasury yields were modestly higher on Wednesday but a push to new highs was rejected on automaker worries.

U.S. two-year yields were up 2.5 bps to 0.96%, with five-year yields up 3.7 bps to 1.89%, 10-year yields up 4.3 bps to 2.94% and 30-year yields up 6.4 bps to 3.80%.

At their peak, 10-year yields briefly touched 2.97% - their highest level since the Federal Reserve announced its quantitative easing program.

"Treasury yields rose on modest retail selling as well as hedge related activity tied to issuance," said Chris Ahrens, fixed income strategist at UBS.

Throughout the session fixed income wavered alongside worries about the financial sector and optimism on housing. Partway through the session, yields have come under pressure after General Motors CFO Ray Young told the Wall Street Journal that General Motors will not make a June 1 debt payment.

Supply concerns blocked the way for any fixed income rally, according to Ahrens.

"We suspect that some of the liquidation may be an early move by investors to shorten market exposures in advance of the May refunding," he said.

On Thursday, the Treasury Department will announce major coupon supply. Market watchers are expecting a combined $99 billion in 2-year, 5-year and 7-year maturities to be sold from Monday.

On April 29, the Treasury will make its quarterly refunding announcement. Markets are expecting about $74 billion in 3-year, 10-year and 30-year maturities.

Weaker Equities Lend Support to Gold

It was a relatively quiet day for gold, but prices climbed modestly on stock market worries.

Most recently, the front month gold contract at the Chicago Board of Trade was up $9.10 to $891.80 per ounce.

Looking at technical patterns, gold prices continue to hold support above the $885 level and on the top side prices are hitting resistance at $900.

News reports that GM will not make a $1 billion debt payment due on June 1 causing equities to fall and pushed gold prices to session highs of $894.

Although gold prices are moving higher following a drop equities, Jon Nadler, senior analyst from Kitco, said he is looking for further weakness in prices.

He pointed out that demand for gold remains extremely weak and could put pressure on prices in the short term, adding that there is strong buying interest at $865.

"[Investors] may get their buys filled, we are just not so sure about the timing at the moment," he said.

Commodity analysts from Jykse Bank are neutral as gold prices continue to bounce around the current channel. They added their short-term call is for gold to once again hit $900.

Oil Prices Shrug off 19-year High in Crude Inventories

Another sizable build in weekly crude oil inventories did little to dampen crude oil prices Wednesday.

WTI crude oil was relatively flat on the day, trading up just 12 cents to $48.67 per barrel. Prices remain trapped in the broader range with support at $46 and resistance at $56.

According to commodity strategists, oil prices continue to ignore fundamental data, despite U.S. weekly oil supplies hitting a 19-year high.

Crude oil inventories increased 3857k compared to the +2500k consensus, the U.S. Energy Information Administration said. It was the seventh consecutive weekly build and brings total U.S. inventories to their highest levels since 1990.

Gasoline supplies increased 802k barrels compared to the -700k consensus estimate. Distillate supplies increased by 2685k compared to expectations of a 1000k drawdown. The data was for the reference week April 17.

Phil Flynn, energy analyst from Alaron, said energy markets are paying more attention to equity markets. As long as equities continue to rally, the positive market sentiment will continue to support oil prices, he said.

Although oil prices are below the psychological level of $50, Flynn said it is unlikely that prices will drop lower. On Tuesday, NYMEX crude oil dropped below $44 a barrel, which was the first time since the Fed started quantitative easing measures on March 18.

"I think March 18 was a major turning point for markets," he said. "I think over the next few months the Fed's actions will continue to hang over the market and provide a floor."

Sterling Down After Record High Deficits, Ahead of Budget Report

The pound sterling was the worst-performing major currency on Wednesday after officials reported record deficit and a potentially onerous budget.

The pound sterling was down 0.0198 to 1.4476 against the U.S. dollar and down 1.78% against the euro.

The UK's budget deficit reached a record £28.4 billion in March, pushing the total amount borrowed over the last fiscal year to £90 billion. Expectations were for a rise to £18.0 billion.

Chancellor of the Exchequer Alistair Darling also released the highly anticipated budget statement. In it, he said government plans to borrow a record £703 billion over the next five years - £269 billion more than in the previous budget - to continue supporting a suffering economy and counteract large job losses.

As expected, the Bank of England's Monetary Policy Committee unanimously voted to leave rates at 0.50% and maintain the £75 billion scheduled for the asset-purchase facility. Members saw "no material change in the conditions" which led to the central bank's decision to use quantitative easing in the first place.

The UK March claimant count for unemployment benefits rose 73.7k versus the expected 116.0k, though less than the previous 136.6k rise; the claimant count rate rose to 4.5% despite forecasts for a 4.6% level and the previous month's 4.3%.

Elsewhere in foreign exchange, the Canadian dollar was down 0.0029 to 0.8063 against the U.S. dollar (1.2403 USD/CAD) and down 0.90 to 79.00 against the yen.

The U.S. dollar was down 0.76 to 97.98 against the yen and the Dollar Index was down 0.349 to 86.191.

The euro was up 0.0057 to 1.3003 against the U.S. dollar, up 0.0130 to 1.6127 against the Canadian dollar, up 0.0158 to 0.8978 against the pound sterling and was lower by 0.42 to 127.38 against the yen.

All data taken at 4:46 p.m. EDT

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