Stocks Rebound After Economic Data

Fears over financials and the swine flu initially took a bite out of stocks, but surprisingly strong readings on housing and consumer confidence helped them trim most of their losses.

The initial declines came after the Wall Street Journal reported that Bank of America and Citigroup may need to raise more capital due to the U.S. government stress tests. The newspaper said Bank of America's capital shortfall amounts to billions of dollars. Shares of Citigroup fell 5.8% and shares of Bank of America declined 8.6%.

The Fed initially planned to release the results of the stress test on May 4, but now says the results will be released sometime next week.

Market participants also continue to grapple with the impact of the swine flu epidemic. After Monday's close, the World Health Organization raised its pandemic risk level from three to four and said the swine flu virus cannot be contained geographically.

Dr. Keiji Fukuda, the World Health Organization's temporary assistant director-general for Health Security, advised nations to strengthen preparations because the virus is too widespread to make containment feasible.

Stock futures had been down by more than 2% as bearish sentiment mounted, but the worries were wiped away by U.S. economic data.

The Conference Board's consumer confidence index surprised to the upside in April, marking its largest jump since November 2005. The index rose to a reading of 39.2 from March's upwardly revised 26.9 level.

"Confidence is presumably being supported by the recent 20% rise in the stock market and signs that conditions have stabilized from the chaos of the end of last year," Capital Economics economist Paul Dales said.

In more better than expected data, the S&P Case-Shiller Home Price Index fell to 143.17 in February against expectations for a reading of 142.80. The 20-city composite index posted a year-over-year decline of 18.63%, slightly less than the 18.70% decline expected.

The S&P 500 closed down 2 points, or 0.27%, to 855, the Dow Jones industrial average declined 8 points to 8017 and the Nasdaq fell 6 points to 1674. In Canada, the TSX composite index declined 84 points to 9311.

European stock markets closed with the Stoxx 50 down 27 points to 1967, the UK FTSE 100 down 71 points to 4096 and the German DAX down 87 points to 4607.

Treasuries Dive on Deficit Worries and Soft Auction

The second consecutive soft auction for U.S. Treasury securities and rumours of longer-dated coupon supply weighed heavily on fixed income Tuesday, pushing yields to their highest levels since quantitative easing was introduced.

Demand in a record $35 billion, five-year U.S. auction was slightly weaker than market participants were anticipating, and the notes sold with a yield of 1.940%, slightly higher than the 1.930% 'when issued' bid.

On the spot market, benchmark U.S. five-year yields rose five basis points after the auction. On the session, they were higher by 10 basis points to 1.94%.

On Wednesday, the Treasury will sell $26 billion in 7-year notes and announce borrowing intentions in the quarterly refunding. There were persistent rumours that the Treasury will announce a 50-year coupon bond.

David Ader, U.S. government bond strategist at RBS Greenwich Capital, said many believe the rumour pushed yields higher.

"This, of course, is nonsense. The long end doesn't need 50-year issuance to weaken -- it's got enough impending supply to achieve that on its own," he said.

On the session, U.S. two-year yields were up 6.3 bps to 0.94%, with 10-year yields up 9.5 bps to 3.00% and 30-year yields up 12.1 bps to 3.95%. The Eurodollar September 09 contract was down 2.0 ticks to 98.95. The yield curve was steeper, with the 10/2-year spread up 7.1 bps to 210.17 bps.

Elsewhere, yields on two-year Canadian government bonds were up 2.8 bps to 0.99%, with five-year yields up 4.0 bps to 1.97%, 10-year yields up 4.7 bps to 3.06% and 30-year yields up 3.6 bps to 3.79%. The September 09 BAX contract was down 3.0 ticks to 99.57.

In Germany, returns on two-year German bonds were down 3.6 bps to 1.32%, with five-year yields down 3.2 bps to 2.34%, 10-year yields down 2.0 bps to 3.14% and 30-year yields down 3.8 bps to 3.92%.

Yields on UK two-year bonds were down 9.5 bps to 1.10%, with five-year yields down 6.7 bps to 2.38%, 10-year yields down 2.9 bps to 3.46% and 30-year yields down 3.1 bps to 4.28%.

Oil Markets Ignore Positive U.S. Economic Data

Better-than-expected U.S. economic figures were unable to provide momentum for the energy market as investors focus on banking and flu concerns Tuesday.

Oil dropped sharply in overnight trading, hitting a session low of $48.57 per barrel. Later, a stronger-than-expected U.S. consumer sentiment report and Richmond Fed manufacturing survey helped prices recover, reaching a high of $49.95.

However, WTI oil was unable to hold its gains and closed down 89 cents to $49.25.

The main focus today has been on the U.S. banking sector and concerns that the swine flu epidemic could turn into a pandemic.

Overnight, media outlets reported that the U.S. government is pressuring Citigroup and Bank of America to raise more capital due to the results of the stress tests.

Although the government has released the criteria set out in the stress test, investors will have to wait until next week to get the official results. According to media reports, the two banks are expected to dispute the government's report of their strength.

Adding to the negative sentiment was news that the World Health Organization has raised its pandemic threat level from three to four. Although the WHO is concerned about the swine flu virus, its has not yet said that the outbreak is a pandemic. Mexican officials have attributed 150 deaths to swine flu.

Aaron Fennell, futures commodity strategist from MF Global Canada, said oil prices could move lower by the end of the week.

"I think we will get more news over the virus by the end of the week. I think if it is serious we will see traders jump back into gold and I think energy markets and agricultural markets will be the hardest hit," he said.

Fennell said if fears of a pandemic prove true, it will cause a major decline in demand. He pointed out that U.S. citizens have already been warned not to travel unless they have to.

"Right now supplies are at record levels and I think it is going to get worse," he said. "I just don't see a lot of people traveling this summer."

Gold Prices Come Under Pressure

Gold fell on Tuesday, despite risk aversion sentiment in markets.

U.S. equity markets did not providing much direction to precious metals as they remained relatively flat on the day. Gold was on a significant downtrend through most of the session and closed down $13.70 to $894.50 per ounce.

Concerns over the U.S. banking sector and a possible flu pandemic are driving fear in financial markets, but that is being weighed against positive domestic data.

Aaron Fennell, a commodity futures broker at MF Global Canada, said the moves in gold are a little confusing, but added it could mean traders aren't taking the negative news too seriously. He said traders could be waiting for more information to be released to determine the full impact of the stress tests and the swine flu.

"I think we will get more news over the virus by the end of the week. I think if it is serious we will see traders jump back into gold," he said.

James Moore, a commodity analyst from the Bullion Desk.com, said the sell off in gold prices could be driven more by the technical outlook than fundamentals. He pointed out that on Monday prices could not hold gains above $918.

"It does look as if the metal needs to correct lower in order to entice fresh investment buying interest," he said.

Canadian Dollar Choppy Alongside Stocks

The Canadian dollar was modestly lower as investors moved into safe haven currencies such as the U.S. dollar and the Japanese yen on Tuesday. Concerns over the U.S. banking sector and the swine flu epidemic generated some negative sentiment for other currencies.

During the last five sessions, the Canadian dollar was one of the top performing currencies against the U.S. dollar, but circumstances changed late Monday after investors reacted to fears of the swine flu epidemic.

USD/CAD retraced most of its losses from the sell off that started on April 24 after the Bank of Canada released its Monetary Policy Report. The cross is trading just above 1.22 CAD as the U.S. dollar continues to benefit from growing risk aversion sentiment. Most recently, USD/CAD was up 0.0009 to 1.2216 after trading as high as 1.2266.

The pair has found some short-term resistance at 1.2267 CAD, which represents the 61.8% retracement level.

As risk aversion continues to grip markets, George Davis, chief technical analyst at RBC Capital markets, said he is expecting the Canadian dollar to lose more ground in the short term.

On a technical basis, he said 1.2117 CAD could attract USD/CAD buyers and could lead to a test of the 1.23 level. He said the recent downtrend will remain in place unless the cross can hold above 1.2413 CAD.

"USD/CAD has been unable to pierce downtrend resistance at 1.2413 despite repeated attempts, thereby sustaining our bearish medium-term technical stance," he said.

Elsewhere in foreign exchange, the U.S. dollar was down 0.36 to 96.40 against the yen and the Dollar Index was down 0.598 to 85.158.

The euro was up 0.0117 to 1.3153 against the U.S. dollar, up 0.0127 to 1.6037 against the Canadian dollar, up 0.0087 to 0.8986 against the pound sterling and was higher by 0.69 to 126.79 against the yen.

The pound sterling was down 0.0009 to 1.4637 against the U.S. dollar and down 0.0032 to 1.7848 against the Canadian dollar.

All data taken at 4:35 p.m. EDT.

By Adam Button, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Ernest Hoffman, This email address is being protected from spam bots, you need Javascript enabled to view it

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