Stocks Surge on Ford Earnings and Economic Data

Unexpectedly strong U.S. home sales and a smaller-than-expected quarterly loss at Ford led to a strong rally in stocks on Friday, but market watchers say looming details of the bank stress tests could threaten the rally.

The Dow Jones industrial average closed up 126 points to 8083, the S&P 500 is up 13 points to 865 and the Nasdaq is up 36 points to 1688. In Canada, the S&P/TSX composite index is up 139 points to 9548.

On the week, the Dow fell 0.7%, the S&P declined 0.4% and the Nasdaq gained 1.3%. The decline in the S&P 500 snaps a streak of six consecutive weeks of gains. In Canada, the S&P/TSX composite index gained 1.0%.

"A strong initial rally from the market's depths has to, at some point, run out of steam. This appears to be the cast this past week as stock indices faded from the intraday highs made last Friday," said Andrew Pyle, wealth advisor at ScotiaMcLeod.

Ford said it burned through less cash than market watchers were expecting in the first quarter, leading to optimism that some portion of the U.S. automotive industry can survive the recession.

Ford posted a loss of 60 cents per share, compared to the $1.23 per share loss that analysts were expecting. The company's cash burn slowed to $3.7 billion, about half of the fourth-quarter pace. Shares of the company were 15.6% higher.

Economic data has also boosted sentiment. Americans bought new homes at a 356,000 annualized pace in March, better than the 337,000 pace expected.

Also, the U.S. Department of Commerce said durable goods orders excluding transportation posted a drop of 0.6% in March despite forecasts for a 1.2% decline.

Paul Ashworth, an economist at Capital Economics, said after falling sharply towards the end of 2008, the pace of decline in U.S. durable goods is beginning to slow.

"This fits within the broader pattern that we are seeing: the severity of the recession is easing gradually, but any actual recovery is still some way off," he said.

Late in the day, stock market were volatile after the release of a Federal Reserve paper addressing the design and implementation of the Fed's stress tests. The Fed ordered tests of the 19 largest financial institutions in the United States to ensure they are strong enough to withstand a substantial further decline in the economy. The results will be released May 4 but the paper had little new information.

Economists at Nomura were disappointed that few of the details were included and were unable to glean how the release of the results will unfold.

"Because the Fed provided little quantitative information in the report, it provided few hints into what the results might reveal. It is worth pointing out, however, that other estimates, for example those published by the IMF this week, indicate a substantial capital short-fall," they wrote in a research note.

Stocks initially dropped on the report but later rose to session highs.

European stock markets closed with the Stoxx 50 up 48 points to 1982, the UK FTSE 100 up 138 points to 4156 and the German DAX up 136 points to 4674.

Weaker U.S. Dollar Supports Commodity Prices

A weaker U.S. dollar and optimism about economic growth provided support for commodity prices Friday.

The U.S dollar began a downtrend Wednesday, losing 2.6% since then. Oil prices appear to be the biggest beneficiary of U.S. dollar weakness on Friday. Of the 19 commodities in the CRB Index, crude was the second best performer. It traded up $1.93 to $51 per barrel. Only sugar is outperforming crude, which is up almost 4% on the day.

Precious metals also performed well on Friday, despite a strong rise in U.S. equity markets. On Thursday, gold broke through strong resistance at $902 and has added to those gains on Friday. Spot gold closed up almost $9 to $913 per ounce.

Commodity strategists from Barclays Capital said oil prices could be benefiting from seasonal factors. Oversupply remains the top concern for the energy complex. However, the strategists are expecting oversupply to have less impact on prices.

"There is a growing acceptance in the market that with the advent of the summer season, crude inventories are likely to whittle down as refineries increase runs. However, until that happens, there is little scope for prices to break through the current trading range," they said.

Phil Flynn, energy analyst at Alaron, said he is not going against the current trend in oil prices. Although the fundamental picture points to weaker oil prices, he said he is bullish.

"Despite this sea of crude oil, the market continues to stay strong," he said. "The way the market is acting, I believe that breaks should be bought."

Broad U.S. Dollar Weakness Helps Push Canadian Dollar Higher

The Canadian dollar continued to make major gains as the U.S. dollar was broadly weaker Friday.

USD/CAD embarked on a strong downtrend in the Asian session and continued to trade lower throughout the session. USD/CAD closed down 0.0124 to 1.2106.

With no major data released in Canada, currency markets continued to react to Thursday's Bank of Canada Monetary Policy Report and equity markets, according to currency strategists. Although the bank released a framework for quantitative easing measures, the bank appears reluctant to follow through with the plans.

BOC Governor Mark Carney said in an interview with BNN Thursday night that unless the economy deteriorates further, it won't be necessary for the central bank to use the instruments already in place in the U.S., Japan and the UK.

"If we have to provide more support, our message today is that we have a framework but it is not our base case that we have to do something at this point," Carney said during the interview.

Currency strategists from Citigroup said the Canadian dollar has underperformed other commodity currencies. However, now that expectations that quantitative easing will be implemented in the short term have diminished, they suggest that the loonie will outperform other currencies, such as the New Zealand Dollar.

In a research note this morning, the strategists said they are maintaining their short NZD/CAD position.

Matt Perrier, currency analyst at BMO Capital Markets, said he is looking for further weakness in USD/CAD, with a target of 1.1640/1.1770 CAD.

"A break of last week's 1.1982 low would generate further downward momentum for completion of the move and only a move above 1.2510 from here negates [a] downside scenario," he said.

Elsewhere in foreign exchange, the U.S. dollar was down 0.85 to 97.12 against the yen and the Dollar Index was down 0.655 to 84.714.

The euro was up 0.0101 to 1.3244 against the U.S. dollar, down 0.0045 to 1.6030 against the Canadian dollar, up 0.0106 to 0.9033 against the pound sterling and was lower by 0.12 to 128.63 against the yen.

The pound sterling was down 0.0059 to 1.4663 against the U.S. dollar and down 0.0258 to 1.7747 against the Canadian dollar.

U.S. 10-Year Yields Brush up Against 3%

Supply concerns drove down Treasury prices on Friday and pushed U.S. yields to their highest levels since the Federal Reserve began buying the securities.

U.S. 10-year yields touched a session high of 2.99% on rising stock markets and better-than-expected housing data. The market is also preparing to absorb $101 billion in the first three days of next week.

"Prices retreated as investors moved to the sidelines in response to modestly more constructive economic data, firmer equities, and in preparation for next week's auctions," said Chris Ahrens, fixed income strategist at UBS.

U.S. two-year yields were up 2.5 bps to 0.95%, with five-year yields up 5.4 bps to 1.93% and 10-year yields up 6.5 bps to 2.98%. The Eurodollar September 09 contract was up 2.0 ticks to 98.91.

The yield curve was steeper, with the 10/2-year spread up 3.6 bps to 202.96 bps. The largest moves have been in 30-year bonds, which gained 8 basis points to 3.87% -- the highest level since Nov. 20.

Market watchers say the Federal Reserve will need to spend more than currently allocated to keep Treasury rates from rising further. On March 18, the Fed pledged to spend $300 billion over six months in an effort to keep yields at low levels. In the first month of the program, the Fed has purchased nearly $67 billion -- a $400 billion pace.

Elsewhere, yields on two-year Canadian government bonds were flat at 0.99%, with five-year yields up 1.1 bps to 1.95%, 10-year yields up 0.9 bps to 3.01% and 30-year yields up 0.8 bps to 3.77%. The September 09 BAX contract was flat at 99.60.

In Germany, returns on two-year German bonds were down 6.8 bps to 1.38%, with five-year yields down 4.4 bps to 2.39%, 10-year yields down 3.1 bps to 3.19% and 30-year yields flat at 3.97%.

Yields on UK two-year bonds were down 6.2 bps to 1.23%, with five-year yields down 4.2 bps to 2.47%, 10-year yields down 3.1 bps to 3.49% and 30-year yields down 6.7 bps to 4.35%.

All data taken at 4:06 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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