Stocks Down After Swine Flu Outbreak

Mounting fears of an outbreak of swine flu caused a selloff in stock markets on Monday and comments by international health authorities placed a further damper on sentiment after the bell.

The S&P 500 closed down 9 points, or 1%, to 857.50. The Dow Jones industrial average declined 51 points, or 0.6%, to 8025 and the Nasdaq declined 15 points, or 0.9%, to 1679. Canadian stocks suffered harsher losses, declining 155 points, or 1.6%, to 9394.

"A response to a serious outbreak threat could mushroom into a major economic catastrophe as even a 'minor' outbreak of just a few thousand sick people geographically distributed around the world could invoke a massive and unprecedented response," said John Hardy, fx strategist at Saxo Bank.

The swine flu death toll has risen to 149 in Mexico, and cases have been reported in the United States, Canada, Spain and New Zealand. Shares of airline stocks are down about 10%.

After the close of trading, the World Health Organization raised its pandemic risk level to 4 from 3. Dr. Keiji Fukuda, the organizations temporary assistant director-general for Health Security, said it's a good time to strengthen preparations, because the virus is too widespread to make containment feasible.

After the announcement, S&P 500 futures fell to 852, about 5 points lower than at the close.

Shares of defensive sectors such as health care, utilities and consumer staples are helping to offset declines in commodity and financials.

Market watchers are closely following a potential reorganization of General Motors. The company also said it will cut dealerships by 42% and the automaker's unionized workforce will fall to 40,000 by the end of 2010 from 62,000 in 2008.

GM is offering creditors 225 shares for each $1,000 they are owed but will need 90% of bond holders to approve the deal before a June 1 deadline. Under the plan, the U.S. government will control more than half the company. The ad hoc committee negotiating on behalf of creditors says the deal is unlikely to succeed. Shares of GM were up 21% on the session.

European stock markets closed with the Stoxx 50 up 11 points to 1993, the UK FTSE 100 up 11 points to 4167 and the German DAX up 20 points to 4694.

U.S. Dollar and Yen Strengthen on Swine Flu Worries

Foreign exchange markets experienced a classic response to uncertainty on Monday as the U.S. dollar and yen made broad gains.

Talk about swine flu dominated markets throughout the session and led to a rally of the traditional safe haven currencies -- the U.S. dollar and Japanese yen. Officials in Mexico said the virus has killed nearly 150 people and the World Health Organization said the rapid spread to other countries has made containment not feasible.

The yen and dollar made gains on every major currency.

The euro was among the lagging currencies after Austrian central banker Ewald Nowotny said that the ECB stands prepared to use unconventional measures. He added that the ECB will hold rates at low levels for as long as is necessary.

The Canadian dollar was down 0.0067 to 0.8202 against the U.S. dollar (1.2192 USD/CAD) and down 0.96 to 79.36 against the yen.

The U.S. dollar was down 0.42 to 96.75 against the yen and the Dollar Index was up 0.979 to 85.696.

The euro was down 0.0202 to 1.3040 against the U.S. dollar, down 0.0113 to 1.5899 against the Canadian dollar, down 0.0123 to 0.8900 against the pound sterling and was lower by 2.49 to 126.16 against the yen.

The pound sterling was down 0.0024 to 1.4653 against the U.S. dollar and up 0.0110 to 1.7864 against the Canadian dollar.

WTI crude oil was down $1.40 to $50.15

Flight to Safety Boosts Treasuries

A fearful market flocked to the safety of Treasuries on Tuesday as a decline in stocks and Federal Reserve buying overwhelmed $40 billion in new coupon supply.

The Treasury Department auctioned $40 billion of two-year notes at a yield 1.3 basis points higher than market participants were expecting. Despite the weakness, Treasuries rallied into the close.

"The market remains caught between the Fed's buybacks/fundamentals and the sizable Treasury issuance," said David Ader, fixed income strategist at RBS Greenwich Capital.

Early in the session, two-year yields fell as low as 0.88% as stock futures tumbled on swine flu worries and $7 billion in Fed purchases but the front end cheapened to 0.92% at the time of the auction. After the supply was absorbed, yields moved lower alongside stocks. Two-year yields ended the day down 8 basis points to 0.87%.

Most recently, U.S. five-year yields were down 4.0 bps to 1.90%, 10-year yields were down 2.1 bps to 2.97% and 30-year yields were up 0.7 bps to 3.89%. The Eurodollar September 09 contract is up 7.0 ticks to 98.98. The yield curve is steeper, with the 10/2-year spread up 3.0 bps to 206.07 bps.

Yields on two-year Canadian government bonds are down 2.4 bps to 0.97%, with five-year yields down 0.7 bps to 1.94%, 10-year yields flat at 3.01% and 30-year yields flat at 3.76%. The September 09 BAX contract is flat at 99.60.

In Germany, returns on two-year German bonds are down 1.2 bps to 1.36%, with five-year yields down 1.8 bps to 2.38%, 10-year yields down 2.8 bps to 3.16% and 30-year yields down 1.0 bps to 3.96%.

Yields on UK two-year bonds are down 4.7 bps to 1.18%, with five-year yields down 1.1 bps to 2.46%, 10-year yields flat at 3.48% and 30-year yields down 4.4 bps to 4.31%.

Gold Prices Down Despite Growing Negative Sentiment

A stronger U.S. dollar pulled down gold on Monday, according to commodity strategists. They caution, however, that a shift in market sentiment could cause another move down for the precious metal.

Concerns about the swine flu pandemic are causing investors to flee from stocks and into safe havens like the U.S. dollar and Treasuries. However, gold did not benefit from the "safe haven play."

Spot gold prices hit session lows of $905.18 per ounce ahead of the North American open. Following a weak open, gold prices jumped $5 but were unable to move into positive territory. The metal closed down $7.20 to 906.90 per troy ounce.

Although markets are waiting for more news on the U.S. bank stress tests and the U.S. auto industry, the main focus is on breaking news about the swine flu.

The World Health Organization said it's the greatest public health threat since SARS in 2003.

Jimmy Tintle, futures broker at Transworld Futures, said Monday's swine flu headlines could cause gold bulls to jump back into the market. He added that gold has a long way to go before breaking out of its recent channel.

"I am looking for a break above $925 to signal a bullish move in gold," he said. "I think for now if we can hold the $900 level we could see higher prices."

Tintle added that he is not reading too much into market moves ahead of the FOMC rate decision on Wednesday. He is expecting liquidity to start drying up as traders cover some of their positions ahead of the decision.

James Moore, gold analyst from TheBullionDesk.com, said he is expecting gold to continue to remain range-bound.

"The key now is for gold to close above $918, in order to break the current chart down-channel and enable a push up towards $940," he said in a research note. "A further failed rally could well see gold extend below recent lows around $865."

All data taken at 4:46 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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