Stocks Rebound Despite Swine Flu Outbreak

Stocks reversed an early slump on Monday and are trading in positive territory despite mounting fears of an outbreak of swine flu.

Toronto's S&P/TSX composite index is down 74 points to 9476, the Dow Jones industrial average is down 6 points to 8070, the S&P 500 is down 3 points to 864 and the Nasdaq is down 2 points to 1692.

"Overnight, it had appeared that flu concerns may impact equities as well, but once trading started in North America, it became quickly apparent that the impact was limited to a few sectors," said Colin Cieszynski, market analyst at CMC Markets.

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%.

Shares of defensive sectors such as health care, utilities and consumer staples are offsetting declines in commodity and financials in broader markets.

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 are up 25%.

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.

Canadian Dollar Shrugs off Negative Market Sentiment

According to some market strategists, some Canadian dollar buying in London is helping to boost the loonie against the greenback on Monday.

The Canadian dollar is the second best performer against the U.S. dollar, but it is unlikely the loonie is benefiting from risk aversion sentiment, some strategists say. They pointed out that as soon as the short-term flow is finished, the Canadian dollar could weaken significantly.

USD/CAD traded higher overnight, but hit its high during the European session at 1.2189 CAD. The cross slumped just ahead of the North American open. Most recently, USD/CAD is up 0.0044 to 1.2141.

Only the Japanese yen and U.S. dollar are higher against the loonie. The yen appears to be benefiting from risk aversion sentiment. Concerns over the flu pandemic are causing investors to flee into safe haven currencies like the U.S. dollar and the yen.

The World Health Organization (WHO) is continuing to assess the global health threat but have not issued any warnings yet. On Sunday, the U.S. declared a public health emergency after 20 cases of swine flu were confirmed in America.

According to media reports, an emergency committee at the WHO will meet later on Monday to discuss declaring a health emergency.

Eight of the cases have been reported in New York, seven in California, two in Kansas, two in Texas and one in Ohio. Six cases of swine flu have also been reported in Canada; four in Nova Scotia and two in British Colombia. According to media reports, the virus originated in Mexico.

However, the Canadian dollar is shrugging off the negative sentiment. Sacha Tihanyi, currency strategist at Scotia Capital, said the Canadian dollar appears to be benefiting from positive sentiment last week following the Bank of Canada's Monetary Policy Report.

In the report, the Bank of Canada released a framework for quantitative easing, saying it would only use those measures as a last resort. Tihanyi said the reluctance from the Bank of Canada to use quantitative easing will help limit loonie weakness

With equities lower and negative sentiment ruling markets Monday morning, Tihanyi said he would be reluctant to look for more losses in USD/CAD.

"Given the general sentiment today, a selloff in Canadian dollars against the U.S. makes sense," he said. "But I would look for the Canadian dollar to make gains against the euro. I think the market is content to put more pressure on the euro."

Matthew Strauss, senior currency strategist at RBC Capital Markets, agreed that no concrete intervention from the BOC will continue to support the Canadian dollar. He is expecting USD/CAD to hold resistance at 1.2431 in the medium term.

"With no concrete market intervention measures announced by the Bank, this key resistance level was able to repel the advance in USD/CAD," he said. "Our bearish view will remain valid while USD/CAD trades below 1.2431 on a daily closing basis."

The U.S. dollar is down 0.59 to 96.57 against the yen and the Dollar Index is up 0.411 to 85.128.

The euro is down 0.0119 to 1.3124 against the U.S. dollar, down 0.0103 to 1.5910 against the Canadian dollar, down 0.0074 to 0.8950 against the pound sterling and is lower by 1.92 to 126.73 against the yen.

The pound sterling is down 0.0012 to 1.4664 against the U.S. dollar and up 0.0023 to 1.7777 against the Canadian dollar.

Treasuries Mixed Ahead of $40 Billion Auction

The front end of the Treasury curve is rallying despite a rebound in stocks and a pending supply injection.

U.S. two-year yields are down 4 basis points to 0.92%. At 1 p.m. EDT, the Treasury Department will auction $40 billion of the notes.

"We expect a strong reception to this month's 2-year supply - looking for a 1-2 basis point stop-through the [when issued bid]." The market is expecting the notes to sell with a yield of 0.957%.

Early in the session, two-year yields fell as low as 0.88% as stock futures tumbled on swine flu worries. But S&P 500 futures have rebounded to unchanged at 865 from a low of 846.

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%.

WTI crude oil is down $1.13 to $50.42. The front month gold contract at the Chicago Board of Trade is down $3.20 to $910.80 per ounce.

All data taken at 12:46 p.m. EDT.

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

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