Stocks Surge Higher on Ford Earnings and Economic Data Ahead of Stress Test Methodology

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 is 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.

"A close above 8100 on the Dow would be most impressive and would break the downtrend line. Were that to happen we'd fire up the bullish van and drive off in favour of owning all stocks everywhere," said Dennis Gartman, editor of The Gartman Letter.

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 are 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.

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.

Investors are cautious about the equity market strength because at 2 p.m. EDT, the Federal Reserve will release the methodology it used in conducting bank stress tests. The results won't be released until May 4, but market watchers will hope to gain some insight.

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.

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

The Canadian dollar continues to make major gains as the U.S. dollar experiences broad weakness Friday.

USD/CAD has been in a strong downtrend since the Asian session and continues to trade near the bottom of Friday's range in the low 1.21 CAD area. Most recently, USD/CAD was down 0.0125 to 1.2105.

The U.S. dollar showed signs of a brief rally just ahead of the North American open, but 1.22 CAD is acting as a strong resistance point for the cross.

With no major data released in Canada, currency markets are continuing to react to Thursday's Bank of Canada Monetary Policy Report, 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 is down 0.94 to 97.03 against the yen and the Dollar Index is down 0.798 to 84.571.

The euro is up 0.0143 to 1.3286 against the U.S. dollar, down 0.0015 to 1.6060 against the Canadian dollar, up 0.0110 to 0.9037 against the pound sterling and is higher by 0.15 to 128.90 against the yen.

The pound sterling is down 0.0022 to 1.4700 against the U.S. dollar and down 0.0235 to 1.7770 against the Canadian dollar.

WTI crude oil is up $1.84 to $51.46. The front month gold contract at the Chicago Board of Trade is up $5.60 to $912.10 per ounce.

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

Supply concerns are driving down Treasury prices on Friday and have pushed U.S. government yields to their highest rates 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.

"Rates are low enough that investors are not as focused on inflation and real returns, but instead remain transfixed by price movements in equities and the state of sovereign balance sheets," said Chris Ahrens, fixed income strategist at UBS.

Most recently, U.S. two-year yields are up 1.7 bps to 0.94%, with five-year yields up 4.4 bps to 1.92% and 10-year yields up 4.9 bps to 2.97%. The Eurodollar September 09 contract is up 3.5 ticks to 98.92. The yield curve is steeper, with the 10/2-year spread up 3.2 bps to 202.50 bps. The largest moves have been in 30-year bonds, which have gained 7 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 more than $400 billion pace spread over six months.

Elsewhere, yields on two-year Canadian government bonds are flat at 0.99%, with five-year yields flat at 1.94%, 10-year yields up 0.6 bps to 3.01% and 30-year yields up 0.6 bps to 3.76%. The September 09 BAX contract is down 1.0 tick to 99.59.

In Germany, returns on two-year German bonds are down 7.0 bps to 1.38%, with five-year yields down 3.6 bps to 2.40%, 10-year yields down 1.7 bps to 3.21% and 30-year yields up 0.9 bps to 3.98%.

Yields on UK two-year bonds are down 6.8 bps to 1.22%, with five-year yields down 4.7 bps to 2.46%, 10-year yields down 2.5 bps to 3.49% and 30-year yields down 6.9 bps to 4.35%.

All data taken at 12:06 p.m. EDT.

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

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