Dollar Soars, Markets Edge Down Ahead of Fed Comments

Market Update
Tuesday, August 10, 2010

Market Summary



Stocks:

Dollar up, stocks slip on caution before Fed. US stocks are poised to fall Tuesday, as investors eyed a drop in overseas markets and awaited the latest statement from the Federal Reserve. The Sterling is looking particularly sensitive right now, with this week's crucial Bank of England quarterly Inflation Report holding the potential to push it hard in either direction.

No one is expecting a change in interest rates, but investors are eager to see whether policymakers will mention possibly reviving their bond-buying program to help stimulate the weak U.S. economy. Chatter about the Fed potentially re-launching its securities purchasing program has picked up recently amid weaker U.S. data.

Uncertainty over whether the Federal Reserve will take further stimulus measures this week kept U.S. stocks trading within a narrow band. Traders backed away from major moves Monday ahead of the central bank's meeting Tuesday. "This Federal Reserve board and Chairman Bernanke in general seem to be taking a little bit of a more standoffish type of approach," said Tom Villalta, lead portfolio manager at the Jones/Villalta Opportunity Fund.

China trade surplus soars as domestic demand flags caution on world markets ahead of Tuesday's US open. China has recorded its biggest trade surplus in a year and a half for July, government data showed.


Treasurys:

Treasury prices fell as stocks rose, but moves were modest as trading in financial markets slowed heading into the Federal Reserve's latest monetary policy meeting Tuesday afternoon. Treasury yields, which move inversely to prices, moved up from recent lows as last week's rally left the bond market ripe for a bit of selling ahead of the Fed. In afternoon trading Monday, the two-year Treasury was off 2/32 to yield 0.537%, the five-year was off 3/32 to yield 1.527% and the benchmark 10-year Treasury was flat to yield 2.820%. The Dow Jones Industrial Average was up by 0.49% and the S&P up by 0.55%.

Goldman Sachs & Co., one of the biggest Treasury bulls in Wall Street, turned even more bullish on U.S. government debt, saying that weak economic growth will push the Federal Reserve to maintain a low interest rate policy while renewing buying bonds to support the economy.

Bond strategists in Goldman, one of the 18 primary dealers that trade directly with the Fed and are obligated to bid on Treasury auctions, expect the 10-year benchmark note's yield to fall to 2.5% during the fourth quarter, a level not seen since March 2009.

The five-year note's yield is likely to drop to a record low of 1% during the same period from 2% previously predicted, the strategists said in a research note Friday.



Forex:

The dollar rose against the yen and euro in subdued trading ahead of Tuesday's closely watched meetings of U.S. and Japanese central bankers. Signs from the Fed about changes to monetary policy will dictate the direction of the dollar this week. Monday's modest dollar strength suggests the euro's run-up to Friday's three-month high might have been overdone, and that investors are taking a second look at nonfarm payrolls and judging the results less harshly, said Nick Bennenbroek, head of currency strategy at Wells Fargo. Gold prices lost more ground Tuesday, with investors selling equities and commodities alike ahead of the US market open.


Dow Jones 10,698.75 +45.19 (0.42%)
S&P 500 1,127.79 +6.15 (0.55%)
Nasdaq 2,305.69 +17.22 (0.75%)
Crude Oil 81.55 + 0.09%
Natural Gas 4.33 + 0.46%
Gasoline 2.12 -
Heating Oil 2.16 + 0.29%
Gold 1199.92 - 0.50%
Silver 18.32 - 0.49%
Copper 3.35 + 0.33%


World markets:


Shanghai 2,595.27 -77.26 (-2.89%)
Nikkei 225 9,551.05 -21.44 (-0.22%)
Hang Seng Index 21,473.60 -327.99 (-1.50%)
TSEC 7,976.74 -57.75 (-0.72%)
FTSE 100 5,386.97 -23.55 (-0.44%)
CAC 40 3,748.27 -29.10 (-0.77%)
S&P TSX 11,863.56 +63.59 (0.54%)
S&P/ASX 200 4,540.70 -54.20 (-1.18%)
BSE Sensex 18,219.99 -67.51 (-0.37%)



Tuesday's US Economic Calendar:

7:30 a.m.
July NFIB Index of Small Business Optimism Index (previous 89)

7:45 a.m.
August 7 ICSC-Goldman Sachs Chain Store Sales Index - WoW (previous -0.1%), YoY (previous +3.9%)

8:30 a.m.
2Q Preliminary Productivity & Costs Non-Farm Productivity (expected +0.3%), Unit Labor Costs (expected +1%)

8:55 a.m.
August 7 Johnson Redbook Retail Sales Index MoM % Change (previous -0.6%),

12MonChgPct (previous +2.9%), 52WkChgPct (previous +3%)

10:00 a.m.
August IBD/TIPP Economic Optimism Index Economic Optimism Index (previous 44.7), 6-Month Economic Outlook (previous 42.8)

10:00 a.m.
June Wholesale Trade Inventories (expected +0.6%)

2:15 p.m.
Federal Reserve Board - U.S. interest rate decision

4:30 p.m.
August 6 API Weekly Statistical Bulletin Crude Stocks (Net Change) (previous -780K), Gasoline Stocks (Net Change) (previous +2.31M), Distillate Stocks (Net Change) (previous +1.11M), Refinery Runs (previous 86.7%)

5:00 p.m.
August 8 ABC News Consumer Confidence Index (previous -50)


Mixed economic data had kept crude contained between $70 and $80 a barrel since May, with prices following the equities markets as a proxy for future economic growth. Now, market watchers are divided on whether crude prices can hold above $80 amid worries about high supplies and sluggish demand.

US stocks extended their gains Monday as the final hour of trade approached, with Wall Street hopeful ahead of the Federal Reserve's policy-setting meeting that ends Tuesday.

Market watchers remain cautious ahead of the Fed meeting and weekly oil supply data from the Department of Energy due Wednesday that is expected to show a drop in crude stockpiles, according to a survey of analysts conducted by Dow Jones Newswires.

"Today it's really been the calm before the storm," said Matt Smith, an analyst with Summit Energy. Crude supplies are expected to drop by 1.8 million barrels, while gasoline inventories are seen falling by 300,000 barrels, according to the mean of six analysts' estimates. Distillates, which include heating oil and diesel fuel, are expected to rise by 1.3 million barrels.