US Market Week Wrap Up

Gold and oil continued their long march upwards this week, contrasting dramatically with the continued downward plunge in the dollar, which reached new lows against the Euro and other major currencies. Pension funds were seen increasing their commodities holdings as a result. A disappointing quarterly report from AIG and a worrisome Comscore report on Google's ad clicks weighed on markets, along with a stream of poor economic data. Fed Chairman Bernanke's semi-annual testimony before the House and Senate seemed to leave the door open for continued aggressive rate cuts going forward, adding to pressure on the dollar.

With no end in sight to the bad economic news and continuing weakness among equities, there has been a flight to quality in the bond market. By Friday the two-year yield had fallen below 1.7% and the 10-year was hovering around 3.55%. Expectations for a more aggressive Fed crept into the Fed fund futures market, with the April contract projecting roughly 60% odds of a 75 basis point cut at the next meeting, while the July contract pricing in a 40% chance the Fed funds rate would drop below 2% by summer.

The Dow opened flat on Monday, climbing higher thanks to January existing home sales that narrowly topped expectations. Inventories of existing homes for sale continue to rise while median prices fell 2.5% in January. IBM's $15B stock repurchase announcement and OFHEO's decision to remove the portfolio caps on Fannie Mae and Freddie Mac were notable bright spots supporting equities early in the week.

But later in the week, equity and bond markets had begun focusing on the plunging dollar and its relationship to commodity prices around the world, as well as weak US consumer confidence data. Indices headed south in Thursday's morning session as comments from Bernanke's testimony on the hill implicitly promised more rate cuts going forward, and that there will probably be some bank failures.

On Friday, indices continued their downward slide on after the Feb Chicago PMI registered a new 6 year low. News that a UBS analyst increased estimates for worldwide losses related to the financial crisis to $600B only added to the pressure, as did a report that three hedge funds were liquidating muni bond positions. Monoline insures continued to be a focal point after press reports that the Ambac bailout has encountered a "significant snag" over last couple days.

Friday culminated in a 315 point sell off on the DJIA, as stagflation fears grew. For the week, the DJIA dropped 1%, Nasdaq fell 1.4%, and the S&P 500 declined 1.7%.

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Posted in: Economy,Forex