- Risk on assets supported by yesterday's speech by Bernanke, who said that highly accommodative policy needed for the foreseeable future and that current unemployment of 7.6%, if anything, overstates health of US labour market.
- ECB's Weidmann said that the ECB has not tied itself to the mast with forward guidance, which does not rule out rate hikes when inflationary pressures emerge.
- The BoJ kept their monetary policy unchanged and retained plan for JPY 60-70trl annual rise in monetary base.
- Bernanke Supports Continuing Stimulus Amid Debate Over QE (BBG)
- Portugal president wants 'salvation' deal, including opposition (Reuters)
- Egypt has less than two months imported wheat left - ex-minister (Reuters)
- A rise in long-term interest rates is creating challenges and opportunities for the largest U.S. banks. (WSJ)
- BoJ says Japanese economy is ‘recovering’ (FT)
- More Chinese cities likely to curb auto sales (Reuters)
- PC Shipments Fall for 5th Quarter (BBG)
- Property Crushes Hedge Funds in Alternative Markets (BBG)
- New aid gives Greece summer respite before showdown (Reuters)
- Rajoy Punishes Exporters Sustaining Spain’s Economy (BBG)
"We don’t believe the Chairman’s intentions have changed. Regardless, the Chairman’s credibility is once again damaged. If the Dollar breakdown continues, it will be a sign that the market believes the Chairman has again lost control over policy. The asset clearly in the best position in such an environment is Gold. After such a notable correction in the past 9 months, the precious metal once again becomes a very attractive global asset if monetary policy in the largest economy of the world spins out of control." - Mike O'Rourke
The only story this morning remains Bernanke's after hours speech, which solidly trumped the FOMC minutes in market impact, and which, in addition to ramping US equity futures to just about new all time highs, sent the EURUSD soaring by almost the same amount (+300 pips) as the actual QE1 announcement on March 18, 2009. Such is the power of verbal currency warfare, when Bernanke hasn't acutally done anything and merely hinted the Fed is as confused as ever about what to do. Of course, as Commerzbank notes this morning, the U.S. economy would have to lose a lot of momentum for the Fed to cancel tapering, and the central bank would only expand the purchase program if the economy collapses, but none of that matters to the "wealth effect" for the 1% where economic destruction simply means more wealth.
Each time the S&P 500 has traded more than 12% above its 200-day moving-average, the following correction has not ended until the average itself was breached by price action. Fundamentally, one can tie 'events' to each of these exuberance spikes - in this case, liquidity-turns-into-a-taper - but sometimes historical prices can be a better guide to the human biases for extrapolating trends and building fragility. Given current levels that would mean a 10% drop from current levels to 1516.
We noted earlier the brief chaos that the minutes created but - following Bernanke's promise to print moar - the after-hours collapse in the USD against every major (and minor) currency pair in the world is tremendous. USDJPY is over 200 pips off the day's highs (JPY surging below 98.50), GBPUSD is getting smashed higher (+275 pips from pre-close), and EURUSD is screaming higher (up 220 pips from the US close breaking above 1.3200). Retaliation for Carney and Draghi's comments? Who knows... but the currency wars are back on (and the 'other' currency is surging to $1290 per ounce).
"Following a weekend of horrific violence in Chicago in which at least 70 people were shot and 12 killed, this was the wrong move for public safety in Illinois," Democratic Governor Jim Quinn noted as lawmakers overturned his veto to allow Illinois to become the last state in the US to allow residents to carry concealed handguns. As the BBC reports, the governor warned that the new law will allow people to carry guns in pubs and bars (and carry virtual arsenals on their persons), we suspect, if Chi-raq (the slang for the anarchic gang-ridden areas of Chicago) is any example, that this is already occurring en masse in a wide population of the state. Gun rights proponents, meanwhile, celebrated, "this is a historic, significant day for law-abiding gun owners, they finally get to exercise their Second Amendment rights."
When every indicator of stress is screaming 'bubble' in the student loan debacle, it would make perfect sense for the government to ignore it and maintain the status quo. As the WSJ reports, the never-ending federal effort to "make college affordable" simply provides the resources to sustain higher prices - especially as an increasing amount of the rising subsidies are pocketed by universities. This policy disaster which results in rising costs, taxpayer losses and over-strapped borrowers is now manifest. So naturally this week Senate liberals will bring to the floor a plan to ensure that the policy continues unchanged (and the CBO-estimated $95 billion losses) - and dismisses a coalition plan that ties student loan rates to 10Y Treasuries, providing some marginal encouragement to students to decide whether their chosen course of study is worth the money.
Commenting on the divergence between the bond market's Taper-On reaction and the equity markets Taper-off reaction amid the total lack of clarity from the FOMC, CNBC's Rick Santelli asks the (rhetorical) question that everyone should ask: "[What the Fed minutes said] is, listen, we have to wait for bigger confirmation that the economy is doing better; and for that, we're going to look at the employment side. [At the same time] we have the fewest people working that can work in 30 years, and all-time-record-high profits for corporations. Now, does that strategy sound rational to you?" It seems, now that Bernanke has seemingly promised that it will really never end, that Santelli's question will become increasingly critical in this country.
One wonders: at what price does the squeeze of the collateral-scarce (as per today's ongoing negative GOFO) yellow metal begin now that Bernanke has made it clear (supposedly) that the new gameplan is just more of the same old?
Let us be blunt: Our capitalist system is approaching failure. Or, perhaps better said: Our marginally capitalist, partly-free market systems are approaching a massive collapse. Not because of what capitalism is, mind you, but because the powers that be have bastardized it. Capitalism can bear many distortions and abuses, but it is not indestructible. And, make no mistake, the ‘capitalist’ system we have today has been massively corrupted, so much so that it’s sagging under the load... and will continue to do so until the proverbial straw breaks its back.
The punchline (as far as markets are concerned) of Bernanke's Q&A appears to be: Inflation and jobs signal more Fed stimulus needed and that Tapering does not end stimulus. In other words - highly accomodative policy needed for foreseeable future:
BERNANKE: 'TOO EARLY' TO SAY U.S. 'WEATHERED FISCAL' RESTRAINT
BERNANKE SAYS INFLATION, JOBS SIGNAL MORE FED STIMULUS NEEDED
So on one hand Bernanke admitted he had to pop the HY bubble with the Hilsenrath leaks a few weeks ago (talk the market down), but is happy to take the equity gains in hopes they will trickle down to wealth effect, inflation and employment even if credit is spooked (and the bond market technically corrupted).
So keep buying (anything) - they'll always be a greater fool (The Fed) to sell to, no matter how much we destroy the markets (yes, collateral is short) until the economy is entirely back on its feet (inflation, jobs, or anything we decide).
After the angst that he created when he last spoke, and today's shenanigans after the Minutes, we can only imagine how his presentation at the NBER's Boston conference will impact the markets. We would be surprised if anything new came from Bernanke's presentation on "The Last 100 Years of The Federal Reserve" but the following Q&A (as we noted here) will be trial-balloon after trial-balloon we suspect as he prepares for next week's Humphrey-Hawkins.