Ben Bernanke, the sequel!

The votes are in and he is Numero UNO! Bernanke was given top marks by global investors for the way he is handling this financial debacle and recession. Beating off stiff opposition…..not…. should help his chances to be reappointed to another 4-year term next Jan. (That was a quick 4-years!). Imagine if he was not re-nominated, what would happen to both equities and a struggling global economy? This fragile environment would certainly become more tenuous at the very least. Expect Ben to continue to fight for the Fed’s independence on monetary policy from congressional scrutiny. In equities, CIT looks like they were ripped off by the bondholder loan terms and will certainly struggle to avoid bankruptcy, maybe a sign to book some equity profits today.

The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a ‘whippy’ O/N session.

The Fed believes that the US economy is showing ‘tentative signs of stabilizing’ and they expect to maintain a highly competitive ‘monetary policy for an extended period of time’. Similar to the BOC’s Governor Carney, southern policy makers believe that the pace of decline has slowed significantly. Their policies will be ‘tightened’ when the labor markets improve and the pressures that are holding down inflation ‘diminish’. Ben continues to point out that dangers remain. He said that financial markets remain ‘stressed’ and household spending remains an ‘important risk to the outlook because of continued job losses and declines in home values’. The Fed is relying heavily on their go-to variable, the ‘consumer’.

The USD$ currently is stronger against the EUR -0.12%, GBP -0.57%, CHF -0.19% and lower against the JPY +0.15%. The commodity currencies are weaker this morning, CAD -0.04% and AUD -0.02%. Buy the rumor and sell the fact certainly affected the loonie yesterday. As expected the BOC kept their O/N lending rate on hold at a record low of +0.25%, but gave a much rosier economic forecast and toned down its language on the strong currency. Like all good CBankers, Governor Carney made reference to the monetary and fiscal stimulus packages being employed by all countries and the impact it seems to be having. They revised their growth forecasts and now see the Canadian economy shrinking by -2.3% this year as opposed to the -3% in April and growing by +3% next year vs. +2.5%. However, Carney indicated that the strong Canadian dollar was ‘significantly moderating the pace of overall growth’. On the inflation front, they remain tilted to the downside, expecting prices once again to diminish in the 2nd-half of this year. The initial reaction after the rate announcement was for a much stronger loonie, but, with global equities and commodity prices under renewed threat, it encouraged traders to take some of the 10-day CAD strength off the table and book it as profit. Last week the CAD managed to end a 6-week losing streak and outperform all of the G10 currencies. The loonies’ appreciation has been violent and swift. Do not be surprised to see further retracement and USD profit taking to continue, directional play comes from commodities.

Aussi CPI rose in the 2nd Q (+0.5% vs. +0.1%), fueling the belief that the RBA has finished lowering interest rates. The AUD is weaker in the O/N session as investors take profit in the recent run up after Bernanke’s testimony yesterday. With the Fed highlighting that dangers remain to the US economy has encouraged investors to pare some of their higher yielding assets (0.8124).

Crude is lower in the O/N session ($64.70 down -91c). Crude managed to advance for a 6th-consecutive day yesterday on the back of global equities and a stellar earning’s season. Earlier this week the Chinese refiners boosted their processing levels to 16-month high also aided prices. China (the 2nd largest oil consumer) raised their operating rates for an 8th-straight week to +85.12%. On the face of it, the Chinese economy seems to be responding positively to their economic stimulus packages. By default, oil prices could remain robust. We must remember that the rest of the world is relying on the Asian markets to drag us out of this recession. The black stuff has advanced +45% this year and +6% alone last week. Green shoot economics has led to higher equities and higher oil prices. Higher risk tolerance means a weaker USD, equals higher oil prices. A fall in inventories translates into higher oil prices. Last week’s EIA and API reports showed a bigger than forecasted decline in inventories on the back of refineries increasing their operating rates. Stocks fell -2.81m barrels to +344.5m w/w, vs. an expected drop of -2.1m. Refineries operated at +87.9% of capacity, the most in 11-months. On the other hand, gas inventories climbed +1.44m barrels to +214.6m, the highest in 3-months vs. an expected increase of +0.875m. Recent strength is highly dependant on advancing equities. This morning we also have the weekly inventory report. Gold traded under pressure yesterday as the demand for the ‘yellow metal’ as an alternative investment wilted on the Fed’s interest- rate outlook and a rise in the dollar, at east temporarily ($946).

The Nikkei closed at 9,723 up +71. The DAX index in Europe was at 5,062 down -31; the FTSE (UK) currently is 4,458 -22. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 13bp yesterday (3.49%) and are little changed in the O/N session. Bernanke did not disappoint FI traders. In Congress yesterday, he said that policy makers ‘see little evidence of inflation and will keep interest rates exceptionally low’ for an ‘extended period’. The Fed’s policy will be ‘tightened when the labor market improves, an economic recovery takes hold and pressures holding down inflation diminish’. Coupled with Government buy-backs and the uncertainty of CIT’s survival have bonds better bid on pull backs.

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