Wednesday, July 10, 2013

Waiting For The Bernanke Reaction

Markets are mixed in early trading.  The Nasdaq is slightly positive while the S&P 500 is down a little.  Bernanke is set to speak today, and it is likely that he reiterates the same tune-- that any tapering of asset purchases is dependant on the incoming economic data.  The question is how will the bond market react?

Recent comments from the Fed have been mixed, with some hinting that QE will continue while others think the tapering could happen soon.  Bond yields rose sharply in the last 2 months on fears of higher interest rates in the future.  As bond fund investors sensed losses, the selling accelerated and created swift declines.  So it will be interesting to see if Bernanke's comments today strike any different chord and if it leads to selling in bondland regardless.

Crude oil is higher again today after reports about a well leak off the coast of Louisiana.  Crude oil is trading near $105.70, a 14-month high.  Consumers might soon begin to notice the recent rice in oil prices, and it remains to be seen if this hurts consumer spending which would slow the economy.

Asian markets were mixed overnight.  China bounced 2.2% after rumors surfaced that the PBOC might cut its reserve requirement ratio after trade data was released.  The trade data showed China's exports fell -3.1%.  But the govt has been reluctant to ease monetary policy lately.  Elsewhere, the Bank of Thailand held its key rate unchanged at 2.50%.

Europe's markets are slightly lower today after Standard & Poors downgraded Italy's sovereign rating to BBB from BBB+.  As a result the Italian 10-year yield rose 5 bps to 4.46%.

Our 10-year yield is slightly higher to 2.66% ahead of Bernanke's speech.

The volatility index is up 1% but still below the 15 level near 14.50.

Trading comment: Most market commentators I hear are still skeptical of this market, with some calling for another top in July and then a correction.  The market loves to climb the proverbial wall of worry, so nothing would surprise us here.  The next leg of the market could be driven by how earnings reports and corporate guidance start to come in.  Earnings season kicks into high gear next week.  The recent rally in the market has come on low volume.  So either that is just a sign of summer trading volumes being lower or it means there is a lack of conviction behind the recent buying.  We haven't made any big changes to our allocations, and continue to view equity weakness as an opportunity to add to the growth side of balanced accounts.

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