Sentiment is generally higher this morning on stronger than anticipated earnings releases in the U.S. despite weak U.S. jobless claims numbers and a mediocre Spanish debt auction. At 9:10 EST, S&P 500 futures were up +5.2 points, the Euro Stoxx 50 was up +0.86% led by Germany’s DAX, and the Nikkei closed +0.79% higher.
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Sentiment is mostly negative this morning ahead of Bernanke’s second day of testimony before Congress, and after U.K. two- and five-year bond yields dropped to record lows, prompted by the BOE minutes out today in which they said they may reconsider an interest-rate cut, and voted to increase stimulus by a 7-2 margin. Sovereign debt yields in Europe are mixed, with Spain’s 10yr moving the most, up by +14.6bps to 6.862%, and German 10yr Bunds are down -3.2bps to 1.198% as of 8:10 EST; spreads to Bunds are moderately higher. S&P 500 futures are lower by -0.344%, the Euro Stoxx 50 is up slightly at +0.28%, led by France’s CAC 40 up +0.72%, and the Nikkei closed lower by -0.32%. Most risky FX are trading lower with the EUR/USD down -0.48% to $1.2234, and commodities are almost all lower on the day.
Bernanke’s Testimony: In Brief (Full Text Attached)
Chairman Bernanke made it clear that policymakers were ready to deploy some form of easing in the event economic growth proves too feeble to produce a lasting decline in unemployment, but did not provide anything concrete as some (not this observer) had anticipated. Mr. Bernanke said, “(The) U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year.” Other statements included familiar wording such as, recent economic data have had a “generally disappointing tone,” and improvement in the labor market is likely to be “frustratingly slow.”
Some highpoints included the Fed seeing slower consumer spending growth in Q2 and seeing “modest signs of improvement in housing.” Another interesting piece was Mr. Bernanke’s response to a question in which he listed easing tools including further asset purchases, such as mortgage-backed securities, reducing the interest rate the Fed pays on reserves banks keep with the Fed, and altering its wording for its outlook on interest rates. One of the more important points Bernanke emphasized is that the government, not the Fed, should make the next move towards promoting economic growth.
The Chairman also defended the Fed’s response to LIBOR manipulation, saying the Federal Reserve cooperated with other regulators and suggested a fix; it is “clear” that the LIBOR system is structurally flawed.
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Sentiment is higher across the board this morning on increased perceptions of Chinese policy accommodation and ahead of Ben Bernanke’s testimony before the U.S. Senate at 10am EST; stocks, commodities, and risky FX pairs are all trading higher. Poor retail sales figures out yesterday helped fueled speculation that Bernanke will use today’s testimony as an opportunity to hint at further easing. Keeping the commentary brief this morning, as there is a lot of news out overnight.
Moody’s Cuts Again: 13 Italian Banks Downgraded
Moody’s Investor Service cut the long-term debt, deposit, or issuer ratings of 13 Italian banks, citing the government’s weakened creditworthiness. UniCredit and Intesa, the nation’s largest and second-largest lenders respectively, had their debt and deposit ratings lowered two steps to Baa2. This marked the second cut in two months for the banks, and both continue to have a negative outlook- in line with the government’s according to Moody’s. Last week Italy’s bond rating was cut to Baa2 (two levels above junk) from A3, and Moody’s said more cuts were possible as the nation grapples with weak growth and continued high unemployment. Moody’s said in statements on July 13, “Italy’s near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets… Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding.”
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