Wednesday, July 21, 2010

Markets sink after Bernanke speaks

This was the first time that testimony from the Federal Reserve chief shook the markets, dropping after his comments. Dow fell 109, decliners over advancers 2-1 & NAZ tumbled a bigger (percentagewise) 35. Even Apple (AAPL) which had been up 13 at its high, closed with a gain of only 2! Bank stocks dropped bringing the Financial Index below 190 & nearer its 10 month low of 180.


Value188.71One-Year Chart for S&P 500 FINANCIALS INDEX (S5FINL:IND)
Change-3.44 (-1.8%)

MLPs held even in the down market. The index was flat in the 330s, its highest level in more than 3 years & so near to a record high. The REIT index fell 5 to the 192s with most of the drop after the testimony. Junk bond funds pulled back about 1%. The VIX jumped 2 to 26, most of that after Bernanke's testimony. Meanwhile Treasuries rallied. The yield on the 10-year Treausry bond fell 4 basis points to 2.89%, a new low since the recovery in yields early last year. 3 month Treasury bills yield 15 basis points while 2 year notes yield only 55 basis points (both are annualized rates). These low rates send ominous signals for the stock markets. The € is just over $1.28½.

Alerian MLP Index -- YTD

Dow Jones REIT Index -- YTD


10-Year Treasury Yld -- YTD

Oil fell 1.10 to 76.48 (sorry there was no link) while gold was flat.

CLQ10.NYMC..rude Oil Aug 10..77.44 ..0.00

GCN10.CMX..Gold Jul 10..1,191.60 T..Up 0.10

**Gold Super Cycle** Click Here

Bernanke Says Fed Is Prepared to Act as Needed

Photo: Bloomberg

Ben Bernanke from the Federal Reserve said the US economy faces "unusually uncertain" prospects & that the central bank was ready to take further steps to bolster growth if needed. "Even as the Federal Reserve continues prudent planning for the ultimate withdrawal of monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain," Bernanke told the Senate Committee. We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability." He added, "Although fiscal policy and inventory restocking will likely be providing less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should help sustain growth." The FED expects economic conditions will warrant an exceptionally low benchmark federal funds rate for an "extended period" -- repeating a vow the central bank has kept in place for more than a year. This testimony was not viewed as optimistic.

Bernanke Says Fed Prepared to Act as Needed to Aid U.S. Growth

A vast revamping of financial regulations has been signed into law targeting the risky banking & oversight failures that led to the last crisis. But most rules won't take effect right away. Regulators will take months to study dozens of issues in the 2,300 page law before drafting rules. Among them: Should the government limit the size of banks? How should stockbrokers be held accountable for advice they give to clients? How can credit ratings be made more reliable?

Financial Overhaul is Law, Now Comes Battle Over its Rules

Stock markets took the Bernanke's testimony badly. On Fri the stress tests for the European banks will be reported & early word is not good. These tests were supposed to reassure investors, but the € is already selling off. Dow had a major setback in May & has not recovered (shown in the chart), it's stuck near 10K. Asian markets should open weak in a few hours.

Dow Jones Industrials -- YTD

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