Update: Global Rally On Bernanke Assurances

Bernanke’s “dovish” comments yesterday sparked a global market rally overnight/today, with Asian stocks ending strong (China – best day of the year, Korea – best day in 1.5 years) and European markets higher across the board (led by the DAX at +1.1%). Here in the U.S., both the DJIA and S&P 500 are flirting with their previous record closes (as of 11AM: DJIA up 140 points to 15,430 and S&P 500 up 1% to 1,669). Once again, Bernanke differentiated between tapering and tightening, but he didn’t really say anything new, other than re-affirm the expectation of his continued long term ZIRP policy. Either way, the market is interpreting his comments/tone as dovish, sending risk assets higher this morning.

Areas Of Focus Today:

Dovish Bernanke – During his Q&A session yesterday, Bernanke sounded a distinctly dovish tone about the direction of monetary policy. He signaled rates would stay low for a long time (ZIRP policy), citing an unemployment rate that probably overstates the health of the labor market.

Weak Economic Data – Jobless claims and import data bolster Bernanke’s accommodative comments from yesterday. Stocks held onto their gains after data showed jobless claims jumping to a 2-month high (360K vs. exp. of 340K) and the price of U.S. imports falling -0.2% in June (marking the 4th straight decline – indicating that inflation remains contained = more QE possible).

Interest Rates Falling – The 10-year yield is back down to 2.57% (off the 23-month high of 2.755 percent set on Monday), although the 30-year mortgage rate is up to a two-year high. The average rate for the 30-year fixed-rate mortgage rose to 4.51% in the week ending July 11 – reaching the highest rate since July 2011 – up from 4.29% in the prior week.

Risk Assets Higher – Spot gold climbed $39, or over 3%, to $1,286.90/ounce putting gold on track for a 4th consecutive day of gains. Meanwhile the dollar is falling, with the dollar index down -1.32%, and off -1% against the Swiss franc. Since the open, however, the dollar is rallying back off the lows in what’s shaping up to be a volatile euro/dollar forex day (carry trade related). Crude oil pulled back below $106/barrel after the International Energy Agency predicted a large increase in production next year.

Japan/Other Central Banks – The Bank of Japan’s policy-setting board left monetary policy unchanged and stuck to its goal of hitting 2% inflation in two years. As Japan continues to battle deflation, both Brazil and Indonesia are fighting ripping inflation. Both central banks raised rates (Brazil ups rates to 8.5% from 8%, Indonesia hikes rates to 6.5% from 6%). Brazil’s central bank raised the benchmark interest rate a 3rd consecutive time and said it was giving continuity to the world’s biggest tightening cycle, signaling increases may be extended through year-end.  Indonesia raised its key rate by 50 basis points (more than forecast), to bolster a weakening currency and ease inflation pressures after the government increased fuel prices last month.

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