Wednesday, February 29, 2012

LTRO, Bernanke testimony and more

Well, we had our second LTRO and European banks signed up for 529.5 billion Euros in three year 1% loans.  The demand was right in the middle of expectations (depending on who you listen to) and the US markets responded positively.  But then Ben Bernanke started his testimony on Capitol Hill and since he didn't explicitly mention QE3 stocks started back pedaling and Gold fell out of bed!  Commodities lagged (as I've been identifying for the past month) and the Dollar bounced. 

What's interesting is that the yield curve steepened slightly with the "belly" (7 to 10 Yrs.) and the "long end" (30 Yrs.) seeing some selling.  This price action was quite unusual as Treasuries have an inverse market relationship with equities and normally any weakness in stocks equates to strength in Treasuries.  No doubt, the US bond market didn't quite know what to make of Bernanke's testimony.

As to Ben's testimony I think the market overreacted a bit as the FED remains extremely accommodative.  And I'm not sure that Gold and the market reacted the way they did because of the FED Chairman's testimony.

I saw nothing in the US or International news today on tomorrow's ISDA meeting that I mentioned in one of my blog posts yesterday.  They will be considering whether to declare a credit event on the Greek "voluntary" debt deal which would trigger Credit Default Swaps.  I won't repeat what the concerns surrounding such an event would be.  See my blog post of yesterday.

As far as stocks go, the weakness today was nothing to be really concerned about.  The VIX (CBOE Volatility Index) is still benign closing at 18.43.  Here's an updated daily chart of the Russell 2000 which lead the market higher in late December.  It's been in a tight trading channel for about a month and today broke down out of the channel a tiny bit (blue arrow):

(click on chart for larger image)

We'll need to see some follow through to the downside to confirm a breakdown and a deeper correction.

What is really starting to bother me is commodities.  The price action is flat to bearish.  Here's the S&P Goldman Sachs Industrial Metals Index that tracks aluminum, lead,copper, zinc and nickel:

(click on chart for larger image)

Although we can make a case that there are glimmers of strength on the chart the index is still stalled at a 50% Fibonacci retracement level and momentum indicators are, at best, neutral.

Until commodities start showing us some relative strength we must be cautious regarding the strength equities have exhibited since late December. 

In the meantime, listen for news when you wake up tomorrow regarding the ISDA (International Swaps & Derivatives Association).