• Bonds rally, as Bernanke doesn’t plan to tighten monetary policy ‘for an extended period’. Today, Bernanke will repeat his semi-annual testimony before Senate Panel

  • Bank of Canada keeps rates unchanged at 0.25%, amid increasing signs that a recovery is nascent

  • S&P (+0.36%) and NASDAQ (+0.36%) close at new highs for the year buoyed by strong earnings from Caterpillar and Merck and despite ongoing uncertainty about CIT. Today, Boeing, Wells Fargo and Pfizer will publish earnings.

  • Apple jumps in after-hours trading on better than expected earnings driven by strong sales of its Iphone

  • Asian equity markets gain further ground this morning, while commodities paint a mixed picture, as BHP Billiton said ‘global demand for commodities remained modest’

  • China’s premier Wen Jiabao says China will use its foreign exchange reserves to support and accelerate overseas expansion and acquisitions by Chinese companies

  • Besides the earnings and Bernanke’s testimony, attention will focus on the Minutes of the Bank of England’s July meeting, when they unexpectedly decided to leave the asset purchase program unchanged


Markets

On Tuesday, all eyes in the markets were on Fed President Bernanke. He was expected to give its semiannual monetary policy testimony before Congress. On top of that, the Fed president also wrote a piece in the Wall Street Journal mainly addressing the measures the Fed has at its disposal to set up a credible exit strategy, somewhere in the future.

The Fed President said that ‘better conditions in financial markets have been accompanied by some improvement in economic prospects’ However, the rate of job losses remains high and the Fed president expected unemployment to remain uncomfortably high into 2011. In this context, he expressed the view that a highly accommodative stance of monetary policy will be appropriate for an extended period. At the same time, Bernanke tried to ease fears that this highly accommodative policy would lead to an inflationary spiral as the economic recovery regains traction. In its article in the Wall street Journal, the Fed president said that the Fed had been devoting considerable attention to issues relating to its exit strategy and that they were confident to have the necessary tools to implement that strategy when appropriate. He also provided a list of technical measures that could be used at the time when this process of reversal should start.

Looking at the reaction on the bond markets, the Fed president apparently has done a good job in convincing the markets that the Fed is in control of the situation.

Bond already received a better bid going into the Bernanke’s testimony and yields declined further once the statement appeared on the screens. Especially the long end of the curve outperformed with yields at longer maturities (5 to 30 years) declining by around 12 basis points. European bonds, which recently outperformed their US counterparts this time lagged the move on the US markets, but still posted decent gains.

The reaction on the stock markets was constructive, but not really euphoric. Despite ongoing strong/better than expected earnings from some major firms, US stock markets indices had difficulties to maintain the opening gains. Bernanke’s concerns on the difficult situation in the labour market might have played a role. However, technical considerations might have played a role, too. The S&P set a new, minor intraday year high; temporary lost some ground, but finally closed the session near the intraday highs. So, even from a stock market point of view, the market reaction to Bernanke’s statement should be considered as constructive. The ST picture for most major stock market indices is constructive, but the jury is still out as to whether a sustained break will occur in the days to come.

On the currency markets, the dollar continues to fight an uphill battle. The combination of a fairly positive global investor sentiment and the prospect that US interest rates will remain at extremely low levels for a considerable period of time continues to weigh on the US currency. EUR/USD reached a new short-term high in the 1.4278 area. However, with several stock market indices close to the year highs, the lackluster performance of USD/JPY is even more striking.

Today, the eco calendar is only moderately interesting. In the US, only the Mortgage applications and the house prices are on the agenda. In Europe the May industrial orders and the UK CBI Quarterly Industrial trends deserve some attention. In the UK, investors will also take a close look at the Minutes of the previous Bank of England meeting. Especially the Bank’s reasoning behind its decision not to raise its program of asset purchases will be examined. In the US, Bernanke will bring its monetary policy report before the Senate panel, but his message should be in line with yesterday’s statement.