Quote of the Day.
There is no respect for others without humility in one's self.
Henri Frederic Amiel
We had a modest recovery or short covering rally after the market liked what they heard from Bernanke during his testimony to Congress on Tuesday morning. He did not surprise the market and he certainly indicated that quantitative easing was not going to end anytime soon. He cited the difficult labor market and low inflation risk. He also said that the benefits of aggressive monetary policy far outweigh the risks. These and many more favorable comments on the Fed's easy money policy were enough to turn the market's attention away from the political dysfunction in Italy and to offset the hawkish comments from the FOMC meeting minutes that came out last week. The market moved into a modest short covering rally after the Bernanke comments with U.S. equities recovering about half of the losses from Monday's sell-off.
Most risk asset markets are still lower on the week but at the moment market participants seem to be moving from a panic mode as they continue to digest the outcome of the Italian elections and the implications it may or may not have on the broader EU & ECB policies as well as the upcoming U.S. sequester cuts due to hit on March 1 (if no agreement is reached). All of the risk asset markets including oil remain in an event driven pattern which will be in play at least through this week. All of the normal macroeconomic data is playing a secondary role as the markets move in sync on each new 30 second news snippets regarding Italy, Bernanke, and the sequester.
Another event that is primarily an oil event... the Iran & P5+1 nuclear talks in Kazakhstan ended pretty much as I predicted it would. No significant progress was made even as both sides had conciliatory comments on the meeting. Iran's Foreign Minister says "very confident" nuclear deal can be found with P5+1. A technical meeting is scheduled for March 18 in Istanbul and political discussion will resume on April 5 with Iran and P5+1 back in Kazakhstan. According to an article in Reuters the west did not offer to suspend oil or financial sanctions during the talks with Iran (according to a U.S. official). They offered to lift some sanctions if Iran scales back its nuclear activity.
We have seen this outcome in prior meetings with both sides saying progress has been made and another round of meetings scheduled. History still suggests that a major deal is not likely to occur anytime soon. As such for the moment I would categorize the outcome of the meeting as neutral to slightly bullish for the oil complex as the market is not likely to see any reason to sell off of the risk premium as nothing has been solved at this stage of the game.
Still no progress on the U.S. sequester talks. I still believe there is less than a 50% chance that a deal gets done by Friday's deadline and if it does it will not be to the very last minute. The President and his party continue to present a fear approach through the media while the Republicans continue to hold to their position. As I have discussed in previous emails I think the whole sequester thing is a bit of a Y2K moment and even if the cuts do begin to occur on March 1 I am not convinced that there will be a major impact on government services nor on the economy. In either case it will be a market moving event with the impact on risk asset markets becoming more pronounced as we move toward the Friday deadline.