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6/7/12

The Peoples Bank of China cut deposit interest rates to 3.25% this morning.  This cut of 0.25% was the first since 2008.  The Bank of England held rates steady at 0.50% and did not announce an increase in their Quantitative Easing program.

Spain was successful in their bond auction this morning, albeit at higher interest rates.  Spain sold $2.6 billion dollars in medium and longer term debt.  Yield on the 10-year bonds finished at 6.04%, this was higher than the 5.74% at last month’s auction but lower than the secondary market pricing yesterday.  This was the highest yield at a Spanish debt auction since 1998.

Fitch downgraded Spain’s debt rating three notches to BBB this morning.  The ratings company warned they would downgrade Italy, Portugal and Cyprus if Greece left the Eurozone.  Ed Parker, a ratings analyst with Fitch, said the U.S. and U.K could be downgraded in 2013.  Parker is concerned about the British economy slowing and the U.S. not addressing the deficit and debt through a “credible fiscal consolidation plan.”

The hot video clip on business programs today is from a live Greek TV discussion.  The Neo-Nazi party politician got upset with the SPARIZA and Communist Party spokeswomen.  He was able to splash one with a glass of water and get a right, left and right on the Communist sitting next to him.  The video is available at the Guardian, for those of you with prurient interests.  Just imagine it is Nancy Pelosi!

Ben Bernanke testified before the Joint Economic Committee in Congress this morning.  He disappointed precious metals traders by not overtly endorsing more quantitative easing.  The Federal Open Market Committee (FOMC) meets in a week and a half.  Traders were hoping for follow on clarity from Bernanke mirroring the dovish comments made by Vice-Chair Janet Yellen last night.  Yellen cited high unemployment and slowing economic indicators would justify quantitative easing to ‘insure against the risk of a downturn.’

The Fed’s Operation Twist ends this month.  Operation Twist is the program started last fall to sell shorter term Treasuries and buy Long Term Treasuries.  The Fed is also investing money from interest received and maturing Treasuries in longer term paper.  This has extended the maturity of the Fed’s book and bought down interest rates on long term bonds.  Analysts estimate the Fed has bought as much as 75% to 90% of all Treasury bonds over 7 years maturity at many auctions.

Working against an announcement of quantitative easing at the June meeting is an observation I heard for the first time this week.  In the past, the Fed has not announced one program to start until a previous program has ended.  This seems accurate and may indicate there will be disappointment on June 19.

The market continues in rally mode today after the interest rate cut in China.  Freeport-McMoran Copper and Gold (FCX) is rallying on the prospect of China increasing activity that requires raw materials.  We think there is some room for selected stocks to move higher from here, but the market is pushing up against resistance at 1331.  It is a good time to be conservative.

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