'Risk-Off' Sentiment Dominates

It was a day of two halves for markets yesterday, with the first half dominated by news that the People’s Bank of China (PBC) cut interest rates for the first time since December 2008, while the second saw traders coming to grips with Federal Reserve Chairman Ben Bernanke’s testimony before Congress.

The PBC rate cut (0.25% to 6.31%), coupled with hopes that a Spanish bank bailout is imminent, led to gains in stocks with the Dow closing higher on the day. That despite Ben Bernanke’s unexpected reticence during his testimony on the subject of more quantitative easing. Bernanke noted that the Fed is “prepared to take action” in the event of further weakness in the U.S. economy, but gave no hints that QE3 is imminent. Precious metals and crude oil sold off in response to this, with gold losing $50, falling toward $1,580. As usual, silver fell harder -- down over a buck (3.5%+) following Bernanke’s comments.

Same Old Bad News
Meanwhile, a fresh raft of depressing European economic data has washed over markets this morning, which, coupled with Bernanke's caution, has cancelled out the lift stocks got from China's rate hike. German imports and exports fell in April, while French Q1 GDP was revised down to -0.1%. The Bank of England also confirmed yesterday that, for the moment, it won’t increase its QE program, which follows on the European Central Bank's 'steady-as-she-goes message on Wednesday. So it’s no surprise to see the same old “risk off” market patterns dominating once again this morning: dollar up, euro down, stocks down and government bond yields for the likes of Germany, the US, Japan and the UK down (with yields on Spanish and Italian debt moving higher).

Talk is growing that Spain will formally request a EU bank bailout this weekend. We could be in for a wild ride next week.