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Bush tax cuts, bonds and S&P

|Includes: SPDR S&P 500 Trust ETF (SPY)

It looks like the White house may be nearing a deal to extend the Bush tax cuts for another 2 years, with a 13 month extension on unemployment benefits and a 1 year payroll tax cut.  This news should be taken well with the Markets tomorrow but watch out for the Bond offerings this week because the US Treasury is selling a shitload of bonds between now and Friday.

 

Ben Bernanke's comments on sixty minutes over the weekend has heightened bond traders expectations of the Fed buying the full 600 billion of treasuries outlined in the QE2 plan put forward a few weeks ago, that means the Fed with QE2 will practically be funding the deficit by buying almost all their own debt this year!  That alone is quite astonishing but his comments never ended there, he also suggested that he may in fact go even further and buy more!

 

What does this mean? Well it's being looked at by commodity traders as a clear sign that the Fed is devaluing the Dollar to inflate their way out of debt, this has never worked in the history of finance and it will not work now either.  What the Fed is doing will inflate every asset priced in dollars, so expect commodities, and US equities to rise while bond auctions are strong, but the first hint that a bond auction fails will send us back to reality, and it could be a long way down!

 

I'm watching the GBPUSD for a long entry, and closing the EURUSD trade from last week, even with Ben debasing the Dollar the Euro problems should act as a counter weight and keep the pair trading sideways for now so the pound looks better to me at the moment.

 

Watch for the rise in Silver, Gold, Oil and the S&P to continue modestly this week while we get through all the debt auctions, providing they all go well the market's should drift higher to year end, otherwise we could see a double top form here which would be a very negative sign as it would suggest the market is not behind the Fed move, I'm voting for the former at present but the bond auctions will be key, particularly what percentage of each auction the Fed buys off of itself.