Darth Bernanke is deploying his monetary storm troopers. During yesterdays testimony he tried little to hide his willingness to invade markets with a new round of cash as “labor markets remains weaker” than the Fed wld like & the recent rise in prices was “mostly linked to transitory factors”. So no issue to worry about inflation, right? But any reason to cheer as done by the markets? Maybe because QE2 proved to work so well in spurring the economy or more likely because of asset price inflation? QE3 wld be the Feds Death Star blowing up markets sooner or later by creating a major asset price bubble.
On the short term, equities went up, vol eased, dollar crashed and govies marched south in a global rebound which was abruptly stopped by Moody´s which said U.S. put on review for possible dg given rising possibility debt limit will not be raised in time sending markets southwards again.
Given the upcoming events over the weekend (EU Summit – have politicians ever been able to deliver when they had to?????, Banks Stress Test release) we strongly stress our view of avoiding getting caught by being gamma short on indices, especially shorting any fat tails on the downside cld proof to be a suicidal move.