Is the appointment of Mr. Bernanke favorable for equity and bond markets?
In the intermediate term, Mr. Bernanke – in order to improve his reputation as a money printing advocate and gain some credibility – may tighten monetary conditions a tad more than Mr. Greenspan might have done. The growth of foreign official dollar reserves is still declining, which is negative for global economic growth, emerging stock markets, industrial commodity prices, but favorable for the US dollar (see figure 1) Figure 1: Foreign Official Dollar Reserves and Crude Oil Demand Source: Ed Yardeni, www.yardeni.com Therefore, when it will become more obvious – even to the eternally optimistic Fed – that the US economy is slowing down, as a consequence of tighter money, bonds could rally from the current somewhat oversold position (see figure 2) Figure 2: US 20-year Government Bond Prices Source: www.DecisionPoint.com But make no mistake! Once Mr. Bernanke realizes that the world’s most productive economy is not as sound as he believed and sees that rising interest rates depress ass
