The struggles among an unsettled Europe, global growth concerns and sequestration are being pitted against the continued loose money policies being pursued by central bankers around the world. For the week, this tug of war was generally a tie from a risk perspective, as equity values are largely unchanged from where they started the week, while corporate spreads are also largely unchanged. In a nod to increased risk, particularly following unexpected Italian election results, Treasury and Bund yields have retraced to early year levels. The situation in Italy remains inconclusive, with disparate outcomes ranging from a grand coalition to another round of elections. We believe that the liquidity spigot will keep these events largely an Italian and European affair, with most risk markets recovering losses following Monday’s election results. Chairman Bernanke affirmed his dovish tendencies during his congressional testimonies, where he left the prospects that low rates and QE buying would continue through his current tenure, and possibly well beyond. Sequestration cuts go into effect today, although its impact will not be felt for weeks, and we expect will be negotiated out when Washington deals with a partial shutdown of the government at the end of the month. Economic results were supportive of slow steady gains in the U.S. economy, and the market will be focused on the monthly payroll report next week. Read the full commentary now.
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