Bernanke rescues risk assets

Ben Bernanke came to the rescue of risk assets on Thursday after he indicated that monetary policy would stay "highly accommodative" for the "foreseeable future".

Bernanke has proved himself over the last few years as a friend of the markets, even though that may not be his main intention. Yesterday's comments suggest that he is all too aware of the mistakes by his predecessor following the Great Depression, a period in which he is a noted authority.

Monetary policy was tightened prematurely by the Fed in 1936-37, and it seems that in 2013 Bernanke would rather err on the side of caution, particularly when inflation is so low.

Expectations of QE tapering have now been scaled back, and the markets rallied accordingly. The Markit iTraxx Europe was 3.5bps tighter at 106bps, while the Markit CDX.NA.IG tightened by 3bps to trade at 78.5bps.

The strongest performers in the US index were the gold miners, and they had Bernanke to thank for their rally. Gold is priced in US dollars, and the currency weakened on the prospect that monetary policy would stay lax for longer. The price of gold consequently rose 3% to $1285 per ounce, its highest level since June 21.

Naturally, this acted as a boon for the likes of Barrick Gold (335bps, -23) and Freeport McMoRan (209bps, -17), which have felt the pinch this year from the declining gold price. Barrack has specific operational problems and a weaker balance sheet, which means that it trades considerably wider than Freeport.

European sovereigns CDS spreads were relatively unresponsive to Bernanke's comments, but Portugal continued to underperform amid news that the president had rejected a plan to rejig the coalition government. The situation is still fragile, and this is reflected in the elevated level of its spreads (486bps, +5).

We noted last Friday that Portugal's CDS are still relatively liquid, despite the EU ban on naked short positions. This was reinforced by the latest DTCC data, which showed that the sovereign was the 10th most active name last week, up from 71st position the previous week, and more than $1.46bn was traded, over three times that in the previous week. Sovereign CDS are still very much active.

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