Good morning,

Markets are called lower this morning. This is what's happening today:

  • Asian stocks fell, paring their first weekly advance since April, the euro weakened and oil headed for the longest losing streak in 13 years as comments by Federal Reserve Chairman Ben S. Bernanke overshadowed China’s first interest-rate cut since 2008. U.S. Treasuries and the yen rallied amid demand for refuge assets;
  • Bernanke said the Fed will need to assess conditions before deciding if more measures are required to stoke an economy threatened by Europe’s debt crisis and U.S. budget cuts. The Fed chairman didn’t call for consideration of additional stimulus;
  • The People’s Bank of China said overnight it will lower its benchmark lending and deposit rates from today. China’s reduction in lending and deposit rates comes a day before the nation is due to report inflation, investment and output figures. Data due today may show German exports fell in April;
  • The global economy will grow 1.7% this quarter and 2% next, after expanding at an annual pace of 2.5% in the final quarter of 2011, economists at JPMorgan Chase & Co. in New York said in a June 1 report. The result is “an extended soft patch as weak as anything experienced in the past two decades outside the Great Recession,” they wrote.
  • Brent is trading at $98.69/barrel;
  • 10-year Italian debt is yielding 5.667%, 10-year Spanish debt is yielding 6.282%, 10-year Portuguese debt is yielding 11.356%;
  • Apple closed the session at $571.72, Priceline closed the session at $636.15


Bernanke is the cause why the markets halted the rally and started selling off after he announced yesterday that the US was not considering further quantitative easing at this point in time. In testimony to Congress on Thursday, Federal Reserve Chairman Ben S. Bernanke was careful not to commit himself to further monetary stimulus. The Fed ought to get off the fence. At the next meeting of its policy-making committee on June 19-20, Bernanke and his colleagues should decide on a new program of monetary easing.

Things are rarely certain in central banking, but the case is stacked pretty strongly in favor of more quantitative easing, the Fed’s unorthodox (and controversial) method for driving long-term interest rates lower by buying government debt. According to the Fed’s analysis, the economy is now growing too slowly to make significant inroads on unemployment. Jobs figures released last week were especially disappointing, suggesting another pause in what was already a painfully slow recovery. Revised figures marked down first- quarter growth in output.

What about inflation? It’s falling. Lower energy prices are helping. Long-term inflation expectations matter more – they’re low and stable, and “the substantial resource slack in U.S. labor and product markets should continue to restrain inflationary pressures,” Bernanke said.

It’s crucial to note that risks in the outlook are tilted to the downside. Europe’s economic difficulties threaten to run out of control at any moment. U.S. fiscal policy is another danger. If the economy falls over the so-called fiscal cliff at year’s end, count on a second recession. If Congress heads that off, fiscal policy is likely to subtract demand from the economy next year. If Congress doesn’t head it off, that wouldn’t prevent the Fed from doing yet another round of QE.


China’s interest-rate swaps dropped to the lowest level in 19 months as the central bank cut borrowing costs for the first time since 2008 to combat an economic slowdown. The yuan weakened. The People’s Bank of China lowered its one-year lending and deposit rates today by a quarter of a percentage point to 6.31% and 3.25%, respectively. It also allowed banks to start offering deposit rates as much as 10% above the official rate and doubled the maximum discount for loans to 20%. The government is scheduled to release May data for inflation, industrial output and trade over the weekend and Bloomberg economist Michael McDonough said the timing of the rate cut suggests the figures will be “very disappointing.”


The European Central Bank announced June 6 it would leave its benchmark interest rate unchanged from 1.00% amid signs of developing cracks in the governing council's position toward lowering rates.

The ECB president, however, underscored the presence of more positive economic data, including a 12% rise in construction production for March, an increase for new orders by 0.5%, rising total export and import values of 3% in the first quarter and figures indicating German GDP growth rebounding by 0.5% in the first quarter.

Draghi defended the bank's maintenance of the status quo, remarking that “beyond the short term, we continue to expect the euro area economy to recover gradually.”

Describing the pace of monetary expansion as “subdued,” the ECB head said inflation expectations for the eurozone economy continued to be “firmly anchored” with the institution's aim of maintaining inflation rates “below, but close to,” 2% over the medium term.

Responding to a query about reports that the ECB president would participate in a four-member group tasked with developing a road map designed to save the euro zone, Draghi confirmed its existence, remarking that the work was the beginning of a process that would “give substance to a European vision for the medium and the long term.”

Additionally comprised of European Commission President Jose Manuel Barroso, Eurogroup President Jean-Claude Juncker, and EU Council President Herman Van Rompuy, the quartet is expected to offer further detail to what German media has referred to as a “master plan for Europe” touted as containing elements relating to the proposed creation of a fiscal union, banking union and political union along with the undertaking of structural reforms, due to be presented June 28-29 in Brussels.

Stock to watch: McDonald's (Price $88.38, Price Target $100)

McDonald's offers compelling value for consumers in a time of stretched wallets, which should support sales growth in a difficult economic environment. The company also enjoys internal drivers to improve sales, including new products (such as McCafe), restaurant reimaging, extended hours, expansion of breakfast and improved operating efficiency. MCD is also well-positioned for steady unit growth internationally, particularly in emerging markets such as Russia and China. The combination of steady same store sales growth and 1-2% global unit growth annually should drive margins higher over time given MCD's relatively fixed cost structure. Finally, valuation is compelling, with the stock trading near the low end of historical ranges and carrying an all-time high dividend yield. Given these positive near-term and long-term investment themes we have a Buy rating on MCD.

For further information on McDonald's or other stocks and bonds we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli