By Greg Peel

The Dow closed up 6 points while the S&P fell 0.3% to 1320 and the Nasdaq lost 0.3%.

Wall Street had marked seven straight days of consistent gains and a 5% rise in 2011 in the broad market S&P 500 with little volatility, so it surprised no one last night that some profit-taking emerged. The market was higher mid-morning but thereafter tipped into the red. The large-cap Dow managed to nip back into the black only on the death.

A notable counterpoint to the rise in stocks has been the fall in bond prices, which has seen the benchmark ten-year yield run from just over 2.5% in November to over 3.7% this week. But yields, too, were in for a correction, and foreign central banks and sovereign funds lent a hand.

Continuing with the pattern of late last year, demand for Treasury bonds at the short end and the very long end has waned. But the ten-years have been consistently sought after as a parking station for foreign reserves over this period, and last night was no different. Tuesday's three-year note auction was a fizzer but last night's ten-year auction met with strong demand, forcing the yield down seven basis points to 3.67%. Foreign governments bought a record 71%, well above the running average of 44%.

The ten-year yield had already tipped over mid-morning in line with stocks, suggesting a correcting flow-back of money from stocks to bonds. The auction result only served to spike up bond prices. The recent run-up in Treasury yields is all about the recovering US economy, suggested Ben Bernanke to the House Budget Committee last night, and nothing to do with local inflation fears.

Bernanke maintained his view that unemployment, although showing some signs of improvement, will remain stronger for longer. He dismissed any notion of inflation being reflected in bond yields and reiterated that US inflation will remain very low for some time. He did, however, confirm that the Fed would abandon QE measures and raise rates as soon as inflation looked like taking off.

So deflationary forces in the US are keeping a lid on inflation and as such the Treasury can print as much money as it likes. Never mind that this policy is causing inflation problems around the rest of the globe. It's not the Fed's problem. However, aside from kick-starting the US economic recovery there is little doubt QE2 has another intended purpose. If Chinese authorities won't bow to entreaties to revalue their currency voluntarily, then American authorities can smoke them out. Two recent Chinese rate rises are testament to China's inherited inflation problems.

The other news on the Street last night was that (shock, horror) that bastion of American capitalist supremacy – the New York Stock Exchange – is in merger talks with Deutsche Bourse with intentions of forming the world's largest exchange company. Oh the irony. Old soldiers will be turning in their graves. But if the merger is successful, the ASX ((ASX)) will have a stronger case to argue in its attempts to merge with the SGX.

[Just as an aside, I was told last week by a more than reliable source that the market monitoring responsibilities taken by ASIC from the ASX rely on “prehistoric” systems and modernisation moves are glacial. SGX systems, on the other hand, are state of the art.]

Bernanke's down-play of US inflation was enough to send the US dollar index lower last night by nearly 0.5% to 77.61. But increasingly the relationship between commodities and commodity currencies and the reserve currency is becoming fractured.

The Aussie has fallen a third of a cent since this time yesterday to US$1.0114, albeit the Battler seems currently stuck in a US$1.01-02 range. The limited bounce in Westpac's consumer confidence survey for February released yesterday, after the flood affected January survey had shown a big drop, likely added to weakness.

Gold stood still last night at US$1364.10/oz despite the greenback's fall and over in London all eyes were on Chinese metal buyers returning from their week-long break. Normally they'd be buyers, but one look at copper over US$10,000/t and they stayed out. Copper thus fell 1% to just under the 10k mark and other metals fell in sympathy. Oil also fell, by US23c to US$86.71/bbl.

The SPI Overnight fell 5 points.

It will be an interesting next 24 hours. In Australia today the result season highlights include Rio Tinto ((RIO)) and Telstra ((TLS)) while the local unemployment data will be released. China will (in theory) release its January trade balance today, albeit the move on rates has already been made.

Tonight the Bank of England will hold a monetary policy meeting. It was only a few months ago that traders were convinced the BoE would also be announcing another round of QE, but in the interim Britain's economic data have been no less than astounding. So tonight there is a strong expectation the BoE will finally lift its cash rate above the longstanding 0.5% level.

My esteemed editor will be appearing on the Lunch Money program on Sky Business today at midday.

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