Forex

Selling in the financials continued Tuesday, with the sector shedding another 3.0%. The key event Tuesday was Fed Chairman Bernanke's semi-annual monetary policy testimony.

Before the Senate Banking Committee, Bernanke noted it was the Fed's position that the risks to the economic outlook skewed to the downside while risks for the inflation forecast were skewed to the upside. Incidentally, his remarks followed soon after it was reported producer prices rose 9.2% year-over-year in June, which was the highest since 1981.

Bernanke's testimony included much of what the market already heard or had contemplated on its own, so it wasn't much of a market-mover. Bernanke then took another turn before the committee with Treasury Secretary Paulson and SEC Chairman Cox to discuss the dealings with respect to Fannie Mae and Freddie Mac.

Bernanke and Paulson both reiterated their view that the GSEs were adequately capitalized and played a vital role for the economy. However, it was SEC Chairman Cox's announcement that naked short selling of 19 financial companies, including the GSEs, would no longer be allowed that set the stage for an historic reversal of fortune for the financial sector.

In the midst of all of this, crude prices were cracking. After touching $146.37 at their high Monday, crude prices ended Tuesday's session at $138.74. The slide, though, didn't end there. The selling persisted for the remainder of the week, with prices settling at $134.60 on Wednesday, $129.29 on Thursday and $128.96 on Friday. The latter price marked an 11% decline from the prior week's close.

Worries about demand destruction, an easing of geopolitical tensions, bearish oil and natural gas inventory reports, and an asset allocation trade all played a role in driving prices lower.

There was no mistaking where many accounts were shifting their oil profits. The financial sector surged 12.3% Wednesday alone, its largest single day percentage gain ever. Even more remarkable was that the sector logged a 21% gain over the final three sessions of the week.