Bernanke Remains Reasonable and Markets Rally

Dr. Bernanke speaks at Jackson Hole and global stock markets and ETFs like what they hear.

Global stocks jumped on Dr. Bernanke’s comments regarding QE3 today in Jackson hole.

In Europe, major indexes were positive with the FTSE up 0.3% approaching lunch hour in New York, the DAX up 1.36% and the Stoxx 50 gaining 1.6%.

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In U.S. markets, the Dow Jones Industrial Average (NYSEARCA:DIA) added 130 points, 1.2% at 1125 EDT, the S&P 500 (NYSEARCA:SPY) jumped 0.93% and the Nasdaq (NYSEARCA:QQQ) gained 0.84%.

Gold (NYSEARCA:GLD) climbed 1.2% on the news while the VIX S&P 500 Volatility Index (NYSEARCA:VXX) fell 4.4% on the Fed Chairman’s comments.

While not saying anything really new, Dr. Bernanke managed to convince markets that he is moving closer to another round of quantitative easing.  He said that unemployment remains unacceptably high and the recovery remains unusually slow.  While acknowledging various risks associated with more asset purchases, he made it very clear that he was ready to do so if needed.

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As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.

“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”  

Major global markets took this to mean that the Fed is moving closer to action and now the monthly unemployment report due on September 7th, becomes ever more important as this will be the last major employment data point before the Fed’s mid September meeting.

He also vigorously defended his policies of quantitative easing saying that QE had helped lower unemployment and support economic recovery, although unemployment remained too high and recovery too slow.  He also mentioned that the risks of easing so far and of more easing ahead remained manageable and had not affected inflation or the functioning of the financial system.

So with the Fed moving closer to more easing and the fall Presidential election about to go into full swing, markets are betting that Dr. Bernanke will move in September rather than waiting until his December meeting as he made it very clear that he thinks the risk/reward of quantitative easing favors reward and so “more is better.”

So early September is shaping up to be most interesting as the European Central Bank meets September 6th to work on its bond buying program and the Fed meets the next week on Sept. 12.

On a technical basis, major U.S. indexes including the Dow Jones Industrial Average (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY) remain in bull market configurations but stranded at significant resistance levels.  Gold (NYSEARCA:GLD) is showing new bullishness as it has just jumped back above its 200 day moving average on hints of more easing which is bullish for commodities and gold.  Volatility as represented by VIX, the S&P 500 Volatility Index (NYSEARCA:VXX) remains in a bear market, below its 200 day moving average and flirting with both sides of its 50 day average as speculators weigh the ongoing effectiveness of QE and the “Bernanke Put.”)

Bottom line:  Global markets expect more from the Fed and the European Central Bank and will likely need to see real action to break through technical resistance and move higher.  For today heading into the long holiday weekend, the prevailing bet is that such action is coming in September.

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John Nyaradi is the author of The ETF Investing Premium Newsletter.