Did Bernanke Blow A Good Opportunity to Boost Market Spirits?

Dr. Bernanke goes to Congress and offers “Fed ready to act.”

Markets seem desperate for another dose of stimulus, but this week, both the European Central Bank and the U.S. Federal Reserve offered little more than promises.

U.S. stocks rallied sharply Wednesday on the hopes for more monetary easing but were disappointed Thursday as Fed Chairman Bernanke offered no hint of further easing in the near future.

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Dr. Bernanke warned of the risks to the U.S. economy being posed by Europe and the rapidly approaching “fiscal cliff” arriving at the end of the year.  Stress in Europe has risen over the past month or two and he said the Fed would act to protect the U.S.

The Fed’s next meeting is scheduled for June 1920 which will be culmination of a pivotal week in which Greece decides if it will stay in the Euro with their much anticipated election scheduled for the 17th.

Stocks rose sharply in early going but weakened as Dr. Bernanke’s testimony wore on.  With the Beige Book reporting “moderate” economic activity and an uncertain future in Europe, it appears that the Fed might be wanting to keep its powder dry as the Greek election looms and problems continue to simmer in Spain.

With a terrible unemployment report last week and slowing global economy, pressure is mounting on the Fed to do something, anything, some would say, to prop up world markets and stimulate demand.  However, the Fed has a problem in that Operation Twist is coming to an end in June and they don’t have much more short term paper to convert to longer term loans, and outright asset purchases could spark a rage of controversy as the Presidential election heats up.

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While Dr. Bernanke was holding pat on policy, China took aggressive action to jump start its economy with an interest rate cut of its own, dropping the one year lending rate by 0.25%, the first interest rate cut in the country since 2008.

Risk assets started the trading day with a strong burst but then weakened after Dr. Bernanke’s testimony.

Gold (NYSEARCA:GLD) took an early hit, down 2.9% at 11:30 Eastern time, and oil (NYSEARCA:USO) showed declines of 0.3%.

Major U.S. stock indexes all weakened after the speech with the S&P 500 (NYSEARCA:SPY) Russell 2000 (NYSEARCA:IWM) and Nasdaq 100 (NYSEARCA:QQQ) all up fractionally.

Bottom line: Global financial markets remain dependent on and addicted to central bank stimulus and easy monetary policies and without a continuous infusion, could easily slip back into deeper recession or depression.  The question has to be how long will markets stay up based on promises alone.

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