While you were sleeping Bernanke's stimulus hedge

Wednesday 18th July 2012

US Federal Reserve Chairman Ben Bernanke's testimony to Congress provided little in the way of new details about plans to stimulate the pace of recovery. Even so, investors took solace in Bernanke's comments that policy makers were ready to act if needed.

The Fed chairman cited the euro-area fiscal and banking crisis, and the US fiscal situation as the two main sources of risk to economic growth.

The lack of enough new jobs remains a key source of concern, which means "the reduction in the unemployment rate seems likely to be frustratingly slow," Bernanke said in his semi-annual testimony today to the Senate Banking Committee in Washington.

Stimulus might come in the form of additional bond purchases, Bernanke said, citing both Treasury debt and mortgage-backed securities. Other options include lending through the Fed's emergency loan window and reducing the rate the Fed pays banks on reserves held at the central bank.

"If the economy is weakening it means [Bernanke] will probably come back to the table. He hasn't spent that bullet yet and until he does, the markets are probably going to hold up," Bruce Bittles, chief investment strategist at Robert W Baird & Co in Nashville, told Reuters.

In late afternoon trading in New York, the Dow Jones Industrial Average rose 0.69 percent¸ the Standard & Poor's 500 Index gained 0.70 percent, and the Nasdaq Composite Index advanced 0.48 percent.

The US dollar was last steady at US$1.2276 per euro.

"Initially the [US] dollar had rallied against all the major currencies as people had adjusted easing expectations because he didn't mention it," Kathy Lien, managing director of foreign exchange at BK Asset Management, told Bloomberg. "As he continued, people realised Bernanke overall remains pessimistic and didn't send a clear-cut signal because he wants to buy time. The door is still wide open."

Helping the mood were the latest US corporate earnings such as from Coca-Cola and Mattel, which surpassed expectations.

Profits beat estimates at 32 of the 45 companies in the S&P 500 that have reported quarterly results so far, data compiled by Bloomberg showed. Earnings are down 3 percent for the group and profits are forecast to drop 2.1 percent for the entire S&P 500.

In Europe the Stoxx 600 Index ended the day with a 0.3 percent decline.

Spain drew decent demand for its auction of short-term debt, selling 3.56 billion euros of bills today.

The Treasury auctioned 12-month securities at an average yield of 3.918 percent, versus 5.074 percent at the previous sale on June 19, and 18-month bills at 4.242 percent, compared with 5.107 percent.

On Thursday the country is set to auction as much as 3 billion euros of medium and longer-dated bonds. The yield on Spain's 10-year bond has been near 7 percent as investors remain concerned the country will need a full international financial bailout.

BusinessDesk.co.nz

Comments from our readers

No comments yet