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While you were sleeping: Investors pause on Bernanke

Thursday 1st March 2012

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Federal Reserve Chairman Ben Bernanke is giving investors a reason to pause after Wall Street's three key benchmarks touched fresh highs in recent days.

Bernanke's cautionary comments offset better-than-expected economic data. The Commerce Department lifted its growth estimate for the final three months of 2011, to 3 percent from 2.8 percent, while the Institute for Supply Management-Chicago's business barometer rose to a 10-month high of 64 in February.

The Fed chairman however spoiled the party as he indicated that the US central bank is prepared to wait and see before taking any additional easing action.

“Monetary policy is not a panacea,” he said in response to a question today. “It can help offset cyclical fluctuations and financial crises like we’ve had, but the long-term health of the economy depends mostly on decisions taken by the Congress and the administration.”

In early afternoon trading in New York, the Dow Jones Industrial Average shed 0.14 percent, the Standard & Poor's 500 Index slipped 0.05 percent and the Nasdaq Composite Index fell 0.19 percent.

Earlier in the session the Nasdaq surpassed 3,000 for the first time since 2000. Yesterday, the Dow had closed above 13,000 for the first time in four years.

In Europe, the Stoxx 600 Index closed unchanged for the day, at 264.32, holding gains for the calendar year so far at 8.1 percent.

“We have a bit of investor nose bleed,” Bruce McCain, chief investment strategist at the private-banking unit of KeyCorp in Cleveland, told Bloomberg News. “There are still enough things to worry about that with the absence of more stimulus would lead us to question - what’s there to move us out of some of that? In addition, we’ve had a big run-up in stocks. No trees grow to the sky.”

Some believe stocks are still cheap. That includes Laurence Fink, chairman and CEO of the US$3.51 trillion asset management firm BlackRock.

"We still have a long way to go to make equities look expensive," Fink said at the Council on Foreign Relations in New York.

In Europe, banks were keen on cheap cash offered by the European Central Bank. The number of financial institutions taking advantage of the ECB's three-year loans jumped to 800 and borrowing rose to a record in an operation that may bolster the euro-zone economy.

The Frankfurt-based central bank said it will lend banks 529.5 billion euros for 1,092 days, surpassing the 489 billion euros handed out to 523 institutions in the first three-year operation in December. Economists predicted an allotment of 470 billion euros in today’s tender, according to a Bloomberg survey.

Italian banks took more than 130 billion euros, Reuters reported, citing an unidentified source, and their Spanish rivals were expected to have borrowed heavily too.

While the central bank's loans have eased the strain of the debt crisis and allowed cash-strapped governments to keep tapping the debt market without having to pay yields considered unsustainable, analysts warned that risks remain.

"It is good for the short term in that it alleviates any immediate liquidity problems,"  Andrew Lim, banking analyst at Espirito Santo in London, told Reuters. "But for the long term, banks are becoming increasingly dependent on state funding, they are storing up an issue for later when they have to revert to more expensive wholesale funding."


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