Friday, August 31, 2012

Bernanke: The Song Remains The Same

The market is higher in early trading, coming more off the heels of developments in Europe as opposed to comments from Bernanke's speech in Jackson Hole.

Europe's markets were higher this morning after the EU plans to make the ECB the sole authority in granting back licenses.  This could pave the way for the ESM to get a bank license which as we have said would dramatically increase its lending capacity.  There is also chatter that the head of the Bundesbank is resigning, which would remove one of the biggest opponent's to the ECB's current plan of action.

The above news has the euro rallying as well as Euro stock markets.  Asian markets were lower overnight on continued fears of a hard-landing in China.

As for Bernanke's speech, I have been saying for weeks that I thought it was highly unlikely that we would hear about new QE initiatives and that it was more likely that he would reiterate what he as been saying recently - that the Fed stands ready to provide additional stimulus as needed by the economy.

That is exactly the tone that Bernanke's speech took today.  He said that the use of non-traditional policies involves higher costs that traditional policies, and as such the bar should be higher for the use of such policies.  He also took a stab at the Administration for its lack of further fiscal initiatives by saying that "Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve."

The market showed some initial disappointment with his remarks and sold off, but that dip was quickly bought again as investors conclude that the Fed stills stands ready to step in, and the ECB is getting closer to providing more support to Europe.  Also, a note out of Goldman this am says they think China's economy will pick up into the end of the year.

Commodities are higher on the lower dollar today.  Oil prices are higher near $95.88.  Gold prices are up to $1672, and silver prices are higher as well.

The 10-year yield remains weak falling to 1.60%.  And the VIX is down -4% back to 17.13.

Trading comment: Looks like the Bernanke selloff came a day early and today's market strength is more about optimism that the ECB will announce some policy initiatives next week to help the eurozone crisis.  I expect volume to be light today ahead of the holiday weekend so I don't want to make any big bets before next week.  Volume levels should pick up again in September and we will see if the market has the strength to push to new highs or if it needs a deeper pullback first.


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