Ah Ben, you’ve done it again! US Federal Reserve chairman Ben Bernanke has moved global markets by hinting ‘something’ may happen at the next meeting of the Federal Open Market Committee in September.
Rumours are rife that QE3 is on the table. That’s why we saw such a sharp rally in the US on Friday night…
Bernanke really didn’t say much… Just that the US Federal Reserve has ‘tools’ that could keep the economy ticking over… But that was all it took…
The Dow Jones rose 1.21%.
The S&P jumped 1.51%.
And the NASDAQ leapt 2.49%.
The media pundits call it Bernanke’s ‘bazooka-in-the-pocket’ play. The logic is, if you say you have a bazooka in your pocket chances are what you want to happen will happen.
And you’ll never actually have to use your bazooka.
It’s like in The Wizard of Oz. The locals said the wizard was great and powerful. Dorothy and co. believed he had the power to give the scarecrow a brain. Because they believed, the scarecrow became one of the greatest thinkers in Oz. Even though he’d got nothing from the wizard but a bagful of sawdust stuffed in his head.
It’s the same thing with Bernanke. People believe he can save the market by pushing a button and pulling a lever. His vague talk of ‘tools’ was enough to lure buyers back into the market on Friday.
In the week following Bernanke’s 2010 speech in Jackson Hole, Wyoming, the Dow climbed 2.9%… The S&P 500 climbed 3.61%… And the NASDAQ jumped 3.59%…
That was the start of a seven-month rally that saw the NASDAQ, Dow Jones and S&P 500 put on an average of 20%…
And our own ASX200 got a 10% boost…
Will it happen this time?
Slipstream Trader, Murray Dawes, says we have now entered a game of cat and mouse with the Fed. The macroeconomic indicators are pointing south. But the market is going up because Bernanke has said he has more tricks up his sleeve.
We could see the market stage a rally ahead of the FOMC meeting in September, but odds – Murray says – the risk will be to the downside after the meeting. That is unless the Bernanke bunch embarks on a very large round of Quantitative Easing. The odds are low, but be aware that it could happen.
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Editor, Money Morning
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