Did Bernanke Pre-announce QE3 And More "Hope" Last Friday As Stocks Believe? Here Is Rosenberg's Take
With today's market session merely a continuation of what happened on Friday, here is David Rosenberg's explanation of the market move seen following the initial dip on Friday, followed by the latest surge in stocks. Rosie's summary on what has been driving stocks higher over the past 48 trading hours? Simple - " the markets were responding to something and they were. It's called hope, and Ben gave them some." If indeed stocks are correct about QE3, look for Brent, WTI, Gold, and everything else to resume the upward climb, completely ignoring anything and everything that the CME decides to do with "speculative" margins levels.
From David Rosenberg:
Friday's Action in Context
What a session, or more like 'what a week!', as the Dow Jones Industrial turns in its best performance since early July via a 4.3% spike.
It was almost like a replay of the FOMC press statement about a month ago (August 9). The markets didn't know what to do with it, selling off and then rallying, and then closing near the session highs. The Dow fell big in the session (down over 200 points, but by the end of the day, it had closed considerably higher (up by 135 points last Friday and was up over 400 points back in August).
There was a critical difference between Ben Bernanke's speech this past Friday and the one he delivered back on August 27, 2010, notwithstanding the similar equity market response (the S&P 500 with a 1.5% gain; the Nasdaq closed 2.5% higher). A year ago, Bernanke practically all but pledged another round of quantitative easing to combat deflationary pressure.
This time around, there was more discussion about fiscal policy than there was about monetary policy and there was no discussion about deflation. He largely reiterated what he said in July at the semi-annual congressional testimony about the "range of too/s" that could be deployed (i.e. extending the term of its assets and charging the banks interest on their excess reserves or even additional balance sheet expansion). But he spent most of the time putting the burden on policymakers down the beltway to act more forcefully ("most of the economic policies that support robust economic growth in the long run are outside the province of the central bank").
Still, the markets were responding to something and they were. It's called hope, and Ben gave them some.
First, the September FOMC meeting is now going to be two days, not one. This provides hope that the Fed will be spending time coming up with another investor-friendly stimulus package (to allow for a "fuller discussion").
Second, Bernanke sounded optimistic over the economic outlook (How can he not sound positive based on the position he holds?). Even so, his forecasting record in the past five years has been circumspect, at best.
Third, by putting the onus on fiscal policy, he is helping President Obama out in his quest for another round of stimulus, to be announced after Labour Day. This will likely include a range of goodies from mortgage market measures, to an extension and expansion of payroll tax relief and more money thrown at infrastructure — see Obama Pressed to Come Out Fighting Over Jobs on page 3 of the weekend FT.
So there is still hope for QE3, hope that Bernanke is right and a recession is averted and the hope that more fiscal stimulus is coming our way. (A tad ironic since in the GDP accounts we see that government spending contracted in volume terms for the third quarter in a row in Q2.)
But there are some problems. First, QE2 and last year's fiscal follies gave us one good quarter of GDP growth and that was it. Why will more short-term gimmicks be any more effective?
Second, the rally last Friday occurred with lighter volume on the NYSE. So call it a low-conviction rally, even if the August 8th lows have held thus far. The brutal down days see the market close at or near the lows and the up days see the market finish at or near the highs. The volatility is intense and still characteristic of a bear phase
Third, unlike August 27, 2010 when the QE2 hopes sparked a move out of bonds and into stocks — the 10-year Treasury yield shot up 16bps that day — there was no such shift this time around. On Friday, the 10-year note rallied 4bps to 2.19% — not providing the validation for the rally we saw in equities.
Fourth, this rally in the equity market in the past week has been noteworthy for its lack of leadership — the leader board is filled with thinly traded stocks and that is never a signpost of a healthy uptrend. And, as the Investor's Business Daily aptly points out, the areas doing the best are the gold miners, discount stores, tobacco and utilities. So this market bounce definitely has a 'defensive quality' feel to it.
Fifth, the market has yet to hit capitulation-like sentiment levels and the reality is that when you see articles like this surface on page B7 of the weekend WSJ — Those Safe Havens You've Been Flocking To Aren't So Safe — then you can rest assured that the bear market in risk assets has hardly run its course completely. There were enough bearish articles on gold in Barron's and the weekend WSJ (like Bubbly Gold might Take a Bath) that you know that there is little chance the yellow metal is in any danger of entering into a bear market any time soon.
Sixth, as anyone who has covered the asset classes over time would know, bonds lead the economy and the equity markets. A sub-1% yield on the 5-year note is ominous in terms of what Treasuries are signaling about the economic outlook..
Credit is already bracing for a recession, or some facsimile thereof, with high- yield debt turning in its bleakest performance since November 2008; and Markit's Crossover Index of European high-yield bond default swaps have gapped up to 724bps, a level not seen since the global economy was struggling to emerge from the Great Recession in July 2009 (see Rally in Equities Defies Credit Gloom on page 12 of the weekend FT).