Bernanke talks tough on Capitol Hill

• The markets fail to get the QE3 go-sign from Bernanke

• Bernanke passes the baton to politicians

• Risk gets knocked off its highs – where to now?

The markets had been in buoyant mood leading up the Bernanke testimony, however he failed to throw them a bone and they have given back some of their earlier gains. Bernanke told those gathered at Capitol Hill that US growth seems to have decelerated in Q2 and that the slowdown in jobs growth is only partly to do with the weather. He also said that there are still factors that could hinder the housing market recovery. While he blamed some of the economic weakness on the Eurozone situation he also mentioned that the other important risk to the US recovery is the US’s own domestic situation. Bernanke took a leaf from the ECB’s book and rather than pledge more action from the Fed, passed the baton to politicians.

Bernanke said that the Committee was prepared to take further action as appropriate to promote a stronger economic recovery, but gave no hint as to what it may (or may not) do. This suggests that the economic data is not there yet to support more unconventional Fed action and it could take another sharp decline in the economic data to get QE3 back on the table. Thus jobs growth on average at 75k a month just isn’t enough to get the Fed to fire up the printing presses.

So what does this mean for the markets?

There are a couple of fundamental things top take from Bernanke’s testimony: 1, the markets need to be watching US economic data like a hawk to try and determine future policy action from the Fed and 2, The US fiscal cliff could be a major hurdle for risky assets this year, and the Fed may not step in to smooth the problem, instead leaving it up to politicians to get the US’s fiscal house in order.

Market reaction in the near-term:

• The recent risk rally seemed fragile, and after a fairly dry testimony from Bernanke risky assets may have lost their major near-term props. This may not cause a sharp decline in risk but rather a slow meander lower. Thus we think that 1.20 is still on the cards for EURUSD and the Aussie crosses could have much further to fall.

• This is also bearish for stocks, especially US stock markets, which is one of our calls for this quarter.

• However, the Fed meets again in 2 weeks, thus we could drift into the meeting as the market reacts to data released between now and then (crucially the meeting concludes prior to the July payrolls release…)

Source: Forex.com

17.07.2012