Bernanke talks down the taper, markets to go wild

Fed chief Ben Bernanke has fired up currency and commodity markets with a speech sharply at odds with the FOMC minutes.

Ben Bernanke has just lit a fire under global commodity and currency markets. And that will flow through to Australian stocks this morning, which are expected to open strongly.

The haste with which markets have unwound their risk positions in the past seven weeks now is being questioned as gold, oil and currency markets have begun to reverse their positions in the past few hours.

Wall Street and European markets marked time overnight but a speech by US Federal Reserve chairman Ben Bernanke, after the close of trade, suddenly had traders reconsidering their expectations that the days of cheap money were rapidly coming to an end.

Bernanke’s comments contrasted sharply with the minutes of the latest FOMC minutes that indicated growing support for tapering by the end of 2013.

Bernanke’s Boston speech was supposed to be about 100 years of the Fed. Pretty much everyone in the room, however, was focussed on the past six weeks and what may happen in the next three months. And on that score, Bernanke dropped hints that policy would be “more accommodative” in the medium term.

“Both sides of our mandate, both the employment side and the inflation side are saying that we need to be more accommodative.”

He then explained that with restrictive fiscal policy, monetary policy would need to be “highly accommodative for the foreseeable future.”

The greenback retreated immediately and Wall Street futures advanced, indicating some strong rises tonight. Those moves have extended since the comments, delivered around 6am Australian Eastern Standard time, with the Australian dollar rising strongly to US92.50 (see my article Recalibrating into the dollar's downturn).

Commodity markets also have reacted to the speech, with strong rises in gold and oil. These moves will create strong demand for Australian stocks this morning, given our market is one of the first equity markets to react to the speech.

Domestically, the jobs numbers today will provide some direction on interest rates. Most economists are predicting a rise to 5.6% following some alarming numbers in private surveys early this week, particularly in West Australia.

Speculation of a rate cut next month has risen strongly in the past week, with some economists pricing in further cuts later this year.

Even before Bernanke's speech commodity prices overnight advanced, in some cases quite strongly. Metal prices including gold and silver were higher. 

But it was oil that dominated proceedings. A sharp drop in US oil inventories overnight sent prices to their highest level since March 2012.

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