Remarks from the Federal Chairman came to the rescue of the markets on Wednesday after he indicated a possible third round of economic stimulus. Subsequently, the markets ended their four-day losing streak and benchmarks ended in the green. Moreover, an encouraging report from China on its economic growth ensured that indices closed the day in positive territory.
The Dow Jones Industrial Average (DJIA) ended 0.2% higher at 12,491.61. The Standard & poor 500 (S&P 500) settled at 1,317.72 after gaining 0.3%. The Nasdaq Composite Index added 0.5% to finish the day at 2,796.92. The fear-gauge CBOE Volatility Index had plunged 9% during the day following the Fed chairman’s testimony before congress, but it finally edged 0.2% higher to trade over 19. Volumes continued to be weak and on the New York Stock Exchange (NYSE), the American Stock Exchange and Nasdaq, consolidated volumes were 6.83 billion shares, well below last year’s daily average of 8.47 billion. On the NYSE, advancers took the upper hand over the decliners as for every two stocks that gained, only one declined.
With the lack of any economic reports or major events, the onus was on Ben Bernanke to deliver some positives in his testimony to the House Financial Services Committee. The Fed Chairman’s comments that suggested another round of economic stimulus if needed, instantly lifted the benchmarks and markets ended their four- day losing streak. In the first of the two hearings before the House Financial Services Committee, Bernanke said: “The possibility remains that the recent weakness may prove more persistent than expected and that deflationary risks might reemerge, implying additional policy support”.
The announcement from the Fed chairman comes a day after the FOMC released the minutes of its June 21-22 meeting on Tuesday. Some Fed members had suggested the central bank should consider the possibility of a third round of quantitative easing. Such a step will become necessary “if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium term”, according to some committee members. However, other members were of the view that the central bank needed to tighten its policies if inflationary pressure refuse to subside. A difference in opinion about the next step will keep the markets choppy.
Quantitative easing, as it is termed, had proved to be beneficial for the markets the last time around. However, Richard Fisher, a member of the interest rate-setting Federal Open Market Committee (FOMC) said: “I firmly believe that the Federal Reserve has already pressed the limits of monetary policy,” and added ,“U.S. banks and businesses are awash in liquidity. Adding more is not the answer to our problems”. This statement dampened a lot of the optimism in the markets and dragged them somewhat lower.
In another development, positive data from China helped to maintain the positive momentum in the markets. China said its economy has expanded 9.5% in the second quarter from the year ago period. This fell shy of the 9.7% increase for the quarter ended March 31, 2011. However, growth was higher than economists’ projection of 9.4%.
It was the energy and materials that led most of the gains, though the rally faded partially later. The Energy Select Sector SPDR (XLE) fund was up 0.7% at the end of the trading session. Stocks including Chevron Corp. (NYSE:CVX), Exxon Mobil Corporation (NYSE:XOM), BP plc (NYSE:BP), Western Refining Inc. (NYSE:WNR) and Valero Energy Corp. (NYSE:VLO) gained 0.7%, 0.7%, 0.8%, 1.5% and 1.0%, respectively. Reports of a significant fall in crude inventories to 3.1 million barrels enabled light, sweet crude oil for August delivery to edge up 62 cents to $98.05 per barrel.
Materials also added to the gains in the broader markets and the Materials Select Sector SPDR (XLB) was up 0.9%. Among the stocks that gained were Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), Southern Copper Corp. (NYSE:SCCO), Newmont Mining Corp. (NYSE:NEM), Augusta Resource Corp. (AMEX:AZC) and Cliffs Natural Resources Inc. (NYSE:CLF) and they were up 2.0%, 4.2%, 2.6%, 4.9% and 2.3%, respectively.
