No surprises from Bernanke as QE3 remains a possibility

<p>An eerily quiet start to trading seemed apt to finish a very quiet month on trading floors across the city. With the much anticipated Jackson […]</p>

An eerily quiet start to trading seemed apt to finish a very quiet month on trading floors across the city. With the much anticipated Jackson Hole speech by Ben Bernanke being the central focus for traders all through the week, no one was willing to place large positions before the 3pm start.

So we should be thankful that the Jackson Hole conference gave us something to look forward to this week. Bernanke did not shock the markets in any way. He had to step an uncomfortable tightrope between giving everything away and not saying anything to disappointing the markets enormously.

Bernanke said he remains open to using more quantitative easing measures to promote growth, although he did not commit to any action. This was very much as expected. He highlighted the stagnation in the US labour market as a grave concern and said that he was open to more stimulus as it was needed. There was more focus on the defence of the QE policy than had been anticipated as Bernanke claimed the policies had provided ‘meaningful support’ to the recovery and can do more.

Despite an initial drop in markets across the globe, prices quickly retraced the steps back, with the FTSE going into the close up 0.5%, the DAX gaining 1.2% and CAC over 1%. The Dow Jones quickly reached its intraday high, up over 1% within an hour of the speech. The market is going to come away from the speech with a sense of security, the feeling that there is a cushion beneath it should things get too difficult. It was reassuring in one sense but also inconclusive in another.

Attention will now be directed firmly on Europe and the ECB meeting on  September 6. The ECB will lower its growth forecasts warning that we should expect negative growth rates in almost all southern countries and continued stagnation in France. This news came at the same time that it was revealed that unemployment across the eurozone had increased to 18 million – the highest number since records began in 1995.

With the continual downbeat news coming from the zone it is crucial that Draghi works hard this weekend to put together the details of the bond buying scheme and smooth relations with Jens Weidmann, President of Bundesbank, who has threatened to resign over plans to resume bond purchases as it blurs the line between monetary and fiscal policy.

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