Markets Heat Up on China Easing, Can Fed’s Bernanke Top It?

(eToro Blog) Investors worldwide are optimistically anticipating that when Ben Bernanke testifies in front of the U.S. Congress later today that they will get a hint that their collective hopes will soon be realized. Already, there have been rallies in global equities, oil and gold as investors count on Big Ben to perform his magic act once again.

What will be closely scrutinized is how Bernanke will couch his remarks; if the assessment is that the U.S. economy is only going through a short-lived soft patch, analysts believe that’s a clue that the Fed intends to extend Operation Twist beyond its June expiration. If, on the other hand, Bernanke expresses worries over the possibility of another downturn in the economy’s fragile recovery that would be the clue that the Fed is ready to consider another round of real quantitative easing.

If Bernanke’s clues suggest that the Fed is going to give the nod to Operation Twist, analysts point out that that does not suggest that QE3 is off the table, rather that the extension will give the Fed members a chance to reevaluate the need for additional “real” stimulus. Recent economic data has been generally hit or miss, though labor data has definitely been a miss, and analysts believe that Bernanke can go either way.

Recently Janet Yellen, Bernanke’s second in charge and considered one of the more influential members of the FOMC, said that she sees substantial and downside risks to the economy’s outlook, and expressed the view that the Fed’s Open Market Committee has room to consider additional accommodation.

If it sounds like an extension of Operation Twist is on the agenda, equity investors should see a smallish bounce, while QE3 prospects would offer a large and more enduring one. Gold and oil should also see a jump on a more accommodative stance, as the commodities are priced in U.S. Dollars which would depreciate in value with more easing.

Oil and gold prices both edged higher yesterday as stimulus hopes were revived and after a brief paused earlier today got a lift from an unexpected place – China’s central bank – which announced a 0.25% rate cut to their benchmark interest rate. Currently gold prices are higher, with spot gold up to 1625.30 and sentiment on OpenBook is bullish. OpenBook trader GermangirlCA had a long position opened earlier today close out when it hit its TP at 1,624.78, for a gain of 16.20%. OpenBook guru peischen, who has a number of long positions open in gold, would benefit tremendously from a gold rally.

NYMEX-traded WTI oil is also trading higher at $86.10, a barrel – a gain of $1.08, with sentiment bullish on OpenBook. Just a short while ago trader sitaramtr from India won two out of three long trades in oil, catching two longs with profits of 31.14% and 45.68%, more than compensating for the loss. Irish trader OgreergO also profitably closed one long position with an 11.55% gain; overt the past week the trader has increased the oil allocation to 68.5% within the portfolio, which has provided a gain of 1.6% over the period.

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