The Overnight Report: Bernanke Scares Off Gold

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By Greg Peel

The Dow fell 53 points or 0.4% while the S&P lost 0.5% to 1365 and the Nasdaq lost 0.7%.

It was one of those upside-down sessions on Wall Street last night – the sort of thing we've often experienced since the GFC – in which good news is bad.

From a US economic standpoint, all the news was positive. The second revision of the December quarter GDP result saw an increase to 3.0% growth from the earlier 2.8% estimate. The Chicago PMI accelerated to a rapid 64.0 in February from 60.2 In January. And the Fed's Beige Book indicated the US economy was growing at a “modest to moderate” pace. For many months the commentary has suggested only “modest”, but last month there were two and this month there were five Fed regions exhibiting “moderate” growth.

The news was all a bit redundant however, given earlier in the day Fed chairman Ben Bernanke had made a regular testimony to the House Financial Services Committee. Bernanke suggested the US economy was currently sending out “mixed signals”, such that while slow improvement in the labour market was promising there is yet to be a matching increase in final demand. Maintaining monetary stimulus for now was warranted, Bernanke suggested, even if the unemployment rate fell and the oil price put pressure on inflation.

Hang on a second. Maintaining monetary stimulus? What happened the usual safety net talk we've become accustomed to?

The bottom line is that for the first time in a long time in one of these official outings, Ben Bernanke did not mention QE3. Previously he has always hinted that QE3 (albeit he never calls it that himself) could always be called into action quickly if needed. This time he didn't. This time he gave the first indication that perhaps, by virtue of an improving US economy, QE3 was off the table.

And with that, gold fell 5% or US$95.20 to US$1690.10/oz. Silver, which only on Tuesday night had seen a sudden 5% jump, fell 7% to US$34.34/oz. There is little doubt the world's gold punters have been setting themselves up to expect more and more global central bank stimulus, so the sudden disappearance of QE3 from Fed rhetoric has come as a bit of a shock.

You'd think the stock market might take Bernanke's assessment as a positive one but no – Wall Street is a bit too scared to buy stocks without the comforting knowledge of a central bank support team. Thus the Dow's fleeting visit above 13,000 proved just that.

Bernanke's testimony came as even more of a shock given Wall Street's attention was firmly focussed on the outcome of last night's LTRO from the ECB, rather than anything much at home. As it was, 800 European banks drew funds totalling E530bn. At the last LTRO in December, 500 banks took E489bn. Markets had been setting themselves for a possible reduction this time around, so on the news of the increase the euro took a 1% dive and sent the US dollar index up 0.7%, also helping gold's demise.

As noted yesterday, it is difficult to interpret the LTRO result. Should we be concerned that more European banks need more money than before, even with Greece supposedly sorted? Or should we be happy that the ECB is keen to flood the banks with lots of money to help avoid any further disasters, and they're all happy to take it? It's a bit of a yin and yang, but a much lower number or a much higher number would likely have been needed to really scare the market.

So last night was all about central banks and how much funny money they are or are not willing to print. In the meantime, oil stopped falling and returned to the upside, with Brent rising US$1.19 to US$123.04/bbl and West Texas adding US40c to US$106.95/bbl.

Lead and nickel saw falls of 2% last night but otherwise base metal falls were small, and while the Aussie slipped on US dollar strength it was only by 0.3% to US$1.0729.

After a promising day yesterday on the local bourse, the SPI Overnight is down 22 points or 0.5%.

It's global manufacturing PMI day today, beginning in Australia and moving to China and beyond. Locally the most important data release will be December quarter capital expenditure, which is fundamental to the RBA policy settings. A tardy Woolies ((WOW)) will report its result.

Rudi will appear on Sky Business at noon.

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