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Banking

US and European equities slip over Bernanke speech

Global equity markets slump and gold edges higher after Federal Reserve’s chairman sidesteps quantitative easing and extends September meeting.

US and European equity market gains over the last few days have been erased after Federal Reserve chairman Ben Bernanke delayed discussing available easing options or give clarity on future stimulus measures. He also revealed the Fed has extended its September meeting by another day.


European equity markets initially fell by 3%, across some bourses. However, while the markets priced in the knee-jerk reaction 15 minutes later, US stocks remained just below positive trading, while European equities stayed negative. Gold climbed by 1.3%, while oil remained in the red.


“It is clear that the recovery from the crisis has been much less robust than we had hoped. Financial stress has been and continues to be a significant drag on the recovery, both here and abroad,” said Bernanke.


“Bouts of sharp volatility and risk aversion in markets have recently re-emerged in reaction to concerns about both European sovereign debts and developments related to the US fiscal situation, including the recent downgrade of the US long-term credit rating by one of the rating agencies and the controversy concerning the raising of the US federal debt ceiling.”


“It is difficult to judge by how much these developments have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth,” he added.


During his speech at Jackson Hole, Wyoming, Bernanke said the September meeting to review the advantages and disadvantages for further stimulus will now be held on September 20 and September 21.


“To achieve economic and financial stability, US fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time,” said Bernanke. “As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.”


“The increasing fiscal burden that will be associated with the aging of the population and the ongoing rise in the costs of healthcare make prompt and decisive action in this area all the more critical,” added Bernanke.


Bernanke also outlined the temporary factors that have dragged the market further:


“Temporary factors, including the effects of the run-up in commodity prices on consumer and business budgets and the effect of the Japanese disaster on global supply chains and production were part of the reason for the weak performance of the economy in the first half of 2011; accordingly, growth in the second half looks likely to improve as their influence recedes. However, the incoming data suggest that other, more persistent factors also have been at work.”


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