Price Action vs Central Bank Speak Since Bernanke Taper Talk

Benjamin Graham once said that markets are voting machines in the short-term and weighing machines in the long-term — sentiment vs fundamentals.

These days, the primary driver of sentiment tends to be central bank statements and actions — with mere statements having huge impact.

If you have doubts about the market impact of central-bank-speak, just take a gander at this calendar of central bank statements compared to market price action:

  • 05/22  Federal Reserve president Ben Bernanke said that a tapering of quantitative easing could begin later this year if conditions warrant
  • 06/18  European Central Bank president Mario Draghi said he had an open mind to doing what was necessary
  • 06/19  Bank of Japan president Haruhiko Kuroda said they are taking steps and felt things would work out
  • 06/20  Peoples Bank of China governor Zhou Xiaochuan added liquidity to their banking system to relieve a liquidity crunch
  • 06/21  St. Louis Fed president James Bullard said QE could actually be increased if inflation slows
  • 07/10  Federal Reserve president Ben Bernanke said the economy needs the Fed’s easy-money policy “for the foreseeable future.”

Now let’s look at price movements on the day after each of those statements/actions:

US Stocks

_US

European Stocks

_Europe

Japanese Stocks

_Japan

Chinese Stocks

_China

Bernanke frightened the markets, and other central banks stepped in with voice and cash to stem the decline, followed by a dovish “clarification” by Bernanke yesterday.

It appears that all is well for now, at least as far as central bank driven sentiment is concerned.

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