U.S. Markets Bounce Back as Bernanke Backs Status Quo on Stimulus

Michael Teague  |

Markets rebounded dramatically on Wednesday all but ignoring the ongoing Cyprus/E.U. bailout crisis, ahead of a highly anticipated announcement from Federal Reserve Chairman Ben Bernanke regarding the future of the $85 billion-per month quantitative easing program.

statement from the Federal Reserve Board said that the Fed would continue to purchase mortgage-backed securities to the tune of $40 billion a month, and Treasury securities at $45 billion a month as long as the unemployment rate remains above 6.5 percent and inflation below 2.5 percent.

Citing an improving employment situation and gains in the housing market, the Chairman justified the day’s rally with the reassurance that stimulus policy would not change until the gains in the labor market, housing sector, fixed business investment, and household spending, could be sustained.

Bernanke was also calm about the situation in Cyprus, saying “At this point, we’re not seeing a major risk to the U.S. financial system of the U.S. economy,” so long as any run on banks in the small Mediterranean island-nation does not have a contagious effect on other Eurozone countries.

The S&P 500 ended its three-day losing streak with a gain of 0.67 percent to close at 1,558.71, making up a good deal of the distance it lost from its all-time high of 1,565.1.

In intraday trading the Dow Jones Industrial Average broke through to a new high of 14,546.82, before pulling back slightly, to close with a gain of 0.39 percent at 14,511.73, while the Nasdaq was up 0.78 percent to end the day at 3,254.19.

Both the gains and the Fed’s announcement served as a buffer against fears of renewed turmoil in the European Union, as the government of Cyprus continues to try and figure a way out of Tuesday’s 36-19 parliamentary vote against a tax on private bank accounts that would qualify the country for a $12.9 billion bailout deal from the European Central Bank and the International Monetary fund and save it from insolvency.

The Cypriot government is keeping banks closed until next Tuesday, though ATMs are still dispensing cash and credit cards are still working.  There is some indication that Cyprus will turn to Russia in order to make up some of the $7.5 billion of its side of the bailout package, perhaps in the form of a continuation of existing loans.  The country’s Greek Orthodox Church has even come forward, offering to mortgage some of its assets to help stave off bankruptcy.

Notable movement for the day included Blackberry (BBRY), who closed up 6.45 percent top $16 per share after Morgan Stanley upgraded the company’s stock to “overweight” and more than doubled price targets from $10 to $22.

First Solar (FSLR) led the S&P in gains up 5.93 percent to $29.49 on the news that Chinese rival Suntech Power Holdings (STP) is headed for bankruptcy, signaling waning support for that country’s solar industry.

The software company Model N Inc. (MDLN) had a tremendous initial public offering, gaining 28.90 percent on its opening price of $15.50 to end the day at $19.98, while shares for Obagi (OMPI) jumped 28.20 percent to $19.73 on news that the producer of medical dermatology therapies was being purchased by the Canadian pharmaceutical company Valeant (VRX) in a $344 million deal.

On the losing side, J.P. Morgan Chase (JPM) continued to leak, closing at a loss of 0.16 percent to $49.12 after it was revealed that the OCC had downgraded the bank’s management rating from “satisfactory” to “needs improvement”, while FedEx Corp (FDX) led all losers on the S&P by shedding a hefty 6.9 percent to close at $99.13 after a disappointing earnings report.

The work uniform company Cintas (CTAS) dropped 4.46 percent to close at $43.88 after missing net income targets.

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