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Behind Today's Rally: Market's Fate 'In Bernanke's Hands'

The prospect that the world’s central bankers will juice the banking system with a new wave of easing sent stocks flyingand the euro rallying.

Federal Reserve Board Chairman Ben Bernanke testifies during a hearing before the Senate Budget Committee February 7, 2012 on Capitol Hill in Washington, DC.
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Federal Reserve Board Chairman Ben Bernanke testifies during a hearing before the Senate Budget Committee February 7, 2012 on Capitol Hill in Washington, DC.

Treasurys and bunds yields snapped higheras investors unloaded securities that were the safe havens of choice just a week ago. Commodities also soared, with oil up more than 2 percent.

“There’s just been, for the last 48, 72 hours a growing feeling that a 10 percent decline in the stock market is as deep a decline as you would get with Ben Bernanke lurking tomorrow,” said Dan Greenhaus, global strategist with BTIG.

The Dow soared more than 200 pointsin a rally fed by sharp gains in financial stocks, like Morgan Stanley, Citigroup, JPMorgan, and Bank of America. The European banking sector moved higher Tuesday and continued to rally, along with U.S. banks, in a more supercharged rally Wednesday.

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Traders also said the victory of Republican Gov. Scott Walkerin the Wisconsin recall election is a good sign for GOP presidential candidate Mitt Romney, and a negative for President Barack Obama.

“It’s certainly part of the mosaic that’s helping the rally today,” said Art Hogan of Lazard Capital Partners. Stocks also gained as traders covered short positions.

Traders also pointed to a story from Reuters that said a deal is in the works that would enable Spain to recapitalize its banks with aid from euro zone countries, but without strict new reforms imposed by the euro zone. The story quoted unnamed German officials.

“The fate of the market in the next couple of days is in Ben Bernanke’s hands, and its over his interpretation of the state of the economy,” said Greenhaus.

Bernanke testifies before the Joint Economic Committee Thursday on the economy. Traders believe if he is more negative than positive in his remarks, another round of Fed easing could be in the offing, as early as the June 19/20 meeting.

The stock market continued to gain after the Fed released its beige book at 2 p.m. which said the US economy expanded at a “moderate rate” in March and April, better than its previous modest to moderate rate. The Fed, however, also noted that its contacts were less optimistic.

"It's a little bit more upbeat than I might have thought—a little less subdued," said David Ader, chief Treasury strategist at CRT Capital. "This is marginal stuff. It was before the nonfarm payrolls and other things. So in context, it sort of comes across as old news."

But it did have a slight impact on the bond market.

"We have stalled in Treasurys. We're a little bit better, on the margin," Ader said.

Earlier Wednesday, the European Central Bank kept rates unchanged, initially disappointing markets. The Bank of England meets tomorrow, and there’s speculation it will carry out another round of easing.

“Today when you learned that China was looking at doing some stimulus and you turned to Europe and the authorities said, ‘we’re not ready to do anything quite yet but we’re here if needed,’ we went from an oversold market, reaching a logical bottom to hopes that the authorities are on guard. So you get a snap back rally of 200 points,” said Art Cashin, director of floor operations at UBS.

Cashin said the rally follows a head and shoulders formationin the S&P 500. “I think it’s probably a reasonably short term bounce, with a life span of one week to, at the outside, three weeks. Then we’ll see again,” said Cashin, who appeared on "Squawk on the Street."

Besides banks, housing stocks, like Hovnanian , KB Homes , and Toll Brothers also moved higher.

“If you were going to get additional easing from the Federal Reserve, you would presume financials would get a benefit from that. Home builders have also been doing quite well,” said Greenhaus. “Semiconductors have also been out in front.”

The type and timing of Fed easing has become the new debate on Wall Street, replacing expectations that the Fed was not ready to do more quantitative easing. But a weak series of economic reports and the dismal jobs report for May, showing just 69,000 jobs created, sparked new expectations the Fed would take action.

One theory is that the Fed extends its Operation Twist, which is scheduled to expire at the end of the month. That program differs from quantitative easing in that the Fed buys longer duration Treasurys and sells an equal number of shorter duration notes, without expanding its balance sheet.

If the Fed decides to do a “QE3,” that could involve the outright purchase of more securities – mortgages or Treasurys.

Greenhaus is in the camp that does not expect immediate Fed action. “We’ve assumed if the Fed is going to launch a new program, it would be in the fall,” he said.

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

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Featured

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.