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More Gloom From Bernanke Could Light Up Stocks

Sadly, it’s a gloomy Ben Bernanke that makes risk markets happy, and traders will be watching the Fed chairman again Wednesday to see if he sounds just as dour in a second day of Congressional testimony.

U.S. Federal Reserve Board Chairman Ben Bernanke arrives to testify at the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill.
Karen Bleier | AFP | Getty Images
U.S. Federal Reserve Board Chairman Ben Bernanke arrives to testify at the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill.

Stocks rallied Tuesday, after initially selling off when Bernanke failed to say anything definitive about more Fed easing during testimony before the Senate Banking committee. But stocks reversed course and the Dow ended the day 78 points higher at 12,805. The S&P 500 was up 10 at 1,363.

“He was so downbeat about the economy that everybody said he’s going to have to come back with something,” said Art Cashin, director of floor operations at UBS. Bernanke appears before the House Financial Services Committee Wednesday at 10 a.m. ET.

Traders had been hoping, but not necessarily expecting, to hear the Fed chairman tip his hand on another round of easing when he appeared for semiannual economic testimony. Fed officials have led markets to believe that they have made no decision on further easing, but the stock market, in particular, has been supported by the idea of more easing as the economy continues to deteriorate.

Bernanke’s comments on the economy were bleaker than his past remarks. He noted the economy had slowed down in the first half of the year, and he reiterated a pledge that the Fed is prepared to take additional action if needed.

Traders have been looking for another round of easing, where the Fed would buy either Treasury or mortgage securities, further ballooning its balance sheet. At its June meeting, the Fed extended Operation Twist, under which it buys and sells an equal amount of Treasurys in an effort to keep rates low at the longer end of the curve.

“I would emphasize the dovish take, the consistency of the message that the Fed is willing to do more, and once again he gave a rather downbeat assessment, particularly on the employment front,” said David Ader, chief Treasury strategist at CRT Capital.

Bernanke said the big risks to the economy are Europe’s sovereign crisis and slowdown, and the U.S. “fiscal cliff.” The U.S. economy faces a potentially sharp jolt, starting Jan. 1 if Congress does not act on the Dec. 31 expiration of tax cuts, and the onerous budget cuts that will automatically take place next year.

Ader noted that Bernanke emphasized the headwinds that are outside the Fed’s control. As for Wednesday’s appearance before the House committee, he expects to hear the same message with a stern warning to Congress.

“It used to be in (former Fed Chairman Alan) Greenspan’s days, it would be bearish one day and the next day he would correct himself, “ Ader said. As for Bernanke, “I don’t think he’s going to change.”

Senators grilled Bernanke on the bank Libor rate-rigging scandal, and the Fed’s role. “He had all the names and dates. He knew it was coming,” said Cashin. “Here we’re on the very edge of potentially slipping into recession and they’re arguing about rates set in London.”

What Else to Watch

Treasury Secretary Timothy Geithner kicks off the second annual Delivering Alpha conference, organized by CNBC and Institutional Investor. Geithner speaks at 8:30 a.m. The conference features widely followed investors, as well as political and economic commentators.

Some of the participants include Perry Group CEO Richard Perry; Pershing Square Capital CEO William Ackman and Omega Advisors founder Leon Cooperman. KKR co-Chairman Henry Kravis is the luncheon keynote speaker. Former Treasury Secretary Robert Rubin joins former Treasury Secretary Hank Paulsen in a discussion. U.S. Attorney Preet Bharara will also participate.

Markets will also be watching for the release of the Fed’s beige book at 2 p.m. ET, an important look at the Fed’s view of the economy. There are also housing starts and building permits at 8:30 a.m.

Earnings news will also be important Wednesday. Results are expected from Bank of America, BlackRock, Honeywell, Northern Trust, PNC Bank, St. Jude Medical and Abbott Labs before the opening bell. American Express, IBM, eBay, F5 Networks, Kinder Morgan, Noble Corp, Stryker, Xilinx, and Yum Brands report after the closing bell.

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Stocks may feel some impact from Tuesday’s late day earnings news, especially Intel which gave a more somber outlook and lowered its revenue forecast, citing slower global growth.

Goldman Sachs CEO Lloyd Blankfein will participate in a discussion at the Economic Club of Washington at 12 p.m.

Bernanke and Geithner meet at 2:30 p.m. with CFTC Chairman Gary Gensler, SEC Chair Mary Shapiro and other members of the Financial Stability Oversight Council on Dodd Frank.

Follow Patti Domm on Twitter: @pattidomm

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

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  • Patti Domm

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

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