By Greg Peel

The Dow closed down 109 points or 1.1% while the S&P lost 1.3% to 1069 and the Nasdaq fell 1.6%.

US Federal Reserve chairman Ben Bernanke was scheduled to make his regular testimony on monetary policy to the Senate last night at 2pm. Wall Street was looking for Bernanke to provide stock markets with some impetus in announcing fresh monetary policy stimulus measures. But he didn't.

Prior to the testimony, the stock indices simply stumbled along the flat line. Earnings reports are now coming thick and fast enough that no one report is sufficient to move the market in isolation. Reports released during the session last night included Coca-Cola, Morgan Stanley and Wells Fargo while Apple's strong result from Tuesday's after-market also had to be accounted for.

Aside from being in waiting mode ahead of Bernanke's speech, Wall Street was unable to gain strength from earnings reports despite a trend of outperforming forecasts on both the bottom and top lines. Generally better than expected earnings and revenues were not enough to overcome a general trend of cautious third quarter guidance and CEO talk of uncertainty ahead.

Then at 2pm, Mr Bernanke sat before the Senate committee and told it that economic conditions were “unusually uncertain”. Bam – the Dow went into free-fall.

The chairman explained that while the Fed had all along expected the US economy to post only moderate and sluggish growth out of the GFC, growth is apparently a bit more modest and sluggish than previously expected. Employment is not picking up as soon as hoped. And the European situation is providing a good deal of the uncertainty.

Bernanke did not, however, believe that the US would suffer a feared double-dip, and he did believe that swift action from the authorities in Europe had overcome the need for possible sovereign debt restructuring. But the Fed had slightly reduced its US GDP growth forecasts for 2010-11 and had begun preliminary discussions on monetary policy measures it may need to deploy or redeploy if the situation worsened.

In the course of an hour, as Bernanke was grilled by Senators, the Dow fell around 150 points. The reality is Bernanke needn't have bothered writing any new speech – he could have just read from the minutes of the FOMC meeting which were released last week. Absolutely nothing was different. Once again the market was jumping at shadows.

When asked what further policy measures the Fed might deploy if the situation required, Bernanke offered three strategies: (1) The FOMC could be more specific in its statements about just how long it foresaw the “extended period” of “exceptionally low” interest rates (ie a funds rate of 0-0.25%) lasting; (2) it could drop the interest paid on bank reserves held by the Fed from 0.25% to zero to encourage banks to shift their cash out of the safety of the Fed and back into lending to businesses; (3) it could roll over the mortgage securities which remain on its balance sheet rather than let them expire, or it could also recommence the purchase of mortgage securities, all of which provides support to the waning housing market.

The last option is representative of “quantitative easing” which the Fed had deployed in response to the GFC but had allowed to wind down in April, back when the US and global economies were seemingly a lot healthier. Wall Street has dubbed such a move “QE2”. What Bernanke did not venture into, however, was any talk of the ultimate form of QE – when the Fed buys US Treasury bonds with money provided by the Treasury.

Other than being a bit more specific about potential QE2 measures, again I can say that Bernanke said absolutely nothing new last night. And indeed, the cautious outlooks provided by reporting companies earlier in the session did not more than echo the Fed's view. But Wall Street wanted action on monetary policy, not just talk.

That the Fed has not yet decided action is warranted can be taken one of two ways. A bearish view is: “Oh God, we're not going to seeing any rescue from the Fed to support the market”. A bullish view is: “Thank God the Fed doesn't see the situation bad enough to warrant a return to quantitative easing”. It all depends which half of the glass you're looking at.

The Dow did recover somewhat to the close to be down only 109 points instead of more than 140. After the bell, Starbucks continued the day's trend of posting a Street-beating result but qualifying it with a sombre outlook. However both of eBay and Qualcomm both beat estimates and provided upbeat guidance.

Perhaps the most telling movement last night was not in stocks, but in bonds. Having reclaimed 3%, the ten-year Treasury yield had slipped again on Tuesday night and last night fell to a 15-month low at 2.88%. The “unusual uncertainty” of which Bernanke speaks is enough to have investors eschewing equity and other risk investments and preferring to park in fixed interest safety for the time being. We now appreciate that US companies are all cashed up – the tune of some US$1.8 trillion – that US banks are all cashed up and enjoying Fed interest payments, and that there remains a high level of “cash on the sidelines” amongst the investment community.

All dressed up and nowhere to go.

Until Wall Street can see its way through lingering post-GFC uncertainty – uncertainty which is hardly surprising – then we are going nowhere much for the time being. The bulls argue all that cash is a reason to be bullish because it will ultimately be “put to work” But when? I said at the beginning of the year that 2010 would be the year we go sideways, and so far that's exactly what's happening.

Over in Europe, currency traders began to square up on their euro positions last night after a good run ahead of the European bank stress test results due on Friday night. The US dollar index rose on euro weakness to be up 0.6% at 83.31. The Aussie fell half a cent to US$0.8781.

The stronger dollar had gold slipping US$6.10 to US$1186.10/oz. Gold will not rally while QE2 is only talk and not action.

Oil fell US$1.02 to US$76.56/bbl in the new front month of September delivery on the usual rollercoaster of weekly inventory movements.

Oil inventories might be higher, but copper inventories are falling. The speculators have again taken over the LME now that the industry dealers are sitting on a beach. Copper broke up through its 100-day moving average last night as technical trading defied all else, leading all metals to 1.5-2.5% gains. The LME closed before Bernanke spoke.

The SPI Overnight is down 49 points or 1.1%.

There have been 100 of the S&P 500 stock reports out so far, and the score card is 78% wins on the earnings line and 65% wins on the revenue line. Wall Street would like to see more revenue growth, but realistically it is cautious guidance which is balancing out generally above-expectation results at this point.

It's a big night tonight, with five Dow components – 3M, American Express, AT&T, Caterpillar and Microsoft – all reporting amongst a host of others such as Amazon, Credit Suisse, Etrade and a company much in the spotlight at present – Diamond Offshore Drilling.

Wall Street will also have to deal with leading economic indicators, existing home sales and the government's house price index, and Uncle Ben will have to endure another grilling, this time from the peanut gallery. Or as they like to call themselves, the House.

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