Bernanke comes to the party, world markets rise

Federal Reserve Chairman Ben Bernanke bolstered markets with comments that the central bank was ready to help the economy if there were further signs of weakness and inflation declined. Gold rose to a record while the US dollar tumbled.

"The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support," Bernanke told the House Financial Services Committee.

In afternoon trading, the Dow Jones Industrial Average climbed 0.70 per cent, the Standard & Poor's 500 Index gained 0.73 per cent and the Nasdaq advanced 0.96 per cent. Across the Atlantic, the Stoxx 600 Index rose 0.7 per cent.

"The last round of quantitative easing was absolutely beneficial for stocks, and the gains today are on the prospects for what is potentially further stimulus," John Kosar, director of research at Asbury Research in Chicago, told Reuters. "However, the fact that we're even discussing another round shows how the economy is still struggling."

Bernanke's comments sent the greenback into a tailspin - the US dollar slumped 1.2 per cent against a basket of major currencies. Further weakness is likely ahead.

The Fed chief "is making it plain that QE3 is still in the Fed's mind and is on the table," Douglas Borthwick, managing director at Faros Trading in Stamford, Connecticut, told Reuters.

"With a Fed on hold and contemplating more quantitative easing we see euro/dollar rallying and the dollar index dropping through the end of the year."

Investors snapped up US$21 billion in an auction of 10-year US Treasury securities.

The notes yielded 2.918 per cent, compared with the average forecast of 2.951 per cent in a Bloomberg News survey of seven of the Fed's primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.17, versus an average of 3.11 for the past 10 sales.

"It was a great auction," Ray Remy, head of fixed income in New York at Daiwa Capital Markets America, told Bloomberg. As one of the 20 primary dealers, the firm is obligated to bid in Treasury offerings. "It shows real demand at these levels below 3 per cent. People are concerned about Europe and the economy."

Indeed, Americans are deeply pessimistic about the future as economic concerns rise and White House talks on raising the US debt limit sputter, according to a Reuters/Ipsos poll released on Wednesday. The number of Americans who believe the country is on the wrong track rose to 63 per cent this month, up from 60 per cent in June.

Meanwhile, China late yesterday said its economy expanded 9.5 per cent in the second quarter from a year earlier, beating expectations, and adding to the gains for raw materials. The Thomson Reuters/Jefferies CRB Commodity Index by 1.4 per cent.

Silver jumped 6 per cent.

"We have fear and contagion risks in Europe, and we are getting a rally of risk assets on the back of Bernanke alluding to the Fed trying to stimulate the economy, what people refer to as QE3," Jeffrey Sherman, commodities portfolio manager at DoubleLine Capital, told Reuters.

Spot gold was 1.2 per cent stronger at US$1,584.39 an ounce as of 12.59pm EDT.

US August futures rose US$22.80 to US$1,585.10 an ounce.

News Corp shares jumped 4.6 per cent and was the Nasdaq's most active stock after announcing it had withdrawn a US$12 billion bid to buy the 61 per cent of broadcaster BSkyB it does not already own.