Hints at QE3 cause mixed reactions

US stocks stopped a three-day slide, but ended well off the highs yesterday as investors took the suggestion of further Federal Reserve stimulus as a mixed blessing.

The three major US stock indexes rose more than one percent at their peaks after Fed Chairman Ben Bernanke suggested the Fed would consider additional measures to support the economy if the outlook gets worse. Energy and materials stocks led gains, but the rally fizzled in afternoon trading.

“Bernanke’s comments were a positive this morning, but we had a little too much happiness early on,” said Richard Sichel, chief investment officer of Philadelphia Trust Co. “The comments were not upbeat by any means, and obviously, no one wants the economy to get to the point where more stimulus is needed.”

The Fed's $600bn bond-buying effort, known as QE2, has contributed to huge equity gains since September.

In testimony to the House Financial Services Committee, Bernanke said “the recent economic weakness may prove more persistent than expected ... implying a need for additional policy support.” Stock investors had put a low probability on any more stimulus from the Fed, but June’s dismal jobs report altered some perceptions.

The CBOE Volatility Index, Wall Street’s fear gauge, ended up just 0.2 per cent after dropping nearly nine per cent to a session low on the Fed chairman’s comments. Over the past three days, the VIX had climbed almost 25 per cent while the S&P 500 lost about 2.3 per cent, pressured by weak earnings and concerns over Europe’s debt crisis.

The Dow Jones industrial average rose 44.73 points, or 0.36 per cent, to 12,491.61 at the close. The Standard & Poor’s 500 Index gained 4.08 points, or 0.31 per cent, to 1,317.72. The Nasdaq Composite Index advanced 15.01 points, or 0.54 per cent, to 2,796.92.

News Corp shares jumped 3.8 per cent to $15.93 and was the Nasdaq’s most active name after announcing it had withdrawn a $12bn bid to buy the 61 per cent of broadcaster BSkyB it does not already own. Volume in the media company’s stock was its highest since 17 December 2004, when it was officially added to the S&P 500.

News Corp is at the center of allegations that one of its tabloid newspapers committed criminal acts.

Energy and material stocks were the top gainers, though they were off their highs as crude oil cut its gains. The S&P energy sector index rose 0.7 per cent.