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In a market increasingly driven by central banks and government policies, next week's Jackson Hole symposium is more important than ever. In addition to Ben Bernanke providing hints about if the Fed will engage in more easing, what type and when, Mario Draghi will be speaking about the future of the Eurozone. Thanks to recent statements by key German officials, that future looks brighter than it did a few weeks ago.

Despite the fact that the 17- ECB national governors and 6 board members supported Mr. Draghi's bond rescue plan earlier this month, the lack of clear German support left lingering doubts about whether a bond policy could really be implemented. Doubts were further stoked by statements from German Bundesbank officials about bond purchases entailing "considerable risks." These statements even made their way into the monthly Bundesbank report this week. Nevertheless, statements by German ECB executive board member, and Merkel administration insider, Jorg Asmussen indicate that German political leaders are going to support Draghi's plan. This means that instead of hollow words that buoy markets for a few days, Draghi may be able to use Jackson Hole to unveil a detailed plan that would likely be set in motion when the ECB's governing council meets on September 6.

Market Implications

The ability of the ECB to act has two major implications:

  1. The Fed does not need to act immediately to buoy the U.S. economy in efforts to defend it from Europe's troubles.
  2. Faith in the Euro will rise causing the U.S. Dollar to fall and equity markets to rise.

Bernanke may still use the Jackson Hole platform to hint at a new stimulative policy, but the pressure is not as great as it once was. Recent statements by Atlanta Fed President Dennis Lockhart reflect this lack of urgency and indicate that QE3 is unlikely in the immediate future. Even though QE3 is unlikely, the Fed may pursue a more intricate policy to stimulate lending or simply adjust its guidance. But, given that Mr. Lockhart has expressed reservations about the market becoming too reliant on the Fed for action, immediate policy change might not be in the cards at all. Nevertheless, Bernanke must still be mindful of timing for political reasons. In particular, any joint program with the Treasury must be initiated before the November election, but doing so in late October is politically dangerous. So, Bernanke may still act in September if he wishes to stimulate lending, but with Germany now supporting Draghi, Bernanke has the economic cover to wait until Twist expires at year end and initiate new stimulus in 2013, if necessary.

With Germany finally supporting Draghi's rescue plan, it is becoming increasingly clear that nobody has any intention of letting the Euro fail. Draghi saying as much has caused rallies in the past, but acting on this language with German support will likely drive a Euro rally. Such a rally will also drive down the relative value of the dollar and this correlation has been known to increase equity prices over the last couple years.

Conclusion

The possibility of more Fed easing could drive down the value of the dollar. At the same time, German support of the ECB's bond buying plan could instill confidence in the Euro and drive its value up. So, early indications are that the Jackson Hole symposium will cause a Euro rally and allow equity prices rise, possibly even breaking through some long-term resistance points.

Source: Jackson Hole To Create Euro Rally