Feels Overdone, but Perhaps the Sell-Off Is Justified
Fears about the Federal Reserve unwinding its monetary stimulus have sent global markets into a tail spin this week and some analysts argue that the sell-off, rather than looking overdone, is in fact justified amid prospects for a major change in U.S. monetary policy.
"I don't think it's an overreaction," said Joel Stern, chairman and CEO of consulting firm Stern Stewart & Co on CNBC Asia's "Squawk Box," referring to a heavy sell-off in stocks, bonds, commodities and emerging market assets following comments from Fed Chairman Ben Bernanke on Wednesday that the days of easy monetary policy are nearing an end.
"I think it's the beginning of something really quite terrible. I believe we're going to have a major adjustment process," Stern added.
On Friday, major Asian stock markets traded lower, tracking a sharp overnight sell-off on Wall Street. The MSCI Emerging Markets Index meanwhile fell over 1 percent, taking its losses for the past month to around near 9.5 percent.
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While some market watchers say the sell-off is overdone, Stern said the reaction was justified, and investors should be very concerned about the impact of quantitative easing ending.
"Yesterday was a very important day… What prices do in markets is they 'present value' for the future, so today's price reflects what is likely to happen in the future," he said.
The Dow Jones Industrial Average and S&P 500 on Thursday suffered their worst day this year, closing more than 2 percent lower. The pain was not confined to equities, with gold prices also falling sharply and government bond yields spiking higher.
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"I wouldn't say the market completely overreacted but there was partly an overreaction," said Rob Aspin, head of equity strategy at wealth management group for Standard Chartered.
"The key message is that tapering will only occur if an improvement in the U.S. economy merits it, if the economy weakens then the tapering will be diluted. We don't see tapering beginning until the first quarter of next year," he added.
According to Bob Iaccino, chief market strategist at trading website Topsteptrader.com, the heavy sell-off in markets is to be expected given that the Fed has now outlined a timeline for when it might start to take back its monetary stimulus.
Fed Chairman Bernanke said on Wednesday said if the economy continues to improve, the asset-purchasing program that has helped fuel a rally in global risk assets could start winding down towards the end of 2013 and wrap up in 2014.
"When you look at what Bernanke said he gave a little bit of a schedule, which was a sooner than expected," Iaccino told CNBC Asia's "The Call."
"He [Bernanke] was saying they would go on this path [tapering] if the economy continues on the trajectory they were going. The Fed has been wrong about their economic forecasts since the crisis started, so I don't think anyone expects them to go on the path they laid out," said Iaccino.
(Read More: Market Seems to Have Lost Confidence in Bernanke)
Stern said the end of the Fed's quantitative easing program and headwinds facing other major economies raised the risk of a global recession next year and the prospect of further downside for risk assets.
"It's possible we could dip into recession next year. I would say there's a 70 to 75 percent chance of a recession," he said.