End of Money Printing Not Priced Into Market: Analysis
CNBC EMEA Head of News
The bulls will tell you that in the next two or three months the global economy will recover and sentiment will improve as a solution is found to the Greek debt crisis.
The bears will point to the sharp slowdown in the US, a lack of a credible resolution on Greece and monetary tightening in emerging markets.
Then there is the end of quantitative easing by the Fed, which is due to come to conclude its extraordinary asset-buying program next week.
The argument is based on the belief that when Federal Reserve Chairman Ben Bernanke takes away the punch bowl, asset prices - which have been driven by the second round of quantitative easing (QE2) - will head back to earth in a similar way to 2010, when the Fed ended QE1.
One analyst who believes stocks are in for a rough ride when the Fed ends its latest round of extraordinary measures is Patrick Legland, the global head of research at Societe Generale in London.
“As of today, the economy seems unable to replace the Fed’s substantial monetary and fiscal stimulus to provide sustainable growth, hence the dollar’s decline, falling roughly 20 percent from the peak of March 2009,” said Legland in an interview with CNBC on Friday.
“If corporate margins disappoint in Q2, a 10 percent market correction over the summer could be expected, as occurred at the end of QE1,” he added.
While the stock market, in Legland’s view, is miscalculating the impact on stocks, he believes the bond market is on the money.
“Bond markets are correctly anticipating the end of QE2. Unfortunately, the situation is a bit different, with rating agencies threatening to downgrade US debt,” he said.
“Hence, yields would certainly have to be higher to attract potential investors to replace Fed buying and three percent for the 10- year rate is probably a floor, considering that the US recovery should slow temporarily, but not double dip,” said Legland.
As talks over the US debt ceiling continue - or not, given the Republicans walked out Thursday night - Legland said the outlook for the dollar is very uncertain.
“QE2 and low interest rates have sent investors to riskier assets. This prompted a fall in the dollar. But, investors are now concerned about what is going to happen to markets when the Fed ends its latest round of quantitative easing, letting Europe handle its problems and leaving risky assets without stimulus,” he said.
“Relatively weak data from the US is adding to concerns of a deeper than expected economic slowdown there. These concerns mean the direction of the dollar is particularly uncertain,” Legland added.