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Don't Expect Bond-Buying by Europe's Central Bank: Pro

Javier E. David|Writer and Editor
Monday, 30 Jul 2012 | 4:10 PM ET
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Investors anticipating a full-fledged quantitative easing by the European Central Bank may be waiting for Godot, said Jim McCaughan, chief executive officer of Principal Global Investors.

Last week, ECB President Mario Draghi sparked a furious rally in markets after he suggested the central bank would do whatever it took to preserve the single currency. Expectations are growing that Europe's monetary authorities will unleash a wave of massive bond-buying on par with the Federal Reserve's efforts to spark a U.S. rebound.

McCaughan, however, thinks markets are over-interpreting Draghi's remarks. The central bank is hamstrung by political realities — including a mandate much more narrowly drawn than that of the Fed — that makes a massive QE program unlikely, he said.

Protecting Your Profits
Discussing how investors can position their portfolios ahead of the Fed decision, with Jim McCaughan, Principal Global Investors CEO, and Peter Tuz, Chase Investment Counsel president.

"There is a danger that the market is expecting the ECB to go embarking on bond purchases [as] pure, full-on quantitative easing. And I doubt if that's going to happen because of the political pressures," McCaughan said in a CNBC interview.

Stock investors have reacted favorably the prospect that the Fed could take up a third round of QE as soon as this week. Still, McCaughan doubts the ECB's actions will completely placate the market.

"What [Draghi] didn’t say was that he’s going to keep all investors whole," McCaughan said, adding that a potential QE3 from the Fed would be a "policy mistake." Potential central bank action is "not really a license just to take risk."

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