Could Errant Expectations Torpedo Stock Markets?
If there was ever a week in which errant expectations could send stocks tumbling, it’s this one.
A handful of heavy-duty votes and decisions are coming and if the market hasn't properly anticipated the outcomes, by Friday investors could be looking at a bloodbath.
Check out what's ahead:
On Wednesday, judges in Germany will rule whether or not to suspend Germany’s ratification of the ESM – the European Union’s bailout fund. Read More:Top German Judge Holds Euro Fate in His Hands
Although the market doesn’t think the court will drop any bombs, if expectations are wrong, the whole viability of the EU could be called on the carpet. And without question the language used by the courts will be widely scrutinized. Even if the wording is considered harsh, markets could get spooked and sell-off.
Also, the outcome of the Dutch general election on Wednesday is likely to send a message of commitment to the EU and the state of affairs in Europe. The German-led austerity drive has been strongly supported by the incumbent government of Liberal Prime Minister Mark Rutte. But a large number of Dutch voters are frustrated with belt-tightening and have become increasingly wary of bailing out southern European governments. "The Dutch elections might shift the balance of power in Europe towards less austerity and reduced support for further bailouts," according to ING.
Again, that would be perceived as bearish by stock markets.
On Thursday the Fed concludes a two-day meeting and speculation is rampant that the central bank is about to unleash a new round of stimulus.
Largely the Street came to view QE3 as a foregone conclusion after the latest jobs report offered little hope that the sluggish recovery would get better anytime soon.
“We now anticipate an announcement of another round of quantitative easing at the FOMC meeting on Sept. 13,” UBS economists wrote in a note to clients.
However, with strong expectations of stimulus already priced into the market, if the Fed doesn’t act, stocks could sell-off sharply.
Also, the Street is going to be flooded with crucial economic reports on Friday including CPI, Industrial production and retail sales. These indicators will provide insights on the economy, and if they come in much weaker than expected, again stocks could be challenged.
"The Kudlow Report" airs weeknights at 7 p.m. ET.