Stock markets are poised for volatile swings once central banks make their monetary policies known, said Arnab Das, managing director of market research and strategy at Roubini Global Economics.
The European Central Bank has already announced plans to buy sovereign debt in secondary markets to lower borrowing costs in countries like Italy and Spain.
The Federal Reserve is due to meet next week to address interest rates and discuss the possibility of rolling out a new round of quantitative easing (QE), under which the Fed buys assets like Treasury holdings or mortgage-backed securities from banks, pumping the financial system full of liquidity in a way that pushes down interest rates across the economy to spur recovery.
Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.
Anticipation of Fed intervention has kept markets steady, as rising stock prices serve as a side effect to QE.
However, once the Fed makes its policy known, global uncertainty will strike fear in many investors and send markets on a volatile ride.
“Volatility in the markets is periodically being suppressed by central banks through QE, or promises of bond buying are effectively short-term sellers of volatility. It will rise once the effect of those interventions has gone,” said Das, according to CNBC.
The European debt crisis is still far from over, while in the United States, tax cuts are set to expire at the same time automatic cuts to government spending kick in at the end of the year, a combination known as a fiscal cliff that could send the economy sliding back into recession next year if left unchecked by Congress.
The nonpartisan Congressional Budget Office (CBO) estimates that the economy could contract by 0.5 percent next year and unemployment rates could rise to around 9 percent by late 2013 if lawmakers fail to steer the country away from the fiscal cliff.
Uncertainty over the cliff today, however, is already harming the economy.
"The sooner that uncertainty is eliminated, the better," CBO director Doug Elmendorf told a news conference, according to Reuters.
"The stakes are very high in the fiscal policy decisions we're going to have to make very shortly."
Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.
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