Tags: Kaiser | selloff | stock | QE3

Goldman’s Kaiser: Stock Selloff Coming in 9 Days

Wednesday, 05 September 2012 08:49 AM

Investors need to brace themselves for a massive stock selloff coming in nine days, says Stuart Kaiser, an equities strategist at Goldman Sachs.

Stock indices have risen on hopes the European Central Bank (ECB) will announce plans to buy sovereign bonds to lower borrowing costs in countries such as Italy and Spain, while the Federal Reserve has said it cannot rule out stimulating the economy, likely through a third round of quantitative easing (QE).

QE sees the Fed buy bonds such as Treasury holdings or mortgage-backed securities from banks, pumping the economy full of liquidity in a way that drives down interest rates across the economy and sending stocks rising as a side effect.

Editor's Note: Sept. 18 Cover-Up Is a Final Turning for America

Investors may get what they hope for, just not as soon as hoped — the ECB meets on Thursday and the Federal Open Market Committee (FOMC) opens a two-day meeting on Sept. 12.

“Our conversations with clients suggest investors anticipate decisive ECB action … and announcement by the (Fed’s) FOMC of another round of asset purchases (QE3),” Kaiser writes in a note to clients, according to CNBC.

German officials have voiced opposition to ECB bond purchases, while the Fed might let the economy run its course a little longer before intervening, and delays could spark a selloff, Kaiser adds.

Stocks have risen 10 percent since June, and considering that September is historically a volatile month anyway, investors should hedge against a selloff likely on Sept. 14.

Other analysts have expressed concern that investors have been too aggressive assuming that the ECB will announce a major policy move this month.

“Expectations for Thursday’s ECB meeting are high, perhaps too high,” says Marie Diron, senior economic advisor at Ernst & Young, according to The Associated Press.

Meanwhile, monetary policy measures can only do so much to get an economy going again, while markets have largely priced intervention into trading strategies, which could water down rallies should the ECB and the Federal Reserve announce stimulus measures as expected.

“Whether upcoming ECB and Fed actions will be sufficient to prevent an escalation in risk aversion is debatable especially as markets have already priced in a lot of potential action,” analysts at Credit Agricole CIB in Hong Kong say in a market commentary, the AP added.

Editor's Note: Sept. 18 Cover-Up Is a Final Turning for America

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