RPT-GLOBAL MARKETS WEEKAHEAD-It’s all about the Fed and QE

(Repeats Friday piece withouth changes)

By Jeremy Gaunt, European Investment Correspondent

LONDON, Oct 29 (BestGrowthStock) – The event putting investors’
positions most at risk in the coming week is the very opposite
of what they feared back in January.

Then it was the “exit strategy” central bankers would employ
to unwind the liquidity they had pumped into the world’s economy
to get it running again after the financial crisis.

Now it is the prospect of a “re-entry strategy” — the
Federal Reserve embarking after its meeting on Wednesday on
renewed asset-buying to stimulate the moribund U.S. economy with
a new quantitative easing (QE) programme.

The risk is that what the Fed ends up doing will not justify
the huge investment plays that have already been put in place in
the run up to the Federal Open Market Committee meeting.

“There is scope for disappointment,” said David Shairp,
global strategist for JPMorgan Asset Management. “There is
always the danger it will be seen as too timid.”

Financial markets are not totally fixated on the Fed’s QE —
there are, for example, earnings seasons under way and signs of
good growth in China, Germany and even Britain, plus Bank of
England, European Central Bank and Bank of Japan meetings in the
week ahead.

But as macro, top-down events go, there is little to compete
with it.

Since the prospect of further QE was accepted by markets
around the time of the Jackson Hole central bankers’ retreat in
late August, what was already a solid investment flow into
emerging markets has turned into a torrent.

It is based on the notion that a) that is where the growth
is; b) QE will mean a weaker dollar with next to no yields,
pushing up emerging market currencies; and c) the financial
system is about to get a new boost of liquidity.

Fund trackers EPFR Global say that nearly $70 billion net
has flowed into the emerging market stock funds they monitor
over this year, close to half of it since August. Year-to-date
flows into emerging market bonds funds, meanwhile, stand at a
net $46.4 billion compared with $9.48 billion for the whole of
2009.

Developed economy stock markets have also been buoyed by the
prospect of new liquidity. In all, it took the MSCI all-country
world stock index (.MIWD00000PUS: ) to two-year highs during the
past week.

The dollar, meanwhile, has been clobbered, falling as much
as 9.7 percent against a basket of major currencies (.DXY: ) since
late August before bouncing back a bit this week.

These huge moves would be at risk if the Fed does something
unexpected or markets have a rethink about what it all means.

For that reason alone, JPMorgan Asset Management’s Shairp
said he has called for his fund firm to take some risk off the
table.

EXPECTATIONS

So what could go wrong? The most obvious risk is that the
Fed will not meet minimum expectations.

William Dudley, president of the Federal Reserve Bank of New
York, has said that $500 billion of bond purchases would likely
have the same impact as a 0.5 or 0.75 percentage point decline
in the Fed’s benchmark federal funds rate.

But other, higher figures have been floated. Consider the
following from hedge fund Bullman Investment Management:

“Our view is that the $500 billion-$750 billion figure is
likely to be released by the FOMC and this may well not be
enough to appease markets.”

Bullman added that the Fed may need to let loose $1 trillion
as a minimum for equity markets to avoid a correction.

Markets in the past week have pulled back a bit, however,
after various comments from Fed officials were seen as
dampeners.

Among them was Dudley saying the U.S. economic context would
determine whether an incremental or big bang approach to asset
purchases was better.

This means that as well as the amount of QE, investors will
also have to digest any announcement about the length of the
period over which it will be delivered.

And at the other end of the scale there is the question of
whether any of the amounts being floated will be enough to lift
the U.S. economy out of its difficulties.

In that sense, markets could look at a QE release they have
priced in and reflect that it is actually a reflection of
weakness in what is still the world’s largest economy.

All in all, it points to one of the most tense weeks in ages
for investors.

And if that is not enough, there is always the U.S. mid-term
elections on Tuesday.

(Editing by Ruth Pitchford)

RPT-GLOBAL MARKETS WEEKAHEAD-It’s all about the Fed and QE