Global Equity Market Analysis/Forecast: End of QE2, Market correction, Panic, QE3

Forecast for the next 2-3 months :  
End of QE2=> Market correction, Panic => Bernanke Solution: QE3
When QE2 ends, we can see a de-leverage process. If the FED try QE3 now it wouldn't be accepted. We need a market panic for the FED to have arguments so even those who are against QE3 will ask for it.

In my humble opinion the market is going to see an important correction over the next 6 weeks the reason being:

Scenario 1:
  • The Debt ceiling will need to be approved with deep cuts in government spending which can lead to a revision of GDP growth (less stimulus) 
  • The Market will anticipate interest rate hikes from the BOE and ECB. This can have a negative impact in the UK economy and exacerbate debt concerns (Greek restructuring…) in EU 
  • Most importantly, the end of QE2 will be a strong test on how strong the recovery is and how much has been an artificial effect of the stimulus.
?         We may see a counter- intuitive effect, whereas the stimulus is in the money market (bond purchasing program…) Equities and commodities could be the ones dropping over recession fears (Less Stimulus or artificially low interest rates  = less cheap credit  = less consumption = less growth) A similar movement to what we have seen when S&P Downgraded the US economic forecast.

What could invalidate my views is:
Scenario 2:
  • The Debt ceiling is raised but no major cuts in government spending is done. Government keeps going into debt and push consumption (rather than production) 
  •  Major Central banks lack of rigor and do not raise interest rates 
  • An increasing propaganda of QE3 as a possibility and a “good thing” to ensure economic growth.

IMHO, What is more likely to happen is a correction as explained in Scenario 1. This, in effect will allow a technical correction after the sharp rise since march 2009. Then, this will give more arguments to Bernanke to push QE3 as a “necessary measure” to “ensure a recovery and for JOBS” whereas the real reason will be to stop the stock market fall, push inflation and devalue the US dollar to gain competitiveness (more exports). Perhaps QE3 could happen end of July beginning of August after the market drop and QE2 ended.
I attached the previous document with the different sectors,
  • Scenario 1 is Good For Bonds and US currency (Gray Colour)
  • Scenario 2 is very good for Commodities (blue) and Precious metals (yellow) and positive for the Equities (to a certain extent <0-5%inflation>)

Following, Charts and illustrations:

(Click the image to enlarge)

For the FTSE, markets are interconnected:

 *Models by: Joé Thierry Arys Ruiz , 11/05/2011 - All rights reserved


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