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US Dollar & Stock Indexes will be the indicators for QE–3.

Where the stock market is going? This is the question that everyone is asking to the experts!  I have doubt whether anyone can give satisfactory response. Most common conclusion is coming that market may recover before US presidential election. One positive point for it is, in recent past markets were positive in US presidential election year. But how is the macro condition in those years!

If we consider the relation between US dollar index and stock indexes, though there is no fixed relation but generally USD goes opposite to stock index. Now days USD is following this inverse relationship and so if USD goes this way then that will not be good for stock market, as we are seeing in recent days. 

The way USD is going it looks to me that it may touch 88–89 in coming future. If USD stays in that level or go more then it will be a cause of a headache for Bernanke & co. On the other side Obama administration is in no position to see that indexes like Dow Jones are plunging to lows in the election year. So USD in 89–90 level may indicate a big plunge in stock markets, from the level where it is now.

So what they will do! It is sure that one remedy for this is QE–3 because that will reduce the USD from higher levels. I think they are waiting for better macro reports but for that the time limitation is up to end of operation Twist. This week jobs reports were not good and stock indexes are plunging into lower figures. Now if we see the past history then US Fed used that liquidity flow when stock market were near to bear market (or stock indexes have faced near 20% correction) and on the other side economy is in recession or close to it. This time many US stock indexes have already lost their gains of this year and there is a threat of more because I think overall situation around the world is more severe than past times when QEs or operation Twist came into force. Now if we go outside US (and I think it is better if we talk less about Euro zone) then Emerging nations were not in trouble at those times in past but now as we know they are facing serious threat of drops in their GDP figures. Inflation is eating their growth though it is different matter whether Quantitative Easing was one of the main contributors in increasing their inflation!  I think it is a different issue.

I am a stock trader not an economist but I have a feeling if US authorities wait more after end of operation Twist this month then they will suffer the same consequences which ECB is suffering now. As I said that I think economic situation is worse this time comparing to past so there is not guarantee that QE–3 (or anything like operation Twist) will change the situation completely. In this matter even we see the past experiences I think they have the expiry date of hardly 6 to 9 months. But if they do late in bringing those things then these expiry dates will drop to lesser months. In the middle of this month there will be an FOMC meeting and I don’t know whether they have already decided the outcomes in that meeting or not! But if US stock indexes plunges more from here then they may think about QE–3 before it becomes too late.

NOTEPlease see the disclaimer of this blog.


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