Investors are bracing for volatility in the market this week as the US central bank is expected to unveil a controversial and much-anticipated stimulus plan that could further weaken its currency.
The Federal Reserve is expected to announce details of an asset-purchase scheme, referred to as its second round of quantitative easing (QE2), before its two-day policy meeting concludes on Wednesday. Investment banks estimate the amount of money the central bank will ultimately pump in through the programme could range between US$1 trillion and US$2 trillion.
Global equity markets have shot up since the Fed signalled in September that it would tolerate higher inflation levels if growth initiatives can reduce unemployment. The central bank has already injected US$1.7 trillion into the financial system and maintained near-zero interest rates.
But investors have grown skittish as the central bank meeting approaches. Some worry policymakers will overstep their bounds, while others fear they will not do enough.
'Everybody has been looking to QE2 and the Fed is now in a difficult position because unless it does quite a bit, it risks disappointing expectations,' said Geoff Lewis, the head of investment services in Hong Kong for JP Morgan Asset Management.
'In the short term anyway, it's probably better to buy the rumour and sell the news.'
Anxiety about the QE2 scheme has helped scuttle the recent rally in the Hang Seng Index. The benchmark slid 1.8 per cent last week to 23,096.32 points, dropping for a second straight week. It had advanced in each of the seven previous weeks, tacking on 15.3 per cent over that period. Local main board turnover has topped HK$100 billion seven times in the past two months after only doing so once in the rest of the year.
