If this week proves any quieter for markets than last week's wild ride, it will only be because the Thanksgiving holiday suspends action in the United States on Thursday. The major issues driving volatility over the last five sessions remain at large: Europe's fiscal problems, rising prices in China and other emerging markets, and the U.S. Federal Reserve's controversial quantitative easing program.
On Tuesday, the Fed will issue the minutes from its Nov. 3 meeting in which the central bank decided to pump another $600-billion (U.S.) into the economy by buying longer-term Treasuries. While Fed officials, including chairman Ben Bernanke, last week launched a public defence of their policy, the minutes may offer further insight into how likely it is that members of the Federal Open Market Committee will agree to enact further rounds of quantitative easing after so-called "QE2" winds up.
"The minutes will capture the heated debate between those policy makers who voted unswervingly for QE2, the few who voted for it grudgingly, and the one policy maker who dissented fearing more stimulus could do more harm to the economy than good," notes Sal Guatieri, senior economist at BMO Nesbitt Burns Inc.
In terms of economic reports, the data on U.S. personal income and spending, to be released Wednesday, are expected to show modest increases for last month, but most economists expect weekly jobless data to remain stubbornly high.
Further details will also emerge of the bailout package for Ireland. Once details of the package are hammered out, expect bond market vigilantes to turn their eyes to debt-laden Portugal and Spain. Growing anxiety about Europe's mountain of debt could mean even greater volatility for stocks and bonds.
Also, look for more concerns about the state of U.S. municipal bonds to emerge. Last week, city officials in Hamtramck, Mich., sought state permission to file for bankruptcy. They were denied and given three loan options instead. But the news, along with a move by Moody's Investors Service to downgrade the cities of San Francisco and Philadelphia, helped send municipal bond yields soaring. Ten-year yields jumped 35 basis points to 3.09 per cent last week, the biggest weekly increase on record, according to Bloomberg.
If the fear of government default spreads to North American shores, stock markets will be guaranteed even more ferocious times.
During the last few years, stock markets have repeatedly created or destroyed 20 per cent of their value in a matter of months, leaving Main Street investors bruised and disillusioned. No respite is likely in the near future. The volatile investment environment will likely only intensify in the "post-financial crisis world," says George Magnus, senior economic adviser at UBS AG.
He believes that politics are trumping economics when it comes to formulating government policy. "Governments will continue to be under pressure to pre-empt or respond to the sensitivity of voters, prioritizing political expediency over what will often be economic common sense," he argues in his latest outlook.
His list of examples includes new banking regulations, Germany's ban on short selling, changes to retirement schemes in Europe, government intervention to halt foreign acquisitions and rising trade protectionism.