US stocks suffered the biggest loss for the year last Friday as disappointing job data, combined with concerns about the European debt crisis, accelerated the May sell-off.

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After shedding 275 pts or 2.2%, its biggest 1-day fall since November, the DJIA closed at 12,118.57 pts.

With a grim labor market and the uncertainty of the European debt crisis, the US economy may not recover anytime soon.

The Big Q: will the US Federal Reserve step in and do what the investors have longed for, unveil a 3rd round of quantitative easing policy, or QE-3?

Some analysts believe this is on the table now at the Fed..

I wrote in April that investors had every reason to expect a prosperous May, as US stocks entered the month with strong confidence.

The S&P topped the 1,400 mark, the DJIA touched the highest level in a month on the 1st trading day of May.

But, things went in the opposite direction, starting with Greece’s political mishap on 6 May, when the election left no party obtaining enough votes for a majority in parliament, resulting in a re-election schedule in mid-June.

Greece’s political uncertainty raised investors’ concerns about the country’s possible exit from the Eurozone.

Then Spain’s banking sector sent another warning sign to the market that Bankia, the country’s 4th biggest bank, of liquidity shortage crisis.

Bankia had received in May the country’s biggest-ever bank bailout, 23.5-B Euros (US$29.1-B), and will obtain 4.5-B Euros (US$5.6-B) from the state bank rescue fund this month.

The EUR then tapped a 22-month low against the USD in the last few trading days of May, signalling that investors are losing faith in the single currency.

The market was pressured by the concerns about the European debt crisis for the whole month, as the DJIA lost a total of more than 6%, and the S&P 500 and the NAS indices faded. Then when investors hoped to get relief from the US economy, the data let them down.

The most anticipated non-farm payroll report showed the economy only added 69,000 jobs, far fewer than previously anticipated, while the unemployment rate ticked up to 8.2%.

Other economic data even deepened investors’ concerns for the World’s biggest economy. The US consumer confidence fell to a 4-month low in May.

Panic hit in the markets.

The yields of US 10-year T-Notes dropped to a new historical low of below 1.5%, while energy prices hit 3 yr lows and metals including Gold rose.

The Chicago Board Options Exchange Volatility Index, widely considered as the best gauge of fear in the market, rose more than 10% to close above 26.

From the POV of some analysts, another round of quantitative easing is possible.

As investors turn to the Fed, as they can neither feel certain in the European situation or comfortable with the US economy. Whenever the market can not recover on its own, the Fed is the 1st place to turn.

A recent poll suggested that 15 dealers believed a 35% chance of the Fed would extend its simulative Operating Twist at its next monetary policy meeting scheduled on 19 June.

The poll also showed that the number of the dealers, who were expecting further quantitative easing, rose from 33 to 50% in May.

Since QE-3 might be too much, some analysts brought up the Operation Twist, which is a unique way the uses Fed to lower the long term interest rate by not adding new liquidity to the market.

But, some argued the Operation Twist was not likely to be implemented again, giving that the Fed had already sold large amount of short-term government bonds.

The average maturity on the Fed’s balance sheet is over 100 months, the target of ‘Operation Twist.

So, I think that a QE-3 aimed at mortgage backed securities that increases money supply is likely this time.

US equities are supported by the perceived ‘Bernanke Put’ as equity markets assume QE-3 will be made available should growth deteriorate more. Stay tuned…

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Knightsbridge Law is a boutique law firm in Thailand. The lawyers of our firm have provided legal advice on a variety of areas of the legal practice, including:

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Paul A. Ebeling, Jnr.

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.

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