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Epic Research
Below is an edited transcript of the analysis on CNBC-TV18.
Q: What do you think the markets are pricing-in in terms of Fed action? It is relatively cool today after fairly dramatic gains the equity markets made on Friday...
A: It is clear that the market is expecting the Fed to act on QE3. We have seen the US economy clearly slowing down. Second quarter growth has been revised by 1.5% to 12.7%. Unemployment has also turned quite disappointing in the last few days. So, it is clearly expected that the Fed will act with a QE3 on September 12.
Q: What are you expecting from the two main events on September 12 - the ESM and the banking union?
A: The ESM will slightly see a severe slowdown during this year. Worldwide, Europe continues to slowdown, the US is struggling with a very slow growth environment and in Asia, China is also planning for low growth rate of 7% for 2012-13. This is why it is expected that central banks continue to be very supportive of quantitative easing.
Q: Do you expect a favourable decision on ESM by the German Constitutional Court?
A: Though the Constitutional Court refused to validate the European Summit on July 9, it is expected to issue a positive announcement regarding the meeting on September 12. The German finance minister Schaeuble said a few days ago that he didn’t see any reason why the European Summit should be against the German Constitution. Obviously, it would have a very positive impact on the market and it would be continuation of the ECB initiative and increases expectation of some initiative from the Fed.
Q: What do the markets expect for assuming the Constitutional Court gives its nod? Would it then tantamount to waiting for Spain to actually make a request for bond purchases? What will be the next set of events to watch out for? Won't the markets be disappointed if bond purchases don't begin soon?
A: There are two contrarian forces currently at work in the market. On one side, Europe will continue to witness a worrisome course of events. At some point Spain will have to certainly request support from the European Union. On the other side, many investors are not at all interested in risky European assets. However, some US investors are re-weighting their positions towards Europe and towards risky European assets and this should be positive signal for the market.
Q: Has the market already price-in a portion of the reaction from news reports regarding an open-ended QE3 programme with no specifications of quantum or timeframe?
A: Yes, you are absolutely right, a large part has already been priced-in. But what is equally important, is the boost in sentiment. If the Fed implements QE3, it will signal investors that Bernanke will support the market and the economy and this would be very positive. On the flip side, it might be an aberration to ensure that long-term interest rates remain at very low levels to maintain a monetary policy close to zero.
Q: After announcement of long-term refinance operations by the ECB on December 15, there was an unexpected rally in global asset classes for the next one month. Is something similar expected this time around?
A: I think that the rally in the markets is not over yet. In the past, many investors clearly feared systemic risk. The ECB decision last week provided very strong support and it is expected that investors will start to reweigh their asset allocation to favour Europe and the rally is expected to continue.
Obviously, at some point it is possible that the may markets return to the doldrums as the economic environment remains poor and Europe may careen towards recession and a infusion security might be initiated to reduce debt.
Q: What do you think the markets are pricing-in in terms of Fed action? It is relatively cool today after fairly dramatic gains the equity markets made on Friday...
A: It is clear that the market is expecting the Fed to act on QE3. We have seen the US economy clearly slowing down. Second quarter growth has been revised by 1.5% to 12.7%. Unemployment has also turned quite disappointing in the last few days. So, it is clearly expected that the Fed will act with a QE3 on September 12.
Q: What are you expecting from the two main events on September 12 - the ESM and the banking union?
A: The ESM will slightly see a severe slowdown during this year. Worldwide, Europe continues to slowdown, the US is struggling with a very slow growth environment and in Asia, China is also planning for low growth rate of 7% for 2012-13. This is why it is expected that central banks continue to be very supportive of quantitative easing.
Q: Do you expect a favourable decision on ESM by the German Constitutional Court?
A: Though the Constitutional Court refused to validate the European Summit on July 9, it is expected to issue a positive announcement regarding the meeting on September 12. The German finance minister Schaeuble said a few days ago that he didn’t see any reason why the European Summit should be against the German Constitution. Obviously, it would have a very positive impact on the market and it would be continuation of the ECB initiative and increases expectation of some initiative from the Fed.
Q: What do the markets expect for assuming the Constitutional Court gives its nod? Would it then tantamount to waiting for Spain to actually make a request for bond purchases? What will be the next set of events to watch out for? Won't the markets be disappointed if bond purchases don't begin soon?
A: There are two contrarian forces currently at work in the market. On one side, Europe will continue to witness a worrisome course of events. At some point Spain will have to certainly request support from the European Union. On the other side, many investors are not at all interested in risky European assets. However, some US investors are re-weighting their positions towards Europe and towards risky European assets and this should be positive signal for the market.
Q: Has the market already price-in a portion of the reaction from news reports regarding an open-ended QE3 programme with no specifications of quantum or timeframe?
A: Yes, you are absolutely right, a large part has already been priced-in. But what is equally important, is the boost in sentiment. If the Fed implements QE3, it will signal investors that Bernanke will support the market and the economy and this would be very positive. On the flip side, it might be an aberration to ensure that long-term interest rates remain at very low levels to maintain a monetary policy close to zero.
Q: After announcement of long-term refinance operations by the ECB on December 15, there was an unexpected rally in global asset classes for the next one month. Is something similar expected this time around?
A: I think that the rally in the markets is not over yet. In the past, many investors clearly feared systemic risk. The ECB decision last week provided very strong support and it is expected that investors will start to reweigh their asset allocation to favour Europe and the rally is expected to continue.
Obviously, at some point it is possible that the may markets return to the doldrums as the economic environment remains poor and Europe may careen towards recession and a infusion security might be initiated to reduce debt.