Ahead of the ECB meet on Thursday, Jurgen Michels of Citi feels chances of ECB action is very little taking into consideration the stands taken by the German Federal Bank, Bundesbank and Spain's reluctance to ask for support from the European Financial Stability Facility (EFSF).
Michels believes, for a third round of quantitative easing, the economy has to go through more weakness. Hence, in a situation like this, there is hardly any hope for a decisive action from the ECB this week, he tells CNBC-TV18.
Here is the edited transcript of the interview on CNBC-TV18.
Q: What are you expecting of the ECB particularly on Thursday and do you think if there is no bond buying programme announced, we could have a sharp sell off in risk assets?
A: The big move in the market after statements from Mr. Draghi last week that the ECB would do everything to preserve the euro and we had also suggested that the ECB is also willing to go ahead with purchases in the markets. We have seen more news from European leaders including Ms Merkel, Mr. Monti, Mr. Hollande and others said, we are prepared to do everything.
I think regarding the ECB, the comments of Mr. Draghi nevertheless were not very well coordinated with the rest. We have seen criticism from the Bundesbank, particularly regarding those measures. I think it depends pretty much on the question, if this bond purchase would come along and in that respect it's very important to see that Spain asks for support from the EFSF through relied programme.
If that does not come, the chance of ECB action is rather small. In that respect, the ECB might disappoint on Thursday because we have not seen any signs from Spain to ask for support. Yesterday again Spanish officials highlighted that they do not think about asking the EFSF to support the summon.
Q: What are you expecting from the US because there is expectation that it pushed forward maybe in the latter part of the year now?
A: I think the FOMC is open for taking further action but, we do not expect a base case and that this action will be taken at this week's meeting. I think they will probably come up with another kind of wordings saying that rates stay low, at least till mid of 2015. That's another thing that they are willing to leave rates for long period of time.
But when it comes to other measures like QE3 and measures in that direction, probably we will have to see more weakness of the economy before they take this. I think the statement relieves all options - they will discuss the things but for the time being we do not think that they will take action this week.
Q: If in case the ECB and the FOMC disappoint or they don't meet market expectations, how much of a sell off would you assume on possibly the euro as well as the European markets?
A: As I said, after the comments of Mr. Draghi we had a very positive reaction there. If they managed to have strong words, they may limit the fall in markets. But, there is a risk that we see. Another round of disappointment may come through in Europe and in US, particularly if we have weak data on Friday in the non-farm payrolls as well.
Q: Do you think the Spanish and Italian yields have formed a floor now given the constant reiteration by European policy makers, the ECB, they'll go all out and protect the euro or despite no near term action do you think the markets will find some support from those statements or will the market want something on Thursday, otherwise there will be a big sell-off?
A: I think the same as equity markets. If we don't see action on Thursday, we are likely to see increased pressure again on both Spain and Italy to come up. This morning's data on Italian unemployment was coming up at 10.8%.
It highlights the difficulties we have in Italy regarding the economic developments and I think we need action from the ECB or very strong language and commitments to future activity to keep the markets ported. Otherwise, we are likely to see widening of spreads and increase in yields of the peripheral countries again.