Bruno Verstrate, CEO of Lakefield Partners explains to CNBC-TV18 that the markets are focused on how the US government will address the fiscal-cliff situation and when Spain will actually make the request for the ECB's aid package.
Below is an edited transcript of the analysis on CNBC-TV18.
Q: What is the mood in the market? Yesterday, the ECB president issued statements that had the market worried. Are the markets stabilising now? What are you expecting to formally hear from the ECB? Is there a possibility of a few placatory statements?
A: I think at this stage there is a bit of stabilisation in the market after the big sell-off on Wednesday. I think what investors will be looking for, in the months to come, is how the fiscal cliff will have an impact on the economy and how it can be avoided.
Of course, that's a political exercise in the US that will influence the rest of the global markets. In Europe, what everyone still seems to be focusing on, although Greece seems to be put on the backburner after its Parliament announced that it would accept the austerity bill and measures on Wednesday which is to be voted again on Sunday, is how Spain goes forward.
I think that is what the ECB will be communicating on and that is what the market will be testing, eventually. It looks as if the timing of help from Spain is being determined by the market. Spain is looking at how markets behave and once the market becomes tight again, it would probably ask for help.
A couple of interesting reports showed that earnings were a bit better and that has added a bit of positive sentiment. But I think that the slowdown in the US will definitely be the theme for the months ahead.
Q: In general, are investors, given the problems that Europe is facing, preparing for any kind of a bounce or a relief rally to be used to sell into the markets? Are they predicting a downside?
A: We exited equities at the beginning of October. But clients who still hold shares tend to believe that this market has run way ahead of the economy and are taking profits at this stage.
However, I wish to add that cash is definitely costing money at this stage because the yields are so low and inflation is still at a level above deflation that they have real negative yields. So everyone is considering what to do. They know that the ECB has put a 'free' put on the markets, but they are looking for the economy to give a reason to go back in and that is not there yet.