Patrick Legland, global head- research, Societe Generale, explains to CNBC-TV18 that the slowdown in China will certainly have an adverse effect on commodities. He adds that though European economies reduced deficit significantly, the growth in GDP which is essential to reduce debt, remained anemic and negative.
Below is an edited transcript of the analysis on CNBC-TV18.
Q: Is this just a temporary lull in the risk rally that was observed just before the QE buzz started or is the rally now hitting a plateau all together?
A: I think you are absolutely right. We are now reaching a point where the market is coming back to economic reality. Globally, the economic indicators have been poor. The PMI in Europe was very poor. Asia is very weak as well. Clearly investors are back in the doldrums on nickel due to economic inflows. So, right now there is certainly a break in the rally.
Q: The central banks have made have announcements on easing, but by when do you think the funds will actually start flowing in? Have the funds already been deployed?
A: Though global investors are reallocating assets towards risky assets in the euro zone, a lot of investors are still risk averse. The consensus on earning estimates in Europe and the US is very poor. Investors are also extremely worried with what's going on in China.
If you take all this into account, investors at this stage prefer to stay in relatively safe territories such as German bonds, gold and assets which do not provide too much volatility.
Q: But this is only the start of the QE3 where every month the US Fed will be buying USD 40-billion worth of mortgage backed securities for an unspecified period. Will this not that give some leg to the risk rally?
A: Yes. But I think in the short-term, the market needs to have a small break. The market situation is similar to the scenario that followed the second round of QE2 in August 2010.
The effect of the Fed's announcement to buy USD 40 billion every month on the market would be very, very powerful. Let us not forget that economic environment is very poor and regular warnings from corporates, will send shocks on equities.
Q: What is the sense in Europe? The two key issues that we keep reading about is the Troika report on Greece and whether or not Spain it is asking for help. What are you picking on those fronts and is there anything else that you would be watching out for?
A: Most governments in Europe did a very good job to reduce their government deficit. In 2009 the budget deficit in Europe was 6.4%. In 2012, it would be roughly in the region of 3.6%. But the real question lies in GDP growth which has been anemic and negative in some European countries and as a consequence, government debt remains high at around 95%.
Q: Where do you think the Euro will find support and how high could the Dollar Index rise? The Dollar Index fell to a low of 78 before bouncing back to go past 79.50. The Euro-Dollar also went to around1.316 and slid to 1.297 now. How far could the Euro-Dollar fall?
A: Active quantitative easing by the Fed and the ECB taking steps towards resolution of the European crisis means that the Euro-Dollar could be at 1.35-1.40 in the next few months. This is not absolutely out of range. Obviously, it would have very negative consequences on the European economy from a competitiveness perspective.
Q: If the dollar is going to be weak versus the euro, there could an increase in risk-assets. What is your view on commodities? There has been a huge cut in crude. Will it find a bottom anytime soon?
A: The current slowdown in China will act as a dampener on commodity prices. Obviously this is a negative. A weak dollar will support commodity prices, but overall we are negative on commodities because of China. We are negative on metals, but we are certainly more positive on agricultural commodities. Gold will continue to be relatively strong and though hovering
in the region of 2,000, it is certainly dovish.