A spate of good news have lent a good support to global markets. ECB had announced its bond purchasing programme, followed by German court approval of European Financial Stability Facility, followed by Federal Reserve's announcement of its open-ended purchase programme for mortgage-backed securities. Global markets have reacted positively to these developments. Speaking to CNBC-TV18 about these global developments, Nigel Chalk of Barclays admitted that most market expectations have been met, but the rally will be durable if further clarity on Europe emerges.
Below is an edited transcript of Barclay's interview on CNBC-TV18
Q: What is the mood across global markets - euphoric or it was expected and therefore has not moved the needle too much?
No. It is still a little bit happy. The markets have seen over the past few weeks pretty much got everything they were looking for. You had the ECB reacting, offering its bond purchase programme; you had the German Constitutional Court approving the European Financial Stability Facility (EFSF) European Stability Mechanism (ESM); and then yesterday you had the Federal Reserve announcing its open-ended purchase programme for mortgage-backed securities. Plus a rate guidance that it's pushed out even further into 2015. You see some of the tail risks in Europe as being curtailed. It is not that risk isn't still there. You still have number of steps in the chain. We haven't yet seen Spain request assistance from the euro group. We haven't yet heard from the Greek Troika Report as to what is going to happen in Greece, but things do seem to be moving in a pretty positive direction.
Q: So do you see an extension of the risk on rally that has been in place over the last few months?
A: I think it looks like it’s going to have some legs to continue and you are seeing that in EM Asia. You are seeing currencies in EM Asia improving. But there is one outstanding question. What’s happening to growth and I think that’s a real issue in Europe. We are seeing it very difficult for the European economies to grow. We have recently downgraded our growth forecast in China. We now expect China's growth next year to be around 6.7% which will mean less demand from China for Asian exports. So there is a question relative to growth, but I think in terms of financial markets they seem relatively risk on.
Q: Do you see more appreciation in emerging market currencies. The rupee started with a bit of a bang this morning, do you see that trend in other Asian markets as well?
A: I think that can continue. The increased liquidity being provided by the international central banks will tend to push more capital flows into Asia and you are going to see more positive (moves). As risk aversion declines you are going to see people moving into Asia as well. How long it continues would depend. You are going to have to see a clear progress in Europe, in terms of Spain requesting a programme and then adhering to that programme. You are going to see some resolution of the situation in Greece as to whether they continue.
Q: Do you see QE3 lifting commodity prices? That’s one part which has been exceptionally weak, commodity stocks in India. Do you see a ripple effect this time?
I think in the past QEs you have seen that impact on commodity prices and naturally there is more liquidity in the system. Some of that liquidity will gravitate into commodity prices which could then raise commodity prices. The open question always is if growth in China is weak, is that going to put a countervailing force on that upward trending commodity prices? So far you have seen relatively strong oil prices coming through the past few months, but on the other hand when you look at minerals you haven’t seen such strong prices in, for example, iron ore. So there are sort of countervailing factors. You have got weaker growth on the one hand, but more liquidity in the system on the other.
Q: We had some important changes in policy last evening in India – how has that gone down with global investors?
I think people are starting to see things beginnning to unlock in India which is a very positive move. For a long time you had great lock and policy status in India where you got a situation, the fiscal balance is deteriorating as a result there is very little equilibrium to provide any fiscal support in the economy. The growth has weakened. Until recently, the monsoon looked worse. The central bank wants to see progress in addressing the fiscal situation and is unwilling to move. The increase in diesel prices could have the potential to start unlocking that system. You get some benefits on the fiscal side. That allows the central bank to lower policy rate and we think they are likely to lower policy rate by 100 bps by end of the fiscal year and then you see a more positive growth coming into India. Certainly that is the way markets perceiving it right now.
Q: What’s your pecking order in terms of top markets in Asia at this point?
We quite like Indian bonds. We have a positive view on Indian bonds. We don’t have very strong views across the currency space. In terms of the economies, I think we see most of the ASEAN economies doing quite well. They have held up remarkably well through this recent global slowdown. There are a lot of domestic demand forces that are pushing those economies along. That’s quite in contrast with places like Korea and Taiwan which have really been much more badly hit by the weak external demand, weakness in exports, weakness in electronic sector, autos. So there is a very differentiated position across Asia, but in terms of the growth story I think ASEAN looks like a very positive growth story going forward.