'Equities to trade sideways with negative bias till Sept'

The Reserve Bank of India and the US Federal Reserve did not announce any stimulus measures in its policy statements, but this was expected by the street. However, markets took a hard blow as the European Central Bank also failed to move on further stimulus.

ECB chief Mario Draghi yesterday announced no interest cuts or any other stimulus measures, but did say they were open to more open market operations to buy bonds . The negative reaction to his statements was seen immediately after, as both US and European markets ended the day with sharp cuts.

So has inaction from the ECB triggered a shift in sentiment, from risk-on to risk-off? Possibly so, according to Robert Parker of Credit Suisse AMC, but only for the short term.

In an interview to CNBC-TV18, Parker says that equity markets will trade sideways with a downward bias for the next couple of week, or atleast till September. “As we go into late-August, early September, there is a high probability that global equity markets actually build on the rally that started in late June,” he said.

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Below is an edited transcript of his interview with Udayan Mukherjee.

Q: Where does what Mario Draghi had to say leave Spanish and Italian yields?

A: What they have said is that they are working on a plan to intervene with the purchase of short duration and not long duration bonds. That's very important, because the pressure on Spain and Italy in recent weeks has been on the short end of the curve rather than the longer end of the curve. But, we do not know when this is going to happen and we do not know whether the ECB has got full German support for that action. Also, we do not know the extent to which they would intervene.

So when he made a statement recently in London, saying they would do everything that it takes to defend the euro, to support the eurozone, that wasn't.

Q: What about the European Stability Mechanism (ESM) banking license, because Draghi lopped the ball directly onto the German’s court or the court of the governments? Do you see the governments playing along?

A: What Mario Draghi said was legally 100% correct. It is not permissible for the ECB to have any influence on whether the ESM gets any banking licence or not. Obviously if the ESM did get a banking licence, that would make its role in markets much more powerful because it would be able to leverage its capital resources. Without a banking licence, its ability to leverage its position and leverage its influence in the market is somewhat limited.

We have got a mixed response from the European governments. Some have indicated that they would accept a banking licence for the ESM. The message from the German government seems to be shifting ground a bit, but even so, there is I think still German resistance to a banking licence being granted.