EU crisis hovers as economies shower rate-cuts:StanChart

Standard Chartered senior economist Sarah Hewin, in her analysis on CNBC-TV18, explains that the risk of an escalation of the economic crisis in the EU has not abated.

Below is an edited transcript of the analysis on CNBC-TV18.

Q: Any specific European worries that are pulling the markets down today? Is it the lack of hints of quantitative easing in the Fed's minutes?

A: It is difficult to say. The central bank took some action last week in terms of cutting interest rates and the Fed was a bit ambivalent about its plans and this indicates that the economy needs to be weaker before the Fed is prepared to do launch quantitative easing. Policy easing was launched in China last week and it was done in Korea today. All these factors seem to be making the euro somewhat weaker.

Q: In Spain, the yields have declined to 6.4, in Italy too there was a modest fall. But the euro-dollar is languishing at 1.22. What do you think is leading to this sharp slide in the euro? Do you think it is the strength of the dollar?

A: You quite rightly pointed out that since the Spanish government announced deficit, with auction measures on Wednesday, there was a rally on the Spanish bonds and yields have moved away from the danger zone of 7%.

I think that the euro is probably reflecting the different moves from the respective central banks. The zero deposit rate-cut in the EU is one of the factors that are making the euro weaker and going forward, it will continue to have that impact.

Overall, I think that the absence of an indication of any initiative in the Fed’s minutes on Wednesday, towards quantitative easing (QE), has perhaps disappointed expectations in some markets and the euro is bearing the brunt of that.

Q: Are you expecting anything specific in the EU? Will the Chinese GDP statistics be terribly seminal?

A: We are keeping a watch on a part of the EU region at the moment. The industrial production data in EU will be released today and that is probably the most important piece of news on the horizon for today.

Regarding China, our expectations run alongside the rest of the market which foresees deterioration in growth in the second quarter. The Chinese GDP is moving firmly below the 8% mark.

There have been fairly better-than-expected data regarding loans today and our view is that as policies ease further in China, the economy should start to look a bit better.

Now, the impact that this has on the euro is difficult to tell. Firstly, investors need to focus on the European Central Bank's measures, secondly, on the economic data from the EU and thirdly, there are still a lot of risks in the EU region. We have the euro group meeting next Friday where the Spanish banks' situation will be considered alongside Greece.

Q: By when will there be some balance-sheet expansion either by the Fed or the ECB? It looks unlikely from the FOMC (Federal Open Market Committee) minutes that the Fed has something in the offing in August.

A: I think Fed has indicated that it will take action if required and the data is not great at the moment, but it's not particularly dreadful either. I think we see the risk of more action from the Fed as we see a greater likelihood that it will happen in the early months of 2013 rather than in the autumn of this of this year.

We are still concerned about the fiscal cliff and still see some sort of fiscal tightening kicking in automatically, which might encourage the Fed to take more action. But we think that probably for the rest of this year, the data will move sideways and that would be particularly encouraging but there are no indications of a worsening slowdown.

From the ECB's perspective, it is reluctant to increase its balance-sheet. We think that they will hold-off any other extraordinary measures until there is a renewed crisis in the region.

We cannot ignore the fact that there is certainly a risk from Greece in its negotiations with the Troika as the country has missed its deficit targets and will need a new injection of funding which the North European voters are just not very supportive of at the moment.

So I think we have to still bear in mind the risk of an escalation in the EU crisis.