Investors concerned by lack of clarity on ECB role: BGC

In an interview to CNBC-TV18, David Buick, partner at BGC, says that the biggest concern for investors is the lack of clarity on the European Central Bank’s role in helping countries. While other central banks have gone on record to say that they will stand behind the country, the ECB has yet to define if it is willing to support eurozone countries with limitless backup.

“Until such time that it says that it’s there to buy bonds on limitless basis and it will eventually turn to quantitative easing, we are likely to see the spikes in the yields in some of the bonds,” said Buick.

Below is an edited transcript of his interview with Latha Venkatesh and Reema Tendulkar. Also watch the accompanying video.

Q: Is the market now getting more concerned about Italy joining the fray for more money?

A: I think that’s right. I think the overall concern is the role the ECB is playing. Unlike the Fed and the Bank of England, it’s less than clear how much it’s prepared to stand behind some of the weak European economies. It is different of course, but in the case of United States and UK, both central banks have said that they are there for limitless amount and that if there are problems they will look after them. The ECB doesn’t seem comfortable about that, but until such time that it says that it’s there to buy bonds on limitless basis and it will eventually turn to quantitative easing, we are likely to see the spikes in the yields in some of the bonds.

The Italian rate will go above 6% this morning without a doubt, if it hasn’t already done so whilst I am talking to. And there is still no sign of Spain coming down much below 6% levels. The concern is that we are reeling from one crisis to another.

Q: How are investors positioning themselves ahead of uncertainty on what role the ECB will play?

A: People are hesitant to get involved despite the fact that we have had a decent rally in recent weeks. Countries over committed to the European Union; Germany is possibly the exception. We are slightly concerned about France for the simple reason that President Hollande seems to be very committed to a bloated public sector and is showing very little signs of cutting its debt. It needs to cut by 43 billion in the next two years but his appetite for doing so it doesn’t look very good to me at the moment.

Apart from that, we are concerned about the slowing down of the economy. In the United States, non-farm payrolls last Friday was very disappointing and the runes in the sand from China are not particularly encouraging at all. So people tend to be either into very unappetizing short end of the bond market, where yields are sometimes negative in some of the currencies, or into solid defensive stocks. There is still a reasonable appetite over here according to my clients who would like the energy stock because there seems to be plenty of M&A activity there and as well as the fact that it is probably a pretty solid place to be.

Q: What would you now watch out for? With Mario Monti making his demand felt, does it look like you might expect action from the ECB?

A: I do not know. I would like to see that the ECB will respond, but you always feel that the ECB’s Mario Draghi has made it very clear that he is the executioner and the judge and the jury are the politicians of the European zone. I think Mario Draghi’s potentially a very good president to the ECB, but he is very keen that the political leaders take the responsibility of making decision.