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May 15, 2012, 02.06 PM IST
Markets all over the world have shown signs of volatility over the last few weeks. The European markets too have not looked up with elections in various countries and the possibility of Greece moving out of the Eurozone.
Markets all over the world have shown signs of volatility over the last few weeks. The European markets too have not looked up with elections in various countries and the possibility of Greece moving out of the Eurozone. In an interview with CNBC-TV18, Mark Matthews of Julius Baer said that although, Europe appears to be in a crisis like situation, the US economy will continue to hold up with a maximum downside of 5%.
Baer also does not expect a sharp correction in the US markets. He believes that the case is not yet strong enough for further easing by the Fed.
Talking about Greece's exit from the Eurozone, Baer said that the commentary from the European Union policymakers suggest the country's exit from the Eurozone. However, the EU crisis may not have a significant impact on the Indian economy.
Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.
Q: We have been talking at length about the news flow from Europe but the new worry that's emanating seems to be from the US and the way those markets are breaking down. Do you expect to see a sharp correction coming through from that market?
A: No, I don't. I think it will hold up because it has a huge internal economy of its own, the largest economy in the world which is slowly on the mends. I can see how it would manifest some weakness on the back of all the concerns right now. But, I do not see the big blue chip stocks there having more than 4-5% downside.
Q: The S&P has corrected quite a bit from well over 1,400 to 1,335 now. Do you see it exerting any pressure on the Fed to come out with any version of QE3 over the next few weeks?
A: They cannot respond on a falling stock market, they could never get away with that. What they could respond to is very poor data and the strength of the data is moderated somewhat from where it was in the Q1 of this year. But it's still okay. I just don’t think they have the ammunition to do it.
Q: What about Europe, do you see things getting far worse over the next few weeks before they get better or you don’t see this as a full-blown crisis brewing in the next few months?
A: It's definitely a crisis and there are two sides to the coin that I can see. The first is that the Greeks seem to think that they will be bailed out. In other words, they feel that they can renegotiate their terms and stay in the euro. But the verbiage coming out of the European commission, the EU and the Germans, suggest otherwise.
To me, the indications are they would actually like if Greece left and then try very hard to contain the rest of the Eurozone. They would not want to see Portugal or Spain leave. I am getting the sense now that Greece is beyond salvation and that’s the opinion of the eurocrats.
The other side of the coin though is keeping it under control, with this shift towards growth platform in almost all the countries in Europe, their leadership could result in some policy response. There is the G8 meeting this weekend and also Hollande's meeting with Merkel starting this evening in Berlin, where they could mollify the markets with some kind of pro-growth policies. So that’s what I think about Europe.
Q: Do you think any of this is causing an immediate choke up in terms of liquidity because the observation seems to be that there is one and that tends to impact Asian equities a lot more than other markets?
A: Yes, certainly we have seen history repeating itself. Last year, during the European crisis Asian stocks fell hard and they are repeating that process now. It's just a reality that in Asia we either have developed countries like Hong Kong, Singapore, Taiwan or Korea which are quite exposed to global growth. Or we have emerging markets like India, Indonesia, Philippines which do not have large enough middle classes to stop their own stock market from going down.
In both cases, the Asian markets do tend to react to the global events. Its unfortunate, that’s what is happening, though, I do not think that the European crisis is going to impact for e.g. India's economy very much. Certainly, it's having an impact on global risk assets.
Q: Do you think Asian equity markets could correct 10% more from here or would that surprise you?
A: No, it wouldn't surprise me. Actually, it would kind of surprise me if they didn't. With the caveat that politics is, it is almost impossible to predict. For example, last year we all got very bearish after the markets crashed in July-August-September. That was in retrospect to the time for buying. We didn't know at that time because we didn't know that the ECB would announce long term refinancing operation (LTRO).
So, who knows what is going to happen in a month from now. It's impossible to predict. Maybe, there will be LTRO three, maybe there will be pro-growth policies coming out of Europe that are currently not anticipated. Maybe, a Greek exit would end up being a good thing in the long-term, just to get it out of the Eurozone.
But, in the meantime, I think the markets are vulnerable. The other thing is that the Chinese data has been worse than what the street expected. That’s another negative to take Asia down.
Tags: Mark Matthews, Julius Baer, Eurozone, European markets, Market, US markets, dollar, rupee, economy, Eurozone, Greece
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